Ch 8 Translation of Foreign Currency Statements

Under the current rate method of translation,

- All assets are translated at the current exchange rate

Current US GAAP recognizes that some foreign entities

Are closely integrated with their parent company and therefore primarily conduct business using parent company currency Are relatively self-contained and integrated with the local economy and therefore primarily conduct business using foreign currency

There is no need to keep record of the acquisition date of exchange rates related to

Assets translated at the current exchange rate under the temporal method Assets translated under the current rate method

Translating a foreign currency balance sheet account at the current exchange rate gives rise to

Balance sheet exposure to foreign exchange risk

Balance sheet accounts translated using the same exchange rate under both the current rate and temporal methods include

Cash and receivables Long-term debt Additional paid in capital

Under the temporal method of translation, balance sheet accounts translated at historical exchange rates include

Common stock and additional paid-in capital Equipment, buildings and land

Translating a foreign currency asset at the current exchange rate when the foreign currency has appreciated gives rise to a -------- translation adjustment.

Positive

In assessing the indicators provided by the FASB for determining the functional currency of a foreign entity, the FASB

Provides no guidance with regard to how the indicators should be weighted

When the temporal method of translation is appropriate, the resulting translation adjustment must be

Recognized as a gain or loss in net income

Under the temporal method, revenues that are earned evenly throughout the year are translated using

The average-for-the-year exchange rate

The indicators provided by the FASB for determining the functional currency of a foreign entity include

Whether the foreign entity's cash flows directly affect the parent's cash flows. The currency in which the foreign entity obtains its financing Whether sales prices are directly affected by short-term fluctuations in the exchange rate

When the temporal method is used, the financial statement items of a foreign entity are said to be ---------- into parent company currency.

remeasured

True or false: The current year's translation adjustment related to a foreign subsidiary is recognized as an adjustment to the Investment in Foreign Subsidiary account on the parent company's books.

true

In consolidating a foreign subsidiary, the current translation adjustment on the excess of fair value over the book value related to that foreign subsidiary must be

Recognized through an adjusting entry on the consolidation worksheet

Assuming that all expenses are incurred evenly throughout the year, those expenses translated using a different exchange rate under the current rate method than under the temporal method include

Cost of goods sold Depreciation expense

Consistent with the underlying assumption of the current rate method that the net investment in a foreign operation is exposed to foreign exchange risk, all assets and liabilities of the foreign operation are translated into parent company currency using the ------- exchange rate.

Current

Under the current rate method of translation

Expenses generated evenly throughout the year are translated at the average-for-they-year exchange rate Exchange incurred evenly throughout the year are translated at the average-for-the-year exchange rate

Foreign currency balance sheet accounts that are translated at the current exchange rate are ------- to translation adjustment.

Exposed

Translation adjustments included in other comprehensive income are

Accumulated in a stockholder's equity account on the consolidated balance sheet

In determining the translation adjustment when the current rate method is used, the foreign entity's net asset balance at the beginning of the year is translated using the

Beginning of-the-year exchange rate

A US-based company has a foreign subsidiary. The functional currency of the foreign subsidiary can be either the US dollar or a ------- currency.

Foreign

The net asset balance sheet exposure of a foreign entity can be hedged using a

Foreign currency option Foreign currency note payable Foreign currency forward contract

The ---------- exchange rate is the exchange rate that existed when a transaction occurred sometime in the past.

Historical

Under the temporal method, revenues that are earned evenly throughout the year are translated using

Historical exchange rates

A net asset balance sheet exposure will generate a positive translation adjustment when the foreign currency

Increases (appreciates) in value

In determining the remeasurement gain or loss that results when the temporal method of the translation is used the beginning net -------- asset or liability is translated using the beginning-of-the-year exchange rate

Monetary

A net liability balance sheet exposure coupled with an appreciation in the value of a foreign currency will result in a -------- translation adjustment.

Negative

Translation using the temporal method with remeasurement gains and losses recognized in net income is appropriate for those foreign entities

That have the US dollar as their functional currency That are located in highly inflationary economies

A US -based company must use the temporal method to translate the financial statements of a foreign subsidiary whose functional currency is

the US dollar