FAR - Foreign Currency Transactions and Translations

The following information pertains to Flint Co.'s sale of 10,000 foreign currency units under a forward contract dated November 1, 20X1, for delivery on January 31, 20X2: 11/01/X1 12/31/X1 Spot rates $0.80 $0.83 30-day future rates 0.79 0.82 90-day future rates 0.78 0.81 Flint entered into the forward contract in order to speculate in the foreign currency. In Flint's income statement for the year ended December 31, 20X1, what amount of loss should be reported from this forward contract? 1 $400 2 $300 3 $200 4 $0

1 $400 Forward rate available for remaining maturity of contract (30-day rate at 12/31/X1) $ .82 Less contracted forward rate (90-day future rate at 11/01/X1) .78 Difference $ .04 Multiplied by foreign currency units x 10,000 Loss on forward contract to be reported in 20X1 $ 400 =======

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? 1 Historical exchange rate 2 Functional exchange rate 3 Weighted-average exchange rate 4 Current exchange rate at the balance sheet date

1 Historical exchange rate When translating the capital accounts of a subsidiary, the historical exchange rate is used for the capital stock account and additional paid-in capital. This date cannot be earlier than the date the parent acquired the investment in the subsidiary.

The functional currency of Nash, Inc.'s, subsidiary is the euro. Nash borrowed euros as a partial hedge of its investment in the subsidiary. In preparing consolidated financial statements, Nash's translation loss on its investment in the subsidiary exceeded its exchange gain on the borrowing. How should the effects of the loss and gain be reported in Nash's consolidated financial statements? 1 The translation loss less the exchange gain is reported in other comprehensive income. 2 The translation loss less the exchange gain is reported in net income. 3 The translation loss is reported in other comprehensive income and the exchange gain is reported in net income. 4 The translation loss is reported in net income and the exchange gain is reported in other comprehensive income.

1 The translation loss less the exchange gain is reported in other comprehensive income. Both of the items involved, the translation loss on the investment in the subsidiary and the partial hedge through the borrowing of euros, are items that will be reported in other comprehensive income. Since one is a gain and the other is a loss, the net effect of both is reported in other comprehensive income.

Fogg Co., a U.S. company, contracted to purchase foreign goods. Payment in foreign currency was due one month after the goods were received at Fogg's warehouse. Between the receipt of goods and the time of payment, the exchange rates changed in Fogg's favor. The resulting gain should be included in Fogg's financial statements as: 1 a component of income from continuing operations. 2 a component of other comprehensive income. 3 a deferred credit. 4 a separate component of stockholders' equity.

1 a component of income from continuing operations. "A change in exchange rates between the functional currency and the currency in which a transaction is denominated increases or decreases the expected amount of functional currency cash flows upon settlement of the transaction. That increase or decrease in expected functional currency cash flows is a foreign currency transaction gain or loss that generally shall be included in determining net income for the period in which the exchange rate changes."

Park Co.'s wholly owned subsidiary, Schnell Corp., maintains its accounting records in German marks. Because all of Schnell's branch offices are in Switzerland, its functional currency is the Swiss franc. (Park's functional currency is also the Swiss franc.) Remeasurement of Schnell's 20X1 financial statements resulted in a $7,600 gain, and translation of its financial statements resulted in an $8,100 gain. What amount should Park report as a foreign exchange gain in its income statement for the year ended December 31, 20X1? 1 $0 2 $7,600 3 $8,100 4 $15,700

2 $7,600 FASB ASC 830-10-45-17 provides that remeasurement for transactions denominated in a currency other than the functional currency will give rise to a "foreign currency transaction gain or loss that generally shall be included in determining net income for the period in which the exchange rate changes." FASB ASC 830-30-45-12 states, "Translation adjustments shall not be included in determining net income but shall be reported separately and accumulated in comprehensive income." Based on this, Park should include the $7,600 remeasurement gain in its income statement, but not the translation gain.

Hunt Co. purchased merchandise for 300,000 British pounds from a vendor in London on November 30, 20X1. Payment in British pounds was due on January 30, 20X2. The exchange rates to purchase one pound were as follows: 11/30/X1 12/31/X1 ---------- ---------- Spot-rate $1.65 $1.62 30-day rate 1.64 1.59 60-day rate 1.63 1.56 In its December 31, 20X1, income statement, what amount should Hunt report as foreign exchange gain? 1 $12,000 2 $9,000 3 $6,000 4 $0

2 $9,000 FASB ASC 830-20 (Foreign Currency Transactions) provides that a gain or loss on a forward contract is computed by multiplying the foreign currency amount of the forward contract by the difference between the spot rate at the balance sheet date and the spot rate at the date of inception of the forward contract. Hunt's reported foreign exchange gain = 300,000 British pounds x ($1.65 - $1.62) per British pound = $9,000

A U.S. company purchased inventory on account at a cost of 1,000 foreign currency units (FCU) from a non-U.S. company on November 15, to be paid on December 15. The FCU is valued at $0.85 on November 15 and at $0.90 on December 15. The journal entry to record payment on December 15 should include which of the following? 1 Debit inventory and credit cash for $850. 2 Debit exchange gains and losses and credit accounts payable for $50. 3 Debit accounts payable and credit exchange gains and losses for $50. 4 Debit accounts payable and credit cash for $850.

2 Debit exchange gains and losses and credit accounts payable for $50. Exchange gains and losses resulting from remeasurement (rather than translation) must enter into the determination of net income. It will now cost the U.S. company an additional $0.05 for each FCU, or a total of $50 ($0.05 × 1,000 FCU). The difference is recognized in net income as an exchange loss, and accounts payable is remeasured from $850 ($0.85 × 1,000 FCU) to $900 ($0.90 × 1,000 FCU).

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? 1 The euro 2 The British pound 3 The U.S. dollar 4 The Japanese yen

2 The British pound Functional currency is the currency of the primary economic environment in which the entity operates (i.e., the environment in which the entity generates and expends cash), which would be British pounds for this example.

A foreign subsidiary of a U.S. parent company should measure its assets, liabilities and operations using the: 1 subsidiary's local currency. 2 subsidiary's functional currency. 3 U.S. dollar. 4 best available spot rate.

2 subsidiary's functional currency. The FASB requires that an asset, liability, revenue, expense, gain, or loss arising from a transaction should be measured and recorded in the functional currency of the recording entity by use of the exchange rate in effect on the transaction date. Functional currency is determined by the primary economic environment in which the entity operates and is often determined by the parent company.

A balance arising from the translation or remeasurement of a subsidiary's foreign currency financial statements is reported in the consolidated income statement when the subsidiary's functional currency is: 1 neither the foreign currency nor the U.S. dollar. 2 the U.S. dollar. 3 the foreign currency. 4 both the foreign currency and the U.S. dollar.

2 the U.S. dollar. The objective of translation or remeasurement is to report the subsidiary's income statement results in the U.S. parent's currency—which is the U.S. dollar.

Which of the following should be reported as a stockholders' equity contra account? 1 Discount on convertible bonds that are common stock equivalents 2 Premium on convertible bonds that are common stock equivalents 3 Cumulative foreign exchange translation loss 4 Organization costs

3 Cumulative foreign exchange translation loss

On September 22, 20X1, Yumi Corp. purchased merchandise from an unaffiliated foreign company for 10,000 units of the foreign company's local currency. On that date, the spot rate was $.55. Yumi paid the bill in full on March 20, 20X2, when the spot rate was $.65. The spot rate was $.70 on December 31, 20X1. What amount should Yumi report as a foreign currency transaction loss in its income statement for the year ended December 31, 20X1? 1 $0 2 $500 3 $1,000 4 $1,500

4 $1,500 A foreign currency transaction loss occurred because it cost more to purchase the units of foreign currency on December 31 ($.70) than it cost when the transaction originated on September 22 ($.55). The amount of loss would be computed as follows: Transaction loss = Number of units x Change in rate = 10,000 x ($.70 - $.55) = 10,000 x $.15 = $1,500

Ball Corp. had the following foreign currency transactions during the current year: Goods purchased from a foreign supplier on January 20 for the U.S. dollar equivalent of $90,000. The invoice was paid on March 20, at the U.S. dollar equivalent of $96,000. On July 1, Ball borrowed the U.S. dollar equivalent of $500,000 evidenced by a note that was payable in the lender's local currency on July 1, in two years. On December 31, the U.S. dollar equivalents of the principal amount and accrued interest were $520,000 and $26,000, respectively. Interest on the note is 10% per annum. In Ball's year-end income statement, what amount should be included as foreign exchange loss? 1 $0 2 $6,000 3 $21,000 4 $27,000

4 $27,000 Ball's year-end income statement should include $27,000 as foreign exchange loss, calculated as follows: Foreign currency loss on goods purchased ($90,000 - $96,000) $ 6,000 Loan principal foreign currency loss ($500,000 - $520,000) 20,000 Loan interest foreign currency loss ($25,000* - $26,000) 1,000 Total loss $27,000