Chapter 7 Translation of foreign Currency Financial Statements.

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As exchange rates change, which assets and liabilities items are NOT exposed to translation adjustment?

The assets and liabilities translated at the historical exchange rates

Under the current rate method, which exchange rate is used to translate the ending inventory reported in a foreign currency balance sheet?

The current exchange rate regardless of whether it is carried at cost or at a lower net realizable value

Under the temporal method, which exchange rate should be used to remeasure inventory carried at cost, PPE and patents?

The historical exchange rates

One of the two methods of translating foreign currency financial statements currently used worldwide is the ______.

temporal method

By multiplying the historical cost in foreign currency by the historical exchange rate, the translated assets such as property and equipment of a foreign subsidiary represents ______.

the amount in parent currency that the parent company would have had to pay to acquire the asset on the acquisition date

For foreign entities located in a highly inflationary economy, U.S. GAAP mandates use of ______.

the temporal method with translation gains/losses reported in net income

In the example of Parentco and its subsidiary Foreignco, why would Parentco use US$1.00 per FC1 exchange rate to translate Foreignco's balance sheet?

It is because US$1 per FC1 is the exchange rate at the acquisition date

In accordance with International Financial Reporting Standards (IFRS), which translation combination would be appropriate for a foreign operation whose functional currency is the currency of the host country (foreign currency)?

Method - Current Rate Treatment of Traslation Adjustment - Separate component of Stockholder's equity

In accordance with U.S. generally accepted accounting principles (GAAP), which translation combination would be appropriate for a foreign operation whose functional currency is the U.S. dollar?

Method - Temporal Treatment of Translation Adjustment - Gain or Loass in Income stmt

Assume a U.S. entity has a Canadian subsidiary, which maintain its accounting records and prepares its financial statements in the local currency, the Canadian dollar. Purchases, sales and financing activities of the subsidiary are in Mexican pesos. What is the functional currency of the subsidiary?

Mexican pesos

Assume a U.S. entity has a Mexican subsidiary, which maintain its accounting records and prepares its financial statements in the local currency, Mexican pesos. Purchases, sales of the subsidiary are in Mexican pesos, and banking activities are in Mexican pesos. What is the functional currency of the subsidiary?

Mexican pesos

Net monetary assets at 1/1/Y1 is 400,000 euro. Increase in monetary items comes from sales in Year 1 and equals 1,000,000 euro. Decrease in monetary items in Year 1 comes from purchases of inventory (acquired evenly throughout Year 1) and equals to 1,200,000 euro. The exchange rate on 1/1/Y1 is $1.30. The average exchange rate in Year 1 is $1.50. What is the net monetary assets (liabilities) as of 12/31/Year 1, remeasured in USD?

Net monetary assets of $220,000

Net monetary assets at 1/1/Y1 is 100,000 euro. Increase in monetary items comes from sales in Year 1 and equals 1,000,000 euro. Decrease in monetary items in Year 1 comes from purchases of inventory (acquired evenly throughout Year 1) and equals to 1,200,000 euro. The exchange rate on 1/1/Y1 is $1.30. The average exchange rate in Year 1 is $1.50. What is the net monetary assets (liabilities) as of 12/31/Year 1, remeasured in USD?

Net monetary liabilities of $170,000

Which one of the following items is normally translated the same way under both the current rate and temporal methods of translation?

Sales Revenue

In the translated financial statements, which method of translation maintains the underlying valuation methods used in the foreign currency financial statements?

Temporal method.

When all assets and liabilities are translated at the current exchange rate, translation adjustments reflect the change in the home currency value of the net investment in a foreign currency if the foreign subsidiary were to be sold. What does a positive translation adjustment signal?

The appreciation of the foreign currency will result in an increase in the home currency value of future foreign currency dividends to be paid by the foreign subsidiary to its parent.

As exchange rates change, which assets and liabilities items are exposed to translation adjustment?

The assets and liabilities translated at the current exchange rates

According to the guidance of FASB ASC 830, when foreign subsidiaries are relatively self-contained and integrated with the local economy and primarily use a foreign currency in their daily operations, which translation method should be used?

The current rate method, also described as the local-currency perspective to translation

If a functional currency is the foreign currency, which translation method is applicable and how is translation adjustment reported?

The current rate method; translation adjustment deferred in stockholders' equity (AOCI)

When all assets and liabilities are translated at the current exchange rate, translation adjustments reflect the change in the home currency value of the net investment in a foreign currency if the foreign subsidiary were to be sold. What does a negative translation adjustment signal?

The depreciation of the foreign currency will result in a decrease in the home currency value of future foreign currency dividends to be paid by the foreign subsidiary to its parent.

Which of the following best explains how a translation loss arises when the temporal method of translation is used to translate the foreign currency financial statements of a foreign subsidiary?

The foreign subsidiary has more monetary assets than monetary liabilities, and the foreign currency depreciates in value.

According to the guidance of FASB ASC 830, when foreign subsidiaries of U.S multinational corporations have very close ties to their parent company and carry out the day-to-day operations and keep their books in USD, which translation method should be used?

The temporal method, also described as the USD perspective to translation

Which translation method is mandated in SFAS 8 and how were gains/losses reported?

The temporal method, reported in income

If a functional currency is U.S. dollars, which translation method is applicable and how is translation adjustment reported?

The temporal method; translation adjustment recognized as gain/loss in net income

The functional currency of Garland Inc.'s Japanese subsidiary is the Japanese yen. Garland borrowed Japanese yen as a partial hedge of its investment in the subsidiary. How should the transaction gain on the foreign currency borrowing be reported in Garland's consolidated financial statements in accordance with IFRS?

The transaction gain is offset against the negative translation adjustment related to the Japanese subsidiary in the stockholders' equity section of the balance sheet.

In translating the financial statements of a foreign subsidiary into the parent's reporting currency under the current rate method, which of the following statements is true?

The translation adjustment is a function of the foreign subsidiary's net assets.

What is the first step in translating foreign currency financial statements?

To determine the functional currency

True or false: An alternative to reporting the translation adjustment as a gain or loss in net income is to include it as a component of other comprehensive income, which is closed to the balance sheet line item accumulated other comprehensive income.

True

True or false: Different functional currencies selected by different companies in the same industry could have significant impact on the comparability of financial statements within that industry.

True

True or false: The disposition of translation adjustment to other comprehensive income defers the unrealized gain or loss in stockholders' equity until it is realized in some way, and at that point the cumulative translation adjustment is transferred to net income.

True

True or false: Under the current rate method, when an equipment is translated using the current exchange rate, the translated amount is not readily interpretable. It does not represent the parent currency equivalent historical cost of the asset.

True

Geoff Co. is a foreign subsidiary of a U.S parent company, acquires inventory evenly throughout the year. There is no beginning inventory of Year 1. Net purchase in Year 1 is FC66,000. Ending inventory of Year 1 is FC 31,000. The exchange rates in Year 1 are as follows: January 1: FC1 = US$0.5 Average: FC1 = US$0.6 December 31: FC1 = US$0.7 Under temporal method, what is the cost of goods sold of Geoff Co. translated in US$?

US$17,900 Reason: 0 + FC66,000 × US$0.6/FC - FC31,000 × US$0.7/FC = US$17,900

Kim Co. is a foreign subsidiary of a U.S parent company, acquires inventory evenly throughout the year. Beginning inventory of Year 1 is FC25,000. Net purchase in Year 1 is FC66,000. Ending inventory of Year 1 is FC 31,000. The exchange rates in Year 1 are as follows: January 1: FC1 = US$0.5 Average: FC1 = US$0.8 December 31: FC1 = US$0.65 Under temporal method, what is the cost of goods sold of Kim Co. translated in US$?

US$45,150 Reason: FC25,000 × US$0.5/FC + FC66,000 × US$0.8/FC - FC31,000 × US$0.65/FC = US$45,150

Assume a U.S. entity has an Italian subsidiary, which maintain its accounting records and prepare its financial statements in the local curency, euro. Purchases, sales, financing activities are in USD. What is the functional currency of the subsidiary and which method would be used to convert the subsidiary's foreign currency financial statements into USD?

USD; temporal method

In translating foreign currency financial statements into the parent company's reporting currency, one of the key questions must be addressed is ______.

What is the appropriate exchange rate to be used in translating each financial statement item?

If all assets and liabilities are translated at a higher exchange rate and equity items are translated at a lower exchange rate, what kind of translation adjustment must be recorded to make the balance sheet "balanced"?

a positive (credit) translation adjustment

Select the best answer to complete the following statement: "Under the temporal method, it is necessary to keep a record of the exchange rates that exist when inventory, prepaid expenses, property, plant and equipment, and intangible assets are ______ because these assets, carried at ______, are translated at ______ exchange rates."

acquired, historical cost, historical

When only monetary assets and liabilities are translated at the current exchange rate, the positive translation adjustment reflects ______.

an unrealized foreign exchange gain

When only monetary assets and liabilities are translated at the current exchange rate, the negative translation adjustment reflects ______.

an unrealized foreign exchange loss

A net asset balance sheet exposure occurs when ______.

assets translated at the current exchange rate are greater in amount than liabilities translated at the current exchange rate

A net liability balance sheet exposure occurs when ______.

assets translated at the current exchange rate are less than liabilities translated at the current exchange rate

Under the current rate method, cost of goods sold in foreign currency is translated into parent reporting currency using the ______.

average exchange rate

Select the best answer to complete the following statement: Many U.S companies comply with the requirement of disclosures related to translation by providing information on the current year's translation adjustment in their statement of ______ and include a column title "Accumulated Other Comprehensive Income" in their statement of ______.

comprehensive income, changes in equity

Select the best answer to complete the following statement: "Regarding to the disclosures of translation, accounting standards require an analysis of the change in the ______ account to be presented in the financial statements or notes."

cumulative translation adjustment

One of the two methods of translating foreign currency financial statements currently used worldwide is the ______.

current rate method

Select the best answer to complete the following statement: "Under the ______ method, cost of goods sold in foreign currency is translated into parent reporting currency using the ______."

current rate, average exchange rate

Select the best answer to complete the following statement: "Under the temporal method, items of property, plant, and equipment (PPE) acquired at different times must be translated at ______ exchange rates. The same is true for depreciation of PPE and accumulated depreciation of PPE."

different historical exchange rates

Which exchange rate should be use to translate dividends at the end of the first year of operations and at the end of the second year of operations?

historical rate at dividend declaration date for both years

One of the reasons that make the temporal method more complicated than the current rate method is ______.

it is necessary to keep a record of the exchange rates at the acquisition dates of assets carried at historical costs

Select the best answer to complete the following statement: "IAS 21 defines functional currency as the currency of the ______ economic environment in which a subsidiary operates. It can be ______."

primary; either the parent currency or a foreign currency

Select the best answer to complete the following statement: "The functional currency is the ______ currency of the foreign entity's operating environment. The functional currency can be ______."

primary; either the parent's currency or a foreign currency

One of the two approaches for translating a subsidiary's assets and liabilities denominated in a foreign currency is ______.

some assets and liabilities are translated at the currency exchange rate, other assets and liabilities are translated at historical exchange rates

Select the best answer to complete the following statement: "Under the ______ method, items of property, plant, and equipment (PPE) acquired at different times must be translated at ______ exchange rates. The same is true for depreciation of PPE and accumulated depreciation of PPE."

temporal, different historical exchange rates

Under the temporal method of translation, at which exchange rate are cash and receivables translated?

Current rate

What is(are) the current standard(s) in U.S. GAAP providing guidance to foreign currency translation?

FASB ASC 830 Foreign Currency Matters

Under the temporal method, how is inventory reported in a foreign currency (FC) balance sheet translated into parent currency (PC)?

FC cost and FC NRV of the inventory are translated into PC at appropriate exchange rates; the lower of PC cost or PC NRV is reported.

Which exchange rate should be use to translate dividends at the end of the first year of operations and at the end of the second year of operations?

Historical exchange rates under both methods

Which exchange rates should be used to translate retained earnings under temporal method and current rate method?

Historical exchange rates under both methods

Under the temporal method of translation, at which exchange rate are property, plant and equipment translated?

Historical rate

In translating foreign currency financial statements into the parent company's reporting currency, one of the key questions must be addressed is ______.

How should the translation adjustment be reported

Which IAS provides guidance to the translation of foreign currency financial statements?

IAS 21

Refer to the income statement of Italco in Exhibit 7.10. If the average exchange rate of Year 1 is $1.40 per euro (all other information remains unchanged), what would be the translated income before income taxes?

$1,473,600

Refer to the income statement of Italco in Exhibit 7.10. If the average exchange rate of Year 1 is $1.50 per euro (all other information remains unchanged), what would be the translated income before income taxes?

$1,585,600

Refer to the foreign currency balance sheet of Italco in Exhibit 7.8. If the exchange rate on December 31, Year 1 is $1.30 per euro, what would be the translated total liabilities?

$3,029,000

Refer to the foreign currency balance sheet of Italco in Exhibit 7.8. If the exchange rate on December 31, Year 1 is $1.30 per euro, what would be the translated total assets?

$4,979,000

Net asset balance on 1/1/Year 1 = 1,000,000 euro. Net income in Year 1 = 825,000 euro. Dividend of 325,000 euro was declared on 12/1/Year 1. The exchange rates are as follows: On 1/1/Year 1: $1.30 = 1 euro Average in Year 1: $1.27 = 1 euro On 12/1/Year1: $1.25 = 1 euro On 12/31/Year1: $1.20 = 1 euro What is the translation adjustment in Year 1?

($141,500)

Net asset balance on 1/1/Year 1 = 1,000,000 euro. Net income in Year 1 = 825,000 euro. Dividend of 325,000 euro was declared on 12/1/Year 1. The exchange rates are as follows: On 1/1/Year 1: $1.40 = 1 euro Average in Year 1: $1.35 = 1 euro On 12/1/Year1: $1.25 = 1 euro On 12/31/Year1: $1.20 = 1 euro What is the translation adjustment in Year 1?

($307,500)

Refer to the foreign currency balance sheet of Italco in Exhibit 7.8. If the exchange rate on December 31, Year 1 is $1.30 per euro (no other changes), what would be the cumulative translation adjustment?

($59,750)

Vichy purchases an equipment on January 1, Year 1, for FC1,000 when the exchange rate is US$2 per FC1. The equipment is estimated to have a five-year useful life and no residual value. On December 31, Year 1, the exchange rate is US$1.5 per FC1. Use temporal method of translation to determine (1) the value of the equipment, (2) depreciation expense and (3) accumulated depreciation of the equipment reported on the parent financial statements at the end of Year 1.

(1) $2,000; (2) $400; (3) $400

Vichy purchases an equipment on January 1, Year 1, for FC2,000 when the exchange rate is US$1 per FC1. The equipment is estimated to have a five-year useful life and no residual value. On December 31, Year 1, the exchange rate is US$2 per FC1. Use temporal method of translation to determine (1) the value of the equipment, (2) depreciation expense and (3) accumulated depreciation of the equipment reported on the parent financial statements at the end of Year 1.

(1) $2,000; (2) $400; (3) $400

The two conceptual problems with treating translation adjustments as gains/losses in net income are: 1. The gain or loss is unrealized, there is no accompanying cash inflow or outflow. 2. The gain or loss may not be consistent with economic reality when the depreciation of a foreign currency may have a positive impact on the foreign operation's export sales and income. 3. The gain or loss is unrealized because the exchange rates used in the translation process are not official exchange rates.

1 and 2

Translation adjustments and remeasurement gains/losses are a function of the following factor(s): 1. Changes in the exchange rate 2. Balance sheet exposure 3. Total assets

1 and 2

Assume a U.S. entity has a Canadian subsidiary, which maintain its accounting records and prepares its financial statements in the local currency, the Canadian dollar. Purchases, sales and financing activities of the subsidiary are in Mexican pesos. What is the procedure to convert the subsidiary's financial statements into parent currency? 1. Remeasurement: converting the subsidiary's financial statements from Canadian dollar into Mexican pesos using temporal method 2. Remeasurement adjustment recognized in net income 3. Translation: converting the subsidiary's financial statements from Mexican pesos into USD. 4. Translation adjustment deferred to stockholders' equity (AOCI)

1, 2, 3, then 4

Balance sheet exposure can be hedged through the use of: 1. a forward contract 2. a foreign currency option 3. a foreign currency borrowing

1, 2, and 3

Select the best answer to complete the following statement: "A country is defined as a highly inflationary economy if its cumulative three-year inflation exceeds _____."

100 percent

If all assets and liabilities are translated at a lower exchange rate and equity items are translated at a higher exchange rate, what kind of translation adjustment must be recorded to make the balance sheet "balanced"?

A negative (debit) translation adjustment

A foreign subsidiary of Wampoa Ltd. has one asset (inventory) and no liabilities. The subsidiary operates with a significant degree of autonomy from Wampoa and primarily uses the local currency (the won) in carrying out its transactions. Since the date the inventory was acquired, the won has decreased in value in relation to Wampoa's reporting currency. In translating the foreign subsidiary's won financial statements into the parent's reporting currency, which of the following is true under IFRS?

A negative translation adjustment must be reported in stockholders' equity.

Which one of the following items is remeasured using the current exchange rate under the temporal method?

Accounts Payable

In the example of Parentco and its subsidiary Foreignco, how would the investment in Foreignco reported in the balance sheet of Parentco?

As an investment asset, reported in US$

Under the current rate method, if revenues and expenses are assumed to incur evenly throughout the year, which exchange rate should be used to translate revenues and expenses?

Average exchange rate

Under the current rate method, which exchange rate should be used to translate cost of goods sold, depreciation of property, plant and equipment and amortization of intangible?

Average exchange rate

Why were U.S. multinational companies strongly opposed to SFAS 8?

Because they considered reporting translation gains/losses in income to be inappropriate because the gains/losses are unrealized

Which countries in the past have been considered "highly inflationary economies"?

Brazil, Israel, Venezuela, and Zimbabwe

Under current rate method, at which exchange rate are property, plant and equipment translated?

Current exchange rate


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