Chapter 14 Multiple Choice

Selvey Inc. is a wholly-owned subsidiary of Parsfield Incorporated, a U.S. firm. The country where Selvey operates is determined to have a highly inflationary economy according to GAAP definitions. Therefore, for purposes of preparing consolidated financial statements, the functional currency is A) its reporting currency. B) its current rate method currency. C) the U.S. dollar. D) its local currency.

c

Which of the following assets and/or liabilities are considered monetary? A) Intangible Assets and Plant, Property, and Equipment B) Bonds Payable and Common Stock C) Cash and Accounts Payable D) Notes Receivable and Inventories carried at cost

c

A U.S. firm has a Belgian subsidiary that uses the British pound as its functional currency. According to GAAP, the U.S. dollar from Belgian unit's point of view will be A) its only foreign currency. B) its local currency. C) its current rate method currency. D) its reporting currency.

d

Assume the functional currency of a foreign entity is the U.S. dollar, but the books are kept in euros. The objective of remeasurement of a foreign entity's accounts is to A) produce the same results as if the foreign entity's books were maintained in the currency of the largest customer. B) produce the same results as if the foreign entity's books were maintained solely in the local currency. C) produce the same results as if the foreign entity's books were maintained solely in the U.S. dollar. D) produce the results reflective of the foreign entity's economics in the local currency.

c

Paskin Corporation's wholly-owned Canadian subsidiary has a Canadian dollar functional currency. In translating the subsidiary's account balances into U.S. dollars for reporting purposes, which one of the following accounts would be translated at historical exchange rates? A) Accounts Receivable B) Notes Payable C) Capital Stock D) Retained Earnings

c

Pelmer has a foreign subsidiary, Sapp Corporation of Germany, whose functional currency is the euro. Sapp's books are maintained in euros. On December 31, 2014, Sapp has an account receivable denominated in British pounds. Which one of the following statements is true? A) Because all accounts of the subsidiary are translated into U.S. dollars at the current rate, the Account Receivable is not adjusted on the subsidiary's books before translation. B) The Account Receivable is remeasured into the functional currency, thus eliminating the need for translation. C) The Account Receivable is first adjusted to reflect the current exchange rate in euros and then translated at the current exchange rate into dollars. D) The Account Receivable is adjusted to euros at the current exchange rate, and any resulting gain or loss is included as a translation adjustment in the stockholders' equity section of the subsidiary's separate balance sheet.

c

A foreign entity is a subsidiary of a U.S. parent company and has always used the current rate method to translate its foreign financial statements on behalf of its parent company. Which one of the following statements is false? A) The U.S. dollar is the functional currency of this company. B) Changes in exchange rates between the subsidiary's country and the parent's country are not expected to affect the foreign entity's cash flows. C) Translation adjustments are shown in stockholders' equity as increases or decreases in other comprehensive income. D) Translation adjustments are not shown on the income statement.

a

Exchange gains or losses from remeasurement appear A) in the continuing operations section of the consolidated income statement. B) as an extraordinary item on the consolidated income statement. C) as other comprehensive income typically reported in a statement of stockholders' equity. D) as an adjustment to the beginning balance of retained earnings on the consolidated Statement of retained earnings

a

A U.S. parent corporation loans funds to a foreign subsidiary to be used to purchase equipment. The loan is denominated in U.S. dollars and the functional currency of the subsidiary is the euro. This intercompany transaction is a foreign currency transaction of A) neither the subsidiary nor the parent, as it is eliminated as part of the consolidation procedure. B) the subsidiary but not the parent. C) both the subsidiary and the parent. D) the parent but not the subsidiary.

b

At the time of a business acquisition, A) identifiable assets and liabilities are allocated the portion of the translation or remeasurement adjustment that existed on the date of acquisition. B) a foreign entity's assets and liabilities are translated into U.S. dollars using the current exchange rate in effect on that date. C) the difference between investment fair value and translated net assets acquired is treated as a remeasurement gain or loss on the income statement. D) the difference between investment fair value and translated net assets acquired is recorded as a cumulative translation adjustment on the balance sheet

b

Which of the following foreign subsidiary accounts will have the same value on consolidated financial statements, regardless of whether the statements are remeasured or translated? A) Trademark B) Deferred Income C) Accounts Receivable D) Goodwill

c

A foreign subsidiary's accounts receivable balance should be translated for the consolidated financial statements at A) the appropriate historical rate. B) the prior year's forecast rate. C) the future rate for the next year. D) the spot rate at year-end.

d

Accounts representing an allowance for uncollectible accounts are converted into U.S. dollars at A) historical rates when the U.S. dollar is the functional currency. B) current rates only when the U.S. dollar is the functional currency. C) historical rates regardless of the functional currency. D) current rates regardless of the functional currency

d

All of the following factors would be used to define a foreign entity's functional currency, except A) high volume of intercompany transactions. B) expenses for foreign entity primarily driven by local factors. C) financing for foreign entity denominated in local currency. D) foreign entity's status as a local tax haven for transfer pricing purposes

d

If a U.S. company wants to hedge a prospective loss on its investment in a foreign entity that may result from a foreign currency fluctuation, the U.S. company should A) purchase a forward to swap currency of the foreign entity's local country for U.S. currency. B) purchase a call option to buy currency of the foreign entity's local country. C) issue a loan in the foreign entity's local country. D) borrow money in the foreign entity's local country

d

The primary goal behind consolidating financial statements of a controlled subsidiary is A) assuring that the subsidiary financial statements are the same under the temporal method or the current rate method. B) assuring that the individual nature of the subsidiary entity is not lost in the consolidation. C) representing the conversion of statements at the historical exchange rate. D) representing the company's underlying economic condition.

d

When translating foreign subsidiary income statements using the current rate method, why are some accounts translated at an average rate? A) This approach improves matching. B) This approach accentuates the conservatism principle. C) This approach smoothes out highly volatile exchange rate fluctuations. D) This approach approximates the effect of transactions which occur continuously during the period.

d

Which of the following statements about the Current Rate method is false? A) Translation involves restating the functional currency amounts into the reporting currency. B) All assets and liabilities are translated at the current rate. C) If the subsidiary maintains their books in their functional currency, the current rate method is used. D) The effect of exchange rate changes are reported on the income statement as a foreign exchange gain or loss.

d