Exam 16: Translating Foreign Currency Statements: The Temporal Method and the Functional Currency Concept

The functional currency concept is based on which currency the foreign unit uses in keeping its books.

_____ Panex owns 100% of the outstanding common stock of Sanex, a foreign subsidiary located in a country having a 20% income tax rate and a 5% dividend withholding tax. For 2006, Sanex reported net income of $600,000 and paid dividends of $300,000. Concerning the 2006 undistributed earnings of $300,000, Panex's intent is to have Sanex (a) distribute $200,000 as dividends when cash becomes available and (b) reinvest $100,000 indefinitely (to be used for internal expansion). Assume a 40% U.S. income tax rate. What is the sum of the taxes paid and payable to the foreign government relating to Sanex's 2006 earnings?

_____ A foreign subsidiary has provided the following information with respect to its year-end inventories: The inventory was acquired when the direct exchange rate was $.14. Assuming that the foreign currency is the functional currency, what should be the valuation of the inventory in dollars?

_____ On 12/31/06, Polbex's payable to a foreign vendor was properly reported at $308,000 in its balance sheet after recording an $8,000 upward adjustment as a result of a change in the exchange rate. On 1/7/07, the settlement required $305,000. Polbex owns a foreign subsidiary that has the U.S. dollar as its functional currency. For 2006, an adverse result of $60,000 occurred in translation for this subsidiary. What amount should be reported in the 2006 consolidated income statement?

_____ Which of the following items is a factor in determining the functional currency of a foreign unit?

Long-term exchange rate changes are best explained by __________________________________________________.

The disappearing plant problem can occur under the current rate method but not under the temporal method.

_____ Under the temporal method, what is the effect of an increase in the direct exchange rate under each of the following situations?

Parent-level income taxes on a foreign subsidiary's earnings are paid only in the year in which dividends are received.

Under current U.S. GAAP, the temporal method and the current-noncurrent method produce the same results.

The direct exchange rate increases as a result of ______________________________.

When the temporal method is used and a net monetary liability position is hedged, there may not be an offsetting effect to the FX transaction gain or loss resulting from the remeasurement process.

The functional currency concept is based on which currency the foreign unit uses to pay dividends to its parent company.

Mixing of valuation bases (foreign fixed assets and domestic fixed assets) occurs under the temporal method.

_____ Which of the following items is a factor in determining the functional currency of a foreign unit?

Under FAS 52, an autonomous foreign unit in a nonhighly inflationary environment would use the current rate method.

_____ At 12/31/06, Pivlex had a $60,000 dividend receivable on its books from its foreign subsidiary. The dividend of 100,000 LCUs was declared on 12/28/06, when the direct exchange rate was $.60. The dividend was remitted to Pivlex on 1/8/07, when the direct exchange rate was $.62. The direct exchange rate at 12/31/06 was $.59. Pivlex uses the temporal method of translation. At 12/31/06, Pivlex should

Popp owns 100% of the outstanding common stock of Soda, a foreign subsidiary located in a country that has a 30% income tax rate and a 10% dividend withholding tax. Assume that the income tax rate in the United States is 45%. Soda reported net income of $70,000 for 2006 and remitted $35,000 of these earnings as dividends to the parent in 2006. The remaining earnings are expected to be remitted in 2007 or 2008. Required: a. Determine the total amount of income taxes relating to the foreign subsidiary that should be shown in the consolidated income statement for 2006. b. Determine the total amount of income tax expense relating to the foreign subsidiary that should be provided in the parent's books for 2006.

_____ Under the temporal method of translation, how is the effect of an exchange rate change reported?

_____ Following are certain items (accounts or account totals) that have been remeasured into dollars at or for the year ending 12/31/06 for a Mexican subsidiary having the U.S. dollar as its functional currency: What is the effect of the 2006 exchange rate change?