The translation adjustment that results from translating the financial statements of a foreign subsidiary using the current rate method should be: a.. Average exchange rates are used to
Trang 1Chapter 13 Translation of Financial Statements of Foreign Affiliates
Multiple Choice
1 When translating foreign currency financial statements for a company whose functional currency is
the U.S dollar, which of the following accounts is translated using historical exchange rates? Notes Payable Equipment
2 Under the temporal method, monetary assets and liabilities are translated by using the exchange rate
existing at the:
a beginning of the current year
b date the transaction occurred
c balance sheet date
d None of these
3 The process of translating the accounts of a foreign entity into its functional currency when they are
stated in another currency is called:
a verification
b translation
c remeasurement
d None of these
4 Which of the following would be restated using the average exchange rate under the temporal
method?
a cost of goods sold
b depreciation expense
c amortization expense
d None of these
5 Paid-in capital accounts are translated using the historical exchange rate under:
a the current rate method only
b the temporal method only
c both the current rate and temporal methods
d neither the current rate nor temporal methods
6 Which of the following would be restated using the current exchange rate under the temporal
method?
a Marketable securities carried at cost
b Inventory carried at market
c Common stock
d None of these
Trang 27 The translation adjustment that results from translating the financial statements of a foreign
subsidiary using the current rate method should be:
a included as a separate item in the stockholders' equity section of the balance sheet
b included in the determination of net income for the period it occurs
c deferred and amortized over a period not to exceed forty years
d deferred until a subsequent year when a loss occurs and offset against that loss
8 Average exchange rates are used to translate certain items from foreign financial statements into
U.S dollars Such averages are used in order to:
a smooth out large translation gains and losses
b eliminate temporary fluctuation in exchange rates that may be reversed in the next fiscal period
c avoid using different exchange rates for some revenue and expense accounts
d approximate the exchange rate in effect when the items were recognized
9 When the functional currency is identified as the U.S dollar, land purchased by a foreign subsidiary
after the controlling interest was acquired by the parent company should be translated using the:
a historical rate in effect when the land was purchased
b current rate in effect at the balance sheet date
c forward rate
d average exchange rate for the current period
10 The appropriate exchange rate for translating a plant asset in the balance sheet of a foreign
subsidiary in which the functional currency is the U.S dollar is the:
a current exchange rate
b average exchange rate for the current year
c historical exchange rate in effect when the plant asset was acquired or the date of acquisition, whichever is later
d forward rate
11 The following balance sheet accounts of a foreign subsidiary at December 31, 2011, have been
translated into U.S dollars as follows:
Translated at Current Rates Historical Rates Accounts receivable, current $ 600,000 $ 660,000
Accounts receivable, long-term 300,000 324,000
Inventories carried at market 180,000 198,000
$1,270,000 $1,402,000 What total should be included in the translated balance sheet at December 31, 2011, for the above items? Assume the U.S dollar is the functional currency
a $1,270,000
b $1,288,000
c $1,300,000
d $1,354,000
Trang 312 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
Wages expense Sales to customers
13 A wholly owned subsidiary of a U.S parent company has certain expense accounts for the year
ended December 31, 2011, stated in local currency units (LCU) as follows:
LCU Depreciation of equipment (related assets
were purchased January 1, 2009) 375,000
The exchange rates at various dates are as follows:
Dollar equivalent
of 1 LCU
Average for year ended December 31, 2011 0.55
Assume that the LCU is the subsidiary's functional currency and that the charges to the expense accounts occurred approximately evenly during the year What total dollar amount should be
included in the translated income statement to reflect these expenses?
a $687,500
b $625,000
c $550,000
d $500,000
14 If the functional currency is determined to be the U.S dollar and its financial statements are
prepared in the local currency, SFAS 52, requires which of the following procedures to be followed?
a Translate the financial statements into U.S dollars using the current rate method
b Remeasure the financial statements into U.S dollars using the temporal method
c Translate the financial statements into U.S dollars using the temporal method
d Remeasure the financial statements into U.S dollars using the current rate method
15 P Company acquired 90% of the outstanding common stock of S Company which is a foreign
company The acquisition was accounted for using the purchase method In preparing consolidated statements, the paid-in capital of S Company should be converted at the:
a exchange rate effective when S Company was organized
b exchange rate effective on the date of purchase of the stock of S Company by P Company
c average exchange rate for the period S Company stock has been upheld by P Company
d current exchange rate
Trang 416 In preparing consolidated financial statements of a U.S parent company and a foreign subsidiary,
the foreign subsidiary’s functional currency is the currency:
a of the country the parent is located
b of the country the subsidiary is located
c in which the subsidiary primarily generates and spends cash
d in which the subsidiary maintains its accounting records
17 Gains from remeasuring a foreign subsidiary’s financial statements from the local currency, which
is not the functional currency, into the parent company’s currency should be reported as a(n):
a other comprehensive income item
b extraordinary item (net of tax)
c part of continuing operations
d deferred credit
18 Assuming no significant inflation, gains resulting from the process of translating a foreign entity’s
financial statements from the functional currency to U.S dollars should be included as a(n):
a other comprehensive income item
b extraordinary item (net of tax)
c part of continuing operations
d deferred credit
19 A foreign subsidiary’s functional currency is its local currency and inflation of over 100 percent has
been experienced over a three-year period For consolidation purposes, SFAS No 52 requires the use of:
a the current rate method only
b the temporal method only
c both the current rate and temporal methods
d neither the current rate or the temporal method
20 The objective of remeasurement is to:
a produce the same results as if the books were maintained in the currency of the foreign
entity’s largest customer
b produce the same results as if the books were maintained solely in the local currency
c produce the same results as if the books were maintained solely in the functional currency
d None of the above
Trang 5Problems
13-1 Ramsey, Inc owns a company that operates in France Account balances in francs for the subsidiary
are shown below:
2011 January 1 December 31
Exchange rates for 2011 were as follows:
Average for the year 0.19
Revenues were earned and operating expenses, except for depreciation and supplies used, were incurred evenly throughout the year No purchases of supplies or plant assets were made during the year
Required:
A Prepare a schedule to compute the translation adjustment for the year, assuming the subsidiary's
functional currency is the franc
B Prepare a schedule to compute the translation gain or loss, assuming the subsidiary's functional
currency is the U.S dollar
Trang 613-2 Sloop Sails Corporation, a U.S company, operates a 100%-owned British subsidiary, Sewart
Corporation The U.S dollar is the functional currency of the subsidiary Financial statements for the subsidiary for the fiscal year-end December 31, 2011, are as follows:
Sewart Corporation Income Statement
Pounds
Cost of Goods Sold
Sewart Corporation Partial Balance Sheet
Long-term Liab 250,000 (issued July 1, 2009)
Other Information:
1 Equipment costing 340,000 pounds was acquired July 1, 2009, and 38,000 was acquired June
30, 2011 Depreciation for the period was as follows:
Equipment – 2009 acquisitions 66,000
– 2011 acquisitions 6,000
2 The beginning inventory was acquired when the exchange rate was $1.77 The inventory is valued on a FIFO basis Purchases and the ending inventory were acquired evenly throughout the period
3 Dividends were paid by the subsidiary on June 30 amounting to 156,000 pounds
4 Sales were made and all expenses were incurred uniformly throughout the year
5 Exchange rates for the pound on various dates were:
Average for 2011 1.73
Trang 713-2 (Continued)
Required:
A Prepare a schedule to determine the translation gain or loss for 2010, assuming the net monetary
liability position on January 1, 2011, was 180,000 pounds
B Compute the dollar amount that each of the following would be reported at in the 2011 financial
statements:
1 Cost of Goods Sold
2 Depreciation Expense
3 Equipment
13-3 Accounts are listed below for a foreign subsidiary that maintains its books in its local currency The
equity interest in the subsidiary was acquired in a purchase transaction In the space provided, indicate the exchange rate that would be used to translate the accounts into dollars assuming the functional currency was identified (a) as the U.S dollar and (b) as the foreign entity's local currency Use the following letters to identify the exchange rate:
H – Historical exchange rate
C – Current exchange rate
A – Average exchange rate for the current period
Exchange rate if the functional currency is:
1 Bonds Payable (issued 01/01/08) _
5 Additional Paid-In Capital _
10 Marketable Securities (carried
Trang 8Use the following information to answer Problems 13-4 and 13-5
On January 2, 2011, Promo Inc., a U.S parent company, purchased a 100% interest in Spot
Company, a subdivision located in Switzerland The purchase method of accounting was used to account for the acquisition The 2011 financial statements for Spot Company, the subsidiary, in Swiss francs were as follows:
Comparative Balance Sheets
Jan 2 Dec 31
Plant and equipment (net) (purchased 6/30/08) 75,000 67,500
Long-term notes payable (issued 6/30/08) 31,500 27,000
Income Statement
Operating expenses including depreciation
90,000
Sales were earned and operating expenses were incurred evenly during the year
Exchange rates for the franc at various dates are:
December 10, 2011, dividend payment date 0.8810
13-4 Use the above information to answer the following question:
Required:
Translate the year-end financial statements of Spot Company, the foreign subsidiary, using the temporal method Round numbers to the nearest dollar
13-5 Use the above information to answer the following question:
Required:
Prepare a schedule to compute the translation gain or loss for Spot Company, assuming the temporal method
of translation Round numbers to the nearest dollar
Trang 913-6 Bass Corporation, a U.S Company, formed a subsidiary with a new company in London on January
1, 2011, by investing 500,000 British pounds in exchange for all of the subsidiary’s common stock The subsidiary purchased land for 100,000 pounds and a building for 300,000 pounds on July 1,
2011 The building is being depreciated over a 40-year life by the straight-line method The
inventory is valued on an average cost basis The British pound is the subsidiary’s functional
currency and its reporting currency and has not experienced any abnormal inflation Exchange rates for the pound on various dates were:
January 1, 2011 1 pound = 1.81
December 31, 2011 1 pound = 1.83
2011 average rate 1 pound = 1.82 The subsidiary’s adjusted trial balance is presented below for the year ended December 31, 2011
Credits
Required: Prepare the subsidiary’s:
A Translated workpapers (round to the nearest dollar)
B Translated income statement
C Translated balance sheet
13-7 Using the information provided in Problem 13-6, use the temporal method instead of the current rate
method
Required: Prepare the subsidiary’s:
A Translated workpapers (round to the nearest dollar)
B Translated income statement
C Translated balance sheet
Trang 1013-8
On January 1, 2011, Roswell Systems, a U.S.-based company, purchased a controlling interest in Swiss Management Consultants located in Zurich, Switzerland The acquisition was treated as a purchase
transaction The 2011 financial statements stated in Swiss francs are given below
SWISS MANAGEMENT CONSULTANTS
Comparative Balance Sheets January 1 and December 31, 2011 Jan 1 Dec 31
SWISS MANAGEMENT CONSULTANTS Consolidated Income and Retained Earnings Statement For the Year Ended December 31, 2011
Operating Expenses including depreciation of 5,000 francs 45,000
Direct exchange rates for Swiss franc are:
U.S Dollars per Franc
Dividend declaration and payment date 0.9810
Required:
A Translate the year-end balance sheet and income statement of the foreign subsidiary using the current rate method of translation
B Prepare a schedule to verify the translation adjustment
Short Answer
1 To accomplish the objectives of translation, two translation methods are used depending on the functional currency of the foreign entity Describe the two translation methods
2 The translation process can be done using either the current rate method or the temporal method Explain under what circumstances each of the methods is appropriate
Trang 11Short Answer Questions from the Textbook
1 What requirements must be satisfied if a foreign subsidiary is to be consolidated?
2 What is meant by an entity’s functional currency and what are the economic indicators identified by
the FASB to provide guidance in selecting the functional currency?
3 The is the functional currency of a foreign subsidiary with operations that are relatively
self-contained and integrated within the country in which it is located In such cases, the method of translation would be used to translate the accounts into dollars
4 The is the functional currency of a foreign subsidiary that is a direct and integral
component or extension of a U.S parent company In such cases, the method of translation is used to translate (remeasure) the accounts into dollars
5 Which method of translation is used to convert the financial statements when a foreign subsidiary
operates in a highly inflationary economy?
6 Define remeasurement
7 Under the current rate method, how are assets and liabilities that are stated in a foreign currency
translated?
8 Under the current rate method, describe how the various balance sheet accounts are translated
(including the equity accounts) and how this translation affects the computation of various ratios (such as debt to equity or the current ratio) In particular, discuss whether or not the ratios will change when computed in local currencies and compared to their calculations (after translation) using the parent’s currency
9 What is the objective of the temporal method of translation?
10 Assuming that the temporal method is used, how are revenue and expense items in foreign currency
financial statements converted?
11 A translation adjustment results from the process of translating financial statements of a foreign
subsidiary from its functional currency into dollars Where is the translation adjustment reported in the financial statements if the current rate method is used to translate the accounts?
Business Ethics Question from the Textbook
The Shady Tree Company is preparing to announce their quarterly earnings numbers The company expectsto beat the analysts’ forecast of earnings by at least5cents a share In anticipation of the increase instockvalue and before the release of the earnings numbers, the company issued stock options to the top executives in the firm, with the option price equal to today’s market price
1 This type of executive stock option is often re-ferred to as “spring-loading.” Do you think this
practice should be allowed? Does it provide in-formation about the integrity of the firm or is this just good business practice?