450 CH 10

A foreign subsidiary of a U.S. parent company should measure its assets, liabilities and operations using (AICAP 2015) A. The subsidiary's local currency. B. The subsidiary's functional currency. C. The U.S. dollar. D. The best available spot rate.

B. The subsidiary's functional currency

reconciliation of net asset (schedule)

net asset at current rate net asset at historical rate IF NOTHING ELSE, WRITE THESE ON UR EXAM but this is a translation of foreign currency times 2 different rates so the foreign currency amount will be the same prior to the translation for both net asset amounts

Does net liability exposure exist under current rate method?

no, only under temporal method

REVIEW ACCOUNTING FOR TRANSLATION OF INVENTORY

ok

In accordance with U.S. generally accepted accounting principles, which translation combination is appropriate for a foreign operation whose functional currency is the U.S. dollar? Method Treatment of Translation Adjustment a. Current rate Other comprehensive income b. Current rate Gain or loss in net income c. Temporal Other comprehensive income d. Temporal Gain or loss in net income

d. Temporal Gain or loss in net income (Determine appropriate translation method and treatment of translation adjustment) When the U.S. dollar is the functional currency, U.S. GAAP requires remeasurement using the temporal method with remeasurement gains and losses reported in income.

A company's foreign subsidiary operation maintains its financial statements in the local currency. The foreign operation's capital accounts would be translated to the functional currency of the reporting entity using which of the following rates? (AICPA 2014) A. Historical exchange rate. B. Functional exchange rate. C. Weighted-average exchange rate. D. Current exchange rate at the balance sheet date.

A. Historical exchange rate. The contributed capital accounts of a foreign subsidiary are translated into the currency of the reporting entity using historical exchange rates, the rates in effect when the capital was contributed to the entity.

A foreign 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 (AICPA 2009) Salaries Exp Sales to external customers A. Yes Yes B. Yes No C. No Yes D. No No

A. Yes Yes

Which of the following items should be shown as a component of comprehensive income? (AICPA 2015) A. Dividend paid to a shareholder. B. Foreign-currency translation adjustment. C. Additional capital contribution. D. Deferred revenue.

B. Foreign-currency translation adjustment.

A company from the United Kingdom uses British pounds in its normal operations, reports in the European Union in euros, and reports in the United States in U.S. dollars. The company is owned by a private equity firm in Japan. What is the company's functional currency? (AICPA 2018) A. The Euro. B. The British pound. C. The U.S. dollar. D. The Japanese yen.

B. The British pound A company's functional currency is the currency it uses in the primary economic environment in which it operates, i.e., the currency it uses in its normal operations.

Newberry, Inc., whose reporting currency is the U.S. dollar ($), has a subsidiary in Argentina, whose functional currency also is the $. The subsidiary acquires inventory on credit on November 1, 2017, for 100,000 pesos that is sold on January 17, 2018, for 130,000 pesos. The subsidiary pays for the inventory on January 31, 2018. Currency exchange rates are as follows: November 1, 2017 . . . . . . . . . . . $0.16 = 1 peso December 31, 2017 . . . . . . . . . . . . . . . . . .0.17 = 1 January 17, 2018 . . . . . . . . . . . . . . . . . . . . 0.18 = 1 January 31, 2018 . . . . . . . . . . . . . . . . . . . . 0.19 = 1 What amount does Newberry's consolidated income statement report for cost of goods sold for the year ending December 31, 2018? a. $16,000. b. $17,000. c. $18,000. d. $19,000.

a. $16,000. (Remeasurement process (temporal method) - cost of goods sold)The U.S. dollar is the foreign subsidiary's functional currency, so remeasurement is appropriate. Cost of goods sold is translated at the historical rate in effect when the inventory was acquired [100,000 x $.16 = $16,000].

The functional currency of Bertrand, Inc.'s Irish subsidiary is the euro. Bertrand borrowed euros as a partial hedge of its investment in the subsidiary. Since then, the euro has decreased in value. Bertrand's negative translation adjustment on its investment in the subsidiary exceeded its foreign exchange gain on its euro borrowing. How should Bertrand report the effects of the negative translation adjustment and foreign exchange gain in its consolidated financial statements? a. Report the translation adjustment in accumulated other comprehensive income on the balance sheet and the foreign exchange gain as a gain on the income statement. b. Report the translation adjustment in the income statement and defer the foreign exchange gain in accumulated other comprehensive income on the balance sheet. c. Report the translation adjustment less the foreign exchange gain in accumulated other comprehensive income on the balance sheet. d. Report the translation adjustment less the foreign exchange gain in the income statement.

c. Report the translation adjustment less the foreign exchange gain in accumulated other comprehensive income on the balance sheet. (Treatment of gains and losses on hedges of net investments)Gains and losses on hedges of net investments (whether through a forward contract, borrowing, or other technique) are offset against the translation adjustment being hedged.

In the translated financial statements, which method of translation maintains the underlying valuation methods used in preparing the foreign currency financial statements? a. Current rate method; income statement translated at average exchange rate for the year. b. Current rate method; income statement translated at exchange rate at the balance sheet date. c. Temporal method. d. Monetary/nonmonetary method.

c. Temporal method. (Concepts underlying current rate and temporal methods) By translating items carried at historical cost by the historical exchange rate, the temporal method maintains the underlying valuation method used by the foreign subsidiary in preparing its financial statements.

A net liability balance sheet exposure exists and the foreign currency depreciates. Which of the following statements is generally true? A. There is no translation adjustment. B. There is a positive translation adjustment. C. There is a negative translation adjustment. D. There is a remeasurement loss. E. There is a remeasurement gain.

E. There is a remeasurement gain.

Which of the following items is remeasured using the current exchange rate under the temporal method? a. Bonds payable. b. Dividends declared. c. Additional paid-in capital. d. Amortization of intangibles.

a. Bonds payable. (Remeasurement process (temporal method)) Long-term debt is translated at the current exchange rate under the temporal method.

Newberry, Inc., whose reporting currency is the U.S. dollar ($), has a subsidiary in Argentina, whose functional currency also is the $. The subsidiary acquires inventory on credit on November 1, 2017, for 100,000 pesos that is sold on January 17, 2018, for 130,000 pesos. The subsidiary pays for the inventory on January 31, 2018. Currency exchange rates are as follows: November 1, 2017 . . . . . . . . . . . $0.16 = 1 peso December 31, 2017 . . . . . . . . . . . . . . . . . .0.17 = 1 January 17, 2018 . . . . . . . . . . . . . . . . . . . . 0.18 = 1 January 31, 2018 . . . . . . . . . . . . . . . . . . . . 0.19 = 1 What amount does Newberry's consolidated balance sheet report for this inventory at December 31, 2017? a. $16,000. b. $17,000. c. $18,000. d. $19,000

a. $16,000. (Remeasurement process (temporal method) - inventory)The U.S. dollar is the foreign subsidiary's functional currency, so remeasurement (rather than translation) is appropriate. Inventory is translated at the historical exchange rate [100,000 x $.16 = $16,000].

Current Rates Historical Rates Accounts receivable, current . . . . . . . .$200,000 $220,000 Accounts receivable, long term . . . . . . . 100,000 110,000 Land . . . . . . . . . . . . . . . . . . . . . 50,000 55,000 Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000 85,000 $430,000 $470,000 This subsidiary's functional currency is a foreign currency. What total should Orchid's balance sheet include for the preceding items? a. $430,000. b. $435,000. c. $440,000. d. $450,000.

a. $430,000. (Translation process (current rate method) - assets)Because the foreign currency is the functional currency, translation (rather than remeasurement) is required. All assets accounts are translated at current rates.

Current Rates Historical Rates Accounts receivable, current . . . . . . . .$200,000 $220,000 Accounts receivable, long term . . . . . . . 100,000 110,000 Land . . . . . . . . . . . . . . . . . . . . . 50,000 55,000 Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000 85,000 $430,000 $470,000 This subsidiary's functional currency is the U.S. dollar. What total should Orchid's balance sheet include for the preceding items? a. $430,000. b. $435,000. c. $440,000. d. $450,000.

c. $440,000. (Remeasurement process (temporal method) - assets)Because the U.S. dollar is the functional currency, remeasurement is required. All receivables are remeasured at current rates. Assets carried at historical cost, such as land and patents, are remeasured at historical rates.

A foreign subsidiary's functional currency is its local currency, which has not experienced significant inflation. The current exchange rate at the balance sheet date is the appropriate exchange rate for translating: Insurance Expense Prepaid Insurance a. Yes Yes b. Yes No c. No Yes d. No No

c. No Yes (Translation process (current rate method) - insurance expense and prepaid insurance)Insurance expense is translated at the average exchange rate; prepaid insurance is translated at the current exchange rate.

At what rates should the following balance sheet accounts in foreign statements be translated (using the current rate method) into U.S. dollars? Equipment Accumulated Depreciation—Equipment a. Current Current b.Current Average for year c.Historical Current d.Historical Historical

a. Current Current (Translation process (current rate method) - asset and related contra-account) All asset accounts are translated at current rates.

In comparing the translation and the remeasurement process, which of the following is true? a. The reported balance of equipment is normally the same under both methods. b. The reported balance of inventory is normally the same under both methods. c. The reported balance of sales is normally the same under both methods. d. The reported balance of depreciation expense is normally the same under both methods.

a. The reported balance of equipment is normally the same under both methods. (Comparison of current rate and temporal methods)

A U.S. company's foreign subsidiary had these amounts in local currency units (LCU) in 2017: Cost of goods sold...................LCU 5,000,000 Beginning inventory................................500,000 Ending inventory.......................................600,000 The average exchange rate during 2017 was $1.00 = LCU 1. The beginning inventory was acquired when the exchange rate was $0.80 = LCU 1. Ending inventory was acquired when the exchange rate was $1.10 = LCU 1. The exchange rate at December 31, 2017, was $1.15 = LCU 1. Assuming that the foreign country is highly inflationary, at what amount should the foreign subsidiary's cost of goods sold be reflected in the U.S. dollar income statement? a. $4,440,000. b. $4,840,000. c. $5,000,000. d. $5,750,000

b. $4,840,000. (Highly inflationary economy (temporal method) - cost of goods sold) Beginning inventory LCU 500,000 x $0.80 = $400,000 Purchases 5,100,000 x $1.00 = 5,100,000 Ending inventory (600,000) x $1.10 = (660,000) Cost of goods sold LCU 5,000,000 $4,840,000

What is a subsidiary's functional currency? a. The parent's reporting currency. b. The currency used by the parent to acquire the subsidiary. c. The currency in which the entity primarily generates and expends cash. d. Always the currency of the country in which the company has its headquarters.

c. The currency in which the entity primarily generates and expends cash. (Definition of functional currency)

McCarthy, Inc.'s Brazilian subsidiary borrowed 100,000 euros on January 1, 2017. Exchange rates between the Brazilian real (BRL) and euro (€) and between the U.S. dollar ($) and BRL are as follows: BRL per € US$ per BRL January 1, 2017 . . . . . . . . . BRL 4.2 $ 0.28 Average, 2017 ......................BRL 4.3 $ 0.25 December 31, 2017.............BRL 4.6 $ 0.20 What amount of foreign exchange gain or loss should be reflected in McCarthy's 2017 consolidated net income? a. $8,000 loss. b. $10,000 loss. c. $2,000 gain. d. $5,000 gain.

a. $8,000 loss. (Nonlocal currency balances in the financial statements of a foreign operation) On December 31, 2017, the Brazilian subsidiary would recognize a foreign exchange loss from remeasurement of the € note payable, calculated as follows: € 100,000 x (BRL 4.6 - BRL 4.2) = BRL 40,000. The BRL 40,000 foreign exchange loss is translated into US$ using the average 2017 US$ per BRL exchange rate as follows: BRL 40,000 x $0.25 = $10,000.

Which of the following statements is true for the translation process using the current rate method? a. A translation adjustment can affect consolidated net income. b. Equipment is translated at the historical exchange rate in effect at the date of its purchase. c. A translation adjustment is created by the change in the relative value of a subsidiary's monetary assets and monetary liabilities caused by exchange rate fluctuations. d. A translation adjustment is created by the change in the relative value of a subsidiary's net assets caused by exchange rate fluctuations.

d. A translation adjustment is created by the change in the relative value of a subsidiary's net assets caused by exchange rate fluctuations. (Translation process (current rate method)

McCarthy, Inc.'s Brazilian subsidiary borrowed 100,000 euros on January 1, 2017. Exchange rates between the Brazilian real (BRL) and euro (€) and between the U.S. dollar ($) and BRL are as follows: BRL per € US$ per BRL January 1, 2017 . . . . . . . . . BRL 4.2 $ 0.28 Average, 2017 ......................BRL 4.3 $ 0.25 December 31, 2017.............BRL 4.6 $ 0.20 At what amount should the Brazilian subsidiary's euro note payable be reported on McCarthy's December 31, 2017, consolidated balance sheet? a. $84,000. b. $86,000. c. $92,000. d. $128,800.

c. $92,000. (Nonlocal currency balances in the financial statements of a foreign operation) On December 31, 2017, the Brazilian subsidiary remeasures the € 100,000 note payable into BRL using the current BRL per € exchange rate as follows:€ 100,000 x BRL 4.6 = BRL 460,000 The BRL 460,000 note payable is then translated into US$ using the December 31, 2017 US$ per BRL exchange rate as follows: BRL 460,000 x $0.20 = $92,000.

A foreign subsidiary of Thun Corporation has one asset (inventory) and no liabilities. The functional currency for this subsidiary is the yuan. The inventory was acquired for 100,000 yuan when the exchange rate was $0.16 = 1 yuan. Consolidated statements are to be produced, and the current exchange rate is $0.12 = 1 yuan. Which of the following statements is true for the consolidated financial statements? a. A remeasurement gain must be reported. b. A positive translation adjustment must be reported. c. A negative translation adjustment must be reported. d. A remeasurement loss must be reported.

c. A negative translation adjustment must be reported. (Determine appropriate translation method and resulting translation adjustment) Because the yuan is the functional currency, the financial statements must be translated using the current rate method. Therefore, answers a. and d. can be eliminated. Because the subsidiary has a net asset position and the yuan has depreciated from $.16 to $.12, a negative translation adjustment will result.

A Clarke Corporation subsidiary buys marketable equity securities and inventory on April 1, 2017, for 100,000 won each. It pays for both items on June 1, 2017, and they are still on hand at year-end. Inventory is carried at cost under the lower-of-cost-or-net realizable rule. Currency exchange rates for 1 won follow: January 1, 2017 . . . . . . . . . . . . . . . $0.15 = 1 won April 1, 2017 . . . . . . . . . . . . . . . . . . .0.16 = 1 June 1, 2017 . . . . . . . . . . . . . . . . . . . 0.17 = 1 December 31, 2017 . . . . . . . . . . . . .0.19 = 1 Assume that the U.S. dollar is the subsidiary's functional currency. What balances does a consolidated balance sheet report as of December 31, 2017? a. Marketable equity securities = $16,000 and Inventory = $16,000. b. Marketable equity securities = $17,000 and Inventory = $17,000. c. Marketable equity securities = $19,000 and Inventory = $16,000. d. Marketable equity securities = $19,000 and Inventory = $19,000.

c. Marketable equity securities = $19,000 and Inventory = $16,000. (Remeasurement process (temporal method) - marketable securities and inventory) The U.S. dollar is the functional currency, so remeasurement is appropriate. Inventory (carried at cost) is remeasured at the historical exchange rate of $.16. Marketable equity securities (carried at market value) are remeasured at the current exchange rate of $.19

Yang Corporation starts a foreign subsidiary on January 1 by investing 20,000 rand. Yang owns all of the shares of the subsidiary's common stock. The foreign subsidiary generates 40,000 rand of net income throughout the year and pays no dividends. The rand is the foreign subsidiary's functional currency. Currency exchange rates for 1 rand are as follows: January 1 . . . . . . . . . . . . . . . . . . .$0.25 = 1 rand Average for the year . . . . . . . . . . . . . . . . . . . .0.28 = 1 December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . 0.31 = 1 In preparing consolidated financial statements, what translation adjustment will Yang report at the end of the current year? a. $400 positive (credit). b. $1,000 positive (credit). c. $1,400 positive (credit). d. $2,400 positive (credit).

d. $2,400 positive (credit). (Calculation of translation adjustment) Beginning net assets, 1/1..............R 20,000x $.25 = $ 5,000 Increase in net assets: Net income .................................. 40,000x $.28 = 11,200 Ending net assets, 12/31 ................. R 60,000 $ 16,200 Ending net assets at current exchange rate ..... R 60,000x $.31 = $ 18,600 Translation adjustment (positive) . $ (2,400)

Charleston Corporation operates a branch operation in a foreign country. Although this branch operates in euros, the U.S. dollar is its functional currency. Thus, a remeasurement is necessary to produce financial information for external reporting purposes. The branch began the year with 500,000 euros in cash and no other assets or liabilities. However, the branch immediately used 300,000 euros to acquire a warehouse. On May 1, it purchased inventory costing 100,000 euros for cash that it sold on July 1 for 160,000 euros cash. The branch transferred 10,000 euros to the parent on October 1 and recorded depreciation on the warehouse of 10,000 euros for the year. Currency exchange rates for 1 euro follow: January 1 . . . . . . . . $1.14 = 1 euro May 1...............................1.18 = 1 July 1................................1.20 = 1 October 1......................1.18 = 1 December 31..............1.08 = 1 Average for the year...1.16 = 1 What is the remeasurement gain or loss to be recognized in the consolidated income statement? a. $100 gain. b. $200 gain. c. $100 loss. d. $200 loss.

d. $200 loss. (Calculation of remeasurement gain/loss) Beginning net monetary assets, 1/1E 500,000x $1.14 = $570,000 Increases in net monetary assets: Sale of inventory ........................ 160,000x $1.20 = 192,000 Decreases in net monetary assets: Purchase of warehouse ............. (300,000)x $1.14 = (342,000) Purchase of inventory ............... (100,000)x $1.18 = (118,000) Transfer to parent ...................... (10,000)x $1.18 = (11,800) Ending net monetary assets, 12/31 E 250,000 $ 290,200 Ending net monetary assets at the current exchange rate ......... E 250,000 x $1.16 = (290,000) Remeasurement loss ...................... $ 200

A Clarke Corporation subsidiary buys marketable equity securities and inventory on April 1, 2017, for 100,000 won each. It pays for both items on June 1, 2017, and they are still on hand at year-end. Inventory is carried at cost under the lower-of-cost-or-net realizable rule. Currency exchange rates for 1 won follow: January 1, 2017 . . . . . . . . . . . . . . . $0.15 = 1 won April 1, 2017 . . . . . . . . . . . . . . . . . . .0.16 = 1 June 1, 2017 . . . . . . . . . . . . . . . . . . . 0.17 = 1 December 31, 2017 . . . . . . . . . . . . .0.19 = 1 Assume that the won is the subsidiary's functional currency. What balances does a consolidated balance sheet report as of December 31, 2017? a. Marketable equity securities = $16,000 and Inventory = $16,000. b. Marketable equity securities = $17,000 and Inventory = $17,000. c. Marketable equity securities = $19,000 and Inventory = $16,000. d. Marketable equity securities = $19,000 and Inventory = $19,000.

d. Marketable equity securities = $19,000 and Inventory = $19,000. (Translation process (current rate method) - marketable securities and inventory) The foreign currency is the functional currency, so translation is appropriate. All assets are translated at the current exchange rate of $.19.