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

Under FAS 52, "translation" is the process of going from a different currency into the reporting currency.

A parent can provide income taxes on only a portion of a subsidiary's undistributed earnings and not provide income taxes on the remainder of the undistributed earnings.

_____ On 1/1/06, a foreign unit acquired equipment costing 100,000 local currency units (equivalent to $50,000 on that date). During 2006, the foreign country had 25% inflation and the United States had 10% inflation. On 12/31/06, the direct exchange rate was $.39. At what the amount would the fixed asset be expressed in U.S. dollars under the PPP current-value approach?

Under FAS 52, going from a different currency into the functional currency requires the use of the ________________________________________ process.

FAS 52 is based on whether a foreign unit is _______________________________ or __________________________________.

_____ The results produced under FAS 52 would not be reliable in which of the following situations?

_____ 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 current income taxes payable in its balance sheet at 12/31/06?

The functional currency concept is needed to use multiple units of measure.

_____ A foreign subsidiary located in Ireland reported net income of $90,000 (translated) to its parent for 2006. Assume that Ireland has a 10% income tax rate and a 10% dividend withholding tax. The U.S. income tax rate is 40%. On 12/31/06, the foreign subsidiary declared and paid a dividend equal to its entire 2006 net income. As a result, how much income tax will the parent pay in the United States for 2006?

Under FAS 52, a lower-of-cost-or-market test in U.S. dollars may be necessary under the remeasurement process but is never necessary under the translation process.

_____ 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 temporal method, at what amount should the inventory be reported in U.S. dollars?

_____ 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 current rate method?

Under APB Opinion No. 23, parent-level income taxes are recorded on a foreign subsidiary's earnings only in the year in which they are paid.

The monetary-nonmonetary method fits under the U.S. dollar unit of measure approach.

Under the U.S. dollar unit of measure approach, the relationships in the foreign currency statements are maintained in translation.

_____ Under FAS 52, which of the following statements is true concerning foreign units located in highly inflationary economies?

The U.S. income tax system taxes ____________________________________ income.

_____ Which exchange rates are used to express the following accounts in dollars under the temporal method of translation? (Assume that valuation in the local currency is at market value, which conforms to the rules of FAS 115, "Accounting for Certain Investments in Debt and Equity Securities.")

Under the temporal method, all current assets and current liabilities are translated at the current exchange rate, and all noncurrent assets and noncurrent liabilities are translated at historical exchange rates.

_____ Unrealized inflationary holding gains resulting from the exchange rate change effect of domestic inflation are reported