Chapter 10

A U.S. company owns a foreign subsidiary. To prepare consolidated financial statements, when would the parent company convert the foreign subsidiary's accounts into U.S. GAAP? a) prior to the beginning of the translation process b) after translation, but prior to consolidation c) after consolidation, but prior to reporting d) no adjustments are necessary, since most foreign countries already use GAAP e) no adjustment should be necessary. foreign subsidiaries are required by the SEC to have an accounting system that is consistent with GAAP

A

Which one of the following translation methods has as its basic assumption the premise that a company's net investment in a foreign operation is exposed to foreign exchange risk? a) current rate method b) average rate method c) current/noncurrent method d) monetary/nonmonetary method e) temporal method

A

Certain balance sheet accounts of a foreign subsidiary of Parks, Inc. had been stated in USD as follows: Current Historical A/R-current 20,000 22,000 A/R-LT 10,000 12,500 Prepaid rent 5,000 5,500 Goodwill 25,000 26,000 Totals 60,000 66,000 If a foreign currency is the functional currency of this subsidiary, what total should have been included in Tulip's balance sheet for the preceding items? a) $61,000 b) $66,000 c) $60,000 d) $62,000 e) $61,500

C

The primary currency of the foreign entity's operating environment is known as the a) translation currency b) functional currency c) reporting currency d) temporal currency e) prime-time currency

b, functional currency

A subsidiary of Porter Inc., a US company, was located in a foreign country. The functional currency of this subsidiary was the stickle. The subsidiary acquired inventory on credit on Nov 1, 2000, for 120,000 stickles that was sold on Jan 17, 2001 for 156,000 stickles. The subsidiary paid for the inventory on Jan 31, 2001. Currency exchange rates between the dollar and the stickle were as follows: Nov 1, 2000 $0.19 = 1 stickle Dec 31, 2000 $0.20 = 1 stickle Jan 17, 2001 $0.22 = 1 stickle Jan 31, 2001 $0.23 = 1 stickle Avg for 2001 $0.24 = 1 stickle What figure would have been reported for this inventory on Porter's consolidated balance sheet at Dec 31, 2000? a) $24,000 b) $26,400 c) $22,800 d) $27,600 e) $28,800

A 120,000 x .20 = 24,000

Westmore, Ltd. is a British subsidiary of a U.S. company. Westmore's functional currency is the pound sterling. The following exchange rates were in effect during 2001: Jan 1 $1 = 0.625 June 30 $1 = 0.610 Dec 31 $1 = 0.620 W. Avg $1 = 0.630 Westmore reported sales of 1,500,000 pounds during 2001. What amount would have been included for this subsidiary in calculating consolidated sales? a) $2,380,952 b) $2,400,000 c) $2,429,150 d) $2,419,355 e) $2,425,876

A 1,500,000/.630 = 2,380,952

Dilty Corp. owned a subsidiary in France. Dilty concluded that the subsidiary's functional currency was the USD. What must Dilty do to ready the subsidiary's financial statements for consolidation? a) first translate them, then remeasure them b) first remeasure them, then translate them c) state all of the subsidiary's accounts in USD using the exchange rate in effect at the balance sheet date d) translate them e) remeasure them

E

In accounting, term translations refers to a) the calculation of gains or losses from hedging transactions b) the calculation of exchange rate gains or losses on individual transactions in foreign currencies c) the procedure required to identify a company's functional currency d) the calculation of gains or losses from all transactions for the year e) a procedure to prepare a foreign subsidiary's financial statements for consolidation

E

Certain balance sheet accounts of a foreign subsidiary of Parks, Inc. had been stated in USD as follows: Current Historical A/R-current 20,000 22,000 A/R-LT 10,000 12,500 Prepaid rent 5,000 5,500 Goodwill 25,000 26,000 Totals 60,000 66,000 If the USD is the functional currency of this subsidiary, what total should have been included in Tulip's balance sheet for the items above? a) $61,000 b) $66,000 c) $60,000 d) $62,000 e) $61,500

E A/R - current (current rate) A/R - LT (current rate) Prepaid rent (historical) Goodwill (historical)

A U.S.-based company has a subsidiary located in Germany. The Euro is the functional currency of the subsidiary. What exchange rate should be used to translate the following items reported in the subsidiary's year-end financial statements? (Inventory, Machinery, Depreciation expense respectively) a) current rate, current rate, average rate b) historical rate, current rate, current rate c) current rate, historical rate, average rate d) average rate, historical rate, current rate e) average rate, current rate, current rate

A

A positive translation adjustment will occur when a) a net asset balance sheet exposure exists and the foreign currency appreciates b) a net asset balance sheet exposure exists and the foreign currency depreciates c) a net liability balance sheet exposure exists and the foreign currency appreciates d) a net liability balance sheet exposure exists and the foreign currency changes e) a remeasurement of financial statement using the temporal method occurs

A

Dilty Corp. owned a subsidiary in France. Dilty concluded that the subsidiary's functional currency was the USD. Which one of the following statements would justify this conclusion? a) most of the subsidiary's sales and purchases were with companies in the US b) Dilty's functional currency is the follar and Ditty is the parent c) Dilty's other subsidiaries all had the dollar as their functional currency d) Generally accepted accounting principles require that the subsidiary's functional currency must be the dollar if consolidated financial statements are to be prepared e) Dilty is located in the US

A

What is a company's functional currency? a) the currency of the primary economic environment in which it operates b) the currency of the country where it has its headquarters c) the currency in which it prepares its financial statements d) the reporting currency of its parent for a subsidiary e) the currency it chooses to designate as such

A

When the current exchange rate is used for translation and the foreign currency increases in value, if the liabilities increase, the company would recognize a a) positive translation adjustment b) negative translation adjustment c) positive remeasurement adjustment d) negative remeasurement adjustment e) remeasurement gain

B

A subsidiary of Porter Inc., a US company, was located in a foreign country. The functional currency of this subsidiary was the stickle. The subsidiary acquired inventory on credit on Nov 1, 2000, for 120,000 stickles that was sold on Jan 17, 2001 for 156,000 stickles. The subsidiary paid for the inventory on Jan 31, 2001. Currency exchange rates between the dollar and the stickle were as follows: Nov 1, 2000 $0.19 = 1 stickle Dec 31, 2000 $0.20 = 1 stickle Jan 17, 2001 $0.22 = 1 stickle Jan 31, 2001 $0.23 = 1 stickle Avg for 2001 $0.24 = 1 stickle What figure would have been reported for COGS on Porter's consolidated income statement at Dec 31, 2001? a) $24,000 b) $26,400 c) $22,800 d) $27,600 e) $28,800

B 120,000 x .22 = 26,400

Westmore, Ltd. is a British subsidiary of a U.S. company. Westmore's functional currency is the pound sterling. The following exchange rates were in effect during 2001: Jan 1 $1 = 0.625 June 30 $1 = 0.610 Dec 31 $1 = 0.620 W. Avg $1 = 0.630 On Dec 31, Westmore had accounts receivable of 280,000lbs. What amount would have been included for this subsidiary in calculating consolidated accounts receivable? a) $444,444 b) $451,613 c) $142,600 d) $176,400 e) $452,830

B 280,000 / .620 = 451,613

A subsidiary of Shaw Inc. has one asset (inventory) and one liability (accounts payable). The functional currency of this subsidiary is the Euro. The inventory was acquired for 90,000 euros when the exchange rate was $1.30 = 1 euro. Accounts Payable, which has a balance of 50,000 euros, was established when the exchange rate was $1.35 = 1 euro. At year-end, the exchange rate was $1.25 = 1 euro. Which one of the following statements is true for the consolidated financial statements? a) the consolidated financial statements are not affected by this siutation b) a debit translation adjustment must be reported c) a credit translation adjustment must be reported d) a transaction loss must be reported e) a transaction gain must be reported

B A translation is appropriate since the euro is the functional currency. All assets/liabilities are translated and reported using the current exchange rate, as of the balance sheet date. The ending translated value is less than the translated value of the net assets when acquired so a negative or debit translation adjustment arises

A subsidiary of Harris Inc. is located in Germany. The functional currency of this subsidiary is the Euro. The subsidiary acquires inventory on October 31 of the precious year for 100,000 euros which is sold on Jan. 15 of the current year for 150,000 euros. Collection of the money takes place on Feb. 4 of the current year. Applicable exchange rates are as follows: Date Spot Rate Oct 31 1.2300 = 1 euro Dec 31 1.2600 = 1 euro Jan 15 1.3000 = 1 euro Feb 4 1.3100 = 1 euro What amount is reported for this inventory on the Dec 31 US $ balance sheet? a) $123,000 b) $126,000 c) $131,000 d) $189,000 e) $226,935

B Translated value at Dec 31 (100,000euros x $1.26) = $126,000

Foreign subsidiaries of U.S. parent companies that operate in highly inflationary economies are required by GAAP to use which method for translating the financial statements: a) Temporal Method, with the Cumulative Translation Adjustment to be reported as part of Comprehensive Income b) Current Rate Method, with the Cumulative Translation to be reported as part of Comprehensive Income c) Temporal Method, with the Translation Gain or Loss to be reported as part of Net Income d) Current Rate Method, with the Cumulative Translation Adjustment to be reported as part of Net Income e) Equity Method, with the Translation Gain or Loss to be reported as part of Non-Controlling Interest in Subsidiary

C

The translation adjustment from translating a foreign subsidiary's financial statements should be shown as a) an asset or liability (depending on the balance) on the consolidated balance sheet b) a revenue or expense (depending on the balance) on the consolidated income statement c) a component of stockholders' equity on the consolidated balance sheet d) a component of cash flows from financing activities on the consolidated statement of cash flows

C

A U.S. company owns an entity located in Denmark that is relatively self-contained and integrated with the local economy. The foreign company uses the krone in its daily operations. The U.S. company has calculated a $50,000 translation adjustment related to the foreign entity. How would the company report this adjustment in its consolidated financial statements? a) the parent would use the temporal method and report the translation adjustment in its income b) the parent would use the temporal method and report the translation adjustment in its OCI c) the parent would use the current rate method and report the translation adjustment in its income d) the parent would use the current rate method and report the translation adjustment in its OCI e) the parent can select the method it prefers

D

In translating a foreign subsidiary's financial statements, which exchange rate does the current method require for the subsidiary's assets and liabilities? A. The exchange rate in effect when each asset or liability was acquired. B. The average exchange rate for the current year. C. A calculated exchange rate based on market value. D. The exchange rate in effect as of the balance sheet date. E. The exchange rate in effect at the start of the current year.

D

Bean Inc. started the current year with two assets: Cash of 30,00 yen and Land which originally cost 50,00 yen when acquired two years ago on June 30. On August 18 of the current year, the company rendered services to a customer for 80,000 yen, an amount that was immediately paid in cash. On Nov 15 of the current year, the company incurred an operating expense of 26,000 yen, which was immediately paid. No other transactions occurred during the current year. Currency exchange rates were as follows: Date Spot Rate June 30, two years ago 0.0080 = 1 yen Jan 1 0.0084 = 1 yen Aug 18 0.0090 = 1 yen Nov 15 0.0096 = 1 yen Dec 31 0.0102 = 1 yen Avg 0.0098 = 1 yen Assume that this company is a Japanese subsidiary of an American company. Also assume that the USD is the functional currency of the parent and the subsidiary so that remeasurement is required. What is the remeasurement gain or loss for the current year? a) $210.40 loss b) $188.10 gain c) $188.10 loss d) $134.40 gain e) $134.40 loss

D Net monetary assets - cash at beginning of current year = 30,000 x $0.0084 = $252.000 Increase in cash - sale = 80,000 x $0.0090 = $720 Decrease in cash - expenses paid = (26,000) x $0.0096 = (249.60) Cash balance @ dec 31 of current year = $722.40 Cash value @ dec 31 current rates = 84,000 x $0.0102 = $856.80 Remeasurement gain = 722.40 - 856.80 = $134.40

A U.S. company would use the foreign currency as its foreign subsidiary's functional currency, if the foreign subsidiary's: a) financing is primarily from its parent b) sales price is affected on a ST basis by changes in the exchange rate c) primary costs for its components are obtained from the parent's country d) sales market is primarily in its parent's country e) intra-entity transactions with the parent company are limited

E

Packstone Inc. owns a subsidiary in UK. The subsidiary's functional currency is the pound. Therefore, translation is necessary in order to prepare consolidated financial statements. The subsidiary began in the current year with 500,000 pounds in cash and no other assets or liabilities. On March 1, the subsidiary used 100,000 pounds to purchase equipment. On April 20, the subsidiary used cash to purchase merchandise inventory costing 80,000 pounds. This merchandise was sold on May 16 for 120,000 pounds in cash. On November 1, the subsidiary paid a cash dividend to Packstone in the amount of 60,000 pounds and recorded depreciation on the equipment for the year of 50,000 pounds. The appropriate exchange rates were as follows: Date Spot Rate Jan 1 1.4800 = 1 lb Mar 1 1.5000 = 1 lb April 20 1.5200 = 1 lb May 16 1.5500 = 1 lb Nov 1 1.5300 = 1 lb Dec 31 1.5600 = 1 lb Avg 1.5400 = 1 lb What is the translation adjustment to be reported in the stockholders' equity section of the consolidated balance sheet? a) $-0- b)$31,000 debit c) $31,000 credit d) $37,600 debit e) $37,600 credit

E Beginning cash balance = 500,000lbs x $1.48 = $740,000 Sale of merchandise for a gain = 40,000lbs x $1.55 = 62,000 Pmt of div = (60,000) x $1.53 = (91,800) Depreciation = (50,000) x $1.54 = (77,000) Totals: 430,000 lbs and $633,200 @ current rate = 430,000 x $1.56 = 670,800 Translation adjustment (credit) = 633,200 - 670,800 = (37,600)