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

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

Under FAS 52, going from the functional currency into the reporting currency (U.S. dollars) requires the use of the __________________________________ process.

_____ At 12/31/06, when the direct spot exchange rate was $.005, a foreign subsidiary reported the following analysis of its year-end inventory and exchange rates existing when the inventory was purchased: If the functional currency is the U.S. dollar, at what amount should the inventory be reported in U.S. dollars?

_____ How can the risk of investing in foreign countries (that is, the risk of not being able to recover one's investment) be greatly minimized?

_____ 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 decreased by $.07 during 2006, which was the result of foreign inflation. How much would the consolidated stockholders' equity change in U.S. dollars under the temporal method.?

Under the current rate method, an increase in the direct exchange rate caused by domestic inflation results in reporting an unrealized ______________________________________________________.

Examples of evidence required to satisfy the conditions for indefinite investment are __________________________________ and ___________________________________.

Under FAS 52, the effect of an exchange rate change is reported currently in earnings when the temporal method is used.

Dividend withholding taxes are treated as a tax to the party paying the dividends.

_____ Which exchange rates are used to express the following accounts in dollars under the temporal method of translation?

_____ On 1/4/06, Polaz created a foreign subsidiary, Solaz. On 10/1/06, Solaz purchased locally acquired inventory at a cost of 840,000 LCUs. The purchase price was equivalent to $140,000 on this date. At 12/31/06, Solaz's inventory consisted solely of inventory purchased on 10/1/06 and amounted to 120,000 LCUs. The exchange rate was 4 LCUs to $1 on 12/31/06, and the average exchange rate for the quarter was 5 LCUs to $1. If Solaz's functional currency is the U.S. dollar at what amount would the inventory be reported in Polaz's consolidated balance sheet at 12/31/06?

_____ The results produced under FAS 52 would be reliable in which of the fol-lowing situations?

Following are certain items (accounts or account totals) that have been translated/remeasured (as appropriate) into U.S. dollars at or for the year ending 12/31/06: Required: a. Assuming that the peso is the functional currency, determine the following amounts: (1) Total Ending Retained Earnings at 12/31/06. (2) Current period effect of the change in the exchange rate. (Use parentheses to indicate if unfavorable.) b. Assuming that the U.S. dollar is the functional currency, determine the following amounts: (1) Total Ending Retained Earnings at 12/31/06. (2) Current period effect of the change in the exchange rate. (Use parentheses to indicate if unfavorable.)

The temporal method properly reports the economic effect of foreign inflation.

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

Under the PPP current-value approach, the focus is on the net asset (net investment) position.

_____ Which exchange rates are used to express the following accounts in dollars under the temporal method of translation?

Under the temporal method of translation, the focus is on the ______________________________________.

Dividend withholding taxes, when recorded, are recorded on the books of the ________________________________________.

A domestic company's 100%-owned foreign subsidiary located in Great Britain had stockholders' equity of 500,000 pounds at 1/1/06. During 2006, the subsidiary (whose functional currency is the pound) reported net income of 300,000 pounds. On 11/30/06, the subsidiary declared and paid a dividend of 100,000 pounds. Direct exchange rate information follows: Required: Calculate the 2006 translation adjustment.