Question 1

_____ Which of the following statements is correct?

Accepted Answer

A)  The effect of a decrease in the direct exchange rate is always unfavorable under the foreign currency unit of measure approach. 
B)  The effect of a decrease in the direct exchange rate is always unfavorable under the U.S. dollar unit of measure approach. 
C)  The effect of an increase in the direct exchange rate is always unfavorable on the assets and favorable on the liabilities. 
D)  The effect of an increase in the direct exchange rate is always favorable under the current rate method of translation. 
E)  None of the above. 
A)  The effect of a decrease in the direct exchange rate is always unfavorable under the foreign currency unit of measure approach. 
B)  The effect of a decrease in the direct exchange rate is always unfavorable under the U.S. dollar unit of measure approach. 
C)  The effect of an increase in the direct exchange rate is always unfavorable on the assets and favorable on the liabilities. 
D)  The effect of an increase in the direct exchange rate is always favorable under the current rate method of translation. 
E)  None of the above.

Question 2

When the temporal method is used, any exchange rate change adjustment to a parent's Dividend Receivable from its foreign subsidiary is reported as an adjustment to Other Comprehensive Income (bypassing earnings).

Accepted Answer

A) True 
 B)False

Question 3

To avoid recording income taxes on the undistributed earnings of their subsidiaries, parent companies must demonstrate that the undistributed earnings are being reinvested permanently.

Accepted Answer

A) True 
 B)False

Question 4

When the temporal method is used, the calculation of any unrealized intercompany profit on inventory transfers is made using the current exchange rate.

Accepted Answer

A) True 
 B)False

Question 5

Under the U.S. dollar unit of measure approach, the temporal method is used to translate all assets and liabilities.

Accepted Answer

A) True 
 B)False

Question 6

Under FAS 52, the effect of an exchange rate change is called a foreign currency transaction gain or loss only if the foreign currency is the functional currency.

Accepted Answer

A) True 
 B)False

Question 7

_____ Pilax owns 100% of the outstanding common stock of Silax, a foreign subsidiary located in a country having a 30% income tax rate and a 10% dividend withholding tax. For 2006, Silax reported net income of $1,400,000 and paid dividends of $560,000. Pilax intends for Silax's remaining 2006 earnings to be invested for an indefinite future period. Pilax's income tax rate is 40%. How much should Pilax record on its books in 2006 for income tax expense pertaining to Silax's 2006 earnings?

Accepted Answer

A)  $ -0- 
B)  $24,000 
C)  $56,000 
D)  $80,000 
E)  $200,000 
A)  $ -0- 
B)  $24,000 
C)  $56,000 
D)  $80,000 
E)  $200,000

Question 8

_____ 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 9

_____ Paxco has a British subsidiary, Saxco. On 12/31/05, Paxco concluded that the pound would strengthen during the remainder of 2006. On this date, Saxco's balance sheet in pounds was as follows:
  Saxco's functional currency is the U.S. dollar. On 12/31/05, Paxco entered into a 12-month FX forward to buy 300,000 pounds at the forward rate of $.82 (the spot rate at the time was $.80). On 12/31/06, Paxco settled the FX forward when the spot rate was $.75. What is the net amount Paxco 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. 
B)  $6,000 net loss. 
C)  $6,000 net gain. 
D)  $21,000 loss. 
E)  $37,000 loss. 
A)  No net gain or loss. 
B)  $6,000 net loss. 
C)  $6,000 net gain. 
D)  $21,000 loss. 
E)  $37,000 loss.

Question 10

After using the temporal method, it is necessary to perform a(n) _______________ _______________________________ in dollars.

Accepted Answer

The answer of After using the temporal method, it is...

Question 11

Inflationary holding gains can be either nominal or real.

Accepted Answer

A) True 
 B)False

Question 12

_____ Povax 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 euros. During 2006, the U.S. dollar strengthened. Povax uses the temporal method of translation. At 12/31/06, Povax 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 13

Under the temporal method, a decrease in the direct exchange rate caused by foreign inflation results in reporting an unrealized ____________________________ when fixed assets are financed by nonindexed local currency debt.

Accepted Answer

The answer of Under the temporal method, a decrease in...

Question 14

The problem with FAS 8 was that it did not account differently for different economic factors.

Accepted Answer

A) True 
 B)False

Question 15

A nominal gain means an unrealized gain.

Accepted Answer

A) True 
 B)False

Question 16

_____ At 12/31/06, when the direct spot exchange rate was $.008, a foreign subsidiary reported the following analysis of its year-end inventory and exchange rates existing when the inventory was purchased:
  The average exchange rate for 2006 was $.006. Under the current rate method, at what amount should the inventory be reported in U.S. dollars?

Accepted Answer

A)  $300,000 
B)  $350,000 
C)  $360,000 
D)  $420,000 
E)  $480,000 
A)  $300,000 
B)  $350,000 
C)  $360,000 
D)  $420,000 
E)  $480,000

Question 17

The U.S. income tax system taxes worldwide income-not just income earned in the U.S.

Accepted Answer

A) True 
 B)False

Question 18

When the temporal method is used, any exchange rate change adjustment to a parent's Dividend Receivable from its foreign subsidiary is reported currently in earnings.

Accepted Answer

A) True 
 B)False

Question 19

A problem that can occur under both the temporal method and the current rate method is the _________________________________________ problem.

Accepted Answer

The answer of A problem that can occur under both...

Question 20

FAS 52 uses ________________________________________ units of measure, which are the _____________________________ and the ________________________________.

Accepted Answer

The answer of FAS 52 uses ________________________________________ units of measure,...

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

_____ Which of the following statements is correct?

When the temporal method is used, any exchange rate change adjustment to a parent's Dividend Receivable from its foreign subsidiary is reported as an adjustment to Other Comprehensive Income (bypassing earnings).

To avoid recording income taxes on the undistributed earnings of their subsidiaries, parent companies must demonstrate that the undistributed earnings are being reinvested permanently.

When the temporal method is used, the calculation of any unrealized intercompany profit on inventory transfers is made using the current exchange rate.

Under the U.S. dollar unit of measure approach, the temporal method is used to translate all assets and liabilities.

Under FAS 52, the effect of an exchange rate change is called a foreign currency transaction gain or loss only if the foreign currency is the functional currency.

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

After using the temporal method, it is necessary to perform a(n) _______________ _______________________________ in dollars.

Inflationary holding gains can be either nominal or real.

Under the temporal method, a decrease in the direct exchange rate caused by foreign inflation results in reporting an unrealized ____________________________ when fixed assets are financed by nonindexed local currency debt.

The problem with FAS 8 was that it did not account differently for different economic factors.

A nominal gain means an unrealized gain.

The U.S. income tax system taxes worldwide income-not just income earned in the U.S.

When the temporal method is used, any exchange rate change adjustment to a parent's Dividend Receivable from its foreign subsidiary is reported currently in earnings.

A problem that can occur under both the temporal method and the current rate method is the _________________________________________ problem.

FAS 52 uses ________________________________________ units of measure, which are the _____________________________ and the ________________________________.

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

After using the temporal method, it is necessary to perform a(n) _ _________________ in dollars.

FAS 52 uses __________________________ units of measure, which are the _ and the __________________.