Chapter 10 Translation of Foreign Currency Financial Statements PDF

Chapter 10 Translation of Foreign Currency Financial Statements
File: Chapter 10 Translation of Foreign Currency Financial Statements

Multiple Choice
[QUESTION]
1. In accounting, the term translation refers to
A) the calculation of gains or losses from hedging transactions.
B) the calculation of exchange rate gains or losses on individual transactions in foreign currencies.
C) the procedure required to identify a company's functional currency.
D) the calculation of gains or losses from all transactions for the year.
E) a procedure to prepare a foreign subsidiary's financial statements for consolidation.
Answer: E
Difficulty: Easy
[QUESTION]
2. What is a company's functional currency?
A) the currency of the primary economic environment in which it operates.
B) the currency of the country where it has its headquarters.
C) the currency in which it prepares its financial statements.
D) the reporting currency of its parent for a subsidiary.
E) the currency it chooses to designate as such.
Answer: A
Difficulty: Easy
[QUESTION]
3. According to SFAS 52, which method is usually required for translating a foreign subsidiary's financial
statements into the parent's reporting currency?
A) the temporal method.
B) the current rate method.
C) the current/noncurrent method.
D) the monetary/nonmonetary method.
E) the noncurrent rate method.
Answer: B
Difficulty: Easy
[QUESTION]
4. In translating a foreign subsidiary's financial statements, which exchange rate does the current method
require for the subsidiary's assets and liabilities?
A) the exchange rate in effect when each asset or liability was acquired.
B) the average exchange rate for the current year.
C) a calculated exchange rate based on market value.
D) the exchange rate in effect as of the balance sheet date.
E) the exchange rate in effect at the start of the current year.
Answer: D
Difficulty: Easy
[QUESTION]
5. The translation adjustment from translating a foreign subsidiary's financial statements should be shown
as
A) an asset or liability (depending on the balance) on the consolidated balance sheet.
B) a revenue or expense (depending on the balance) on the consolidated income statement.
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C) a component of stockholders' equity on the consolidated balance sheet.

D) a component of cash flows from financing activities on the consolidated statement of cash flows.
E) an element of the notes which accompany the consolidated financial statements.
Answer: C
Difficulty: Easy
REFERENCE: Ref. 10_01
Westmore, Ltd. is a British subsidiary of a U.S. company. Westmore's functional currency is the pound
sterling. The following exchange rates were in effect during 2008:
Jan. 1
June 30
Dec. 31
Weighted average rate for the year
$1 = .625
$1 = .610
$1 = .620
$1 = .630
[QUESTION]
REFER TO: Ref. 10_01
6. Westmore reported sales of 1,500,000 during 2008. What amount (rounded) would have been
included for this subsidiary in calculating consolidated sales?
A) $2,380,952.
B) $2,400,000.
C) $2,429,150.
D) $2,419,355.
E) $2,425,876.
Answer: A
Difficulty: Medium
[QUESTION]
7. On December 31, Westmore had accounts receivable of 280,000. What amount (rounded) would
have been included for this subsidiary in calculating consolidated accounts receivable?
A) $444,444.
B) $451,613.
C) $142,600.
D) $176,400.
E) $452,830.
Answer: B
Difficulty: Medium
[QUESTION]
8. Gunther Co. established a subsidiary in Mexico on January 1, 2008. The subsidiary engaged in the
following transactions during 2008:
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Jan. 1
Dec. 31
Sold common stock to Gunther for 5,000,000 pesos. Purchased

inventory throughout the year, 8,000,000 pesos ( remained at yearend).
Sales throughout the year totaled 12,000,000 pesos.
Purchased equipment for 1,000,000 pesos.
Gunther concluded that the subsidiarys functional currency was the dollar.
Exchange rates for 2008 were:
Jan. 1
1 peso = $.20
31
1 peso = $.19
Dec. 31
1 peso = $.16
1 peso = $.18
What amount of foreign exchange gain or loss would have been recognized on Gunther's consolidated
income statement for 2008?
A) $200,400 loss.
B) $90,000 loss.
C) $226,000 loss.
D) $235,600 loss.
E) $250,000 loss.
Answer: E
Difficulty: Hard
Darron Co. was formed on January 1, 2009 as a wholly owned foreign subsidiary of a U.S. corporation.
Darron's functional currency was the stickle (). The following transactions and events occurred during
2007:
Jan. 1
June 30
Dec. 31
Darron issued common stock for 1,000,000.

Darron paid dividends of 20,000.
Darron reported net income of 80,000 for the year.
Exchange rates for 2009 were:

Jan. 1
June 30
Dec. 31
$1 = .48
$1 = .46
$1 = .42
$1 = .44
[QUESTION]
9. What exchange rate should have been used in translating Darron's revenues and expenses for 2009?
A) $1 = .48.
B) $1 = .44.
C) $1 = .46.
D) $1 = .42.
E) $1 = .45.
Answer: B
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Difficulty: Easy
[QUESTION]
10. What was the amount of the translation adjustment for 2009?
A) $293,479 increase in relative value of net assets.
B) $302,137 increase in relative value of net assets.
C) $300,160 increase in relative value of net assets.
D) $187,418 increase in relative value of net assets.
E) $270,800 increase in relative value of net assets.
Answer: B
Difficulty: Hard
[QUESTION]
11. Which of the following translation methods was originally mandated by SFAS No. 8?
A) Current/Noncurrent Method.
B) Monetary/Nonmonetary Method.
C) Current Rate Method.
D) Temporal Method.
E) Indirect Method.
Answer: D
Difficulty: Easy
[QUESTION]
12. Which accounts are remeasured using current exchange rates?
A) all revenues and expenses.
B) all assets and liabilities.
C) all monetary assets and liabilities.
D) all current assets and liabilities.
E) all noncurrent assets and liabilities.
Answer: D
Difficulty: Medium
[QUESTION]
13. For a foreign subsidiary that uses the US dollar as its functional currency, what translation method is
required?
A) Current/Noncurrent Method.
B) Monetary/Nonmonetary Method.
C) Current Rate Method.
D) Temporal Method.
E) Indirect Method.
Answer: D
Difficulty: Medium
Dilty Corp. owned a subsidiary in France. Dilty concluded that the subsidiary's functional currency was
the U.S. dollar.
[QUESTION]
14. Which one of the following statements would justify this conclusion?
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A) Most of the subsidiary's sales and purchases were with companies in the U.S.
B) Dilty's functional currency is the dollar and Dilty is the parent.
C) Dilty's other subsidiaries all had the dollar as their functional currency.
D) Generally accepted accounting principles require that the subsidiary's functional currency must be the
dollar if consolidated financial statements are to be prepared.
E) Dilty is located in the U.S.
Answer: A
Difficulty: Medium
[QUESTION]
15. What must Dilty do to ready the subsidiary's financial statements for consolidation?
A) first translate them, then remeasure them.
B) first remeasure them, then translate them.
C) state all of the subsidiary's accounts in U.S. dollars using the exchange rate in effect at the balance
sheet date.
D) translate them.
E) remeasure them.
Answer: E
Difficulty: Easy
Certain balance sheet accounts of a foreign subsidiary of the Tulip Co. had been stated in U.S. dollars as
follows:
Accounts receivable current

Accounts receivable long-term
Prepaid insurance
Goodwill
Totals
Stated at
Current
Historical
Rates
Rates
$ 280,000
$ 308,000
140,000
154,000
70,000
77,000
112,000
119,000
$ 602,000
$ 658,000
[QUESTION]
16. If a foreign currency is the functional currency of this subsidiary, what total should have been
included in Tulip's balance sheet for the preceding items?
A) $609,000.
B) $658,000.
C) $602,000.
D) $630,000.
E) $616,000.
Answer: C
Difficulty: Easy
[QUESTION]
17. If the U.S. dollar is the functional currency of this subsidiary, what total should have been included in
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Tulip's balance sheet for the items above?

A) $609,000.
B) $658,000.
C) $602,000.
D) $630,000.
E) $616,000.
Answer: E
Difficulty: Medium
A subsidiary of Porter Inc., a U.S. company, was located in a foreign country. The functional currency of
this subsidiary was the stickle (). The subsidiary acquired inventory on credit on November 1, 2008, for
120,000 that was sold on January 17, 2009 for 156,000. The subsidiary paid for the inventory on
January 31, 2009. Currency exchange rates between the dollar and the stickle were as follows:
November 1, 2008
December 31,2008
January 1, 2009
January 31, 2009
Average for 2009
$.19 = 1
$.20 = 1
$.22 = 1
$.23 = 1
$.24 = 1
[QUESTION]
18. What figure would have been reported for this inventory on Porter's consolidated balance sheet at
December 31, 2008?
A) $24,000.
B) $26,400.
C) $22,800.
D) $27,600.
E) $28,800.
Answer: A
Difficulty: Easy
[QUESTION]
19. What figure would have been reported for cost of goods sold on Porter's consolidated income
statement at December 31, 2009?
A) $24,000.
B) $26,400.
C) $22,800.
D) $27,600.
E) $28,800.
Answer: E
Difficulty: Medium
[QUESTION]
20. A U.S. company's foreign subsidiary had the following amounts in stickles () in 2009:
Cost of goods sold

Ending inventory
Beginning inventory
12,000,000
600,000
240,000
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The average exchange rate during 2009 was 1 = $.96. The beginning inventory was acquired when the
exchange rate was 1 = $1.20. The ending inventory was acquired when the exchange rate was 1 =
$.90. The exchange rate at December 31, 2009 was 1 = $.84. Assuming that the foreign country had a
highly inflationary economy, at what amount should the foreign subsidiary's cost of goods sold have been
reflected in the 2009 U.S. dollar income statement?
A) $11,253,600.
B) $11,577,600.
C) $11,649,600.
D) $11,613,600.
E) $11,523,600.
Answer: D
Difficulty: Hard
[QUESTION]
21. A historical exchange rate for a foreign subsidiary is best described as
A) The rate at date of acquisition for a purchase transaction.
B) The rate when the common stock was originally issued for a purchase transaction.
C) The average rate from date of acquisition to the date of balance sheet.
D) The rate from the prior years balances.
E) The January 1 exchange rate.
Answer: A
Difficulty: Medium
[QUESTION]
22. A net asset balance sheet exposure exists and the foreign currency appreciates. Which of the
following statements is true?
A) There is no translation adjustment.
B) There is a transaction loss.
C) There is a transaction gain.
D) There is a negative translation adjustment.
E) There is a positive translation adjustment.
Answer: E
Difficulty: Medium
[QUESTION]
23. A net asset balance sheet exposure exists and the foreign currency depreciates. Which of the
Answer: D
Difficulty: Medium
[QUESTION]
24. A net liability balance sheet exposure exists and the foreign currency appreciates. Which of the
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Answer: D
Difficulty: Medium
[QUESTION]
25. A net liability balance sheet exposure exists and the foreign currency depreciates. Which of the
Answer: E
Difficulty: Medium
[QUESTION]
26. Which method of translating a foreign subsidiary's financial statements is correct?
A) Historical rate method.
B) Working capital method.
C) Current rate method.
D) Remeasurement.
E) Temporal method.
Answer: C
Difficulty: Easy
[QUESTION]
27. Which method of remeasuring a foreign subsidiary's financial statements is correct?
A) Historical rate method.
B) Working capital method.
C) Current rate method.
D) Translation.
E) Temporal method.
Answer: E
Difficulty: Easy
[QUESTION]
28. Under the temporal method, inventory at market would be restated at what rate?
A) Beginning of the year rate.
B) Average rate.
C) Current rate.
D) Historical rate.
E) Composite amount.
Answer: C
Difficulty: Medium
[QUESTION]
29. Under the current rate method, inventory at market would be restated at what rate?
B) Average rate.
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C) Current rate.
D) Historical rate.
Answer: C
Difficulty: Medium
[QUESTION]
30. Under the temporal method, common stock would be restated at what rate?
B) Average rate.
C) Current rate.
D) Historical rate.
Answer: D
Difficulty: Easy
[QUESTION]
31. Under the current rate method, common stock would be restated at what rate?
B) Average rate.
C) Current rate.
D) Historical rate.
Answer: D
Difficulty: Easy
[QUESTION]
32. Under the current rate method, property, plant & equipment would be restated at what rate?
B) Average rate.
C) Current rate.
D) Historical rate.
Answer: C
Difficulty: Medium
[QUESTION]
33. Under the temporal method, property, plant & equipment would be restated at what rate?
B) Average rate.
C) Current rate.
D) Historical rate.
Answer: D
Difficulty: Medium
[QUESTION]
34. Under the current rate method, retained earnings would be restated at what rate?
B) Average rate.
C) Current rate.
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D) Historical rate.
Answer: E
Difficulty: Medium
[QUESTION]
35. Under the temporal method, retained earnings would be restated at what rate?
B) Average rate.
C) Current rate.
D) Historical rate.
Answer: E
Difficulty: Medium
[QUESTION]
36. Under the current rate method, depreciation expense would be restated at what rate?
B) Average rate.
C) Current rate.
D) Historical rate.
Answer: B
Difficulty: Medium
[QUESTION]
37. Under the temporal method, depreciation expense would be restated at what rate?
B) Average rate.
C) Current rate.
D) Historical rate.
Answer: D
Difficulty: Medium
[QUESTION]
38. Under the temporal method, how would cost of goods sold be restated?
B) Average rate.
C) Current rate.
D) Historical rate.
Answer: E
Difficulty: Medium
[QUESTION]
39. Under the current rate method, how would cost of goods sold be restated?
B) Average rate.
C) Current rate.
D) Historical rate.
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Answer: B
Difficulty: Medium
[QUESTION]
40. How is the disposition of the translated gain or loss reported on the parent company's financial
statements?
A) Net income/loss on the income statement.
B) Cumulative translation adjustment as a deferred asset.
C) Cumulative translation adjustment as a deferred liability.
D) Other comprehensive income.
E) Retained earnings.
Answer: D
Difficulty: Medium
[QUESTION]
41. How is the disposition of the remeasurement gain or loss reported on the parent company's financial
statements?
A) Net income/loss on the income statement.
B) Cumulative translation adjustment as a deferred asset.
C) Cumulative translation adjustment as a deferred liability.
D) Other comprehensive income.
E) Retained earnings.
Answer: A
Difficulty: Medium
[QUESTION]
42. A highly inflationary economy is defined as
A) Cumulative 5-year inflation in excess of 100%.
B) Cumulative 3-year inflation in excess of 100%.
C) Cumulative 5-year inflation in excess of 90%.
D) Cumulative 3-year inflation in excess of 90%.
E) Any country designated as a company operating in an underworld economy.
Answer: B
Difficulty: Medium
[QUESTION]
43. If a subsidiary is operating in a highly inflationary economy, how are the financial statements to be
restated?
A) Historical rate.
B) Working capital rate.
C) Translation.
D) Remeasurement.
E) Current rate.
Answer: D
Difficulty: Medium
[QUESTION]
44. When consolidating a foreign subsidiary, which of the following statements is true?
A) Parent reports a cumulative translation adjustment using the equity method.
B) Parent's reports a gain or loss in net income using the equity method.
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C) Subsidiary's cumulative translation adjustment is carried forward to the consolidated balance sheet.
D) Subsidiary's income/loss is carried forward to the consolidated balance sheet.
E) All foreign currency gains/losses are eliminated on the consolidated income statement and balance
sheet.
Answer: A
Difficulty: Hard
[QUESTION]
45. When preparing a consolidating statement of cash flows, which of the following statements is false?
A) Subsidiary dividends are deducted as a financing activity.
B) Noncontrolling interest in subsidiary dividends are deducted as a financing activity.
C) Parent dividends are deducted as a financing activity.
D) Amortization of cost over book value of the investment in subsidiary is added to net income as an
operating activity using the indirect method.
E) Intercompany gains do not appear on the consolidated statement of cash flows.
Answer: A
Difficulty: Medium
The following account balances are available for Esposito, an Italian U.S. subsidiary for 2009:
Beginning inventory
Purchases
Ending inventory
20,000
400,000
15,000
Relevant exchange rates follow:

4th quarter average, 2008
December 31, 2008
Average 2009
December 31, 2009
$.93 = 1
. 94 = 1
.96 = 1
.99 = 1
1.01 = 1
[QUESTION]
46. Compute the cost of goods sold for 2009 in U.S. dollars using the temporal method.
A) $376,650.
B) $387,750.
C) $388,800.
D) $400,950.
E) $409,050.
Answer: B
Difficulty: Medium
[QUESTION]
47. Compute the cost of goods sold for 2009 in U.S. dollars using the current rate method.
A) $376,550.
B) $387,750.
C) $388,800.
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D) $400,950.
E) $409,050.
Answer: C
Difficulty: Medium
[QUESTION]
48. Compute ending inventory for 2009 under the temporal method.
A) $13,950.
B) $14,100.
C) $14,400.
D) $14,850.
E) $15,150.
Answer: D
Difficulty: Medium
[QUESTION]
49. Compute ending inventory for 2009 under the current rate method.
A) $13,950.
B) $14,100.
C) $14,400.
D) $14,850.
E) $15,150.
Answer: E
Difficulty: Medium
The following inventory balances for 2008 in local currency units (LCU) are given:
Inventory at cost
Inventory at replacement cost
Inventory at net realizable value
Inventory at net realizable value
Less normal profit margin
320,000 LCU
300,000
420,000
400,000
The following exchange rates are given for 2008:

January 1, 2008
Average, 2008
December 31, 2008
$1.50 = 1 LCU
1.48 = 1
1.43 = 1
1.42 = 1
[QUESTION]
50. Compute the December 31, 2008, inventory balance using the lower of cost or market method under
the temporal method.
A) $429,000.
B) $457,600.
C) $596,000.
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D) $568,000.
E) $473,600.
Answer: A
Difficulty: Medium
[QUESTION]
51. Compute the December 31, 2008, inventory balance using the current rate method.
A) $454,400.
B) $457,600.
C) $596,000.
D) $568,000.
E) $473,600.
Answer: A
Difficulty: Medium
Perez Company, a Mexican subsidiary of a U.S. company, sold equipment costing 200,000 pesos with
accumulated depreciation of 75,000 pesos for 140,000 pesos on March 1, 2009. The equipment was
purchased on January 1, 2008, when the exchange rate for the peso was $.11. Relevant exchange rates for
the peso are as follows:
January 1, 2008
March 1, 2009
December 31, 2009
Average, 2009
$ .1071
.106
.102
.105
[QUESTION]
52. The financial statements for Perez are translated by its U.S. parent. What amount of gain or loss
would be reported in its translated income statement?
A) $1,530.
B) $1,575.
C) $1,590.
D) $1,090.
E) $1,650.
Answer: C
Difficulty: Medium
[QUESTION]
53. The financial statements for Perez are remeasured by its U.S. parent. What amount of gain or loss
would be reported in its translated income statement?
A) $1,530.
B) $1,575.
C) $1,465.
D) $1,090.
E) $1,650.
Answer: D
Difficulty: Hard
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Certain balance sheet accounts of a foreign subsidiary of Parker Company at December 31, 2008, have
been restated into U.S. dollars as follows:
Cash
Accounts receivable
Inventory, at market
Land
Equipment (net)
Total
Restated at
Current Rates
Historical Rates
$ 47,500
$ 45,000
95,000
90,000
76,000
72,000
57,000
54,000
142,500
135,000
$418,000
$396,000
[QUESTION]
54. Assuming the functional currency of the subsidiary is the U.S. dollar, what total should be included
in Parker's consolidated balance sheet at December 31, 2008, for the above items?
A) $407,500.
B) $418,000.
C) $396,000.
D) $403,500.
E) $398,500.
Answer: A
Difficulty: Medium
[QUESTION]
55. Assuming the functional currency of the subsidiary is the local currency, what total should be
included in Parker's consolidated balance sheet at December 31, 2008, for the above items?
A) $407,500.
B) $418,000.
C) $396,000.
D) $403,500.
E) $398,500.
Answer: B
Difficulty: Easy
[QUESTION]
56. If the current rate used to restate these balances is $.95, what was the historical rate used to restate the
same balances?
A) $.90.
B) $1.00.
C) $.95.
D) $.9474.
E) $1.0556.
Answer: A
Difficulty: Medium
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Kennedy Company acquired all of the outstanding common stock of Hastie Company of Canada for
US$350,000 on January 1, 2009, when the exchange rate for the Canadian dollar was US$.70. The fair
value of the net assets of Hastie was equal to their book value of C$450,000 (Canadian dollars) on the
date of acquisition. Any excess cost over fair value was attributed to an unrecorded patent with a
remaining life of five years. The functional currency of Hastie is the Canadian dollar.
For the year ended December 31, 2009, Hastie's translated net income was $25,000. The average
exchange rate for the Canadian dollar during 2009 was US$.68, and the 2009 year-end exchange rate was
US$.65.
[QUESTION]
57. Calculate the US$ amount allocated to the patent at January 1, 2009.
A) $50,000.
B) $35,000.
C) $34,000.
D) $32,500.
E) $28,200.
Answer: B
Difficulty: Medium
[QUESTION]
58. Amortization of the patent, translated, for 2009 would be
A) $7,000.
B) $10,000.
C) $6,800.
D) $9,000.
E) $6,500.
Answer: C
Difficulty: Medium
[QUESTION]
59. Compute the amount of the patent reported on the consolidated balance sheet at December 31, 2009.
A) $28,200.
B) 428,000.
C) $35,000.
D) $27,200.
E) $26,000.
Answer: E
Difficulty: Medium
[QUESTION]
60. Kennedy's share of Hastie's net income for 2009 would be
A) $18,000.
B) $15,000.
C) $18,200.
D) $16,000.
E) $18,500.
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Answer: C
Difficulty: Medium
Quadros Inc., a Portugese firm was acquired by a U.S. company on January 1, 2007. Selected account
balances are available for the year ended December 31, 2008, and are stated in euro, the local currency.
Sales
Inventory (bought on February 1, 2008)
Equipment (bought on January 1, 2007)
Dividends (paid on September 1, 2008)
Accumulated depreciation Equipment 12/31/08
Depreciation expense Equipment, 2008
400,000
20,000
90,000
20,000
45,000
9,000
Relevant exchange rates are given below:

January 1, 2007
January 1, 2008
February 1, 2008
September 1, 2008
December 31, 2008
Average, 2008
$ .91
.93
.94
.97
1.01
.90
.98
.95
[QUESTION]
61. Assume the functional currency is the euro, compute the restated amount for sales for 2008.
A) $364,000.
B) $372,000.
C) $380,000.
D) $360,000.
E) $404,000.
Answer: C
Difficulty: Easy
[QUESTION]
62. Assume the functional currency is the euro, compute the restated amount for inventory for 2008.
A) $18,600.
B) $19,600.
C) $18,000.
D) $20,200
E) $19,000.
Answer: D
Difficulty: Easy
[QUESTION]
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63. Assume the functional currency is the euro, compute the restated amount for equipment for 2008.
A) $81,900.
B) $90,900.
C) $83,700.
D) $88,200.
E) $85,500.
Answer: B
Difficulty: Medium
[QUESTION]
64. Assume the functional currency is the euro, compute the restated amount for dividends for 2008.
A) $19,000.
B) $20,200.
C) $18,600.
D) $19,400.
E) $19,600.
Answer: D
Difficulty: Easy
[QUESTION]
65. Assume the functional currency is the euro, compute the restated amount for accumulated
depreciation for 2008.
A) $40,950.
B) $41,850.
C) $45,450.
D) $42,750.
E) $44,100.
Answer: C
Difficulty: Medium
[QUESTION]
66. Assume the functional currency is the euro, compute the restated amount for depreciation expense for
2008.
A) $8,190.
B) $8,370.
C) $8,820.
D) $9,090.
E) $8,550.
Answer: E
Difficulty: Medium
[QUESTION]
67. Assume the functional currency is the U.S. dollar, compute the restated amount for sales for 2008.
A) $364,000.
B) $372,000.
C) $380,000.
D) $360,000.
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E) $404,000.
Answer: C
Difficulty: Easy
[QUESTION]
68. Assume the functional currency is the U.S. dollar, compute the restated amount for inventory for
2008.
A) $18,600.
B) $19,600.
C) $18,000.
D) $20,200.
E) $19,000.
Answer: B
Difficulty: Medium
[QUESTION]
69. Assume the functional currency is the U.S. dollar, compute the restated amount for equipment for
2008.
A) $81,900.
B) $90,900.
C) $83,700.
D) $88,200.
E) $85,500.
Answer: A
Difficulty: Medium
[QUESTION]
70. Assume the functional currency is the U.S. dollar, compute the restated amount for dividends for
2008.
A) $19,000.
B) $20,200.
C) $18,600.
D) $19,400.
E) $19,600.
Answer: D
Difficulty: Easy
[QUESTION]
71. Assume the functional currency is the U.S. dollar, compute the restated amount for accumulated
depreciation for 2008.
A) $40,950.
B) $41,850.
C) $45,450.
D) $42,750.
E) $44,100.
Answer: A
Difficulty: Medium
Page 19
[QUESTION]
72. Assume the functional currency is the U.S. dollar, compute the restated amount for depreciation
expense for 2008.
A) $8,190.
B) $8,370.
C) $8,820.
D) $9,090.
E) $8,550.
Answer: A
Difficulty: Medium
[QUESTION]
73. When translating Quadros' financial statements, which of the following statements is true?
A) There will be a remeasurement gain reported on the consolidated income statement.
B) There will be a remeasurement loss reported on the consolidated income statement.
C) There will be a positive cumulative translation adjustment reported on the consolidated balance sheet.
D) There will be a positive cumulative translation adjustment reported on the consolidated income
statement.
E) There will be a transaction gain reported on the consolidated income statement.
Answer: C
Difficulty: Medium
Essay
[QUESTION]
74. A foreign subsidiary was purchased on January 1, 2008. Determine the exchange rate used to restate
the following accounts at December 31, 2008. Land was purchased on October 1, 2008. Relevant
exchange dates follow:
(A) January 1, 2008
(B) October 1, 2008
(C) December 31, 2008
(D) Average, 2008
(E) Composite, using multiple dates.
Identify the exchange rate used to translate items 1-5:
____ 1. Land.
____ 2. Equipment.
____ 3. Bonds payable.
____ 4. Common stock.
____ 5. Retained earnings.
Identify the exchange rate used to remeasure the items 6-10:
____ 6. Land.
____ 7. Equipment.
____ 8. Bonds payable.
____ 9. Common stock.
____ 10. Retained earnings.
Answer:
(1.) C; (2) C; (3.) C; (4.) A; (5.) E; (6.) B; (7.) A; (8.) C; (9.) A; (10.) E
Difficulty: Medium
Page 20
[QUESTION]
75. In translating a foreign subsidiary's financial statements, what exchange rate should be used for the
subsidiary's revenues and expenses?
Answer: The historical rate that was in effect when the revenues and expenses were incurred should be
used unless those revenues and expenses occur throughout the year, then a weighted average exchange
rate for the year may be used.
Difficulty: Medium
[QUESTION]
76. How can a parent corporation determine the functional currency for a foreign subsidiary that
conducts business in more than one country?
Answer: If the foreign subsidiary has distinct and separable operations in different countries, each of these
operations can use a different currency. If the subsidiary does not have distinct operations in different
countries, the currency in which the most transactions are carried out should be selected.
Difficulty: Medium
[QUESTION]
77. What exchange rate should be used to translate (a) revenues and expenses that occur throughout the
year and (b) a gain or loss that occurs on a specific day?
Answer: Revenues and expenses occurring throughout the year may be translated using the average
exchange rate for the year. A gain or loss occurring on a specific date should be translated using the rate
in effect on that day.
Difficulty: Easy
[QUESTION]
78. Perkle Co. owned a subsidiary in Belgium; the subsidiary's functional currency was the Belgian
franc. During 2009, Perkle engaged in hedging transactions to offset part of the subsidiary's net asset
position. How should the effects of exchange rate fluctuations on the currency hedge be accounted for?
Answer: Any effect on the contract resulting from exchange rate fluctuations is classified as a translation
adjustment, rather than as a foreign exchange gain or loss.
Difficulty: Easy
[QUESTION]
79. Under what circumstances would the translation of a foreign subsidiary's financial statements not be
required?
Answer: The translation of a foreign subsidiary's financial statements is not required in the following two
situations:
(A.) when the subsidiary's functional currency is the U.S. dollar.
(B.) when the subsidiary operates in a highly inflationary economy.
Difficulty: Medium
[QUESTION]
80. A foreign subsidiary of a U.S. corporation purchased equipment on January 4, 2005.
(A.) How would depreciation expense on the equipment be translated for 2008?
(B.) How would depreciation expense on the equipment be remeasured for 2008?
Answer: (A.) Depreciation expense would be translated using the average exchange rate for 2008. (B.)
Depreciation expense would be remeasured using the exchange rate in effect when the equipment was
purchased.
Difficulty: Medium
Page 21
[QUESTION]
81. What exchange rate would be used to translate the asset and liability account balances of a foreign
subsidiary? What justification can be given for using this exchange rate?
Answer: Assets and liabilities are translated using the current exchange rate, the rate in effect at the
balance sheet date. This rate is chosen because assets and liabilities are expected to affect future cash
flows. Therefore, they should be translated using the most up-to-date exchange rates available.
Difficulty: Easy
[QUESTION]
82. Farley Brothers, a U.S. company, had a subsidiary in Italy. Under what conditions would the U.S.
dollar be the functional currency for this subsidiary?
Answer: To determine the subsidiary's functional currency, Farley Brothers should look at the volume of
the subsidiary's transactions in various currencies. If most of the subsidiary's sales and purchases are in
dollars, the dollar may be the logical choice for the functional currency. If there are many transactions
between the subsidiary and the parent, and if most of the subsidiary's financing comes from the U.S., the
dollar may be a better choice than the lira or other European currencies.
Difficulty: Easy
[QUESTION]
83. What is the justification for the remeasurement of foreign currency transactions?
Answer: Remeasurement is needed for transactions denominated in a currency other than the entity's
functional currency. A U.S. company which engages in transactions in other countries may have to
remeasure some of its transactions. The implicit justification for remeasurement is that foreign currency
transactions which affect monetary assets and liabilities have a direct effect on the entity's cash flows.
There will be direct effects on future cash flows in the functional currency, and thus an effect on net
income.
Difficulty: Medium
[QUESTION]
84. Contrast the purpose of remeasurement with the purpose of translation.
Answer: The purpose of translation is to transform a subsidiary's financial statements, prepared in its
functional currency, into the reporting currency of the parent. The purpose of remeasurement is to restate
transactions from one currency into the functional currency of the entity. Remeasurement is also required
when a subsidiary's financial statements have been denominated in a currency other than the subsidiary's
functional currency.
Difficulty: Medium
[QUESTION]
85. On January 1, 2008, Fandu Corp. started a foreign subsidiary. On April 1, 2008, the subsidiary
purchased inventory costing 150,000 stickles. One-fourth of this inventory remained unsold at the end of
2008 while 40% of the liability from the purchase had not yet been paid. The pertinent exchange rates
were:
January 1, 2008
April 1, 2008
Average for 2008
December 31, 2008
$1 = 3.0
$1 = 3.4
$1 = 3.2
$1 = 3.6
Required:
What should have been the December 31, 2008 inventory and accounts payable balances for this foreign
Page 22
subsidiary as translated into U.S. dollars? (Round your answers to the nearest whole dollar.)
Difficulty: Medium
Answer:
Inventory (150,000 x x (1 3.6))
$ 10,417
Accounts payable (150,000 x 40% x (1 3.6))
$ 16,667
[QUESTION]
86. On January 1, 2008, Veldon Co., a U.S. corporation with the U.S. dollar as its functional currency,
established Malont Co. as a subsidiary. Malont is located in the country of Sorania, and its functional
currency is the stickle. Malont engaged in the following transactions during 2008:
January 1, 2008
July 14, 2008
October 1, 2008
Issued common stock for 500,000

Sold equipment at a loss of 40,000
Paid dividends of 60,000
Malonts operating revenues and expenses for 2008 were 800,000

and 650,000, respectively. The appropriate exchange rates were:
January 1, 2008
July 14, 2008
October 1, 2008
December 31, 2008
Average for 2008
$1 = 2.5
$1 = 2.1
$1 = 2.6
$1 = 2.7
$1 = 2.4
Required:
Calculate the translation adjustment for Malont. (Round your answers to the nearest whole dollar.)
Answer:
Stickles
Rate
U.S. Dollars
Net assets, 1/1/08
0
Change in net assets, 2008:
Common stock issuance
500,000
$1 2.5H
$200,000
Operating income
150,000
$1 2.4A
62,500
Loss on sale of equipment
(40,000) $1 2.1H
(19,048)
Dividends paid
(60,000) $1 2.6H
(23,077)
Net assets, 12/31/08
550,000
$(220,375)
Net assets, 12/31/08 at current
exchange rate
550,000
$1 2.7C
203,704
Translation adjustment , 2008
(negative)
$ (16,671)
Difficulty: Hard
Ginvold Co. began operating a subsidiary in a foreign country on January 1, 2008 by acquiring all of the
common stock for 50,000. This subsidiary immediately borrowed 120,000 on a five-year note with ten
percent interest payable annually beginning on January 1, 2008. A building was then purchased for
Page 23
170,000. This property had a ten-year anticipated life and no salvage value and was to be depreciated
using the straight-line method. The building was immediately rented for three years to a group of local
doctors for 6,000 per month. By year-end, payments totaling 60,000 had been made. On October 1,
5,000 were paid for a repair made on that date. A cash dividend of 6,000 was transferred back to
Ginvold on December 31, 2008. The functional currency for the subsidiary was the stickle. Currency
exchange rates were as follows:
January 1, 2008
October 1, 2008
Average for 2008
December 31, 2008
$2.40 = 1
$2.22 = 1
$2.28 = 1
$2.16 = 1
[QUESTION]
87. Prepare an income statement for this subsidiary in stickles and then translate these amounts into U.S.
dollars.
Answer:
Ginvold Co. Subsidiary

Income Statement
For the Year Ended December 31, 2008
Rent revenue
Interest expense
Depreciation expense
Repair expense
Net income
Stickles
72,000
( 12,000)
( 17,000)
( 5,000)
38,000
Rate
x $2.28 A =
x $2.28 A =
x $2.28 A =
x $2.22 H =
U.S. Dollars
$ 164,160
( 27,360)
( 38,760)
( 11,100)
$
86,940
Difficulty: Medium
[QUESTION]
88. Prepare a statement of retained earnings for this subsidiary in stickles and then translate these
amounts into U.S. dollars.
Answer:
Statement of Retained Earnings
For the Year Ended December 31, 2008
Retained earnings, 1/1/08
Net income
Dividends paid
Retained earnings, 12/31/08
Stickles
0
38,000
(6,000)
32,000
Rate
(above)
x $2.16H=
Difficulty: Medium
Page 24
U.S. Dollars
$
0
86,940
(12,960)
$73,980
[QUESTION]
89. Prepare a balance sheet for this subsidiary in stickles and then translate these amounts into U.S.
dollars.
Answer:
Balance Sheet
December 31, 2008
Cash
Accounts receivable
Building
Accumulated depreciation
Total assets
Interest payable
Note payable
Common stock
Retained earnings
Translation adjustment
Total liabilities and equities
Calculation of Translation
Adjustment
Net assets, 1/1/08
Common stock issuance
Net income
Dividends paid
exchange rate
Translation adjustment, 2008
(negative)
Stickles
49,000
12,000
170,000
(17,000)
214,000
x
x
x
x
12,000
120,000
50,000
32,000
x $2.16C =
x $2.16C =
x $2.40H =
(above)
$ 25,920
259,200
120,000
73,980
_______
214,000
(below)
(16,860)
$462,240
Rate
$2.16C =
$2.16C =
$2.16C =
$2.16C =
U. S. Dollars
$ 105,840
25,920
367,200
(36,720)
$ 462,240
50,000
38,000
(6,000)
82,000
x $2.40 =
(above)
x $2.16 =
120,000
86,940
(12,960)
$(193,980)
82,000
x $2.16 =
177,120
$ (16,860)
Difficulty: Medium
[QUESTION]
90. Prepare a statement of cash flows for this subsidiary in stickles and then translate these amounts into
U.S. dollars.
Answer:
Statement of Cash Flows
For the Year Ended, December 31, 2008
Stickles
Rate
Operating activities:
Page 25
U. S. Dollars
Net income
Depreciation
Increase in accounts receivable
Increase in interest payable
Net cash from operations
Investing activities:
Purchase of building
Financing activities:
Proceeds from common stock
Proceeds from note payable
Dividend paid
Net cash from financing
Increase in cash
Effect on exchange rate change on
cash
Cash at December 31, 2007
Cash at December 31, 2008
38,000
17,000
(12,000)
12,000
55,000
(Above)
x $2.28A =
x $2.28A =
x $2.28A =
$ 86,940
38,760
(27,360)
27,360
125,700
(170,000) x $2.40H =
(408,000)
50,000
120,000
(6,000)
164,000
49,000
120,000
288,000
(12,960)
395,040
112,740
0
49,000
x $2.40H =
x $2.40H =
x $2.16H =
x $2.16C =
(6,900)
0
$105,840
Difficulty: Medium
Boerkian Co. started 2008 with two assets: cash of 26,000 (stickles) and land that originally cost
72,000 when acquired on April 4, 2004. On May 1, 2008, the company rendered services to a customer
for 36,000, an amount immediately paid in cash. On October 1, 2008, the company incurred an
operating expense of 22,000 that was immediately paid. No other transactions occurred during the year.
Currency exchange rates were as follows:
April 4, 2004
January 1, 2008
May 1, 2008
October 1, 2008
Average for 2008
December 31, 2008
1 = $.28
1 = $.29
1 = $.30
1 = $.31
1 = $.32
1 = $.35
[QUESTION]
REFER TO: 10_13
91. Assume (1) that Boerkian was a foreign subsidiary of a U.S. multinational company that used the
U.S. dollar as its functional currency and (2) that the stickle was the functional currency of the subsidiary.
What was the translation adjustment for this subsidiary for 2008?
Answer:
Page 26
The translation adjustment is based on changes in the net assets of the subsidiary.
Net assets, 1/1/08
Rendered services
Incurred expense
exchange rate
Translation adjustment, 2008
(positive)
98,000
x $.29 =
36,000 x $.30 =
( 22,000) x $.31 =
112,000
112,000
28,420
10,800
6,820)
32,400
(
$
x $.35 =
39,200
$
6,800
Difficulty: Medium
[QUESTION]
92. Assume (1) that Boerkian was a foreign subsidiary of a U.S. multinational company that used the
U.S. dollar as its reporting currency and (2) that the U.S. dollar was the functional currency of the
subsidiary. What was the remeasurement gain or loss for 2008?
Difficulty: Medium
Answer:
The remeasurement gain or loss is based on changes in the net monetary assets of
the subsidiary.
Net monetary assets, 1/1/08
Change in net monetary assets, 2008:
Rendered services
Incurred expense
Net monetary assets, 12/31/08
Net monetary assets, 12/31/08 at
current exchange rate
Remeasurement gain
26,000
x $.29 =
36,000 x $.30 =
( 22,000) x $.31 =
40,000
40,000
7,540
10,800
6,820)
11,520
14,000
2,480
x $.35 =
Difficulty: Hard
[QUESTION]
93. Required:
Assume that Boerkian was a foreign subsidiary of a U.S. multinational company. On the December 31,
2008 balance sheet, what was the translated value of the Land account?
Difficulty: Medium
Answer:
Page 27
Translated value of land
72,000
x $.35 =
25,200
[QUESTION]
94. Assume that Boerkian was a foreign subsidiary of a U.S. multinational company. On the December
31, 2008 balance sheet, what was the remeasured value of the Land account?
Answer:
Remeasured value of land
Difficulty: Medium
Page 28
72,000
x $.28 =
20,160

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