Exam 15: Translating Foreign Currency Statements: The Current Rate Method

Under FAS 52, the effect of an exchange rate change arising from using the current rate method is called a(n) _______________________________.

Under the foreign currency unit of measure approach, the monetary-nonmonetary distinction is crucial.

To express a foreign subsidiary's financial statements in U.S. dollars, one ____________________________ and then ____________________________.

Under FAS 52, the effect of an exchange rate change when using the current rate method is called a(n) ____________________________________, and it is reported in ____________________________________________________.

When the current rate 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 the OCI-Translation Adjustment account (bypassing the current income statement)-regardless of whether the amount is expected to be paid in the foreseeable future.

Under the current rate 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.

A foreign subsidiary that has liabilities exceeding its assets is said to be in a(n) ________________________________.

When the current rate method is used, the effect of an exchange rate change is reported currently in earnings.

_____ 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 using the foreign currency unit of measure approach?

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

_____ Parrco has a long-term intercompany receivable on its books 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 Swiss francs. During 2006, the U.S. dollar strengthened. Parrco uses the foreign currency unit of measure approach. At 12/31/06, Parrco should

_____ Parco's foreign subsidiary had the following average balances for its individual assets and liabilities during 2006: Using the foreign currency unit of measure approach, what was the relevant average financial position during 2006?

_____ Under the current rate method of translation, what is the effect of an increase in the direct exchange rate under each of the following situations?

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

_____ Pemex's Swiss subsidiary, Semex, had stockholders' equity of 500,000 Swiss francs on 1/1/06. For 2006, Semex reported net income of 100,000 Swiss francs (which was earned evenly during the year). On 1/2/06, Semex declared and paid a dividend of 20,000 Swiss francs. Pemex uses the current rate method of translation. Direct exchange rate information follows: What is the effect of the 2006 exchange rate change?

_____ Pavax has intercompany sales to its foreign subsidiary and uses the foreign currency unit of measure approach. Pavax should calculate the amount of any unrealized intercompany profit using the

_____ During 2006, the Japanese yen strengthened. Under the current rate method, a favorable reporting result occurred as a result of this 2006 exchange rate change. What was the subsidiary's average financial position during 2006?

_____ Before a foreign subsidiary's financial position and results of operations can be reported to the stockholders of the U.S. parent company, it is necessary to

_____ Patonics has a long-term intercompany receivable on its books 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. Patonics uses the foreign currency unit of measure approach. At 12/31/06, Patonics should

_____ During 2006, the Swiss franc weakened. Under the current rate method, an unfavorable reporting result occurred as a result of this 2006 exchange rate change. What was the subsidiary's average financial position during 2006?