Chapter 10 - Translation of Foreign Currency Financial Statements

Chapter 10
Translation of Foreign Currency Financial Statements

Chapter 10 Translation of Foreign Currency Financial Statements Answer Key

Multiple Choice Questions

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.

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Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

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.

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Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate
method and when they are to be translated using the temporal method.

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Chapter 10 - Translation of Foreign Currency Financial Statements
3. According to U.S. GAAP for a local currency perspective, 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.

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Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate
method and when they are to be translated using the temporal method.

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.

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Chapter 10 - Translation of Foreign Currency Financial Statements
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) in the consolidated balance sheet.
B. a revenue or expense (depending on the balance) in the consolidated income statement.
C. a component of stockholders' equity in the consolidated balance sheet.
D. a component of cash flows from financing activities in the consolidated statement of cash
flows.
E. an element of the notes which accompany the consolidated financial statements.

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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 2011:

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Chapter 10 - Translation of Foreign Currency Financial Statements

6. Westmore reported sales of 1,500,000 during 2011. What amount (rounded) would have
been included for this subsidiary in calculating consolidated sales?
A. $2,415,000.
B. $2,400,000.
C. $2,385,000.
D. $943,396.
E. $931,677.

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Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.
Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate
method and when they are to be translated using the temporal method.
Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the current rate
method and calculate the related translation adjustment.

7. On December 31, 2011, Westmore had accounts receivable of 280,000. What amount
(rounded) would have been included for this subsidiary in calculating consolidated accounts
receivable?
A. $173,913.
B. $176,100.
C. $445,200.
D. $448,000.
E. $450,800.

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Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.
Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate
method and when they are to be translated using the temporal method.
Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the current rate
method and calculate the related translation adjustment.

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Chapter 10 - Translation of Foreign Currency Financial Statements

8. Gunther Co. established a subsidiary in Mexico on January 1, 2011. The subsidiary

engaged in the following transactions during 2011:

What amount of foreign exchange gain or loss would have been recognized in Gunther's
consolidated income statement for 2011?
A. $800,000 gain.
B. $760,000 gain.
C. $320,000 loss.
D. $280,000 loss.
E. $440,000 loss.

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Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.
Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate
method and when they are to be translated using the temporal method.
Learning Objective: 10-04 Remeasure a foreign subsidiary's financial statements using the temporal method and calculate the associated
remeasurement gain or loss.

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Chapter 10 - Translation of Foreign Currency Financial Statements

Darron Co. was formed on January 1, 2011 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 2011:

9. What exchange rate should have been used in translating Darron's revenues and expenses
for 2011?
A. $1 = §.48.
B. $1 = §.44.
C. $1 = §.46.
D. $1 = §.42.
E. $1 = §.45.

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Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.
Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate
method and when they are to be translated using the temporal method.

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Chapter 10 - Translation of Foreign Currency Financial Statements

10. What was the amount of the translation adjustment for 2011?
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.

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Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.
Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate
method and when they are to be translated using the temporal method.
Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the current rate
method and calculate the related translation adjustment.

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Chapter 10 - Translation of Foreign Currency Financial Statements

11. Sinkal Co. was formed on January 1, 2011 as a wholly owned foreign subsidiary of a U.S.
corporation. Sinkal's functional currency was the stickle (§). The following transactions and
events occurred during 2011:

What was the amount of the translation adjustment for 2011?

A. $52,000 decrease in relative value of net assets.
B. $60,800 decrease in relative value of net assets.
C. $61,200 decrease in relative value of net assets.
D. $466,400 increase in relative value of net assets.
E. $26,000 increase in relative value of net assets.

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Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.
Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate
method and when they are to be translated using the temporal method.
Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the current rate
method and calculate the related translation adjustment.

12. Which accounts are translated using current exchange rates?

A. All revenues and expenses.
B. All assets and liabilities.
C. Cash, receivables, and most liabilities.
D. All current assets and liabilities.
E. All noncurrent assets and liabilities.

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Chapter 10 - Translation of Foreign Currency Financial Statements

13. Which accounts are remeasured using current exchange rates?

A. All revenues and expenses.
B. All assets and liabilities.
C. Cash, receivables, and most liabilities.
D. All current assets and liabilities.
E. All noncurrent assets and liabilities.

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Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

14. For a foreign subsidiary that uses the U.S. dollar as its functional currency, what method is
required to ready the financial statements for consolidation?
A. Current/Noncurrent Method.
B. Monetary/Nonmonetary Method.
C. Current Rate Method.
D. Temporal Method.
E. Indirect Method.

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Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate
method and when they are to be translated using the temporal method.

Dilty Corp. owned a subsidiary in France. Dilty concluded that the subsidiary's functional
currency was the U.S. dollar.

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Chapter 10 - Translation of Foreign Currency Financial Statements

15. Which one of the following statements would justify this conclusion?
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.

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Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate
method and when they are to be translated using the temporal method.

16. 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.

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Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate
method and when they are to be translated using the temporal method.

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Chapter 10 - Translation of Foreign Currency Financial Statements

Certain balance sheet accounts of a foreign subsidiary of the Tulip Co. had been stated in
U.S. dollars as follows:

17. If the subsidiary's local currency is its functional currency, what total amount should be
included in Tulip's balance sheet in U.S. dollars?
A. $609,000.
B. $658,000.
C. $602,000.
D. $630,000.
E. $616,000.

AACSB: Analytic
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Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.
Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate
method and when they are to be translated using the temporal method.
Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the current rate
method and calculate the related translation adjustment.

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Chapter 10 - Translation of Foreign Currency Financial Statements

18. If the U.S. dollar is the functional currency of this subsidiary, what total amount should be
included in Tulip's balance sheet in U.S. dollars?
A. $609,000.
B. $658,000.
C. $602,000.
D. $630,000.
E. $616,000.

AACSB: Analytic
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Difficulty: Medium
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.
Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate
method and when they are to be translated using the temporal method.
Learning Objective: 10-04 Remeasure a foreign subsidiary's financial statements using the temporal method and calculate the associated
remeasurement gain or loss.

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 local currency where the subsidiary is
located. The subsidiary acquired inventory on credit on November 1, 2010, for §120,000 that
was sold on January 17, 2011 for §156,000. The subsidiary paid for the inventory on January
31, 2011. Currency exchange rates between the dollar and the stickle were as follows:

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Chapter 10 - Translation of Foreign Currency Financial Statements

19. What amount would have been reported for this inventory in Porter's consolidated balance
sheet at December 31, 2010?
A. $24,000.
B. $26,400.
C. $22,800.
D. $27,600.
E. $28,800.

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Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.
Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate
method and when they are to be translated using the temporal method.
Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the current rate
method and calculate the related translation adjustment.

20. What amount would have been reported for cost of goods sold on Porter's consolidated
income statement at December 31, 2011?
A. $24,000.
B. $26,400.
C. $22,800.
D. $27,600.
E. $28,800.

AACSB: Analytic
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AICPA FN: Measurement
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Difficulty: Medium
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.
Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate
method and when they are to be translated using the temporal method.
Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the current rate
method and calculate the related translation adjustment.

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Chapter 10 - Translation of Foreign Currency Financial Statements

21. A U.S. company's foreign subsidiary had the following amounts in stickles (§) in 2011:

The average exchange rate during 2011 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, 2011 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 2011 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.

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10-14
Chapter 10 - Translation of Foreign Currency Financial Statements

22. A U.S. company's foreign subsidiary had the following amounts in stickles (§), the
functional currency, in 2011:

The average exchange rate during 2011 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, 2011 was §1 = $.84. At what
amount should the foreign subsidiary's cost of goods sold have been reflected in the 2011 U.S.
dollar income statement?
A. $11,253,600.
B. $11,577,600.
C. $11,520,000.
D. $11,613,600.
E. $11,523,600.

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Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

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Chapter 10 - Translation of Foreign Currency Financial Statements

23. A U.S. company's foreign subsidiary had the following amounts in stickles (§), the
functional currency, in 2011:

The average exchange rate during 2011 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, 2011 was §1 = $.84. At what
amount should the foreign subsidiary's purchases have been reflected in the 2011 U.S. dollar
income statement?
A. $11,865,600.
B. $11,577,600.
C. $11,520,000.
D. $11,613,600.
E. $11,523,600.

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Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

24. A historical exchange rate for common stock of a foreign subsidiary is best described as
A. The rate at date of the acquisition business combination.
B. The rate when the common stock was originally issued for the acquisition transaction.
C. The average rate from date of acquisition to the date of the balance sheet.
D. The rate from the prior year's balances.
E. The January 1 exchange rate.

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10-16
Chapter 10 - Translation of Foreign Currency Financial Statements

25. 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.

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26. A net asset balance sheet exposure exists and the foreign currency depreciates. 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.

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Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

10-17
Chapter 10 - Translation of Foreign Currency Financial Statements

27. A net liability 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.

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Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

28. A net liability balance sheet exposure exists and the foreign currency depreciates. 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.

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Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

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Chapter 10 - Translation of Foreign Currency Financial Statements

29. 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.

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Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate
method and when they are to be translated using the temporal method.

30. 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.

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Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate
method and when they are to be translated using the temporal method.

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Chapter 10 - Translation of Foreign Currency Financial Statements

31. Under the temporal method, inventory at market would be remeasured at what rate?
A. Beginning of the year rate.
B. Average rate.
C. Current rate.
D. Historical rate.
E. Composite amount.

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Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

32. Under the current rate method, inventory at market would be translated at what rate?
A. Beginning of the year rate.
B. Average rate.
C. Current rate.
D. Historical rate.
E. Composite amount.

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Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

33. Under the temporal method, common stock would be remeasured at what rate?
A. Beginning of the year rate.
B. Average rate.
C. Current rate.
D. Historical rate.
E. Composite amount.

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Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

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Chapter 10 - Translation of Foreign Currency Financial Statements

34. Under the current rate method, common stock would be translated at what rate?
A. Beginning of the year rate.
B. Average rate.
C. Current rate.
D. Historical rate.
E. Composite amount.

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Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

35. Under the current rate method, property, plant & equipment would be translated at what
rate?
A. Beginning of the year rate.
B. Average rate.
C. Current rate.
D. Historical rate.
E. Composite amount.

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Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

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Chapter 10 - Translation of Foreign Currency Financial Statements

36. Under the temporal method, property, plant & equipment would be remeasured at what
rate?
A. Beginning of the year rate.
B. Average rate.
C. Current rate.
D. Historical rate.
E. Composite amount.

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AICPA BB: Global
AICPA FN: Measurement
Bloom's: Knowledge
Difficulty: Medium
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

37. Under the current rate method, retained earnings would be translated at what rate?
A. Beginning of the year rate.
B. Average rate.
C. Current rate.
D. Historical rate.
E. Composite amount.

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Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

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Chapter 10 - Translation of Foreign Currency Financial Statements

38. Under the temporal method, retained earnings would be remeasured at what rate?
A. Beginning of the year rate.
B. Average rate.
C. Current rate.
D. Historical rate.
E. Composite amount.

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Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

39. Under the current rate method, depreciation expense would be translated at what rate?
A. Beginning of the year rate.
B. Average rate.
C. Current rate.
D. Historical rate.
E. Composite amount.

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Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

40. Under the temporal method, depreciation expense would be remeasured at what rate?
A. Beginning of the year rate.
B. Average rate.
C. Current rate.
D. Historical rate.
E. Composite amount.

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Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

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Chapter 10 - Translation of Foreign Currency Financial Statements

41. Under the temporal method, how would cost of goods sold be remeasured?
A. Beginning of the year rate.
B. Average rate.
C. Current rate.
D. Historical rate.
E. Composite amount.

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Difficulty: Medium
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

42. Under the current rate method, how would cost of goods sold be translated?
A. Beginning of the year rate.
B. Average rate.
C. Current rate.
D. Historical rate.
E. Composite amount.

AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Knowledge
Difficulty: Medium
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

10-24
Chapter 10 - Translation of Foreign Currency Financial Statements

43. Where is the disposition of a translation loss reported in the parent company's financial
statements?
A. Net loss in the income statement.
B. Cumulative translation adjustment as a deferred asset.
C. Cumulative translation adjustment as a deferred liability.
D. Accumulated other comprehensive income.
E. Retained earnings.

AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Knowledge
Difficulty: Medium
Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate
method and when they are to be translated using the temporal method.

44. Where is the disposition of a remeasurement gain or loss reported in the parent company's
financial statements?
A. Net income/loss in 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.

AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Knowledge
Difficulty: Medium
Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate
method and when they are to be translated using the temporal method.

10-25
Chapter 10 - Translation of Foreign Currency Financial Statements

45. 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 a third-world economy.

AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Knowledge
Difficulty: Medium
Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate
method and when they are to be translated using the temporal method.

46. 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.

AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Knowledge
Difficulty: Medium
Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate
method and when they are to be translated using the temporal method.

10-26
Chapter 10 - Translation of Foreign Currency Financial Statements

47. When consolidating a foreign subsidiary, which of the following statements is true?
A. Parent reports a cumulative translation adjustment from adjusting its investment account
under the equity method.
B. Parent reports a gain or loss in net income from adjusting its investment account under the
equity method.
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 in the consolidated income statement and
balance sheet.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Analysis
Difficulty: Hard
Learning Objective: 10-06 Prepare a consolidation worksheet for a parent and its foreign subsidiary.

48. When preparing a consolidating statement of cash flows, which of the following
statements is false?
A. All operating activity items are translated at an average exchange rate for the period.
B. A change in accounts receivable is translated using the current rate.
C. A change in long-term debt is translated using the historical rate at the date of the change.
D. Dividends paid are translated using the historical rate at the date of the payment.
E. All items follow translation rates used for the balance sheet and the income statement.

AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Knowledge
Difficulty: Medium
Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the current rate
method and calculate the related translation adjustment.

10-27
Chapter 10 - Translation of Foreign Currency Financial Statements

49. When preparing a consolidation worksheet for a parent and its foreign subsidiary
accounted for under the equity method, which of the following statements is false?
A. The cumulative translation adjustment included in the Investment in Subsidiary account is
eliminated.
B. The excess of fair value over book value since the date of acquisition is revalued for the
change in exchange rate.
C. The amount of equity income recognized by the parent in the current year is eliminated .
D. The allocations of excess of fair value over book value at the date of acquisition are
eliminated.
E. The subsidiary's stockholders' equity accounts as of the beginning of the year are
eliminated.

AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Analysis
Difficulty: Medium
Learning Objective: 10-06 Prepare a consolidation worksheet for a parent and its foreign subsidiary.

Esposito is an Italian subsidiary of a U.S. company.

Esposito's ending inventory is valued at the average cost for the last quarter of the year.
The following account balances are available for Esposito for 2011:

10-28
Chapter 10 - Translation of Foreign Currency Financial Statements

50. Compute the cost of goods sold for 2011 in U.S. dollars using the temporal method.
A. $376,650.
B. $387,750.
C. $388,800.
D. $400,950.
E. $409,050.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Application
Difficulty: Medium
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.
Learning Objective: 10-04 Remeasure a foreign subsidiary's financial statements using the temporal method and calculate the associated
remeasurement gain or loss.

51. Compute the cost of goods sold for 2011 in U.S. dollars using the current rate method.
A. $376,550.
B. $387,750.
C. $388,800.
D. $400,950.
E. $409,050.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Application
Difficulty: Medium
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.
Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the current rate
method and calculate the related translation adjustment.

10-29
Chapter 10 - Translation of Foreign Currency Financial Statements

52. Compute ending inventory for 2011 under the temporal method.
A. $13,950.
B. $14,100.
C. $14,400.
D. $14,850.
E. $15,150.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Application
Difficulty: Medium
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.
Learning Objective: 10-04 Remeasure a foreign subsidiary's financial statements using the temporal method and calculate the associated
remeasurement gain or loss.

53. Compute ending inventory for 2011 under the current rate method.
A. $13,950.
B. $14,100.
C. $14,400.
D. $14,850.
E. $15,150.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Application
Difficulty: Medium
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.
Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the current rate
method and calculate the related translation adjustment.

10-30
Chapter 10 - Translation of Foreign Currency Financial Statements

A foreign subsidiary uses the first-in first-out inventory method. The following inventory
balances are given at December 31, 2011 in local currency units (LCU):

54. Compute the December 31, 2011, inventory balance using the lower of cost or market
method under the temporal method.
A. $429,000.
B. $457,600.
C. $596,400.
D. $568,000.
E. $426,000.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Application
Difficulty: Hard
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

10-31
Chapter 10 - Translation of Foreign Currency Financial Statements

55. Compute the December 31, 2011, inventory balance using the current rate method.
A. $454,400.
B. $457,600.
C. $596,400.
D. $568,000.
E. $426,000.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Application
Difficulty: Medium
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

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, 2011.
The equipment was purchased on January 1, 2010. Relevant exchange rates for the peso are as
follows:

56. 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.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Application
Difficulty: Medium
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

10-32
Chapter 10 - Translation of Foreign Currency Financial Statements

57. 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. $1590.
D. $1,090.
E. $1,650.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Application
Difficulty: Medium
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

Certain balance sheet accounts of a foreign subsidiary of Parker Company at December 31,
2011, have been restated into U.S. dollars as follows:

10-33
Chapter 10 - Translation of Foreign Currency Financial Statements

58. 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, 2011, for the above items?
A. $407,500.
B. $418,000.
C. $396,000.
D. $403,500.
E. $398,500.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Application
Difficulty: Medium
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.
Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate
method and when they are to be translated using the temporal method.

59. 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, 2011, for the above
items?
A. $407,500.
B. $418,000.
C. $396,000.
D. $403,500.
E. $398,500.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Application
Difficulty: Easy
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.
Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate
method and when they are to be translated using the temporal method.

10-34
Chapter 10 - Translation of Foreign Currency Financial Statements

60. If the current rate used to restate these amounts is $.95, what was the average historical
rate used to arrive at the total amount for historical rates?
A. $.90.
B. $1.00.
C. $.95.
D. $.9474.
E. $1.0556.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Application
Difficulty: Medium
Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate
method and when they are to be translated using the temporal method.

Kennedy Company acquired all of the outstanding common stock of Hastie Company of
Canada for U.S. $350,000 on January 1, 2011, when the exchange rate for the Canadian dollar
(CAD) was U.S. $.70. The fair value of the net assets of Hastie was equal to their book value
of CAD 450,000 on the date of acquisition. Any acquisition consideration excess 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, 2011, Hastie's trial balance net income was translated at
U.S. $25,000. The average exchange rate for the Canadian dollar during 2011 was U.S. $.68,
and the 2011 year-end exchange rate was U.S. $.65.

61. Calculate the U.S. dollar amount allocated to the patent at January 1, 2011.
A. $50,000.
B. $35,000.
C. $34,000.
D. $32,500.
E. $28,200.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Application
Difficulty: Medium
Learning Objective: 10-06 Prepare a consolidation worksheet for a parent and its foreign subsidiary.

10-35
Chapter 10 - Translation of Foreign Currency Financial Statements

62. Amortization of the patent, translated, for 2011 would be

A. $7,000.
B. $10,000.
C. $6,800.
D. $9,000.
E. $6,500.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Application
Difficulty: Hard
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

63. Compute the amount of the patent reported in the consolidated balance sheet at December
31, 2011.
A. $28,200.
B. 25,700.
C. $35,000.
D. $27,200.
E. $26,000.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Application
Difficulty: Medium
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

10-36
Chapter 10 - Translation of Foreign Currency Financial Statements

64. Kennedy's share of Hastie's net income for 2011 would be

A. $18,000.
B. $15,000.
C. $18,200.
D. $16,000.
E. $18,500.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Application
Difficulty: Hard
Learning Objective: 10-06 Prepare a consolidation worksheet for a parent and its foreign subsidiary.

Quadros Inc., a Portugese firm was acquired by a U.S. company on January 1, 2010. Selected
account balances are available for the year ended December 31, 2011, and are stated in euro,
the local currency.

10-37
Chapter 10 - Translation of Foreign Currency Financial Statements

65. Assume the functional currency is the euro, compute the U.S. income statement amount
for sales for 2011.
A. $364,000.
B. $372,000.
C. $380,000.
D. $360,000.
E. $404,000.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Application
Difficulty: Easy
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.
Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the current rate
method and calculate the related translation adjustment.

66. Assume the functional currency is the euro, compute the U.S. balance sheet amount for
inventory at December 31, 2011.
A. $18,800.
B. $19,600.
C. $18,000.
D. $20,200
E. $19,000.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Application
Difficulty: Easy
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.
Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the current rate
method and calculate the related translation adjustment.

10-38
Chapter 10 - Translation of Foreign Currency Financial Statements

67. Assume the functional currency is the euro, compute the U.S. balance sheet amount for
equipment for 2011.
A. $81,900.
B. $90,900.
C. $83,700.
D. $88,200.
E. $85,500.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Application
Difficulty: Medium
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.
Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the current rate
method and calculate the related translation adjustment.

68. Assume the functional currency is the euro, compute the U.S. statement of retained
earnings amount for dividends for 2011.
A. $19,000.
B. $20,200.
C. $18,600.
D. $19,400.
E. $19,600.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Application
Difficulty: Easy
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.
Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the current rate
method and calculate the related translation adjustment.

10-39
Chapter 10 - Translation of Foreign Currency Financial Statements

69. Assume the functional currency is the euro, compute the U.S. balance sheet amount for
accumulated depreciation for 2011.
A. $40,950.
B. $41,850.
C. $45,450.
D. $42,750.
E. $44,100.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Application
Difficulty: Medium
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.
Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the current rate
method and calculate the related translation adjustment.

70. Assume the functional currency is the euro, compute the U.S. income statement amount
for depreciation expense for 2011.
A. $8,190.
B. $8,370.
C. $8,820.
D. $9,090.
E. $8,550.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Application
Difficulty: Medium
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.
Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the current rate
method and calculate the related translation adjustment.

10-40
Chapter 10 - Translation of Foreign Currency Financial Statements

71. Assume the functional currency is the U.S. dollar, compute the U.S. income statement
amount for sales for 2011.
A. $364,000.
B. $372,000.
C. $380,000.
D. $360,000.
E. $404,000.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Application
Difficulty: Easy
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.
Learning Objective: 10-04 Remeasure a foreign subsidiary's financial statements using the temporal method and calculate the associated
remeasurement gain or loss.

72. Assume the functional currency is the U.S. dollar, compute the U.S. balance sheet amount
for inventory, at cost, for 2011.
A. $18,800.
B. $19,600.
C. $18,000.
D. $20,200.
E. $19,000.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Application
Difficulty: Easy
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.
Learning Objective: 10-04 Remeasure a foreign subsidiary's financial statements using the temporal method and calculate the associated
remeasurement gain or loss.

10-41
Chapter 10 - Translation of Foreign Currency Financial Statements

73. Assume the functional currency is the U.S. dollar, compute the U.S. balance sheet amount
for equipment for 2011.
A. $81,900.
B. $90,900.
C. $83,700.
D. $88,200.
E. $85,500.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Application
Difficulty: Medium
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.
Learning Objective: 10-04 Remeasure a foreign subsidiary's financial statements using the temporal method and calculate the associated
remeasurement gain or loss.

74. Assume the functional currency is the U.S. dollar, compute the U.S. statement of retained
earnings amount for dividends for 2011.
A. $19,000.
B. $20,200.
C. $18,600.
D. $19,400.
E. $19,600.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Application
Difficulty: Easy
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.
Learning Objective: 10-04 Remeasure a foreign subsidiary's financial statements using the temporal method and calculate the associated
remeasurement gain or loss.

10-42
Chapter 10 - Translation of Foreign Currency Financial Statements

75. Assume the functional currency is the U.S. dollar, compute the U.S. balance sheet amount
for accumulated depreciation for 2011.
A. $40,950.
B. $41,850.
C. $45,450.
D. $42,750.
E. $44,100.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Application
Difficulty: Medium
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.
Learning Objective: 10-04 Remeasure a foreign subsidiary's financial statements using the temporal method and calculate the associated
remeasurement gain or loss.

76. Assume the functional currency is the U.S. dollar, compute the U.S. income statement
amount for depreciation expense for 2011.
A. $8,190.
B. $8,370.
C. $8,820.
D. $9,090.
E. $8,550.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Application
Difficulty: Medium
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.
Learning Objective: 10-04 Remeasure a foreign subsidiary's financial statements using the temporal method and calculate the associated
remeasurement gain or loss.

10-43
Chapter 10 - Translation of Foreign Currency Financial Statements
Matching Questions

77. A foreign subsidiary was acquired on January 1, 2011. Determine the exchange rate used
to restate the following accounts at December 31, 2011. Land was purchased on October 1,
2011. Relevant exchange dates follow:
Identify the exchange rate used to remeasure the items 6-10 when the functional currency is
the U.S. dollar:

1. October 1, 2011 Land. 3

2. January 1, 2011 Equipment. 3
3. December 31, 2011 Bonds payable. 3
4. January 1, 2011 Common stock. 2
5. December 31, 2011 Retained earnings. 7
6. December 31, 2011 Land. 1
7. Composite, using multiple dates Equipment. 2
8. January 1, 2011 Bonds payable. 3
9. December 31, 2011 Common stock. 2
10. Composite, using multiple dates Retained earnings. 7

AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Knowledge
Difficulty: Medium
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.
Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate
method and when they are to be translated using the temporal method.

Essay Questions

78. In translating a foreign subsidiary's financial statements, what exchange rate should be
used for the subsidiary's revenues and expenses?

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, and then a weighted
average exchange rate for the year may be used.

AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Knowledge
Difficulty: Medium
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

10-44
Chapter 10 - Translation of Foreign Currency Financial Statements

79. How can a parent corporation determine the functional currency for a foreign subsidiary
that conducts business in more than one country?

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.

AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate
method and when they are to be translated using the temporal method.

80. 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?

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.

AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Knowledge
Difficulty: Easy
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

10-45
Chapter 10 - Translation of Foreign Currency Financial Statements

81. Perkle Co. owned a subsidiary in Belgium; the subsidiary's functional currency was the
Belgian franc. During 2011, 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?

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.

AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Comprehension
Difficulty: Easy
Learning Objective: 10-05 Understand the rationale for hedging a net investment in a foreign operation and describe the treatment of gains
and losses on hedges used for this purpose.

82. Under what circumstances would the remeasurement of a foreign subsidiary's financial
statements be required?

The remeasurement of a foreign subsidiary's financial statements is required in the following

situations:
(A.) when the subsidiary's functional currency is the U.S. dollar.
(B.) when the subsidiary operates in a highly inflationary economy.
(C.) when the local currency is not the functional currency and the statements first need to be
remeasured from one foreign currency to another foreign currency.

AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Knowledge
Difficulty: Medium
Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate
method and when they are to be translated using the temporal method.

10-46
Chapter 10 - Translation of Foreign Currency Financial Statements

83. A foreign subsidiary of a U.S. corporation purchased equipment on January 4, 2008.

(A.) How would depreciation expense on the equipment be translated for 2011?
(B.) How would depreciation expense on the equipment be remeasured for 2011?

(A.) Depreciation expense would be translated using the average exchange rate for 2011. (B.)
Depreciation expense would be remeasured using the exchange rate in effect when the
equipment was purchased.

AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Knowledge
Difficulty: Medium
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.
Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate
method and when they are to be translated using the temporal method.

84. 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?

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.

AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Comprehension
Difficulty: Easy
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

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Chapter 10 - Translation of Foreign Currency Financial Statements

85. 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?

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 euro.

AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Comprehension
Difficulty: Easy
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

86. What is the justification for the remeasurement of foreign currency transactions?

Remeasurement is needed for transactions denominated in a currency other than the entity's
functional currency. A U.S. company that 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.

AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 10-04 Remeasure a foreign subsidiary's financial statements using the temporal method and calculate the associated
remeasurement gain or loss.

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Chapter 10 - Translation of Foreign Currency Financial Statements

87. Contrast the purpose of remeasurement with the purpose of translation.

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.

AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.
Learning Objective: 10-04 Remeasure a foreign subsidiary's financial statements using the temporal method and calculate the associated
remeasurement gain or loss.

88. On January 1, 2011, Fandu Corp. began operations of a foreign subsidiary. On April 1,
2011, the subsidiary purchased inventory costing 150,000 stickles. One-fourth of this
inventory remained unsold at the end of 2011 while 40% of the liability from the purchase had
not yet been paid. The pertinent indirectexchange rates were:

Required:
What should have been the December 31, 2011 inventory and accounts payable balances for
this foreign subsidiary as translated into U.S. dollars? (Round your answers to the nearest
whole dollar.)

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Application
Difficulty: Medium
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.
Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the current rate
method and calculate the related translation adjustment.

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Chapter 10 - Translation of Foreign Currency Financial Statements

89. On January 1, 2011, 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
2011:

Required:
Calculate the translation adjustment for Malont. (Round your answers to the nearest whole
dollar.)

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Application
Difficulty: Medium
Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the current rate
method and calculate the related translation adjustment.

10-50
Chapter 10 - Translation of Foreign Currency Financial Statements

Ginvold Co. began operating a subsidiary in a foreign country on January 1, 2011 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, 2012. A building was then purchased for §170,000 on January 1, 2011. 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 received. On October 1,
§5,000 were paid for a repair made on that date and it was the only transaction of this kind for
the year. A cash dividend of §6,000 was transferred back to Ginvold on December 31, 2011.
The functional currency for the subsidiary was the stickle. Currency exchange rates were as
follows:

90. Prepare an income statement for this subsidiary in stickles and then translate these
amounts into U.S. dollars.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Application
Difficulty: Medium
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.
Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the current rate
method and calculate the related translation adjustment.

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Chapter 10 - Translation of Foreign Currency Financial Statements

91. Prepare a statement of retained earnings for this subsidiary in stickles and then translate
the amounts into U.S. dollars.

Ginvold Co. Subsidiary

Statement of Retained Earnings
For the Year Ended December 31, 2011

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Application
Difficulty: Medium
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.
Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the current rate
method and calculate the related translation adjustment.

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Chapter 10 - Translation of Foreign Currency Financial Statements

92. Prepare a balance sheet for this subsidiary in stickles and then translate the amounts into
U.S. dollars.

Ginvold Co. Subsidiary

Balance Sheet
December 31, 2011

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Application
Difficulty: Medium
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.
Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the current rate
method and calculate the related translation adjustment.

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Chapter 10 - Translation of Foreign Currency Financial Statements

93. Prepare a statement of cash flows for this subsidiary in stickles and then translate the
amounts into U.S. dollars.

Ginvold Co. Subsidiary

Statement of Cash Flows
For the Year Ended, December 31, 2011

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Application
Difficulty: Medium
Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the current rate
method and calculate the related translation adjustment.

10-54
Chapter 10 - Translation of Foreign Currency Financial Statements

Boerkian Co. started 2011 with two assets: cash of §26,000 (stickles) and land that originally
cost §72,000 when acquired on April 4, 2008. On May 1, 2011, the company rendered
services to a customer for §36,000, an amount immediately paid in cash. On October 1, 2011,
the company incurred an operating expense of §22,000 that was immediately paid. No other
transactions occurred during the year so an average exchange rate is not necessary. Currency
exchange rates were as follows:

94. Assume that Boerkian was a foreign subsidiary of a U.S. multinational company and the
stickle was the functional currency of the subsidiary. Calculate the translation adjustment for
this subsidiary for 2011 and state whether this is a positive or a negative adjustment.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Application
Difficulty: Medium
Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the current rate
method and calculate the related translation adjustment.

10-55
Chapter 10 - Translation of Foreign Currency Financial Statements

95. Assume Boerkian was a foreign subsidiary of a U.S. multinational company and the U.S.
dollar was the functional currency of the subsidiary. Prepare a schedule of changes in the net
monetary assets of Boerkian for the year 2011 and properly label the resulting gain or loss.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Application
Difficulty: Medium
Learning Objective: 10-04 Remeasure a foreign subsidiary's financial statements using the temporal method and calculate the associated
remeasurement gain or loss.

96. Required:
Assume that Boerkian was a foreign subsidiary of a U.S. multinational company and the local
currency of the subsidiary (stickle) is the functional currency. On the December 31, 2011
balance sheet, what was the translated value of the Land account?

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Application
Difficulty: Medium
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.
Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate
method and when they are to be translated using the temporal method.

10-56
Chapter 10 - Translation of Foreign Currency Financial Statements

97. Assume that Boerkian was a foreign subsidiary of a U.S. multinational company and the
U.S. dollar is the functional currency. On the December 31, 2011 balance sheet, what was the
remeasured value of the Land account?

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Application
Difficulty: Medium
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.
Learning Objective: 10-04 Remeasure a foreign subsidiary's financial statements using the temporal method and calculate the associated
remeasurement gain or loss.

10-57