Econ 139 Chapter 8 - Foreign Currency Translation

How is RE calculated?

-computed on 1/1 value + translated/remeasured NI - translated dividends

Parent's currency

-currency in which the parent prepares and issues its consolidated financial statements

Local currency

-currency in which the subsidiary records its transactions and prepares its financial statement information

How is the remeasurement gain/loss calculated

-in the income statement for temporal -it is a plug to balance the trail balance

Which of the following best describes current GAAP with respect to the translation process? a. Assets and liabilities are translated at the exchange rate at the balance sheet date regardless of when they arose. b. Assets and liabilities are translated at the exchange rate in effect when they arose. c. Assets are translated at the exchange rate at the balance sheet date, but liabilities are translated at the exchange rate in effect with the liabilities were incurred. d. Revenues and expenses must be translated at the exchange rate in effect then they are recognized.

a. Assets and liabilities are translated at the exchange rate at the balance sheet date regardless of when they arose.

An exchange rate of $1.34:€1: a. Can also be expressed as $1:€0.75 b. Means that each $US is worth 1.34€ c. Implies that the $US has strengthened vis-à-vis the € d. Implies that the € has strengthened vis-à-vis the $US

a. Can also be expressed as $1:€0.75

A highly inflationary economy is best defined as: a. One which has a cumulative inflation of over 100% over a three-year period b. One in which the rate of inflation is greater than that of the parent company c. One with inflation that is greater than its neighboring countries d. None of the above

a. One which has a cumulative inflation of over 100% over a three-year period

Assume that the $US has weakened with respect to the Euro and that we have a Euro-denominated payable. a. Our company will accrue a loss on the statement date. b. Our company will report the gain only on the payment date. c. Our company will not report a gain or loss because there has been no cash effect. d. Our company will report the loss only on the payment date.

a. Our company will accrue a loss on the statement date.

Which of the following best describes the cumulative translation adjustment? a. The cumulative translation adjustment is a plug figure to balance the trial balance. b. Changes in the cumulative translation adjustment are reflected in net income for the period. c. The cumulative translation adjustment reflects changes in the fair values of marketable securities on the balance sheet. d. The cumulative translation adjustment can only be a positive dollar amount.

a. The cumulative translation adjustment is a plug figure to balance the trial balance.

Upon the sale of a foreign subsidiary: a. The gain or loss on the sale is affected by the balance of the cumulative translation adjustment account. b. The gain or loss on the sale is only reflected in other comprehensive income (OCI) not in net income. c. The gain or loss on the sale is not affected by the balance of the cumulative translation adjustment account. d. The equity adjustment account is first adjusted to current market value before the gain or loss on sale is recognized.

a. The gain or loss on the sale is affected by the balance of the cumulative translation adjustment account.

Which of the following best describes the accounting for nonmonetary assets and liabilities? a. They are reported at their historical cost b. They are reported at market value c. Declines in market value are recognized, but only if other than temporary d. We recognize decreases in fair value, but not increases

a. They are reported at their historical cost

A foreign currency subsidiary's functional currency is its local currency, which has not experienced significant inflation. The weighted average exchange rate for the current year would be the appropriate exchange rate for translating salary expenses and sales to external customers a. yes yes b. yes no c. no yes d. no no

a. yes yes

Which of the following best describes the accounting for the net investment in a foreign subsidiary? a. The net investment in a foreign subsidiary is reported at fair value. b. Companies can hedge the net investment in a foreign subsidiary like any other investment. c. The net investment in a foreign subsidiary is reported on the consolidated balance sheet at historical cost. d. Both a and b are true

b. Companies can hedge the net investment in a foreign subsidiary like any other investment.

Which of the following statements is true? a. The functional currency cannot be changed once it is selected. b. If the functional currency is changed, prior financial statements continue to be reported in the previous functional currency. c. The functional currency can be changed as often as is deemed necessary to minimize fluctuations in reported earnings. d. If the functional currency is changed, previously issued financial statements should be restated into the new functional currency.

b. If the functional currency is changed, prior financial statements continue to be reported in the previous functional currency.

Monetary assets and liabilities are assets and liabilities: a. Which include only cash and marketable securities b. Which are measured at fair value c. Whose amounts are fixed in terms of units of currency by contract or otherwise d. All of the above

c. Whose amounts are fixed in terms of units of currency by contract or otherwise

Gains from remeasuring a foreign subsidiary's financial statements from the local currency, which is not the functional currency, into the parent company's currency should be reported as a(n): a. other comprehensive income item. b. extraordinary item (net of tax). c. part of continuing operations. d. deferred credit

c. part of continuing operations.

What is the exchange rate used for Revenues?

current: weighted average temporal: weighted average

What is the exchange rate used for operating expenses?

current: weighted average temporal: weighted average

Which of the following are indications that the subsidiary is not autonomous? a. Significant assets may be acquired from the parent or otherwise by expending the parent's functional currency. b. The sale of assets may make available to the parent units of the parent's functional currency. c. Financing is primarily by the parent or otherwise in the parent's functional currency. d. All of the above

d. All of the above

Why is remeasurement required for companies that are in economies with very high rates of inflation? a. Because the purchasing power of their currencies is low b. Because their liabilities would be translated at ever-increasing $US amounts as a result of the strengthening of the $US c. Because the $US value of reported assets would increase significantly, thus misreporting their true replacement cost d. Because the net assets of the subsidiary would decrease significantly, maybe to zero

d. Because the net assets of the subsidiary would decrease significantly, maybe to zero

Are translation adjustments reflected in earnings?

no

Functional currency

-currency of the primary economic environment in which the subsidiary operates, normally that is the currency of the environment which subsidiary primarily generates and expends cash

How is the cumulative translation adjustment solved for?

-in balance sheet and for current method -computed on 1/1 carryforward balance +/- current period translation gain or loss, its a plug that falls out of the trial balance

Which of the following best describes the accounting for nonmonetary assets and liabilities? a. They are reported at fair value b. Revenues and expenses arising from these assets are translated at historical cost c. They are reported at fair value only if less than historical cost d. None of the above are true

b. Revenues and expenses arising from these assets are translated at historical cost

Do translation adjustments have an immediate effect on cash flows?

No

A wholly owned subsidiary of a U.S. parent company has certain expense accounts for the year ended December 31, 2008, stated in local currency units (LCU) as follows: LCU Depreciation of equipment (related assets were purchased January 1, 2006) 300,000 Provision for doubtful accounts 200,000 Rent 500,000 The exchange rates at various dates are as follows: Dollar equivalent of 1 LCU December 31, 2008 $.50 Average for year ended 12/31/08 .55 January 1, 2006 .40 Assume that the LCU is the subsidiary's functional currency and that the charges to the expense accounts occurred approximately evenly during the year. What total dollar amount should be included in the translated income statement to reflect these expenses? a. $550,000 b. $505,000 c. $495,000 d. $500,000

a. $550,000

When the functional currency is identified as the U.S. dollar, land purchased by a foreign subsidiary after the controlling interest was acquired by the parent company should be translated using the a. historical rate in effect when the land was purchased. b. current rate in effect at the balance sheet date. c. forward rate. d. average exchange rate for the current period.

a. historical rate in effect when the land was purchased.

Assuming no significant inflation, gains resulting from the process of translating a foreign entity's financial statements from the functional currency to U.S. dollars should be included as a(n): a. other comprehensive income item. b. extraordinary item (net of tax). c. part of continuing operations. d. deferred credit.

a. other comprehensive income item.

The equity investment account: a. Is not recognized in the case of foreign subsidiaries b. Is reported at fair value on the consolidated balance sheet with unrealized gains or losses reflected in Accumulated Other Comprehensive Income (AOCI) c. Is updated for both the change in the cumulative translation adjustment and for AAP translation gains or losses d. Is updated for only the change in the cumulative translation adjustment and not for AAP translation gains or losses

c. Is updated for both the change in the cumulative translation adjustment and for AAP translation gains or losses

When translating foreign currency financial statements for a company whose functional currency is the U.S. dollar, which of the following accounts is translated using historical exchange rates? Notes Payable Equipment a. Yes Yes b. Yes No c. No No d. No Yes

c. No No

One of out subsidiary companies maintains its accounting records in Euros and designates the British pound as its functional currency. Your computation yields a translation gain of 5,000 and a remeasurement loss of 7,000. What amount should you report as a gain or loss in your income statement? a. 0 b. 5,000 c. (7,000) d. (2,000)

c. (7,000)

The following balance sheet accounts of a foreign subsidiary at December 31, 2008, have been translated into U.S. dollars as follows: Translated at Current Rates Historical Rates Accounts receivable, current $ 600,000 $ 660,000 Accounts receivable, long-term 300,000 324,000 Inventories carried at market 180,000 198,000 Goodwill 240,000 270,000 $1,320,000 $1,452,000 What total should be included in the translated balance sheet at December 31, 2008, for the above items? Assume the U.S. dollar is the functional currency. a. $1,320,000 b. $1,338,000 c. $1,350,000 d. $1,404,000

c. 1,350,000

Which of the following best describes the translation of financial statements? a. All asset, liability and equity accounts are translated at the current exchange rate on the financial statement date. b. All asset, liability and equity accounts are translated at an average exchange rate for the period. c. Common stock and APIC accounts are translated at their respective historical exchange rates. d. All equity accounts are translated at their respective historical exchange rates.

c. Common stock and APIC accounts are translated at their respective historical exchange rates.

Which of the following is an indication that the subsidiary is autonomous? a. The subsidiary borrows in the parent's functional currency. b. The subsidiary operates in a highly inflationary economy. c. The subsidiary primarily sells goods that are sold by the parent. d. The subsidiary pays for its purchases using the parent's functional currency.

c. The subsidiary primarily sells goods that are sold by the parent

The appropriate exchange rate for translating a plant asset in the balance sheet of a foreign subsidiary in which the functional currency is the U.S. dollar is the a. current exchange rate. b. average exchange rate for the current year. c. historical exchange rate in effect when the plant asset was acquired or the date of acquisition, whichever is later. d. forward rate.

c. historical exchange rate in effect when the plant asset was acquired or the date of acquisition, whichever is later.

If a subsidiary financial statements are translated using the current rate method, the translation gain (loss) is related to changes in: a. operating profit b. net monetary assets c. stockholder's equity d. working capital

c. stockholder's equity

What is the exchange rate used for accounts payable, notes payable, bonds, deferred taxes and other monetary liabilities?

current: current temporal: current

What is the exchange rate used for cash, a/r, and other monetary assets?

current: current temporal: current

What is the exchange rate used for deferred revenues and other nonmonetary liabilities?

current: current temporal: historical

What is the exchange rate used for ppe, intangible assets, and other monetary liabilities?

current: current temporal: historical

What is the exchange rate used for prepaid expenses, inventory and other nonmonetary current assets?

current: current temporal: historical

What is the exchange rate used for cost of goods sold?

current: weighted average temporal: beg. inv @ historical + purchases @ wtd. avg - end inv @ purchase date

What is the exchange rate used for depreciation expense?

current: weighted average temporal: historical

Which of the following statements is true? a. Revenues and expenses can only be translated at the exchange rate in effect when recognized. b. US GAAP permits an averaging of exchange rates in order to facilitate the translation process and prescribes a specific approach for companies to use. c. Companies are required to use an averaging method that weights transactions by the relative proportion of sales volume during the period. d. Companies are permitted to use an average exchange rate for the period to translate revenues and expenses under the assumptions that revenues and expenses occur evenly throughout the period.

d. Companies are permitted to use an average exchange rate for the period to translate revenues and expenses under the assumptions that revenues and expenses occur evenly throughout the period.

Which of the following is not a factor that must be considered in determining the functional currency? a. In which currencies does the subsidiary transact sales and ultimately generate its cash? b. In which currencies does the subsidiary purchase labor, materials, and other goods and services and ultimately expend cash? c. In which currencies does the subsidiary obtain its financing? d. In which currency will fluctuations in $US value be minimized?

d. In which currency will fluctuations in $US value be minimized?

Which of the following statements is not true? a. Gains and losses arising from remeasurement are reflected in current income. b. Cost of Goods Sold is not computed as the product of the foreign currency amount and an exchange rate. c. There is no cumulative translation adjustment arising from the remeasurement process. d. Remeasurement gains and losses are reflected in Other Comprehensive Income (OCI).

d. Remeasurement gains and losses are reflected in Other Comprehensive Income (OCI).

Which of the following statements is true about the treatment of the AAP in the consolidation process? a. The $US value of the beginning-of-year balance carries over from the previous year. b. The AAP relating to foreign acquisitions is not amortized like that related to US acquisitions. c. There is no gain or loss resulting from the translation of the AAP. d. The translation of the AAP requires both amortization and the recognition of gains or losses on the translation.

d. The translation of the AAP requires both amortization and the recognition of gains or losses on the translation.

Average exchange rates are used to translate certain items from foreign financial statements into U.S. dollars. Such averages are used in order to a. smooth out large translation gains and losses. b. eliminate temporary fluctuation in exchange rates that may be reversed in the next fiscal period. c. avoid using different exchange rates for some revenue and expense accounts. d. approximate the exchange rate in effect when the items were recognized.

d. approximate the exchange rate in effect when the items were recognized.

Which of the following best describes the translation of the statement of cash flows? a. The statement of cash flows is prepared from the translated comparative balance sheet and income statement. b. All line items on the statement of cash flows are translated at the current exchange rate on the statement date. c. Translation of the statement of cash flows generally utilizes the weighted average exchange rate for all line items except significant one-time transactions. d. None of the above are true.

c. Translation of the statement of cash flows generally utilizes the weighted average exchange rate for all line items except significant one-time transactions.