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

Under the U.S. dollar unit of measure approach, the focus is on the net investment (net asset) position.

Under FAS 52, the effect of an exchange rate change is reported in a statement of comprehensive income when the temporal method is used.

_____ 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. How much should Panex report for deferred income taxes payable in its balance sheet at 12/31/06?

Under FAS 52, "remeasurement" is going from a nonfunctional currency into the functional currency.

A factor pointing toward the use of the U.S. dollar as the functional currency is the foreign unit purchasing its inventory from vendors in the United States.

A factor to be considered in determining a foreign unit's functional currency is whether earnings are reinvested or distributed to the parent/home office.

The manner of calculating U.S. income taxes on a foreign subsidiary's earnings is in the nature of a(n) ________________________________________.

_____ A foreign operation that has an extremely high inflation rate (cumulatively more than 100% over three years) will in most cases

_____ During 2006, a foreign subsidiary had fixed assets of 100,000 local currency units that were financed with nonindexed local currency debt. Assume that the direct exchange rate increased by $.04 during 2006, which was the result of domestic inflation. How much would the consolidated stockholders' equity change in U.S. dollars under the temporal method?

_____ The best way to gain (get ahead) in a personal situation versus merely maintain purchasing power during periods of inflation is to

_____ On 1/1/06, the direct exchange rate was $.60. On 12/31/06, the direct exchange rate was $.39. During 2001, the United States had 6% inflation, and the foreign country had 20% inflation. How much of the change in the exchange rate was the result of noninflationary factors?

When the temporal method is used, any exchange rate change adjustment to a parent's long-term intercompany receivable from (or payable to) its foreign subsidiary is reported in Other Comprehensive Income (bypassing earnings)-regardless of whether the amount is expected to be paid in the foreseeable future.

_____ Under the temporal method of translation, which translation procedures are followed?

An excess of monetary assets over monetary liabilities is referred to as a(n) ____________________________________.

The direct exchange rate decreases as a result of ______________________________.

Under FAS 52, the effect of an exchange rate change is reported as a deferred gain or loss in the balance sheet when the temporal method is used.

_____ The U.S. dollar is the functional currency of a German subsidiary. During 2006, the German euro weakened. An unfavorable reporting result occurred as a result of this 2006 exchange rate change. What was the subsidiary's average financial position during 2006?

A factor pointing toward the use of the U.S. dollar as the functional currency is a significant level of intercompany inventory transfers.

_____ A parent owns a foreign subsidiary that has as its functional currency the U.S. dollar. To avoid reporting a possible negative effect in the U.S. dollar financial statements from an adverse change in the exchange rate, the parent should hedge which of the following items?

Under FAS 52, a foreign unit in a highly inflationary economy must use the U.S. dollar as its functional currency.