ACC 520 - Chapter 8
High inflationary economies, when considering compounding, have an approximate annual inflation rate of
26% for three years in a row
Placo Ltd., a Scottish subsidiary of Limko, Inc. , a US compay, showed cost of goods sold on its income statement for the year ended December 31, 2010. Inventory, 1/1/10 100,000 Purchases 900,000 COGS, Available for sale 1,00,000 December 31, 2010 exchange .552 December 31, 2009 exchange .560 2010 average .547 What amount should be used to consolidate Placo's COGS into Limko's income statement under the temporal method?
443,900
Which of the following items on the balance sheet is subject to accounting exposure?
All accounts translated at current exchange rates.
Which of the following statements is true of nonlocal currency balances in the foreign currency financial statements of foreign operations?
Any loss is reflected in the measurement of consolidated net income.
When the current rate method is used, the sign (+ or -) of the translation adjustment is the result of:
Appreciation or depreciation of the foreign currency and the nature of the balance sheet exposure
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?
As a decrease in income (loss on disposal)
Under FASB ASC 830, Foreign Currency Matters, when the temporal method is used, how are translation adjustments treated in the consolidated financial statements?
As gains or losses on the current period consolidated income statement.
Under the current rate method of translating foreign currency statements, what exchange rate should be used for cost of goods sold?
Average rate during the year
What is meant by the "translation" of foreign currency financial statements?
Converting financial statements of a foreign currency into a domestic currency.
Why would the management of a multinational corporation incur real costs to hedge accounting exposure, which is only on paper?
Fluctuations in reported income may affect stock price. Management compensation may be tied to accounting income. Hedging can smooth income.
Which of the following is a non-derivative hedging instrument?
Foreign currency borrowing
Which of the following actions could a company use to hedge balance sheet exposure?
Forward contract, foreign currency option, and foreign currency borrowing.
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?
Historical Rate
Under both the temporal method and the current rate method, what exchange rate should be used to translate a foreign subsidiary's additional pain-in capital into parent company currency?
Historical rate
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?
Historical rate
Under the current rate method of translating foreign currency financial statements, what is the amount of the balance sheet exposure?
It is equal to the foreign operation's net asset position.
A Danish subsidiary of a US corporation recorded a building it purchased in 2010 for 100,000,000 krone, when the exchange rate was .132/krone. The current exchange rate is .163/krone. Under the current rate method, how should the translated amount of the restated asset be interpreted?
None of the above
Of all of the following methods for translating foreign currency financial statements, which one maintains the underlying valuation method (ie historical cost or current value) used by the foreign subsidiary?
Temporal method
Under US GAAP, what method of translating foreign currency financial statements must be used for subsidiaries in highly inflationary economies.
Temporal method
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.
Temporal method
Which of the following methods for translating foreign currency financial statements require to be used under IAS 21?
Temporal method
International accounting standards define functional currency as:
The currency of the primary economic environment in which the subsidiary operates.
Homeko, Inc. is located in the US but it was subsidiaries in Germany. When the euro appreciates relative to the U.S. Dollar, which is the direction of the translation adjustment to consolidate Homeko's financial statements?
When there is net asset exposure, the translation adjustment will be positive.
Excellent, Inc. is located in the U.S. but it has subsidiaries in Japan. When the yen depreciates relative to the US Dollar, what is the direction of the translation adjustment to consolidate Excellent's financial statements?
When there is net liability exposure, the translation adjustment will be positive.
Nonmonetary assets do not include
accounts receivable
Placo Ltd., a Scottish subsidiary of Limko, Inc. , a US compay, showed cost of goods sold on its income statement for the year ended December 31, 2010. Inventory, 1/1/10 100,000 Purchases 900,000 COGS, Available for sale 1,00,000 December 31, 2010 exchange .552 December 31, 2009 exchange .560 2010 average .547 What amount should be used to consolidate Placo's COGS into Limko's income statement under the current rate method?
437,600
Under FASB ASC 830, Foreign Currency Matters, when the current rate methof is used, how are translation adjustments treated in the consolidated financial statements?
As part of other comprehensive income on the consolidated balance sheet.
Which of the following is a limitation of using the temporal method for translating foreign currency financial statements?
Financial ratios after translation will be distorted
What is the "disappearing plant" problem that is addressed by FASB ASC 830, Foreign Currency Matters?
High inflation can result in extreme decrease in the reported amount of foreign fixed assets.
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?
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?
Historical rate
How is the international standard for translating foreign currency financial statements (IAS 21) different from US GAAP with respect to subsidiaries in hyperinflationary economies?
IAS 21 requires that the subsidiary's financial statemensts be restated to account for the inflation before using the current exchange rate for all balance sheet accounts.
When should the balance sheet exposure arising from the current rate method become realized?
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?
It is the currency least likely to experience hyperinflation.
Using the temporal method of translating foreign currency financial statements, what bases should be employed when using the "lower of cost or market" rule for inventory valuation?
Lower of parent currency cost or parent currency market at appropriate exchange rate.
Which of the following is true of monetary assets?
Monetary assets are those assets whose values do not fluctuate over time.
What is one problem in translating retained earnings using either the temporal or current rate method?
Net income is calculated differently, depending upon which method is used.
What is the cause of balance sheet exposure?
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?
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?
Parent company management
What is the paradox of hedging balance sheet exposure?
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?
Sales price not affected by changes in exchange rate in the short-run
Which method of translating foreign currency financial statements must be used according to FASB ASC 830, Foreign Currency Matters?
Temporal Method for subsidiaries that are closely controlled by the parent and current rate method for subsidiaries which are not.
A Danish subsidiary of a US corporation recorded a building it purchased in 2010 for 100,000,000 krone, when the exchange rate was .132/krone. The current exchange rate is .163/krone. Under the temporal method, how should the translated amount of the restated asset be interpreted?
The US parent would have to pay 13,000,000 to acquire the building in 2010.
Which of the following is not among the four methods which have been used to translate foreign currency financial statements globally?
The historic/non-historic method
Under FASB ASC 830, Foreign Currency Matters, what is the definition of "functional currency"?
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?
There is no single rate that can be used for this purpose.
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?
This allows the use of the current method, which defers recognizing translation gains or losses in income.
What is the primary difference between transaction exposure and accounting exposure?
Transaction exposure results in changes in cash flow, whereas accounting exposure does not necessarily result in changes in cash flow.
What is another term for "balance sheet exposure"?
Translation exposure
What is the objective in hedging balance sheet exposure?
Creating an equilibrium between foreign currency asset and foreign currency liability balances affected by exchange rates.
How does FASB ASC 830, Financial Currency Matter define a "highly inflationary economy"?
Cumulative three-year inflation over 100%
Essco Ltd., a foreign subsidiary of Peako Corp,. has written down its inventory to current market value under a "lower of cost of market" rule. When consolidating Essco's balance sheet into Peako's balance sheet using the current method, what exchange rate should be used for the inventory under the temporal method?
Current rate
Companies must choose between which exchange rates for consolidating foreign subsidiaries?
Current rate and historical rate
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?
Current rate method
Which of the following methods for translating foreign currency financial statements is required under IAS 21?
Current rate method or temporal method, depending on the functional currency of the subsidiary.
Which of the following methods for translating foreign currency financial statements is no longer allowed under US GAAP?
Current/noncurrent method