Exam 2: Chapter 8

Under FASB ASC 830, Foreign Currency Matters, when the temporal method is used, how are translation adjustments treated in the consolidated financial statements?

A. As gains or losses on the current period consolidated income statement

*When the parent company of a foreign subsidiary believes that all of its investment in the subsidiary is exposed to foreign exchange risk, what method of translation should be used in consolidating the financial statements?

A. Current rate method

How is the international standard for translating foreign currency financial statements (IAS 21) different from U.S. GAAP with respect to subsidiaries in hyperinflationary economies?

A. IAS 21 requires that the subsidiary's financial statements be restated to account for the inflation before using the current exchange rate for all balance sheet accounts.

What is the paradox of hedging balance sheet exposure?

A. Real costs can be incurred to hedge an unrealized translation adjustment.

According to FASB ASC 830, Foreign Currency Matters, which of the following conditions would indicate that a foreign subsidiary's functional currency is the foreign currency?

A. Sales price not affected by changes in exchange rate in the short-run

*Which of the following is NOT among the four methods which have been used to translate foreign currency financial statements globally?

A. The historic/non-historic method

Homeko, Inc. is located in the U.S., but it has subsidiaries in Germany. When the euro appreciates relative to the U.S. dollar, what is the direction of the translation adjustment to consolidate Homeko's financial statements?

A. When there is net asset exposure, the translation adjustment will be positive.

*Parentco, Inc. had a negative cumulative translation adjustment of ($250,000) on its balance sheet pertaining to its investment in Subko Ltd at the point in time that Parentco sold its interest in Subko. How must Parentco handle this translation adjustment when it records the sale of Subko?

B. As a decrease in income (loss on disposal)

Under the current rate method of translating foreign currency financial statements, what exchange rate should be used for cost of goods sold?

B. Average rate during the year

*What is meant by the "translation" of foreign currency financial statements?

B. Converting financial statements of a foreign currency into a domestic currency

*What is the objective in hedging balance sheet exposure?

B. Creating an equilibrium between foreign currency asset and foreign currency liability balances affected by exchange rates

Essco Ltd, a foreign subsidiary of Peako Corp., has written down its inventory to current market value under a "lower of cost or market" rule. When consolidating Essco's balance sheet into Peako's balance sheet using the current rate method, what exchange rate should be used for the inventory under the temporal method?

B. Current rate

*Which of the following methods for translating foreign currency financial statements is no longer allowed under U.S. GAAP?

B. Current/Noncurrent method

What is the "disappearing plant" problem that is addressed by FASB ASC 830, Foreign Currency Matters?

B. High inflation can result in extreme decreases in the reported amounts for foreign fixed assets.

Under both the temporal method and the current rate method, what exchange rate should be used to translate a foreign subsidiary's dividends into parent company currency?

B. Historical rate

What exchange rate should be used to translate the common stock of Essco Ltd, a foreign subsidiary of Peako Corp., when consolidating the financial statements using the current rate method?

B. Historical rate

*Which of the following is true of monetary assets?

B. Monetary assets are those assets whose values do not fluctuate over time

A Danish subsidiary of a U.S. corporation recorded a building it purchased in 2010 for 100,000,000 krone, when the exchange rate was $0.132/krone. The current exchange rate is $0.163/krone. Under the temporal method, how should the translated amount of the restated asset be interpreted?

B. The U.S. parent would have had to pay $13,200,000 to acquire the building in 2010.

*What is the primary difference between transaction exposure and accounting exposure?

B. Transaction exposure results in changes in cash flow, whereas accounting exposure does not necessarily result in changes in cash flow.

*When would the balance sheet exposure arising from the current rate method become realized?

C. It is realized when the foreign operation is sold at book value and the proceeds are converted into parent company currency.

*Under IAS 21, which of the following is NOT a factor in determining functional currency?

C. It is the currency least likely to experience hyperinflation.

*Using the temporal method of translating foreign currency financial statements, what basis should be employed when using the "lower of cost or market" rule for inventory valuation?

C. Lower of parent currency cost or parent currency market at appropriate exchange rate

What is one problem in translating retained earnings using either the temporal or current rate method?

C. Net income is calculated differently, depending upon which method is used.

*Of the following methods for translating foreign currency financial statements, which one maintains the underlying valuation method (i.e. historical cost or current value) used by the foreign subsidiary?

C. Temporal method

*Which of the following methods for translating foreign currency financial statements require to be used under IAS 21?

C. Temporal method

Under U.S. GAAP, what method of translating foreign currency financial statements must be used for subsidiaries in highly inflationary economies?

C. Temporal method

In their research published in 1988 related to translating foreign currency financial statements, Doupnik and Evans found that U.S. multinationals were biased in favor of using a foreign currency as the functional currency. What reason did the researchers give for this management decision?

C. This allows the use of the current method, which defers recognizing translation gains or losses in income

A Danish subsidiary of a U.S. corporation recorded a building it purchased in 2010 for 100,000,000 krone, when the exchange rate was $0.132/krone. The current exchange rate is $0.163/krone. Under the current rate method, how should the translated amount of the restated asset be interpreted?

D. None of the above

What is the cause of balance sheet exposure?

D. None of the above

Which of the following methods uses the current exchange rate to consolidate all accounts of a foreign subsidiary into the financial statements of its parent?

D. None of the above

Under FASB ASC 830, Foreign Currency Matters, what group is responsible for determining the functional currency of a foreign subsidiary for many cases?

D. Parent company management

*Which of the following methods for translating foreign currency financial statements attempts to produce consolidated financial statements as if a foreign subsidiary had actually used the parent company's currency for all its transactions?

D. Temporal method

Which method of translating foreign currency financial statements must be used according to FASB ASC 830, Foreign Currency Matters?

D. Temporal method for subsidiaries that are closely controlled by the parent and current rate method for subsidiaries which are not

Under FASB ASC 830, Foreign Currency Matters, what is the definition of "functional currency?"

D. The primary currency of the foreign entity's operating environment

Under the temporal method of translating foreign currency financial statements, what exchange rate should be used for cost of goods sold?

D. There is no single rate that can be used for this purpose

International accounting standards define functional currency as:

B. the currency of the primary economic environment in which the subsidiary operates.

High inflationary economies, when considering compounding, have an approximate annual inflation rate of:

C. 26% for three years in a row.

*Which of the following statements is true of nonlocal currency balances in the foreign currency financial statements of foreign operations?

C. Any loss is reflected in the measurement of consolidated net income.

Under FASB ASC 830, Foreign Currency Matters, when the current rate method is used, how are translation adjustments treated in the consolidated financial statements?

C. As part of other comprehensive income on the consolidated balance sheet

*Companies must choose between which exchange rates for consolidating foreign subsidiaries?

C. Current rate and historical rate

Which of the following methods for translating foreign currency financial statements is required under IAS 21?

C. Current rate method or temporal method, depending on the functional currency of the subsidiary.

Which of the following is a limitation of using the temporal method for translating foreign currency financial statements?

C. Financial ratios after translation will be distorted.

Which of the following is a nonderivative hedging instrument?

C. Foreign currency borrowing

According to FASB ASC 830, Foreign Currency Matters, which of the following conditions would indicate that a foreign subsidiary's functional currency is the parent company's currency?

C. High volume of intercompany transactions

Under the temporal method of consolidating foreign currency financial statements, what exchange rate should be used for translating the depreciation expense recorded by a subsidiary?

C. Historical rate

Under the current rate method of translating foreign currency financial statements, what is the amount of the balance sheet exposure?

C. It is equal to the foreign operation's net asset position.

What is another term for "balance sheet exposure?"

C. Translation exposure

15. Excellent Inc. is located in the U.S., but it has subsidiaries in Japan. When the yen depreciates relative to the U.S. dollar, what is the direction of the translation adjustment to consolidate Excellent's financial statements?

C. When there is net liability exposure, the translation adjustment will be positive.

Nonmonetary assets DO NOT include:

C. accounts receivable.

*When the current rate method is used, the sign (+ or -) of the translation adjustment is the result of:

C. both (A) and (B).

12. Which of the following items in the balance sheet is subject to accounting exposure?

D. All accounts translated at current exchange rates

Why would the management of a multinational corporation incur real costs to hedge accounting exposure, which is only on paper?

D. All of the above

53. Which of the following actions could a company use to hedge balance sheet exposure?

D. All of the above may be used to hedge balance sheet exposure.

How does FASB ASC 830, Foreign Currency Matters define a "highly inflationary economy?"

D. Cumulative three-year inflation over 100%

Under both the temporal method and the current rate method, what exchange rate should be used to translate a foreign subsidiary's additional paid-in capital into parent company currency?

D. Historical rate