Question 1

_____ Which of the following statements is false concerning the U.S. income tax rules?

Accepted Answer

A)  Only domestic subsidiaries can pay U.S. income taxes at the subsidiary level. 
B)  If a domestic subsidiary has paid income taxes to the U.S. government at the subsidiary level, then the subsidiary's earnings (net of income taxes) will not be taxed again in the form of dividends at the parent level. 
C)  The intent of the U.S. Internal Revenue Code is to tax only once (in the United States) at the corporate level the earnings of a subsidiary-domestic or foreign. 
D)  The earnings of foreign branches/divisions are taxed in the United States in the year in which the earnings occur. 
E)  None of the above. 
A)  Only domestic subsidiaries can pay U.S. income taxes at the subsidiary level. 
B)  If a domestic subsidiary has paid income taxes to the U.S. government at the subsidiary level, then the subsidiary's earnings (net of income taxes) will not be taxed again in the form of dividends at the parent level. 
C)  The intent of the U.S. Internal Revenue Code is to tax only once (in the United States) at the corporate level the earnings of a subsidiary-domestic or foreign. 
D)  The earnings of foreign branches/divisions are taxed in the United States in the year in which the earnings occur. 
E)  None of the above.

Question 2

Under the U.S. dollar unit of measure approach, a decrease in the direct exchange rate always results in an adverse reporting result when the parent has a positive balance in its Investment in Subsidiary account.

Accepted Answer

A) True 
 B)False

Question 3

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. Panex uses the equity method of accounting.
Required:
Prepare all journal entries Panex should record for 2006 relating to its investment in Sanex.

Accepted Answer

The answer of Panex owns 100% of the outstanding common...

Question 4

Under FAS 52, "remeasurement" is going from the functional currency to the reporting currency.

Accepted Answer

A) True 
 B)False

Question 5

Under the temporal method, the "disappearing plant" problem occurs if _________________ inflation exceeds ___________________ inflation.

Accepted Answer

The answer of Under the temporal method, the "disappearing plant"...

Question 6

Under the U.S. dollar unit of measure approach, an increase in the direct exchange rate always results in an adverse reporting result when the parent has a positive balance in its Investment in Subsidiary account.

Accepted Answer

A) True 
 B)False

Question 7

_____ Pevex has an intercompany receivable denominated in foreign currency from a foreign subsidiary that has the U.S. dollar as its functional currency. In which account should Pevex make adjustments to reflect the current exchange rate?

Accepted Answer

The answer of _____ Pevex has an intercompany receivable denominated...

Question 8

_____ Petex's Swiss subsidiary, Setex, sold inventory on credit to a British customer on 12/22/06. The sale was denominated in pounds, and the customer paid in full in March 2007. From the sales date to 12/31/06, the pound strengthened, relative to the franc. The U.S. dollar is Setex's functional currency. Setex's gain should be reported as

Accepted Answer

A)  An offset to the uncollected receivable. 
B)  A separate component of stockholders' equity (bypassing the income statement). 
C)  A deferred credit reported immediately below liabilities. 
D)  An adjustment to the recorded sales amount. 
E)  An FX transaction gain in the current income statement. 
A)  An offset to the uncollected receivable. 
B)  A separate component of stockholders' equity (bypassing the income statement). 
C)  A deferred credit reported immediately below liabilities. 
D)  An adjustment to the recorded sales amount. 
E)  An FX transaction gain in the current income statement.

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

The answer of _____ Under the temporal method, what is...

Question 11

An increase in the direct exchange rate as a result of domestic inflation results in a realized nominal inflationary holding gain.

Accepted Answer

A) True 
 B)False

Question 12

A gain that is not in name only is called a(n) __________________________________ gain.

Accepted Answer

The answer of A gain that is not in name...

Question 13

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 as an adjustment to Other Comprehensive Income account (bypassing earnings)-if the amount is not expected to be paid in the foreseeable future.

Accepted Answer

A) True 
 B)False

Question 14

_____ Pellax owns 100% of the outstanding common stock of Sellax, a foreign subsidiary located in a country having a 25% income tax rate and a 10% dividend withholding tax. For 2006, Sellax reported net income of $600,000 and paid dividends of $250,000. Pellax intends for Sellax's remaining earnings to be distributed as dividends in the near future. Pellax's income tax rate is 40%. How much should Pellax record on its books in 2006 for income tax expense pertaining to Sellax's 2006 earnings?

Accepted Answer

A)  $ -0- 
B)  $25,000 
C)  $60,000 
D)  $95,000 
E)  $120,000 
A)  $ -0- 
B)  $25,000 
C)  $60,000 
D)  $95,000 
E)  $120,000

Question 15

The problem with FAS 8 was that it was not based on dealing with causes of exchange rate changes.

Accepted Answer

A) True 
 B)False

Question 16

_____ 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 foreign inflation?

Accepted Answer

A)  $.12 
B)  $(.12) 
C)  $.03 
D)  $(.03) 
E)  $(.14) 
A)  $.12 
B)  $(.12) 
C)  $.03 
D)  $(.03) 
E)  $(.14)

Question 17

_____ Poomax has a long-term intercompany receivable resulting from a loan made to a foreign subsidiary several years ago. No due date is specified inasmuch as settlement is not planned in the foreseeable future. The receivable is denominated in U.S. dollars. During 2006, the U.S. dollar strengthened. Poomax uses the temporal method of translation. At 12/31/06, Poomax should

Accepted Answer

A)  Adjust the intercompany receivable downward and debit OCI-Translation Adjustment. 
B)  Adjust the intercompany receivable downward and debit FX Transaction Loss. 
C)  Adjust the intercompany receivable downward and debit Investment in Subsidiary. 
D)  Make no adjustment to the intercompany receivable account. 
E)  None of the above. 
A)  Adjust the intercompany receivable downward and debit OCI-Translation Adjustment. 
B)  Adjust the intercompany receivable downward and debit FX Transaction Loss. 
C)  Adjust the intercompany receivable downward and debit Investment in Subsidiary. 
D)  Make no adjustment to the intercompany receivable account. 
E)  None of the above.

Question 18

Under the PPP current-value approach, the relationships that exist in the inflation-adjusted foreign balance sheet are maintained in translation.

Accepted Answer

A) True 
 B)False

Question 19

_____ On 11/11/06, Puzco sold inventory costing $50,000 to Suzco, its foreign subsidiary, for $100,000. At year-end, Suzco reported in its balance sheet 60,000 LCUs of this inventory. On 11/11/06, $1 equalled 4 LCUs. On 12/31/06, $1 equalled 5 LCUs. How much intercompany profit must be deferred in the consolidated income statement at 12/31/06 under the temporal method of translation?

Accepted Answer

A)  $6,000 
B)  $7,500 
C)  $30,000 
D)  $37,500 
E)  None of the above. 
A)  $6,000 
B)  $7,500 
C)  $30,000 
D)  $37,500 
E)  None of the above.

Question 20

_____ Parco's German subsidiary is Sarco. On 12/31/05, Parco concluded that the euro would weaken during the remainder of 2006. On this date, Sarco's balance sheet in euros was as follows:
  Sarco's functional currency is the U.S. dollar. On 12/31/05, Parco entered into a 12-month FX forward to sell 100,000 euros at the forward rate of $.60 (the spot rate at the time was also $.60). On 12/31/06, Parco settled the FX forward when the direct exchange rate was $.56. Using only the above information, what is the net amount Parco reports in its FX Gain or Loss account (that includes the remeasurement gain or loss) for 2006?

Accepted Answer

A)  No net gain or loss ($4,000 gain from the hedging transaction offset by a $4,000 loss from the remeasurement process). 
B)  A $4,000 loss from the hedging transaction. 
C)  A $4,000 gain from the hedging transaction. 
D)  A $12,000 gain ($4,000 loss from the hedging transaction netted against a $16,000 gain from the remeasurement process). 
E)  A $20,000 gain ($4,000 gain from the hedging transaction plus a $16,000 gain from the remeasurement process). 
A)  No net gain or loss ($4,000 gain from the hedging transaction offset by a $4,000 loss from the remeasurement process). 
B)  A $4,000 loss from the hedging transaction. 
C)  A $4,000 gain from the hedging transaction. 
D)  A $12,000 gain ($4,000 loss from the hedging transaction netted against a $16,000 gain from the remeasurement process). 
E)  A $20,000 gain ($4,000 gain from the hedging transaction plus a $16,000 gain from the remeasurement process).

_____ Which of the following statements is false concerning the U.S. income tax rules?

Under the U.S. dollar unit of measure approach, a decrease in the direct exchange rate always results in an adverse reporting result when the parent has a positive balance in its Investment in Subsidiary account.

Under FAS 52, "remeasurement" is going from the functional currency to the reporting currency.

Under the temporal method, the "disappearing plant" problem occurs if _ inflation exceeds ___ inflation.

Under the U.S. dollar unit of measure approach, an increase in the direct exchange rate always results in an adverse reporting result when the parent has a positive balance in its Investment in Subsidiary account.

_____ Pevex has an intercompany receivable denominated in foreign currency from a foreign subsidiary that has the U.S. dollar as its functional currency. In which account should Pevex make adjustments to reflect the current exchange rate?

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

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

An increase in the direct exchange rate as a result of domestic inflation results in a realized nominal inflationary holding gain.

A gain that is not in name only is called a(n) __________________________________ gain.

The problem with FAS 8 was that it was not based on dealing with causes of exchange rate changes.

_____ 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 foreign inflation?

Under the PPP current-value approach, the relationships that exist in the inflation-adjusted foreign balance sheet are maintained in translation.

Wholly Owned Subsidiaries: at Date of Creation

Wholly Owned Subsidiaries: Postcreation Periods

Partially Owned Created Subsidiaries & Variable Interest Entities

Introduction to Business Combinations

The Purchase Method: at Date of Acquisition-100 Ownership

The Purchase Method: Postacquisition Periods and Partial Ownerships

New Basis of Accounting

Introduction to Intercompany Transactions

Intercompany Inventory Transfers

Intercompany Fixed Asset Transfers & Bond Holdings

Changes in a Parents Ownership Interest, Statement of Cash Flows, & Earnings Per Share

Reporting Segment and Related Information

International Accounting Standards & Translating Foreign Currency Transactions

Using Derivatives to Manage Foreign Currency Exposures

Translating Foreign Currency Statements: The Current Rate Method

Interim Period Reporting

Securities and Exchange Commission Reporting

Bankruptcy Reorganizations and Liquidations

Partnerships: Formation and Operation

Partnerships: Changes in Ownership

Partnerships: Liquidations

Estates and Trusts

Governmental Accounting: Basic Principles and the General Fund

Governmental Accounting: The Special-Purpose Funds and Special General Ledger

Not-For-Profit Organizations: Introduction and Private Npos

Filters

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

_____ Which of the following statements is false concerning the U.S. income tax rules?

Under the U.S. dollar unit of measure approach, a decrease in the direct exchange rate always results in an adverse reporting result when the parent has a positive balance in its Investment in Subsidiary account.

Under FAS 52, "remeasurement" is going from the functional currency to the reporting currency.

Under the temporal method, the "disappearing plant" problem occurs if _________________ inflation exceeds ___________________ inflation.

Under the U.S. dollar unit of measure approach, an increase in the direct exchange rate always results in an adverse reporting result when the parent has a positive balance in its Investment in Subsidiary account.

_____ Pevex has an intercompany receivable denominated in foreign currency from a foreign subsidiary that has the U.S. dollar as its functional currency. In which account should Pevex make adjustments to reflect the current exchange rate?

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

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

An increase in the direct exchange rate as a result of domestic inflation results in a realized nominal inflationary holding gain.

A gain that is not in name only is called a(n) __________________________________ gain.

The problem with FAS 8 was that it was not based on dealing with causes of exchange rate changes.

_____ 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 foreign inflation?

Under the PPP current-value approach, the relationships that exist in the inflation-adjusted foreign balance sheet are maintained in translation.

Wholly Owned Subsidiaries: at Date of Creation

Wholly Owned Subsidiaries: Postcreation Periods

Partially Owned Created Subsidiaries & Variable Interest Entities

Introduction to Business Combinations

The Purchase Method: at Date of Acquisition-100 Ownership

The Purchase Method: Postacquisition Periods and Partial Ownerships

New Basis of Accounting

Introduction to Intercompany Transactions

Intercompany Inventory Transfers

Intercompany Fixed Asset Transfers & Bond Holdings

Changes in a Parents Ownership Interest, Statement of Cash Flows, & Earnings Per Share

Reporting Segment and Related Information

International Accounting Standards & Translating Foreign Currency Transactions

Using Derivatives to Manage Foreign Currency Exposures

Translating Foreign Currency Statements: The Current Rate Method

Interim Period Reporting

Securities and Exchange Commission Reporting

Bankruptcy Reorganizations and Liquidations

Partnerships: Formation and Operation

Partnerships: Changes in Ownership

Partnerships: Liquidations

Estates and Trusts

Governmental Accounting: Basic Principles and the General Fund

Governmental Accounting: The Special-Purpose Funds and Special General Ledger

Not-For-Profit Organizations: Introduction and Private Npos

Filters

Under the temporal method, the "disappearing plant" problem occurs if _ inflation exceeds ___ inflation.