AFA Exam 2

When Palm, Inc. acquired its 100% investment in Star Co, a foreign entity, the excess of cost over book value was 10,000FC. This excess was traceable to a 10-year patent. The elimination entry to distribute the excess will include a(n) debit to Patent for 10,000FC multiplied by the current exchange rate debit to Patent for 10,000FC multiplied by the historical exchange rate credit to Investment in Star for 10,000FC multiplied by the average exchange rate credit to Cumulative Translation Adjustment for 10,000FC multiplied by the historical exchange rate

debit to Patent for 10,000FC multiplied by the current exchange rate

When Palm, Inc. acquired its 100% investment in Star Co, a foreign entity, the excess of cost over book value was 10,000FC. This excess was traceable to a 10-year patent. The elimination entry to amortize the excess will include a(n) debit to amortization expense for 1,000FC multiplied by the current exchange rate debit to amortization expense for 1,000FC multiplied by the weighted-average exchange rate credit to Patent for 1,000FC multiplied by the historical exchange rate credit to Cumulative Translation Adjustment for 1,000FC multiplied by the difference between the historical and weighted-average exchange rate

debit to amortization expense for 1,000FC multiplied by the weighted-average exchange rate

A U.S. company that has purchased inventory from a German vendor would be exposed to a net exchange gain on the unpaid balance if the amount to be paid was denominated in dollars. dollar weakened relative to the Euro and the Euro was the denominated currency. dollar strengthened relative to the Euro and the Euro was the denominated currency. U.S. company purchased a forward contract to buy Euros.

dollar strengthened relative to the Euro and the Euro was the denominated currency.

Which of the following does not represent an exchange risk on an exposed position to a company transacting business with a foreign vendor? transaction is denominated in foreign currency, settled at a future date firm commitment to purchase inventory to be paid for in foreign currency Forecasted foreign currency transaction with a high probability of occurrence firm commitment to purchase inventory denominated in U.S. dollars

firm commitment to purchase inventory denominated in U.S. dollars

A forward exchange contract is being transacted at a premium if the current forward rate is less than the expected spot rate. greater than the expected spot rate. less than the current spot rate. greater than the current spot rate.

greater than the current spot rate.

The translation (remeasurement) adjustment reported in a translation when the functional currency is not the foreign currency is included as a separate component of other comprehensive income in the current liability section of the balance sheet as deferred revenue in the calculation of net income none of the above

in the calculation of net income

When an U.S. investor entity acquires interest in a foreign entity with the payment of foreign currency, the determination of excess is calculated: in dollars in the foreign currency in dollars if remeasurement (historical rate/temporal method) is indicated in the foreign currency if translation (current rate/functional method) is indicated

in the foreign currency

Exchange gains and losses on a forward exchange contract that covers the same time period as the transaction which it provides a fair value hedge for should be recognized as an extraordinary item. part of the original sales transaction. income from continuing operations. other comprehensive income.

income from continuing operations.

The forward rate in a forward contract is the spot rate at the expiration date of the contract. changes as the spot rate changes. is said to be at a discount if it exceeds the spot rate at the inception of the contract. None of the above are true.

is the spot rate at the expiration date of the contract.

The two distinguishing characteristics of a derivative are: one or more options and one or more exchange rates. one or more underlyings and one or more notional amounts. cash flows and economic exchange. a per share price and a quantity.

one or more underlyings and one or more notional amounts.

The time value of an option is the difference between the premium paid and its current rate. premium paid and its intrinsic value. exercise price and its current rate. call option price and the put option price

premium paid and its intrinsic value.

If the translation process is sound, it should: provide information that is compatible with the expected economic effects of rate changes. reflect in the financial statements the financial results of the company in conformity to the accounting principles of the country in which the subsidiary is located. result in translation adjustments that are relatively consistent in amount. None of the above is correct.

provide information that is compatible with the expected economic effects of rate changes.

When an economic transaction is denominated in a currency other than the entity's domestic currency, the entity must establish a domestic rate. hedge rate. rate of currency change. rate of exchange.

rate of exchange.

A United States based company that has not hedged an exposed asset position would experience an exchange gain if forward rates increased. forward rates decreased. spot rates increased. spot rates decreased.

spot rates increased.

To qualify for fair value hedge accounting, a company must document all but: its hedging objectives and strategy. how hedge effectiveness will be assessed. the nature of the risk being hedged. the amount of the gain or loss in other comprehensive income.

the amount of the gain or loss in other comprehensive income.

In a company's disclosure of foreign currency transactions and hedges and translation adjustments, all of the following items should be disclosed except: beginning and ending cumulative translation adjustments. the amount of income taxes for the period allocated to translation adjustments. the amount transferred from cumulative translation adjustment due to changes in foreign exchange rates. the aggregate adjustment for the period resulting from translation adjustment.

the amount transferred from cumulative translation adjustment due to changes in foreign exchange rates.

Assuming that a foreign entity is deemed to be operating in an environment dominated by the local currency, the entity's assets are translated using the current rate. a simple average rate. a weighted average rate. a historical rate.

the current rate.

If a subsidiary's functional currency is not the local currency in which it operates, but the parent's reporting currency: the foreign subsidiary's translated financial statements are identical to the statements that would have resulted if the transactions had been recorded in dollars. the translation adjustment is recorded as a component of other comprehensive income. there is no indication that exchange rate changes will impact the subsidiary's or the parent's cash flows or equity. None of the above is correct.

the foreign subsidiary's translated financial statements are identical to the statements that would have resulted if the transactions had been recorded in dollars.

Which of the following factors influences the spread between forward and spot rates? which currency is denominated as the domestic currency the interest rate differential over time the current cross rate between the two currencies all are factors that may influence the spread

the interest rate differential over time

A transaction involving foreign currency will most likely result in gains and losses to the reporting entity if the forward exchange contract is selling at a premium. transaction is denominated and measured in the reporting entity's currency. transaction takes place in a country with a tiered monetary system. transaction is denominated in a foreign currency and measured in the reporting entity's currency.

transaction is denominated in a foreign currency and measured in the reporting entity's currency.

If currency exchange rate changes impact potential cash flows available to the parent and the parent's economic well being: the functional currency of the subsidiary is the foreign currency. translation gains or losses should be included in net income. the financial relationships as measured in the translated statements are the same as those measured in the foreign currency. the parent may adopt a change in the subsidiary's functional currency.

translation gains or losses should be included in net income.

Which of the following statements is true concerning forward contracts classified as hedges of an identifiable foreign currency commitment? Forward contracts used as hedges cannot exceed the foreign currency commitment. Forward contracts cannot extend for a time period after the transaction date of the commitment. The gain or loss traceable to the time period after the transaction date of the commitment are treated as a hedge of a receivable or payable. None of these statements is true.

The gain or loss traceable to the time period after the transaction date of the commitment are treated as a hedge of a receivable or payable.

Which of the following is not true concerning the accounting for hedges of forecasted transactions using an option? An intrinsic value must be calculated throughout the hedge period The accounting requires revaluing the market value of the option The option fixes the value of the transaction to the date of the commitment. All of these statements are true.

The option fixes the value of the transaction to the date of the commitment.

Which of the following best describes the accounting for a foreign entity requiring translation or remeasurement if the local economy is classified as highly inflationary? The entity's financial statements are first adjusted for inflation and then translated into the domestic currency. The entity's financial statements are first adjusted for inflation and then remeasured into the domestic currency. The unadjusted trial balance is translated if the functional currency is the local currency. The unadjusted trial balance is remeasured regardless of the functional currency.

The unadjusted trial balance is remeasured regardless of the functional currency.

When may the translation adjustment resulting from translating financial statements using the current or functional method be recognized in income? When there is an accumulated other comprehensive deficit that exceeds retained earnings. When the parent disposes of its interest in the subsidiary. When the functional currency changes to the reporting currency. None of the above is correct.

When the parent disposes of its interest in the subsidiary.

Exchange gains and losses resulting from translating (not remeasuring) foreign currency financial statements into U.S. dollars should be included as a(an) a component of other comprehensive income. extraordinary item in the income statement for the period in which the rate changes. ordinary gain/loss item in the income statement. component of operating income.

a component of other comprehensive income.

In a hedge of a forecasted transaction, gains or losses on derivative instruments prior to the occurrence of the actual transaction should be reported as: a component of stockholders' equity. a component of other comprehensive income. an extraordinary item. income from continuing operations.

a component of other comprehensive income.

Changes in the functional currency of a subsidiary are not permitted. are accounted for retroactively. are accounted for prospectively. are reported as extraordinary items.

are accounted for prospectively.

The adjustment resulting from the remeasurement of an entity operating in a highly inflationary environment would appear in the stockholders' equity section of the balance sheet. as a component of other comprehensive income. as an ordinary income statement item. as an extraordinary item on the income statement.

as an ordinary income statement item.

In a credit transaction resulting in an exposed asset or liability, gains and losses on foreign currency transactions should be recognized only upon settlement or payment. when the sale or purchase takes place. at settlement or payment and at the end of any reporting period. only if material.

at settlement or payment and at the end of any reporting period.

In the accounting for forward exchange contracts, gains and losses are measured using either spot or forward rates. Which of the following statements concerning measurement of gains and losses is true? A. The gains or losses in a hedge on an exposed asset will be calculated using the spot rate for the asset and the forward rate for the forward contract. B.The contract premium in a hedge of a forecasted transaction will be calculated using the forward rate throughout the contract. C. The gains or losses in a hedge on an identifiable commitment will be calculated using the spot rate for the commitment and the forward rate for the forward contract. D. All of these statements are true.

A. The gains or losses in a hedge on an exposed asset will be calculated using the spot rate for the asset and the forward rate for the forward contract.

FASB standards require which of the following disclosures from firms involved in foreign currency transactions? Beginning cumulative translation adjustments. Ending cumulative translation adjustments. The amount of income taxes for the period allocated to translation adjustments. All are required disclosures.

All are required disclosures.

When the functional currency is the foreign entity's currency: exchange rate changes do not affect the economic well being of the parent the subsidiary operates as an entity, independent of the parent exchange rate changes do not have immediate impact on the cash flows of the parent All of the above are correct

All of the above are correct

A derivative: requires little or no initial investment. derives its value from changes in its underlying rate. can be settled for cash without having to buy or sell the related asset or liability. All of the above.

All of the above.

Which of the following statements is not true regarding forward contracts that cover periods of time different from the settlement period (transaction date to the settlement date)? A. If the forward contract expires before the settlement date, the gain or loss will partially offset the gain or loss on the foreign currency transaction. B. If the forward contract expires after the settlement date, post-settlement date gains and losses are not recognized as components of current operating income. C. Premium and discount are amortized over the life of the contract. D. All of these statements are true.

B. If the forward contract expires after the settlement date, post-settlement date gains and losses are not recognized as components of current operating income. Premium and dis

Gains and losses resulting from a derivative instrument used for a cash flow hedge are recognized in current earnings: for the portion is deemed ineffective. as incurred. in the same period the hedged item affects earnings. Both a and c are correct.

Both a and c are correct.

As part of the consolidation process for a partially-held foreign subsidiary, the elimination entry to distribute the excess of cost over book value will include a credit to Cumulative Translation Adjustment-Parent A. for the amount of excess attributable to identifiable net assets multiplied by the difference between historical and current exchange rates B. for the amount of excess attributable to identifiable net assets multiplied by the difference between average and current exchange rates C. for the Parent's portion of the excess attributable to identifiable net assets multiplied by the difference between historical and current exchange rates D. for the Parent's portion of the excess attributable to identifiable net assets multiplied by the difference between average and current exchange rates

C. for the Parent's portion of the excess attributable to identifiable net assets multiplied by the difference between historical and current exchange rates

The functional currency approach adopted by FASB 52 requires: A. separate statements be maintained by the domestic parent company and the foreign branch both in their own currencies B. separate statements be maintained by the domestic parent company and the foreign branch with the foreign branch translated into the functional currency C. results from foreign currency changes to be ignored D. a focus on whether the domestic reporting entity's cash flows will be indirectly or directly affected by changes in the exchange rates of the foreign entity's currency

D. a focus on whether the domestic reporting entity's cash flows will be indirectly or directly affected by changes in the exchange rates of the foreign entity's currency

Consider the consolidation process for a foreign subsidiary: When the excess of cost over book value is attributable to identifiable assets, those assets are adjusted in the "distribution" elimination entry by an amount that is calculated as A. the difference between cost and fair value as measured in the foreign currency B. the difference between cost and fair value as measured in the foreign currency multiplied by the historical exchange rate C. the difference between cost and fair value as measured in the foreign currency multiplied by the weighted-average exchange rate D. the difference between cost and fair value as measured in the foreign currency multiplied by the current exchange rate

D. the difference between cost and fair value as measured in the foreign currency multiplied by the current exchange rate

A U.S. parent purchased a foreign subsidiary last year at a price in excess of the subsidiary's book value. The subsidiary's functional currency is the foreign currency. This excess is assumed to be traceable to undervalued equipment. When the parent company prepares its elimination entries for the excess, which of the following combinations of exchange rates should be used? Equipment: Current Depreciation Expense: Average

Equipment: Current Depreciation Expense: Average

Which is true of foreign currency forward contracts and foreign currency options? Forward contracts: requires no up front fee, Options: part may "walk" if "out of the money"

Forward contracts: requires no up front fee, Options: part may "walk" if "out of the money"

In most cases, which of the following is not a component of translated retained earnings? Translated retained earnings at the end of the prior period Income from the period translated at the historical rate The value of dividends translated at the exchange rate on the date of declaration All are components of translated retained earnings

Income from the period translated at the historical rate

Which of the following best describes the measurement of a gain or loss from the sale of a depreciable asset by a foreign subsidiary whose functional currency is not the local currency? A. Reconstruct the journal entry on the date of the sale using the historical rate for cash and the depreciable asset and its accumulated depreciation. B. Reconstruct the journal entry on the date of the sale using the current rate for cash and the historical rate for the depreciable asset and its accumulated depreciation. C.Translate the gain or loss using the historical rate. D.Translate gains at the current rate and losses at the historical rate.

Reconstruct the journal entry on the date of the sale using the current rate for cash and the historical rate for the depreciable asset and its accumulated depreciation.

Which of the following procedures would be necessary when a Swiss subsidiary maintains its books in euros and its functional currency is Japanese Yen and its parent is a U.S. company? Remeasurement from euros to U.S. Dollars Remeasurement from euros to Japanese Yen; translate from Yen to U.S. Dollars Remeasurement from Yen to euros; translate from euros to U.S. Dollars none of the above

Remeasurement from euros to Japanese Yen; translate from Yen to U.S. Dollars

A debit balance in a parent's cumulative translation adjustment after the first year of owning a foreign subsidiary suggests which of the following is true? The exchange rate has strengthened relative to the U.S. dollar. The exchange rate has weakened relative to the U.S. dollar. The foreign entity had net income but there was not a change in exchange rates. The foreign entity had a net loss but there was not a change in exchange rates.

The exchange rate has weakened relative to the U.S. dollar.

Exchange rates will not usually directly affect the cash flows of the parent entity in which of the following cases? The foreign entity operates in a currency other than its own. The foreign entity operates in its local currency. The foreign entity functions in a currency other than its local currency. The foreign entity functions in the parent's currency.

The foreign entity operates in its local currency.

Which of the following best describes the normal required method of accounting for statements of foreign entities whose functional currency is the foreign entity's local currency, and in which a U.S. firm has an equity interest? The functional method The monetary-nonmonetary method The current-noncurrent method The temporal method

The functional method