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

____ Pamex's 100%-owned Swiss subsidiary, Samex, had stockholders' equity of 900,000 euros on 1/1/06. For 2006, Samex reported net income of 300,000 euros. On 10/1/06, Samex declared and paid a cash dividend of 100,000 euros. The euro is the functional currency. Direct exchange rate information follows: What is the effect of the 2006 exchange rate change?

Under FAS 52, the AOCI-Cumulative Translation Adjustment account balance is reported in earnings when the foreign unit is ______________________________ or ____________________________.

_____ Which of the following statements holds true for the foreign currency unit of measure approach?

Under the foreign currency unit of measure approach, the temporal method is used to translate all assets and liabilities.

When a foreign subsidiary has its foreign currency as its functional currency, the parent would hedge the _______________________________________ to prevent reporting an adverse impact on stockholders' equity as a result of an adverse exchange rate change.

_____ Which exchange rates are used to express the following accounts in dollars when the current rate method is used? (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.")

_____ Following are certain items (accounts or account totals) that have been translated into U.S. dollars at or for the year ending 12/31/06 for a Mexican subsidiary having the peso as its functional currency: What is the total ending Retained Earnings balance at 12/31/06?

Under FAS 52, the AOCI-Cumulative Translation Adjustment account is closed out directly to retained earnings when the foreign unit is sold or liquidated.

_____ Which of the following accounts is not a monetary item?

_____ Which of the following statements is false for the foreign currency unit of measure approach?

_____ Pakex's French subsidiary, Sakex, sold inventory on credit to a British customer on 12/22/06. The sale was denominated in pounds, and the customer paid in full in March 2007. From the sales date to 12/31/06, the pound strengthened relative to the franc (which is Sakex's functional currency). Sakex's gain should be reported as

_____ On 12/31/06, a Danish subsidiary accrued a litigation liability of 100,000 krones ($40,000 when translated at the current rate at 12/31/06), even though the probability of payment is remote. The outcome is not expected to be determined until 2007. The worksheet entry required at 12/31/07 (not 12/31/06) will result in which of the following (assuming no change in the exchange rate during 2007)?

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

_____ Which of the following is not an allowable reason for eliminating the balance in the AOCI-Cumulative Translation Adjustment account?

_____ On 4/1/07, Pakco sold its foreign subsidiary for $5,000,000. On this date, the carrying value of the Investment in Subsidiary account was $4,000,000, and the AOCI-Cumulative Translation Adjustment account had a debit balance of $700,000. In the 2007 financial statements, what should Pakco report?

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

_____ A Swiss subsidiary follows the practice of recording a liability for potential future losses at its manufacturing location (which is not insured). The offsetting debit to income is in accordance with Swiss GAAP and is deductible under Swiss tax laws. The liability account had a balance of 500,000 francs at the beginning of 2006. During 2006, 100,000 francs were added to the account, and 40,000 francs were charged against the liability account as a result of fire damage from an accident. The Swiss income tax rate is 40%. What adjustment is required to the subsidiary's beginning Retained Earnings, assuming that under Swiss income tax law, additions to the liability account are either deductible or not deductible?

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

_____ Under FAS 52, how is the effect of an exchange rate change reported when the current rate method of translation is used?

_____ Which of the following accounts is a monetary item?