Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

Chapter 12 Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements

Multiple Choice

uestions

The !alance in "e#sprint Corp$%s foreign e&change loss account #as '1()((( on *ece !er +1) 2((,) !efore any necessary year-end ad-ust ent relating to the follo#ing:

.1/ "e#sprint had a '10)((( de!it resulting fro the restate ent in dollars of the accounts of its #holly o#ned foreign su!sidiary for the year ended *ece !er +1) 2((,$ .2/ "e#sprint had an account paya!le to an unrelated foreign supplier) paya!le in the supplier%s local currency unit .1C2/ on 3anuary 10) 2((4$ The 2$S$ dollar5e6ui7alent of the paya!le #as '0()((( on the *ece !er 1) 2((,) in7oice date and '0+)((( on *ece !er +1) 2((,$

1$ 8ased on the infor ation pro7ided) in "e#sprint%s 2((, consolidated inco e state ent) #hat a ount should !e included as foreign e&change loss in co puting net inco e) if the 1C2 is the functional currency and the translation ethod is appropriate9 A$ '2,)((( 8$ '1+)((( C$ '20)((( *$ ',)(((

2$ 8ased on the infor ation pro7ided) in "e#sprint%s 2((, consolidated inco e state ent) #hat a ount should !e included as foreign e&change loss in co puting net inco e) if the 2$S$ dollar is the functional currency and the re easure ent ethod is appropriate9 A$ '10)((( 8$ '1()((( C$ '20)((( *$ '2,)(((

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

+$ Infinity Corporation ac6uired ,( percent of the co on stoc: of an Egyptian co pany on 3anuary 1) 2((,$ The good#ill associated #ith this ac6uisition #as '1,)+0($ E&change rates at 7arious dates during 2((, follo#:

;ood#ill suffered an i pair ent of 2( percent during the year$ If the functional currency is the Egyptian <ound) ho# uch good#ill i pair ent loss should !e reported on Infinity%s consolidated state ent of inco e for 2((,9 A$ '+)=>( 8$ '+)>(( C$ '+)=,( *$ '+)=4(

?$ Infinity Corporation ac6uired ,( percent of the co on stoc: of an Egyptian co pany on 3anuary 1) 2((,$ The good#ill associated #ith this ac6uisition #as '1,)+0($ E&change rates at 7arious dates during 2((, follo#:

;ood#ill suffered an i pair ent of 2( percent during the year$ If the functional currency is the 2$S$ dollar) ho# uch good#ill i pair ent loss should !e reported on Infinity%s consolidated state ent of inco e for 2((,9 A$ '+)=,( 8$ '+)=>( C$ '+)=4( *$ '+)>((

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

0$ Si on Co pany has t#o foreign su!sidiaries$ @ne is located in France) the other in England$ Si on has deter ined the 2$S$ dollar is the functional currency for the French su!sidiary) #hile the 8ritish pound is the functional currency for the English su!sidiary$ 8oth su!sidiaries aintain their !oo:s and records in their respecti7e local currencies$ Ahat ethods #ill Si on use to con7ert each of the su!sidiary%s financial state ents into 2$S$ dollars9

A$ @ption A 8$ @ption 8 C$ @ption C *$ @ption *

Michigan-!ased 1eo Corporation ac6uired 1(( percent of the co on stoc: of a 8ritish co pany on 3anuary 1) 2((,) for '1)1(()((($ The 8ritish su!sidiary%s net assets a ounted to 0(()((( pounds on the date of ac6uisition$ @n 3anuary 1) 2((,) the !oo: 7alues of its identifia!le assets and lia!ilities appro&i ated their fair 7alues$ As a result of an analysis of functional currency indicators) 1eo deter ined that the 8ritish pound #as the functional currency$ @n *ece !er +1) 2((,) the 8ritish su!sidiary%s ad-usted trial !alance) translated into 2$S$ dollars) contained '1>)((( ore de!its than credits$ The 8ritish su!sidiary reported inco e of ++)((( pounds for 2((, and paid a cash di7idend of ,)((( pounds on @cto!er 20) 2((,$ Included on the 8ritish su!sidiary%s inco e state ent #as depreciation e&pense of +)0(( pounds$ 1eo uses the !asic e6uity ethod of accounting for its in7est ent in the 8ritish su!sidiary and deter ined that good#ill in the first year had an i pair ent loss of 20 percent of its initial a ount$ E&change rates at 7arious dates during 2((, follo#:

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

=$ 8ased on the preceding infor ation) #hat a ount should 1eo record as Binco e fro su!sidiaryB !ased on the 8ritish su!sidiary%s reported net inco e9 A$ '>2)4+( 8$ '02)0(( C$ '>2)=(( *$ '=4)+((

>$ 8ased on the preceding infor ation) the receipt of the di7idend #ill result in a credit to the in7est ent account for: A$ '1=),(( 8$ '1>)=,( C$ '1,)((( *$ '1>)=((

,$ 8ased on the preceding infor ation) on 1eo%s consolidated !alance sheet at *ece !er +1) 2((,) #hat a ount should !e reported for the good#ill ac6uired on 3anuary 1) 2((,9 A$ '+=),?0 8$ '+4)2,= C$ '+=)4(0 *$ '+=)=(>

4$ 8ased on the preceding infor ation) in the stoc:holders% e6uity section of 1eo%s consolidated !alance sheet at *ece !er +1) 2((,) 1eo should report the translation ad-ust ent as a co ponent of other co prehensi7e inco e of: A$ '14)??( 8$ '1>)((( C$ '1,)>,= *$ '14)+,(

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

1($ Ahich of the follo#ing defines a foreign-!ased entity that uses a functional currency different fro the local currency9 I$ A 2$S$ su!sidiary in 8ritain aintains its accounting records in pounds sterling) #ith the a-ority of its transactions deno inated in pounds sterling$ II$ A 2$S$ su!sidiary in <eru conducts 7irtually all of its !usiness in 1atin A erica) and uses the 2$S$ dollar as its a-or currency$ A$ I$ 8$ II$ C$ 8oth I and II$ *$ "either I nor II$

11$ Ahen the local currency of the foreign su!sidiary is the functional currency) a foreign su!sidiary%s in7entory carried at cost #ould !e con7erted to 2$S$ dollars !y: A$ translation using historical e&change rates$ 8$ re easure ent using historical e&change rates$ C$ re easure ent using the current e&change rate$ *$ translation using the current e&change rate$

12$ Ahen the local currency of the foreign su!sidiary is the functional currency) a foreign su!sidiary%s inco e state ent accounts #ould !e con7erted to 2$S$ dollars !y: A$ translation using historical e&change rates$ 8$ re easure ent using current e&change rates at the ti e of state ent preparation$ C$ translation using a7erage e&change rate for the period$ *$ re easure ent using the current e&change rate at the ti e of state ent preparation$

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

1+$ If the restate ent ethod for a foreign su!sidiary in7ol7es re easuring fro the local currency into the functional currency) then translating fro functional currency to 2$S$ dollars) the functional currency of the su!sidiary is: I$ 2$S$ dollar$ II$ 1ocal currency unit$ III$ A third country%s currency$ A$ I 8$ III C$ II *$ Either I or II

1?$ If the 2$S$ dollar is the currency in #hich the foreign affiliate%s !oo:s and records are aintained) and the 2$S$ dollar is also the functional currency) A$ the translation ethod should !e used for restate ent$ 8$ the re easure ent ethod should !e used for restate ent$ C$ either translation or re easure ent could !e used for restate ent$ *$ no restate ent is re6uired$

10$ All of the follo#ing stoc:holders% e6uity accounts of a foreign su!sidiary are translated at historical e&change rates e&cept: A$ retained earnings$ 8$ co on stoc:$ C$ additional paid-in capital$ *$ preferred stoc:$

1=$ *i7idends of a foreign su!sidiary are translated at: A$ the a7erage e&change rate for the year$ 8$ the e&change rate on the date of declaration$ C$ the current e&change rate on the date of preparation of the financial state ent$ *$ the e&change rate on the record date$

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

1>$ If the functional currency is the local currency of a foreign su!sidiary) #hat e&change rates should !e used to translate the ite s !elo#) assu ing the foreign su!sidiary is in a country #hich has not e&perienced hyperinflation o7er three years9

A$ @ption A 8$ @ption 8 C$ @ption C *$ @ption *

1,$ If the functional currency is the local currency of a foreign su!sidiary) #hat e&change rates should !e used to translate the ite s !elo#) assu ing the foreign su!sidiary is in a country #hich has not e&perienced hyperinflation o7er three years9

A$ @ption A 8$ @ption 8 C$ @ption C *$ @ption *

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

14$ Ahich co !ination of accounts and e&change rates is correct for the translation of a foreign entity%s financial state ents fro the functional currency to 2$S$ dollars9

A$ @ption A 8$ @ption 8 C$ @ption C *$ @ption *

2($ Ahich co !ination of accounts and e&change rates is correct for the re easure ent of a foreign entity%s financial state ents fro its local currency to 2$S$ dollars9

A$ @ption A 8$ @ption 8 C$ @ption C *$ @ption *

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

21$ The assets listed !elo# of a foreign su!sidiary ha7e !een con7erted to 2$S$ dollars at !oth current and historical e&change rates$ Assu ing that the local currency of the foreign su!sidiary is the functional currency) #hat total a ount should appear for these assets on the 2$S$ co pany%s consolidated !alance sheet9

A$ '=+=)((( 8$ '=?,)((( C$ '>(,)((( *$ '4=()(((

22$ The gain or loss on the effecti7e portion of a 2$S$ parent co pany%s hedge of a net in7est ent in a foreign entity should !e treated as: A$ an ad-ust ent to the retained earnings account in the stoc:holders% e6uity section of its !alance sheet$ 8$ other co prehensi7e inco e$ C$ a translation gain or loss in the co putation of net inco e for the reporting period$ *$ an ad-ust ent to a 7aluation account in the asset section of its !alance sheet$

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

2+$ *o7er Co pany o#ns 4(C of the capital stoc: of a foreign su!sidiary located in Italy$ *o7er%s accountant has -ust translated the accounts of the foreign su!sidiary and deter ined that a de!it translation ad-ust ent of ',()((( e&ists$ If *o7er uses the e6uity ethod for its in7est ent) #hat entry should *o7er record in order to recogniDe the translation ad-ust ent9

A$ @ption A 8$ @ption 8 C$ @ption C *$ @ption *

2?$ For each of the ite s listed !elo#) state #hether they increase or decrease the !alance in cu ulati7e translation ad-ust ents .assu ing a credit !alance at the !eginning of the year/ #hen the foreign currency strengthened relati7e to the 2$S$ dollar during the year$

A$ @ption A 8$ @ption 8 C$ @ption C *$ @ption *

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

20$ "ichols Co pany o#ns 4(C of the capital stoc: of a foreign su!sidiary located in Ireland$ As a result of translating the su!sidiary%s accounts) a de!it of '1=()((( #as needed in the translation ad-ust ents account so that the foreign su!sidiary%s de!its and credits #ere e6ual in 2$S$ dollars$ Eo# should "ichols report its translation ad-ust ents on its consolidated financial state ents9 A$ As a '1??)((( increase in the stoc:holders% e6uity section of the !alance sheet$ 8$ As a '1??)((( reduction in consolidated co prehensi7e net inco e$ C$ As a '1=()((( de!it in stoc:holders% e6uity section of the !alance sheet$ *$ As a '1=()((( reduction in consolidated co prehensi7e net inco e$

2=$ 2nder the te poral ethod) #hich of the follo#ing is usually used to translate a ounts to the functional currency9 I$ The current e&change rate II The historical e&change rate III$ A7erage e&change rate A$ I 8$ III C$ II *$ Either I or II

onetary

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

Mercury Co pany is a su!sidiary of "eptune Co pany and is located in FalparaGso) Chile) #here the currency is the Chilean <eso$ *ata on Mercury%s in7entory and purchases are as follo#s:

The !eginning in7entory #as ac6uired during the fourth 6uarter of 2((>) and the ending in7entory #as ac6uired during the fourth 6uarter of 2((,$ <urchases #ere ade e7enly o7er the year$ E&change rates #ere as follo#s:

2>$ Refer the infor ation pro7ided a!o7e$ Assu ing the 2$S$ dollar is the functional currency) #hat is the a ount of Mercury%s cost of goods sold re easured in 2$S$ dollars9 A$ '1)=,( 8$ '1)>12 C$ '1)>(( *$ '1)=42

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

2,$ 8ased on the preceding infor ation) the translation of cost of goods sold for 2((,) assu ing that the Spanish peseta is the functional currency is: A$ '1)>(($ 8$ '1)>=($ C$ '1)=,($ *$ '1)=42$

24$ The 8ritish su!sidiary of a 2$S$ co pany reported cost of goods sold of >0)((( pounds .sterling/ for the current year ended *ece !er +1$ The !eginning in7entory #as 1()((( pounds) and the ending in7entory #as 10)((( pounds$ Spot rates for 7arious dates are as follo#s:

Assu ing the dollar is the functional currency of the 8ritish su!sidiary) the re easured a ount of cost of goods sold that should appear in the consolidated inco e state ent is: A$ '1(,)>0($ 8$ '112)0(($ C$ '11?)20($ *$ '120)>(($

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

+($ The 8ritish su!sidiary of a 2$S$ co pany reported cost of goods sold of >0)((( pounds .sterling/ for the current year ended *ece !er +1$ The !eginning in7entory #as 1()((( pounds) and the ending in7entory #as 10)((( pounds$ Spot rates for 7arious dates are as follo#s:

Assu ing the pound is the functional currency of the 8ritish su!sidiary) the translated a ount of cost of goods sold that should appear in the consolidated inco e state ent is: A$ '1(,)>0($ 8$ '112)0(($ C$ '11?)+(($ *$ '120)>(($

Elan) a 2$S$ corporation) co pleted the *ece !er +1) 2((,) foreign currency translation of its >( percent o#ned S#iss su!sidiary%s trial !alance using the current rate ethod$ The translation resulted in a de!it ad-ust ent of '20)((($ The su!sidiary had reported net inco e of ,(()((( S#iss francs for 2((, and paid di7idends of 0()((( S#iss francs on Septe !er 1) 2((,$ The translation rates for the year #ere:

The 3anuary 1 !alance of the In7est ent in the S#iss su!sidiary account #as '1)=(()((($ Elan ac6uired its interest in the S#iss su!sidiary at !oo: 7alue #ith no differential or good#ill recorded at ac6uisition$

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

+1$ Elan%s In7est ent in S#iss su!sidiary account at *ece !er +1) 2((,) is: A$ '1),,1)(0($ 8$ '1)41=)(0($ C$ '1)42+)40($ *$ '2)(01)0(($

+2$ Elan%s consolidated #or:paper eli inations related to the foreign currency translation ad-ust ent #ill include #hich entry9

A$ @ption A 8$ @ption 8 C$ @ption C *$ @ption *

++$ Seattle) Inc$ o#ns an ,( percent interest in a <ortuguese su!sidiary$ For 2((,) Seattle reported inco e fro operations of '2$( illion$ The <ortuguese co pany%s inco e fro operations) after foreign currency translation) #as '1$1 illion$ The foreign currency translation ad-ust ent #as '12()((( .credit/$ Consolidated net inco e and consolidated co prehensi7e inco e for the year are:

A$ @ption A 8$ @ption 8 C$ @ption C *$ @ption *

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

@n 3anuary 2) 2((,) 3ohnson Co pany ac6uired a 1((C interest in the capital stoc: of <erth Co pany for '+)1(()((($ Any e&cess cost o7er !oo: 7alue is attri!uta!le to a patent #ith a 1(-year re aining life$ At the date of ac6uisition) <erth%s !alance sheet contained the follo#ing infor ation:

<erth%s inco e state ent for 2((, is as follo#s:

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

The !alance sheet of <erth at *ece !er +1) 2((,) is as follo#s:

<erth declared and paid a di7idend of 2()((( FC2 on @cto!er 1) 2((,$ Spot rates at 7arious dates for 2((, follo#:

Assu e <erth%s re7enues) purchases) operating e&penses) depreciation e&pense) and inco e ta&es #ere incurred e7enly throughout 2((,$

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

+?$ Refer to the a!o7e infor ation$ Assu ing the local currency of the country in #hich <erth Co pany is located is the functional currency) #hat are the translated a ounts for the ite s !elo# in 2$S$ dollars9

A$ @ption A 8$ @ption 8 C$ @ption C *$ @ption *

+0$ Refer to the a!o7e infor ation$ Assu ing <erth%s local currency is the functional currency) #hat is the a ount of translation ad-ust ents that result fro translating <erth%s trial !alance into 2$S$ dollars at *ece !er +1) 2((,9 A$ '+4=)0(( de!it 8$ '2,0)((( credit C$ '?(0)((( credit *$ '?11)((( credit

+=$ Refer to the a!o7e infor ation$ Assu ing <erth%s local currency is the functional currency) #hat is the a ount of patent a ortiDation for 2((, that results fro 3ohnson%s ac6uisition of <erth%s stoc: on 3anuary 2) 2((,$ Round your ans#er to the nearest dollar$ A$ '11)0(( 8$ '11),,? C$ '>)==> *$ '4)+4?

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

+>$ Refer to the a!o7e infor ation$ Assu ing <erth%s local currency is the functional currency) #hat is the a ount of translation ad-ust ent that appears on 3ohnson%s consolidated financial state ents at *ece !er +1) 2((,9 A$ '?14)1,? credit 8$ '?1=),,? credit C$ '?(0),,? de!it *$ '+4,)0(( credit

+,$ Refer to the a!o7e infor ation$ Assu ing <erth%s local currency is the functional currency) #hat is the !alance in 3ohnson%s in7est ent in foreign su!sidiary account at *ece !er +1) 2((,) assu ing use of the e6uity ethod9 A$ '+)21=)0(( 8$ '+)0=()((( C$ '+)0=,)+(( *$ '+)0>>)=4?

+4$ Refer to the a!o7e infor ation$ Assu ing the 2$S$ dollar is the functional currency) #hat is 3ohnson%s re easure ent gain .loss/ for 2((,9 .Assu e the ending in7entory #as ac6uired on *ece !er +1) 2((,$/ A$ '+1)((( gain 8$ '+=)0(( loss C$ '22)((( gain *$ '+2)((( gain

?($ Refer to the a!o7e infor ation$ Assu ing the 2$S$ dollar is the functional currency) #hat is the a ount of <erth%s cost of goods sold re easured in 2$S$ dollars9 A$ ',11)0(( 8$ ',?+)0(( C$ ',,?)0(( *$ '>44)0((

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

?1$ Refer to the a!o7e infor ation$ Assu ing the 2$S$ dollar is the functional currency) #hat is the a ount of patent a ortiDation for 2((, that results fro 3ohnson%s ac6uisition of <erth%s stoc: on 3anuary 2) 2((,9 A$ '11),,? 8$ '11)>>( C$ '12)00( *$ '11)0((

?2$ Refer to the a!o7e infor ation$ Assu ing the 2$S$ dollar is the functional currency) #hat is <erth%s net inco e for 2((, in 2$S$ dollars .include the re easure ent gain or loss in <erth%s net inco e/9 A$ '2+,)((( 8$ '22,)((( C$ '214)0(( *$ '2(2)(((

?+$ Refer to the a!o7e infor ation$ Assu ing the 2$S$ dollar is the functional currency) #hat is the !alance in 3ohnson%s in7est ent in foreign su!sidiary account at *ece !er +1) 2((, .assu ing the use of the e6uity ethod/9 A$ '+)+(+)?(( 8$ '+)24?)0(( C$ '+)+2+)?(( *$ '+)+1?)0((

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

@n 3anuary 1) 2((,) Transport Corporation ac6uired >0 percent interest in Stea ship Co pany for '+(()((($ Stea ship is a "or#egian co pany$ The local currency is the "or#egian :roner ."Hr/$ The ac6uisition resulted in an e&cess of cost-o7er-!oo: 7alue of '20)((( due solely to a patent ha7ing a re aining life of 0 years$ Transport uses the e6uity ethod to account for its in7est ent$ Stea ship%s *ece !er +1) 2((,) trial !alance has !een translated into 2$S$ dollars) re6uiring a translation ad-ust ent de!it of ',)((($ Stea ship%s net inco e translated into 2$S$ dollars is '+0)((($ It declared and paid an "Hr 2()((( di7idend on 3une 1) 2((,$ Rele7ant e&change rates are as follo#s:

Assu e the :roner is the functional currency$

??$ 8ased on the preceding infor ation) in the -ournal entry to record the receipt of di7idend fro Stea ship) A$ In7est ent in Stea ship Co pany #ill !e credited for '+)?0($ 8$ Cash #ill !e de!ited for '+)+(($ C$ In7est ent in Stea ship Co pany #ill !e credited for '?)((($ *$ Cash #ill !e de!ited for '+)=(($

?0$ 8ased on the preceding infor ation) in the -ournal entry to record parent%s share of su!sidiary%s translation ad-ust ent: A$ @ther Co prehensi7e Inco e I Translation Ad-ust ent #ill !e de!ited for ',)((($ 8$ @ther Co prehensi7e Inco e I Translation Ad-ust ent #ill !e credited for '=)((($ C$ In7est ent in Stea ship Co pany #ill !e credited for '=)((($ *$ In7est ent in Stea ship Co pany #ill !e de!ited for ',)((($

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

?=$ 8ased on the preceding infor ation) #hat a ount of translation ad-ust ent is re6uired for increase in differential9 A$ '+)((( 8$ '0)0(( C$ '?)0(( *$ '0)(((

?>$ 8ased on the preceding infor ation) in the -ournal entry to record the a ortiDation of the patent for 2((, on the parent%s !oo:s) In7est ent in Stea ship Co pany #ill !e de!ited for: A$ '0)((( 8$ '0)0(( C$ '?)0(( *$ '+)(((

@n Septe !er +() 2((,) Ailfred Co pany sold in7entory to 3ac:son Corporation) its Canadian su!sidiary$ The goods cost Ailfred '+()((( and #ere sold to 3ac:son for '?()((() paya!le in Canadian dollars$ The goods are still on hand at the end of the year on *ece !er +1$ The Canadian dollar .C'/ is the functional currency of the Canadian su!sidiary$ The e&change rates follo#:

?,$ 8ased on the preceding infor ation) at #hat dollar a ount is the ending in7entory sho#n in the trial !alance of the consolidated #or:paper9 A$ '?0)((( 8$ '0()((( C$ '?()((( *$ '+0)(((

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

?4$ 8ased on the preceding infor ation) #hat a ount of unrealiDed interco pany gross profit is eli inated in preparing the consolidated financial state ents for the year9 A$ '( 8$ '0)((( C$ '1()((( *$ '10)(((

0($ 8ased on the preceding infor ation) at #hat a ount is the in7entory sho#n on the consolidated !alance sheet for the year9 A$ '?0)((( 8$ '+()((( C$ '?()((( *$ '+0)(((

Essay

uestions

01$ 8riefly e&plain the follo#ing ter s associated #ith accounting for foreign entities: a/ Functional Currency !/ Translation c/ Re easure ent

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

02$ @n 3anuary 1) 2((,) <ace Co pany ac6uired all of the outstanding stoc: of Spin <1C) a 8ritish Co pany) for '+0()((($ Spin%s net assets on the date of ac6uisition #ere 20()((( pounds .J/$ @n 3anuary 1) 2((,) the !oo: and fair 7alues of the Spin%s identifia!le assets and lia!ilities appro&i ated their fair 7alues e&cept for property) plant) and e6uip ent and trade ar:s$ The fair 7alue of Spin%s property) plant) and e6uip ent e&ceeded its !oo: 7alue !y '20)((($ The re aining useful life of Spin%s e6uip ent at 3anuary 1) 2((,) #as 1( years$ The re ainder of the differential #as attri!uta!le to a trade ar: ha7ing an esti ated useful life of 0 years$ Spin%s trial !alance on *ece !er +1) 2((,) in pounds) follo#s:

Additional Infor ation 1 Spin uses the FIF@ ethod for its in7entory$ The !eginning in7entory #as ac6uired on *ece !er +1) 2((>) and ending in7entory #as ac6uired on *ece !er 2=) 2((,$ <urchases of J+(()((( #ere ade e7enly throughout 2((,$ 2 Spin ac6uired all of its property) plant) and e6uip ent on March 1) 2((=) and uses straightline depreciation$ + Spin%s sales #ere ade e7enly throughout 2((,) and its operating e&penses #ere incurred e7enly throughout 2((,$ ? The di7idends #ere declared and paid on "o7e !er 1) 2((,$ 0 <ace%s inco e fro its o#n operations #as '10()((( for 2((,) and its total stoc:holders% e6uity on 3anuary 1) 2((,) #as '1)((()((($ <ace declared '0()((( of di7idends during 2((,$ = E&change rates #ere as follo#s:

12-2?

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

Re6uired: 1/ <repare a schedule translating the trial !alance fro 8ritish pounds into 2$S$ dollars$ Assu e the pound is the functional currency$ 2/ Assu e that <ace uses the !asic e6uity ethod$ Record all -ournal entries that relate to its in7est ent in the 8ritish su!sidiary during 2((,$ <ro7ide the necessary docu entation and support for the a ounts in the -ournal entries) including a schedule of the translation ad-ust ent related to the differential$ 2/ <repare a schedule that deter ines <ace%s consolidated co prehensi7e inco e for 2((,$ ?/ Co pute <ace%s total consolidated stoc:holders% e6uity at *ece !er +1) 2((,$

0+$ 2se the infor ation gi7en in 6uestion 02 to prepare a schedule pro7iding a proof of the translation ad-ust ent$

12-20

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

0?$ Refer to the infor ation in 6uestion 02$ Assu e the 2$S$ dollar is the functional currency) not the pound$ Re6uired: 1/ <repare a schedule re easuring the trial !alance fro 8ritish pound into 2$S$ dollars$ 2/ Assu e that <ace uses the !asic e6uity ethod$ Record all -ournal entries that relate to its in7est ent in the 8ritish su!sidiary during 2((,$ <ro7ide the necessary docu entation and support for the a ounts in the -ournal entries$ +/ <repare a schedule that deter ines <ace%s consolidated net inco e for 2((,$ ?/ Co pute <ace%s total consolidated stoc:holders% e6uity at *ece !er +1) 2((,$

00$ Refer to the infor ation in 6uestion 02$ Assu e the 2$S$ dollar is the functional currency) not the pound$ <repare a schedule pro7iding a proof of the re easure ent gain or loss$ Assu e that the 8ritish su!sidiary had the follo#ing onetary assets and lia!ilities at 3anuary 1) 2((,:

12-2=

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

0=$ <arisian Co$ is a French co pany located in <aris$ Kan:ee Corp$) located in "e# Kor: City) ac6uires <arisian Co$ <arisian has the Euro as its local currency and the S#iss Franc as its functional currency$ Kan:ee has the 2$S$ dollar as its local currency and the 2$S$ dollar as its functional currency$ Re6uired: a/ The year-end consolidated financial state ents #ill !e prepared in #hich currency9 !/ E&plain #hich ethod is appropriate to use to use at year-end: Translation or Re easure ent9

Chapter 12 Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents Ans#er Hey

Multiple Choice

uestions

The !alance in "e#sprint Corp$%s foreign e&change loss account #as '1()((( on *ece !er +1) 2((,) !efore any necessary year-end ad-ust ent relating to the follo#ing:

.1/ "e#sprint had a '10)((( de!it resulting fro the restate ent in dollars of the accounts of its #holly o#ned foreign su!sidiary for the year ended *ece !er +1) 2((,$ .2/ "e#sprint had an account paya!le to an unrelated foreign supplier) paya!le in the supplier%s local currency unit .1C2/ on 3anuary 10) 2((4$ The 2$S$ dollar5e6ui7alent of the paya!le #as '0()((( on the *ece !er 1) 2((,) in7oice date and '0+)((( on *ece !er +1) 2((,$

12-2>

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

1$ 8ased on the infor ation pro7ided) in "e#sprint%s 2((, consolidated inco e state ent) #hat a ount should !e included as foreign e&change loss in co puting net inco e) if the 1C2 is the functional currency and the translation ethod is appropriate9 A$ '2,)((( !" '1+)((( C$ '20)((( *$ ',)(((

AACSB: Analytic AICPA: Measurement

2$ 8ased on the infor ation pro7ided) in "e#sprint%s 2((, consolidated inco e state ent) #hat a ount should !e included as foreign e&change loss in co puting net inco e) if the 2$S$ dollar is the functional currency and the re easure ent ethod is appropriate9 A$ '10)((( 8$ '1()((( C$ '20)((( #" '2,)(((

AACSB: Analytic AICPA: Measurement

12-2,

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

+$ Infinity Corporation ac6uired ,( percent of the co on stoc: of an Egyptian co pany on 3anuary 1) 2((,$ The good#ill associated #ith this ac6uisition #as '1,)+0($ E&change rates at 7arious dates during 2((, follo#:

;ood#ill suffered an i pair ent of 2( percent during the year$ If the functional currency is the Egyptian <ound) ho# uch good#ill i pair ent loss should !e reported on Infinity%s consolidated state ent of inco e for 2((,9 A$ '+)=>( 8$ '+)>(( C" '+)=,( *$ '+)=4(

AACSB: Analytic AICPA: Measurement

?$ Infinity Corporation ac6uired ,( percent of the co on stoc: of an Egyptian co pany on 3anuary 1) 2((,$ The good#ill associated #ith this ac6uisition #as '1,)+0($ E&change rates at 7arious dates during 2((, follo#:

;ood#ill suffered an i pair ent of 2( percent during the year$ If the functional currency is the 2$S$ dollar) ho# uch good#ill i pair ent loss should !e reported on Infinity%s consolidated state ent of inco e for 2((,9 A$ '+)=,( !" '+)=>( C$ '+)=4( *$ '+)>((

AACSB: Analytic AICPA: Measurement

12-24

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

0$ Si on Co pany has t#o foreign su!sidiaries$ @ne is located in France) the other in England$ Si on has deter ined the 2$S$ dollar is the functional currency for the French su!sidiary) #hile the 8ritish pound is the functional currency for the English su!sidiary$ 8oth su!sidiaries aintain their !oo:s and records in their respecti7e local currencies$ Ahat ethods #ill Si on use to con7ert each of the su!sidiary%s financial state ents into 2$S$ dollars9

A$ @ption A 8$ @ption 8 C$ @ption C #" @ption *

AACSB: Reflective Thinking AICPA: Decision Making

12-+(

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

Michigan-!ased 1eo Corporation ac6uired 1(( percent of the co on stoc: of a 8ritish co pany on 3anuary 1) 2((,) for '1)1(()((($ The 8ritish su!sidiary%s net assets a ounted to 0(()((( pounds on the date of ac6uisition$ @n 3anuary 1) 2((,) the !oo: 7alues of its identifia!le assets and lia!ilities appro&i ated their fair 7alues$ As a result of an analysis of functional currency indicators) 1eo deter ined that the 8ritish pound #as the functional currency$ @n *ece !er +1) 2((,) the 8ritish su!sidiary%s ad-usted trial !alance) translated into 2$S$ dollars) contained '1>)((( ore de!its than credits$ The 8ritish su!sidiary reported inco e of ++)((( pounds for 2((, and paid a cash di7idend of ,)((( pounds on @cto!er 20) 2((,$ Included on the 8ritish su!sidiary%s inco e state ent #as depreciation e&pense of +)0(( pounds$ 1eo uses the !asic e6uity ethod of accounting for its in7est ent in the 8ritish su!sidiary and deter ined that good#ill in the first year had an i pair ent loss of 20 percent of its initial a ount$ E&change rates at 7arious dates during 2((, follo#:

=$ 8ased on the preceding infor ation) #hat a ount should 1eo record as Binco e fro su!sidiaryB !ased on the 8ritish su!sidiary%s reported net inco e9 A" '>2)4+( 8$ '02)0(( C$ '>2)=(( *$ '=4)+((

AACSB: Analytic AICPA: Measurement

12-+1

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

>$ 8ased on the preceding infor ation) the receipt of the di7idend #ill result in a credit to the in7est ent account for: A$ '1=),(( 8$ '1>)=,( C" '1,)((( *$ '1>)=((

AACSB: Analytic AICPA: Measurement

,$ 8ased on the preceding infor ation) on 1eo%s consolidated !alance sheet at *ece !er +1) 2((,) #hat a ount should !e reported for the good#ill ac6uired on 3anuary 1) 2((,9 A$ '+=),?0 !" '+4)2,= C$ '+=)4(0 *$ '+=)=(>

AACSB: Analytic AICPA: Measurement

4$ 8ased on the preceding infor ation) in the stoc:holders% e6uity section of 1eo%s consolidated !alance sheet at *ece !er +1) 2((,) 1eo should report the translation ad-ust ent as a co ponent of other co prehensi7e inco e of: A" '14)??( 8$ '1>)((( C$ '1,)>,= *$ '14)+,(

AACSB: Analytic AICPA: Measurement

12-+2

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

1($ Ahich of the follo#ing defines a foreign-!ased entity that uses a functional currency different fro the local currency9 I$ A 2$S$ su!sidiary in 8ritain aintains its accounting records in pounds sterling) #ith the a-ority of its transactions deno inated in pounds sterling$ II$ A 2$S$ su!sidiary in <eru conducts 7irtually all of its !usiness in 1atin A erica) and uses the 2$S$ dollar as its a-or currency$ A$ I$ !" II$ C$ 8oth I and II$ *$ "either I nor II$

AACSB: Reflective Thinking AICPA: Glo al

11$ Ahen the local currency of the foreign su!sidiary is the functional currency) a foreign su!sidiary%s in7entory carried at cost #ould !e con7erted to 2$S$ dollars !y: A$ translation using historical e&change rates$ 8$ re easure ent using historical e&change rates$ C$ re easure ent using the current e&change rate$ #" translation using the current e&change rate$

AACSB: Reflective Thinking AICPA: Decision Making

12$ Ahen the local currency of the foreign su!sidiary is the functional currency) a foreign su!sidiary%s inco e state ent accounts #ould !e con7erted to 2$S$ dollars !y: A$ translation using historical e&change rates$ 8$ re easure ent using current e&change rates at the ti e of state ent preparation$ C" translation using a7erage e&change rate for the period$ *$ re easure ent using the current e&change rate at the ti e of state ent preparation$

AACSB: Reflective Thinking AICPA: Decision Making

12-++

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

1+$ If the restate ent ethod for a foreign su!sidiary in7ol7es re easuring fro the local currency into the functional currency) then translating fro functional currency to 2$S$ dollars) the functional currency of the su!sidiary is: I$ 2$S$ dollar$ II$ 1ocal currency unit$ III$ A third country%s currency$ A$ I !" III C$ II *$ Either I or II

AACSB: Reflective Thinking AICPA: Decision Making

1?$ If the 2$S$ dollar is the currency in #hich the foreign affiliate%s !oo:s and records are aintained) and the 2$S$ dollar is also the functional currency) A$ the translation ethod should !e used for restate ent$ 8$ the re easure ent ethod should !e used for restate ent$ C$ either translation or re easure ent could !e used for restate ent$ #" no restate ent is re6uired$

AACSB: Reflective Thinking AICPA: Decision Making

10$ All of the follo#ing stoc:holders% e6uity accounts of a foreign su!sidiary are translated at historical e&change rates e&cept: A" retained earnings$ 8$ co on stoc:$ C$ additional paid-in capital$ *$ preferred stoc:$

AACSB: Reflective Thinking AICPA: Decision Making

12-+?

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

1=$ *i7idends of a foreign su!sidiary are translated at: A$ the a7erage e&change rate for the year$ !" the e&change rate on the date of declaration$ C$ the current e&change rate on the date of preparation of the financial state ent$ *$ the e&change rate on the record date$

AACSB: Reflective Thinking AICPA: Decision Making

1>$ If the functional currency is the local currency of a foreign su!sidiary) #hat e&change rates should !e used to translate the ite s !elo#) assu ing the foreign su!sidiary is in a country #hich has not e&perienced hyperinflation o7er three years9

A" @ption A 8$ @ption 8 C$ @ption C *$ @ption *

AACSB: Reflective Thinking AICPA: Decision Making

12-+0

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

1,$ If the functional currency is the local currency of a foreign su!sidiary) #hat e&change rates should !e used to translate the ite s !elo#) assu ing the foreign su!sidiary is in a country #hich has not e&perienced hyperinflation o7er three years9

A$ @ption A !" @ption 8 C$ @ption C *$ @ption *

AACSB: Reflective Thinking AICPA: Decision Making

14$ Ahich co !ination of accounts and e&change rates is correct for the translation of a foreign entity%s financial state ents fro the functional currency to 2$S$ dollars9

A$ @ption A !" @ption 8 C$ @ption C *$ @ption *

AACSB: Reflective Thinking AICPA: Decision Making

12-+=

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

2($ Ahich co !ination of accounts and e&change rates is correct for the re easure ent of a foreign entity%s financial state ents fro its local currency to 2$S$ dollars9

A$ @ption A 8$ @ption 8 C" @ption C *$ @ption *

AACSB: Reflective Thinking AICPA: Decision Making

21$ The assets listed !elo# of a foreign su!sidiary ha7e !een con7erted to 2$S$ dollars at !oth current and historical e&change rates$ Assu ing that the local currency of the foreign su!sidiary is the functional currency) #hat total a ount should appear for these assets on the 2$S$ co pany%s consolidated !alance sheet9

A" '=+=)((( 8$ '=?,)((( C$ '>(,)((( *$ '4=()(((

AACSB: Analytic AICPA: Measurement

12-+>

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

22$ The gain or loss on the effecti7e portion of a 2$S$ parent co pany%s hedge of a net in7est ent in a foreign entity should !e treated as: A$ an ad-ust ent to the retained earnings account in the stoc:holders% e6uity section of its !alance sheet$ !" other co prehensi7e inco e$ C$ a translation gain or loss in the co putation of net inco e for the reporting period$ *$ an ad-ust ent to a 7aluation account in the asset section of its !alance sheet$

AACSB: Reflective Thinking AICPA: Decision Making

2+$ *o7er Co pany o#ns 4(C of the capital stoc: of a foreign su!sidiary located in Italy$ *o7er%s accountant has -ust translated the accounts of the foreign su!sidiary and deter ined that a de!it translation ad-ust ent of ',()((( e&ists$ If *o7er uses the e6uity ethod for its in7est ent) #hat entry should *o7er record in order to recogniDe the translation ad-ust ent9

A$ @ption A 8$ @ption 8 C" @ption C *$ @ption *

AACSB: Analytic AICPA: Measurement

12-+,

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

2?$ For each of the ite s listed !elo#) state #hether they increase or decrease the !alance in cu ulati7e translation ad-ust ents .assu ing a credit !alance at the !eginning of the year/ #hen the foreign currency strengthened relati7e to the 2$S$ dollar during the year$

A$ @ption A !" @ption 8 C$ @ption C *$ @ption *

AACSB: Reflective Thinking AICPA: Decision Making

20$ "ichols Co pany o#ns 4(C of the capital stoc: of a foreign su!sidiary located in Ireland$ As a result of translating the su!sidiary%s accounts) a de!it of '1=()((( #as needed in the translation ad-ust ents account so that the foreign su!sidiary%s de!its and credits #ere e6ual in 2$S$ dollars$ Eo# should "ichols report its translation ad-ust ents on its consolidated financial state ents9 A$ As a '1??)((( increase in the stoc:holders% e6uity section of the !alance sheet$ !" As a '1??)((( reduction in consolidated co prehensi7e net inco e$ C$ As a '1=()((( de!it in stoc:holders% e6uity section of the !alance sheet$ *$ As a '1=()((( reduction in consolidated co prehensi7e net inco e$

AACSB: Analytic AICPA: Decision Making

12-+4

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

2=$ 2nder the te poral ethod) #hich of the follo#ing is usually used to translate a ounts to the functional currency9 I$ The current e&change rate II The historical e&change rate III$ A7erage e&change rate A" I 8$ III C$ II *$ Either I or II

onetary

AACSB: Reflective Thinking AICPA: Decision Making

Mercury Co pany is a su!sidiary of "eptune Co pany and is located in FalparaGso) Chile) #here the currency is the Chilean <eso$ *ata on Mercury%s in7entory and purchases are as follo#s:

The !eginning in7entory #as ac6uired during the fourth 6uarter of 2((>) and the ending in7entory #as ac6uired during the fourth 6uarter of 2((,$ <urchases #ere ade e7enly o7er the year$ E&change rates #ere as follo#s:

12-?(

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

2>$ Refer the infor ation pro7ided a!o7e$ Assu ing the 2$S$ dollar is the functional currency) #hat is the a ount of Mercury%s cost of goods sold re easured in 2$S$ dollars9 A$ '1)=,( 8$ '1)>12 C$ '1)>(( #" '1)=42

AACSB: Analytic AICPA: Measurement

2,$ 8ased on the preceding infor ation) the translation of cost of goods sold for 2((,) assu ing that the Spanish peseta is the functional currency is: A$ '1)>(($ !" '1)>=($ C$ '1)=,($ *$ '1)=42$

AACSB: Analytic AICPA: Measurement

12-?1

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

24$ The 8ritish su!sidiary of a 2$S$ co pany reported cost of goods sold of >0)((( pounds .sterling/ for the current year ended *ece !er +1$ The !eginning in7entory #as 1()((( pounds) and the ending in7entory #as 10)((( pounds$ Spot rates for 7arious dates are as follo#s:

Assu ing the dollar is the functional currency of the 8ritish su!sidiary) the re easured a ount of cost of goods sold that should appear in the consolidated inco e state ent is: A$ '1(,)>0($ 8$ '112)0(($ C" '11?)20($ *$ '120)>(($

AACSB: Analytic AICPA: Measurement

+($ The 8ritish su!sidiary of a 2$S$ co pany reported cost of goods sold of >0)((( pounds .sterling/ for the current year ended *ece !er +1$ The !eginning in7entory #as 1()((( pounds) and the ending in7entory #as 10)((( pounds$ Spot rates for 7arious dates are as follo#s:

Assu ing the pound is the functional currency of the 8ritish su!sidiary) the translated a ount of cost of goods sold that should appear in the consolidated inco e state ent is: A$ '1(,)>0($ !" '112)0(($ C$ '11?)+(($ *$ '120)>(($

AACSB: Analytic AICPA: Measurement

12-?2

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

Elan) a 2$S$ corporation) co pleted the *ece !er +1) 2((,) foreign currency translation of its >( percent o#ned S#iss su!sidiary%s trial !alance using the current rate ethod$ The translation resulted in a de!it ad-ust ent of '20)((($ The su!sidiary had reported net inco e of ,(()((( S#iss francs for 2((, and paid di7idends of 0()((( S#iss francs on Septe !er 1) 2((,$ The translation rates for the year #ere:

The 3anuary 1 !alance of the In7est ent in the S#iss su!sidiary account #as '1)=(()((($ Elan ac6uired its interest in the S#iss su!sidiary at !oo: 7alue #ith no differential or good#ill recorded at ac6uisition$

+1$ Elan%s In7est ent in S#iss su!sidiary account at *ece !er +1) 2((,) is: A" '1),,1)(0($ 8$ '1)41=)(0($ C$ '1)42+)40($ *$ '2)(01)0(($

AACSB: Analytic AICPA: Measurement

12-?+

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

+2$ Elan%s consolidated #or:paper eli inations related to the foreign currency translation ad-ust ent #ill include #hich entry9

A$ @ption A 8$ @ption 8 C$ @ption C #" @ption *

AACSB: Analytic AICPA: Decision Making

++$ Seattle) Inc$ o#ns an ,( percent interest in a <ortuguese su!sidiary$ For 2((,) Seattle reported inco e fro operations of '2$( illion$ The <ortuguese co pany%s inco e fro operations) after foreign currency translation) #as '1$1 illion$ The foreign currency translation ad-ust ent #as '12()((( .credit/$ Consolidated net inco e and consolidated co prehensi7e inco e for the year are:

A$ @ption A 8$ @ption 8 C$ @ption C #" @ption *

AACSB: Analytic AICPA: Re!orting

12-??

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

@n 3anuary 2) 2((,) 3ohnson Co pany ac6uired a 1((C interest in the capital stoc: of <erth Co pany for '+)1(()((($ Any e&cess cost o7er !oo: 7alue is attri!uta!le to a patent #ith a 1(-year re aining life$ At the date of ac6uisition) <erth%s !alance sheet contained the follo#ing infor ation:

<erth%s inco e state ent for 2((, is as follo#s:

12-?0

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

The !alance sheet of <erth at *ece !er +1) 2((,) is as follo#s:

<erth declared and paid a di7idend of 2()((( FC2 on @cto!er 1) 2((,$ Spot rates at 7arious dates for 2((, follo#:

Assu e <erth%s re7enues) purchases) operating e&penses) depreciation e&pense) and inco e ta&es #ere incurred e7enly throughout 2((,$

12-?=

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

+?$ Refer to the a!o7e infor ation$ Assu ing the local currency of the country in #hich <erth Co pany is located is the functional currency) #hat are the translated a ounts for the ite s !elo# in 2$S$ dollars9

A$ @ption A 8$ @ption 8 C" @ption C *$ @ption *

AACSB: Analytic AICPA: Re!orting

+0$ Refer to the a!o7e infor ation$ Assu ing <erth%s local currency is the functional currency) #hat is the a ount of translation ad-ust ents that result fro translating <erth%s trial !alance into 2$S$ dollars at *ece !er +1) 2((,9 A$ '+4=)0(( de!it 8$ '2,0)((( credit C" '?(0)((( credit *$ '?11)((( credit

AACSB: Analytic AICPA: Decision Making

+=$ Refer to the a!o7e infor ation$ Assu ing <erth%s local currency is the functional currency) #hat is the a ount of patent a ortiDation for 2((, that results fro 3ohnson%s ac6uisition of <erth%s stoc: on 3anuary 2) 2((,$ Round your ans#er to the nearest dollar$ A$ '11)0(( !" '11),,? C$ '>)==> *$ '4)+4?

AACSB: Analytic AICPA: Measurement

12-?>

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

+>$ Refer to the a!o7e infor ation$ Assu ing <erth%s local currency is the functional currency) #hat is the a ount of translation ad-ust ent that appears on 3ohnson%s consolidated financial state ents at *ece !er +1) 2((,9 A" '?14)1,? credit 8$ '?1=),,? credit C$ '?(0),,? de!it *$ '+4,)0(( credit

AACSB: Analytic AICPA: Decision Making

+,$ Refer to the a!o7e infor ation$ Assu ing <erth%s local currency is the functional currency) #hat is the !alance in 3ohnson%s in7est ent in foreign su!sidiary account at *ece !er +1) 2((,) assu ing use of the e6uity ethod9 A$ '+)21=)0(( 8$ '+)0=()((( C" '+)0=,)+(( *$ '+)0>>)=4?

AACSB: Analytic AICPA: Measurement

+4$ Refer to the a!o7e infor ation$ Assu ing the 2$S$ dollar is the functional currency) #hat is 3ohnson%s re easure ent gain .loss/ for 2((,9 .Assu e the ending in7entory #as ac6uired on *ece !er +1) 2((,$/ A$ '+1)((( gain 8$ '+=)0(( loss C$ '22)((( gain #" '+2)((( gain

AACSB: Analytic AICPA: Measurement

12-?,

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

?($ Refer to the a!o7e infor ation$ Assu ing the 2$S$ dollar is the functional currency) #hat is the a ount of <erth%s cost of goods sold re easured in 2$S$ dollars9 A" ',11)0(( 8$ ',?+)0(( C$ ',,?)0(( *$ '>44)0((

AACSB: Analytic AICPA: Measurement

?1$ Refer to the a!o7e infor ation$ Assu ing the 2$S$ dollar is the functional currency) #hat is the a ount of patent a ortiDation for 2((, that results fro 3ohnson%s ac6uisition of <erth%s stoc: on 3anuary 2) 2((,9 A$ '11),,? 8$ '11)>>( C$ '12)00( #" '11)0((

AACSB: Analytic AICPA: Measurement

?2$ Refer to the a!o7e infor ation$ Assu ing the 2$S$ dollar is the functional currency) #hat is <erth%s net inco e for 2((, in 2$S$ dollars .include the re easure ent gain or loss in <erth%s net inco e/9 A" '2+,)((( 8$ '22,)((( C$ '214)0(( *$ '2(2)(((

AACSB: Analytic AICPA: Re!orting

12-?4

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

?+$ Refer to the a!o7e infor ation$ Assu ing the 2$S$ dollar is the functional currency) #hat is the !alance in 3ohnson%s in7est ent in foreign su!sidiary account at *ece !er +1) 2((, .assu ing the use of the e6uity ethod/9 A$ '+)+(+)?(( !" '+)24?)0(( C$ '+)+2+)?(( *$ '+)+1?)0((

AACSB: Analytic AICPA: Re!orting

@n 3anuary 1) 2((,) Transport Corporation ac6uired >0 percent interest in Stea ship Co pany for '+(()((($ Stea ship is a "or#egian co pany$ The local currency is the "or#egian :roner ."Hr/$ The ac6uisition resulted in an e&cess of cost-o7er-!oo: 7alue of '20)((( due solely to a patent ha7ing a re aining life of 0 years$ Transport uses the e6uity ethod to account for its in7est ent$ Stea ship%s *ece !er +1) 2((,) trial !alance has !een translated into 2$S$ dollars) re6uiring a translation ad-ust ent de!it of ',)((($ Stea ship%s net inco e translated into 2$S$ dollars is '+0)((($ It declared and paid an "Hr 2()((( di7idend on 3une 1) 2((,$ Rele7ant e&change rates are as follo#s:

Assu e the :roner is the functional currency$

12-0(

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

??$ 8ased on the preceding infor ation) in the -ournal entry to record the receipt of di7idend fro Stea ship) A" In7est ent in Stea ship Co pany #ill !e credited for '+)?0($ 8$ Cash #ill !e de!ited for '+)+(($ C$ In7est ent in Stea ship Co pany #ill !e credited for '?)((($ *$ Cash #ill !e de!ited for '+)=(($

AACSB: Analytic AICPA: Measurement

?0$ 8ased on the preceding infor ation) in the -ournal entry to record parent%s share of su!sidiary%s translation ad-ust ent: A$ @ther Co prehensi7e Inco e I Translation Ad-ust ent #ill !e de!ited for ',)((($ 8$ @ther Co prehensi7e Inco e I Translation Ad-ust ent #ill !e credited for '=)((($ C" In7est ent in Stea ship Co pany #ill !e credited for '=)((($ *$ In7est ent in Stea ship Co pany #ill !e de!ited for ',)((($

AACSB: Analytic AICPA: Measurement

?=$ 8ased on the preceding infor ation) #hat a ount of translation ad-ust ent is re6uired for increase in differential9 A$ '+)((( 8$ '0)0(( C" '?)0(( *$ '0)(((

AACSB: Analytic AICPA: Measurement

12-01

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

?>$ 8ased on the preceding infor ation) in the -ournal entry to record the a ortiDation of the patent for 2((, on the parent%s !oo:s) In7est ent in Stea ship Co pany #ill !e de!ited for: A$ '0)((( !" '0)0(( C$ '?)0(( *$ '+)(((

AACSB: Analytic AICPA: Measurement

@n Septe !er +() 2((,) Ailfred Co pany sold in7entory to 3ac:son Corporation) its Canadian su!sidiary$ The goods cost Ailfred '+()((( and #ere sold to 3ac:son for '?()((() paya!le in Canadian dollars$ The goods are still on hand at the end of the year on *ece !er +1$ The Canadian dollar .C'/ is the functional currency of the Canadian su!sidiary$ The e&change rates follo#:

?,$ 8ased on the preceding infor ation) at #hat dollar a ount is the ending in7entory sho#n in the trial !alance of the consolidated #or:paper9 A" '?0)((( 8$ '0()((( C$ '?()((( *$ '+0)(((

AACSB: Analytic AICPA: Measurement

12-02

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

?4$ 8ased on the preceding infor ation) #hat a ount of unrealiDed interco pany gross profit is eli inated in preparing the consolidated financial state ents for the year9 A$ '( 8$ '0)((( C" '1()((( *$ '10)(((

AACSB: Analytic AICPA: Measurement

0($ 8ased on the preceding infor ation) at #hat a ount is the in7entory sho#n on the consolidated !alance sheet for the year9 A$ '?0)((( 8$ '+()((( C$ '?()((( #" '+0)(((

AACSB: Analytic AICPA: Measurement

Essay

uestions

12-0+

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

01$ 8riefly e&plain the follo#ing ter s associated #ith accounting for foreign entities: a/ Functional Currency !/ Translation c/ Re easure ent a/ Functional currency is the currency of the pri ary econo ic en7iron ent in #hich the entity operatesL nor ally that is the currency of the en7iron ent in #hich an entity pri arily generates and recei7es cash$ The functional currency is used to differentiate !et#een t#o types of foreign operations) those that are self-contained and integrated into a local en7iron ent) and those that are an e&tension of the parent and integrated #ith the parent$ !/ Translation is the ost co on ethod used and is applied #hen the local currency is the foreign entity%s functional currency$ To translate the financial state ents) the co pany #ill use the current rate) #hich is the e&change rate on the !alance sheet date) to con7ert the local currency !alance sheet account !alances into 2$S$ dollars$ Any translation ad-ust ent that occurs is a co ponent of co prehensi7e inco e$ 8ecause re7enues and e&penses are assu ed to occur unifor ly o7er the period) re7enues and e&penses on the inco e state ent are translated using the a7erage rate for the reporting period$ c/ Re easure ent is the restate ent of the foreign entity%s financial state ents fro the local currency that the entity used into the foreign entity%s functional currency$ Re easure ent is re6uired only #hen the functional currency is different fro the currency used to aintain the !oo:s and records of the foreign entity$ Monetary assets and lia!ilities are translated at the current rate$ "on- onetary assets and lia!ilities) including in7entories) are translated at their historical rates$ The inco e state ent ite s other than cost of goods sold is translated at a7erage rates$ Any resulting ad-ust ent is ta:en into current period inco e$

AACSB: Communication AICPA: Glo al

12-0?

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

02$ @n 3anuary 1) 2((,) <ace Co pany ac6uired all of the outstanding stoc: of Spin <1C) a 8ritish Co pany) for '+0()((($ Spin%s net assets on the date of ac6uisition #ere 20()((( pounds .J/$ @n 3anuary 1) 2((,) the !oo: and fair 7alues of the Spin%s identifia!le assets and lia!ilities appro&i ated their fair 7alues e&cept for property) plant) and e6uip ent and trade ar:s$ The fair 7alue of Spin%s property) plant) and e6uip ent e&ceeded its !oo: 7alue !y '20)((($ The re aining useful life of Spin%s e6uip ent at 3anuary 1) 2((,) #as 1( years$ The re ainder of the differential #as attri!uta!le to a trade ar: ha7ing an esti ated useful life of 0 years$ Spin%s trial !alance on *ece !er +1) 2((,) in pounds) follo#s:

Additional Infor ation 1 Spin uses the FIF@ ethod for its in7entory$ The !eginning in7entory #as ac6uired on *ece !er +1) 2((>) and ending in7entory #as ac6uired on *ece !er 2=) 2((,$ <urchases of J+(()((( #ere ade e7enly throughout 2((,$ 2 Spin ac6uired all of its property) plant) and e6uip ent on March 1) 2((=) and uses straightline depreciation$ + Spin%s sales #ere ade e7enly throughout 2((,) and its operating e&penses #ere incurred e7enly throughout 2((,$ ? The di7idends #ere declared and paid on "o7e !er 1) 2((,$ 0 <ace%s inco e fro its o#n operations #as '10()((( for 2((,) and its total stoc:holders% e6uity on 3anuary 1) 2((,) #as '1)((()((($ <ace declared '0()((( of di7idends during 2((,$ = E&change rates #ere as follo#s:

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

Re6uired: 1/ <repare a schedule translating the trial !alance fro 8ritish pounds into 2$S$ dollars$ Assu e the pound is the functional currency$ 2/ Assu e that <ace uses the !asic e6uity ethod$ Record all -ournal entries that relate to its in7est ent in the 8ritish su!sidiary during 2((,$ <ro7ide the necessary docu entation and support for the a ounts in the -ournal entries) including a schedule of the translation ad-ust ent related to the differential$ 2/ <repare a schedule that deter ines <ace%s consolidated co prehensi7e inco e for 2((,$ ?/ Co pute <ace%s total consolidated stoc:holders% e6uity at *ece !er +1) 2((,$

12-0=

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

12-0>

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

12-0,

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

12-04

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

AACSB: Analytic AICPA: Measurement

12-=(

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

0+$ 2se the infor ation gi7en in 6uestion 02 to prepare a schedule pro7iding a proof of the translation ad-ust ent$

AACSB: Analytic AICPA: Measurement

12-=1

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

0?$ Refer to the infor ation in 6uestion 02$ Assu e the 2$S$ dollar is the functional currency) not the pound$ Re6uired: 1/ <repare a schedule re easuring the trial !alance fro 8ritish pound into 2$S$ dollars$ 2/ Assu e that <ace uses the !asic e6uity ethod$ Record all -ournal entries that relate to its in7est ent in the 8ritish su!sidiary during 2((,$ <ro7ide the necessary docu entation and support for the a ounts in the -ournal entries$ +/ <repare a schedule that deter ines <ace%s consolidated net inco e for 2((,$ ?/ Co pute <ace%s total consolidated stoc:holders% e6uity at *ece !er +1) 2((,$

12-=2

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

2/ 3ournal entries for 2((,:

12-=+

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

12-=?

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

AACSB: Analytic AICPA: Measurement

12-=0

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

00$ Refer to the infor ation in 6uestion 02$ Assu e the 2$S$ dollar is the functional currency) not the pound$ <repare a schedule pro7iding a proof of the re easure ent gain or loss$ Assu e that the 8ritish su!sidiary had the follo#ing onetary assets and lia!ilities at 3anuary 1) 2((,:

AACSB: Analytic AICPA: Measurement

12-==

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity State ents

0=$ <arisian Co$ is a French co pany located in <aris$ Kan:ee Corp$) located in "e# Kor: City) ac6uires <arisian Co$ <arisian has the Euro as its local currency and the S#iss Franc as its functional currency$ Kan:ee has the 2$S$ dollar as its local currency and the 2$S$ dollar as its functional currency$ Re6uired: a/ The year-end consolidated financial state ents #ill !e prepared in #hich currency9 !/ E&plain #hich ethod is appropriate to use to use at year-end: Translation or Re easure ent9 a/ The consolidated financial state ents #ill !e reported in Kan:ee%s functional currency - the 2$S$ dollar$ !/ <arisian%s financial state ents #ill need to !e re easured first fro the Euro to the S#iss Franc$ Then the financial state ents% 7alued in the S#iss Franc #ill !e translated to the 2$S$ dollar$

AACSB: Communication AICPA: Critical Thinking

12-=>