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

Under current U.S. GAAP, the temporal method and the monetary-nonmonetary method produce the same results.

A factor to be considered in determining a foreign unit's functional currency is whether inventory is purchased from the parent company versus unrelated vendors located in the United States.

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 currently in earnings-regardless of whether the amount is expected to be paid in the foreseeable future.

_____ 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 income tax expense will be recorded on Sanex's books for 2006?

Under FAS 52, it may be necessary in some cases to use the remeasurement process and then the translation process for a specific foreign unit.

_____ What is the effect of an exchange rate change called in each of the following situations?

_____ For financial reporting purposes, parent companies must provide income taxes on their share of their foreign subsidiaries' earnings

A foreign subsidiary will not pay taxes to the U.S. government.

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

The disappearing plant problem does not occur under the PPP current-value approach.

Under the U.S. dollar unit of measure approach, monetary accounts are always translated at the current exchange rate.

The current-noncurrent method does not fit under the foreign currency unit of measure approach.

The temporal method is no more able to produce realistic results when high __________________ inflation is the dominant exchange rate change factor than the current rate method is able to produce reliable results when high _________________ inflation is the dominant exchange rate change factor.

_____ Pindax owns 100% of the outstanding common stock of Sindax, a foreign subsidiary located in a country having a 25% income tax rate and a 5% dividend withholding tax. For 2006, Sindax reported net income of $300,000 and paid dividends of $300,000. Pindax's income tax rate is 40%. How much should Pindax record on its books in 2006 for income tax expense pertaining to Sindax's 2006 earnings?

Indicate which of the following exchange rates would be used to translate or remeasure the accounts listed below. Code C = Current rate (at balance sheet date) C-R = Current rate (when recognized in the income statement) H = Historical rate A = Average rate (for the year) R = Reciprocal amount O = Other (explain this one) N/A = Not applicable

The accounting for the gain or loss on the hedging of a net investment position depends on whether the foreign currency or the U.S. dollar is the foreign unit's functional currency.

_____ On 1/1/06, a foreign unit of a domestic company acquired a parcel of land at a cost of 100,000 LCUs. During 2006, the inflation rate in the foreign country was 20%. The direct exchange rate was $.60 on 1/1/06 and $.52 on 12/31/06. At what amount would the land be expressed in dollars in the 12/31/06 translated balance sheet under the temporal method of translation?

If foreign inflation exceeds domestic inflation, the direct exchange rate should increase under PPP theory.

_____ Paltex's foreign subsidiary reported depreciation expense for 2007 of 250,000 LCUs (100,000 LCUs pertain to equipment acquired in 2007, when the exchange rate was $1 = 8 LCUs, and 150,000 LCUs pertain to equipment acquired in 2007, when the exchange rate was $1 = 6 LCUs). For 2007, the average exchange rate was $1 = 5 LCUs, and the year-end exchange rate was $1 = 4 LCUs. If the U.S. dollar is the functional currency, what amount should be reported for depreciation expense in dollars?

Under FAS 52, a highly inflationary economy is defined as one that has inflation of more than 100% annually.