International Accounting final exam

C. When there is net liability 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 U.S. dollar, what is the direction of the translation adjustment to consolidate Excellent's financial statements?

C. 26% for three years in a row.

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

C. IASB standards and U.S. GAAP are essentially the same for accounting for joint ventures.

How are IASB requirements to account for joint ventures different from U.S. GAAP?

D. All of the above.

How do multinational corporations combine operations?

D. Cumulative three-year inflation over 100%

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

A. The cumulative inflation rate over a three-year period is 75% or higher.

Which of the following is NOT a characteristic which is indicative of hyperinflation under IAS 29?

A. The historic/non-historic method

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

C. U.S. GAAP does not require reporting of segment liabilities.

Which of the following is a difference that exists between IFRS 8 and U.S. GAAP?

C. Financial ratios after translation will be distorted.

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

B. Inflation is insignificant in the U.S. and the U.K. since late 1980's.

Why inflation accounting is NOT required in the United States and the United Kingdom since late 1980s?

D. All of the above

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

D. None of the above

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?

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

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. 12%

A representative market basket of products cost $250 at the beginning of the year, and the same collection of products costs $280 at the end of the year. What is the annual rate of inflation?

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

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. A parent corporation and all of its subsidiary corporations

For the purpose of financial reporting under IASB standards, what is a "group?"

B. IFRS excludes subsidiaries acquired for disposal within one year from the consolidation requirement, whereas U.S. GAAP requires all controlled subsidiaries to be consolidated.

How does U.S. GAAP differ from IFRS with respect to presenting consolidated financial statements?

B. It is allowed to be expensed in the year the subsidiary is acquired.

How is Goodwill resulting from business combinations treated under Japanese GAAP?

D. It is treated as an extraordinary gain on the consolidated income statement.

How is negative goodwill accounted for under U.S. GAAP?

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.

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?

C. It must be written down when its fair value is less than its carrying value.

How must Goodwill resulting from business combinations be treated under U.S. GAAP?

A. Parent company concept

IFRS 3, issued in 2004, eliminated the use of which concept for reporting assets and liabilities of an acquired company on the parent company's consolidated financial statements?

B. expanded U.S. GAAP to consider effective control rather than legal control for consolidated financial statements.

In January 2003, the FASB released Interpretation 46, "Consolidation of Variable Interest Entities," which:

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

International accounting standards define functional currency as:

B. As Goodwill on the consolidated balance sheet

Mega Corporation acquired 65% of the voting shares of Forko Ltd for €10 billion and used the purchase method of accounting for the merger. Mega Corporation's interest in Forko Ltd. had a restated value of €950 million. How should the difference be accounted for by Mega Corporation?

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

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. $437,600

Placo Ltd., a Scottish subsidiary of Limko, Inc., a U.S. company, showed cost of goods sold on its income statement for the year ended December 31, 2010. What amount should be used to consolidate Placo's cost of goods sold into Limko's income statement under the current rate method?

B. Purchase method

Since 2001, which method of accounting for a business combination is required under U.S. GAAP?

A. No rule is currently in place that generally requires inflation-adjusted financial statements.

Since 2003, what method for supplemental disclosure of inflation-adjusted financial statements is required of all companies affected by the IASB standards?

A. criterion for consolidation purposes.

Under ARB 51, "controlling financial interest" is:

B. 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?

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

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?

A. $443,900

What amount should be used to consolidate Placo's cost of goods sold into Limko's income statement under the temporal method?

C. On average, a typical basket of goods costs 5% more at the end of the year than it did at the beginning of the year.

What does it mean to say that the inflation rate last year was 5%?

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?

C. Translation exposure

What is another term for "balance sheet exposure?"

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

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

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

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

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

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

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

What is the objective in hedging balance sheet exposure?

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

What is the paradox of hedging balance sheet exposure?

C. both (A) and (B).

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

B. Current/Noncurrent method

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

D. 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?

C. 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 required under IAS 21?

C. Temporal method

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

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?

A. The pooling of interests method is no longer acceptable under IFRS.

Which of the following statements is true about pooling of interests method of accounting for business combinations?

B. One-line consolidation

Which of the following terms is often used to describe the equity method of accounting?

A. Consolidation obscures facts that may be important for evaluating financial statements.

Why do financial analysts and other readers of financial statements want segmented information?

B. Entry B

Canto Ltd, a Spanish corporation, acquired 100% interest in Bevo, Inc., a U.S. corporation for $50,000,000. The net assets of Bevo had a book value of $35,000,000 and a fair value of $46,000,000. How should Canto record the business combination?

D. Entry D

Canto Ltd, a Spanish corporation, acquired 100% interest in Bevo, Inc., a U.S. corporation for $50,000,000. The net assets of Bevo had a book value of $35,000,000 and a fair value of $56,000,000. How should Canto record the business combination?

C. Current rate and historical rate

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

C. High volume of intercompany transactions

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?

D. All of the above may result in control by one corporation over another.

According to IAS 27, how can effective control be achieved without owning more than 50% of another company's voting shares?

C. It should be recognized immediately as a gain in the income statement.

According to IFRS 3, how should companies account for negative goodwill arising from business combinations?

C. It is required to be tested for impairment every year.

According to IFRS 3, which of the following statements is true about the treatment of Goodwill arising from business combinations?

A. The factors used to identify operating segments

According to both IFRS 8 and U.S. GAAP, which of the following information should be disclosed for each separate reportable operating segment?

B. Average rate during the year

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

B. Current rate

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?

A. Purchase method

Mega Corporation acquired 65% of the voting shares of Forko Ltd. Mega consolidated its accounts by restating assets and liabilities of the subsidiary at fair value on the date the shares were acquired. Which of the following methods for accounting for the business combination is being used by Mega Corporation?

C. accounts receivable.

Nonmonetary assets DO NOT include:

C. Temporal method

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

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

C. Historical rate

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?

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

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

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

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

C. The power to govern financial and operating policies of an entity so as to obtain the benefits from its activities

Under IAS 27, how is "control" defined?

C. As an element of income in the current year

Under general purchasing power accounting, how is the gain or loss in purchasing power reported?

C. Joint venture

What term does IAS 11 use for "a contractual arrangement whereby two or more parties having joint control have right to the net assets of the arrangement"?

C. Consolidation

What term is used to refer to presenting the financial statements for a group of enterprises as if it was a single entity?

A. Current rate method

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?

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

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

B. General purchasing power.

Which method most closely represents the requirement of IAS 29 for reporting financial statements of companies in hyperinflationary economies

A. Current replacement cost method

Which method of accounting for changing prices (inflation) reflects current replacement cost of specific assets?

D. General purchasing power method

Which method of accounting for changing prices (inflation) updates assets by applying inflation rates to historical costs?

D. Inflation accounting is not required under U.S. GAAP.

Which method of accounting for inflation is used under U.S. GAAP?

D. All of the above are potential problems

Which of the following is potentially a problem associated with historical cost-based financial statements in periods of inflation?

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

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

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

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

D. None of the above

Which of the following countries requires companies to use current replacement cost accounting to prepare primary financial statements?

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

Which of the following is true of monetary assets?

B. Additions to long-lived assets where such assets are hard to be readily removed

Which of the following disclosures is required by U.S. GAAP in addition to separate reporting for operating segments?

B. Information about intersegmental transfer pricing

Which of the following entity-wide disclosures is NOT required under both IFRS 8 and U.S. GAAP?

C. Foreign currency borrowing

Which of the following is a nonderivative hedging instrument?

D. All of the above are reasons for segmented reporting.

Which of the following is a reason to report segmented accounting information for multinational enterprises?

D. All accounts translated at current exchange rates

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

C. Management approach

IFRS 8 adopts which approach to report segmented financial information?

B. purchasing power losses.

Holding monetary assets during a period of inflation results in:

A. purchasing power gains.

Holding monetary liabilities during a period of inflation results in:

C. General purchasing power

Prior to 2007, which method of accounting for inflation most closely represented the supplemental reporting required in Mexico?

C. Entity concept

Under IFRS 3, which concept must be used to report the assets and liabilities of an acquired company on the parent company financial statements?

C. The segment must have revenue that is more than half from external sources.

Under IFRS 8, which of the following criteria is NOT considered by all segments that are considered reportable business segments?

C. 20% ownership of voting shares.

Under U.S. GAAP and IASB standards, the threshold for determining "significant influence" in an associate enterprise is:

C. Temporal method

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

B. Fair value

Under both IFRS and U.S. GAAP, which of the following methods should be used by an investing entity to report accounting for investment in nonconsolidated subsidiaries?

D. 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 paid-in capital into parent company currency?

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

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

C. The increase in owners' equity resulting from holding nonmonetary assets during a period of inflation

What is a "holding gain?"

D. Mandating inflation adjustment for primary financial statements of companies in hyperinflationary economies

What issue of reporting effects of changing prices is addressed by IAS 29, issued by the International Accounting Standards Board in 1989?