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

Under the foreign currency unit of measure approach, monetary accounts are always translated at the current exchange rate.

The three translation approaches that can be used are (a) the __________________ __________________ approach, (b) the ____________________________ approach, and (c) the __________________________.

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 currently in earnings-only if the amount is not expected to be paid in the foreseeable future.

_____ A parent owns a foreign subsidiary that has as its functional currency the local currency. During 2006, the foreign subsidiary had (a) a net asset position of 500,000 LCUs and (b) a net monetary asset position of 400,000 LCUs. Which of the following gains or losses on hedging transactions can be charged or credited to the parent's OCI-Translation Adjustment account?

When the current rate method is used, the effect of an exchange rate change is reported in Other Comprehensive Income-not in earnings.

_____ Under FAS 52, which translation procedures are followed under the current rate method of translation?

_____ During 2006, the Mexican peso weakened. A favorable reporting result occurred as a result of this 2006 exchange rate change. What was the subsidiary's average financial position during 2006?

Under the foreign currency unit of measure approach, a decrease in the direct exchange rate results in an adverse reporting result when the parent has a positive balance in its Investment in Subsidiary account.

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

_____ On 1/1/06, Savtex, an Irish subsidiary of Pavtex, acquired a copyright for 100,000 LCU. Ireland's GAAP and income tax laws require amortization over no more than four years. Accordingly, Savtex uses a four-year life, even though the patent has a useful life of 10 years. Savtex's income tax rate is 40%. What adjustment, if any, is required for the income tax accounts at 12/31/07 (not 2006)?

_____ Parrex has a foreign subsidiary, Sarrex, in a country in which the direct exchange rate decreased from $.70 at 1/1/06 to $.60 at 12/31/06. During 2006, Sarrex had (a) an average net asset position of 400,000 LCUs and (b) an average net monetary liability position of 600,000 LCUs (900,000 LCUs - 300,000 LCUs). Under the current rate method, what is the effect of the 2006 exchange rate change?

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

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

_____ A foreign subsidiary has the foreign currency as its functional currency. The parent enters into an FX forward to hedge its net investment. What will occur or be the accounting treatment?

_____ Which of the following accounts is a monetary item?

_____ Under FAS 52, the term current rate is defined

A basic procedure before translation is to conform to U.S. GAAP.

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 earnings)-only if the amount is not expected to be paid in the foreseeable future.

_____ A parent owns a foreign subsidiary that has as its functional currency the local currency. To avoid reporting a possible negative effect in the U.S. dollar financial statements from an adverse change in the exchange rate, the parent should hedge which of the following items?

A basic procedure before translation is to adjust foreign fixed assets for foreign inflation.