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

_____ 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%. The worksheet adjusting entry required at 12/31/07 (not 2006) to restate to U.S. GAAP includes which of the following postings?

When the current rate method is used, FX gains and losses on hedges of net investments must be reported in Other Comprehensive Income.

_____ Parco has a German subsidiary, Sarco. On 1/1/06, Parco concluded that the euro would weaken during the remainder of 2006. On this date, Sarco's balance sheet in euros was as follows: Sarco's functional currency is the euro. On 1/1/06, Parco entered into a 12-month FX forward to sell 100,000 euros at the forward rate of $.60 (the spot rate at the time was also $.60). On 12/31/06, Parco settled the FX forward when the direct exchange rate was $.56. Using only the above information, what is Parco's change in its AOCI-Cumulative Translation Adjustment account for 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

When the current rate method is used, the calculation of any unrealized intercompany profit on intercompany inventory transfers is made using the current exchange rate.

_____ A translation method that fits under the foreign currency unit of measure approach is

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

When the current rate method is used, any exchange rate change adjustment to a parent's Dividend Receivable from its foreign subsidiary is reported as an adjustment to the OCI-Translation Adjustment account (bypassing earnings).

_____ Information for 2006 pertaining to a foreign subsidiary's statement of cash flows is as follows: What is the effect of the change in the exchange rate on cash for 2006?

_____ Under FAS 52, what occurs in translation under the current rate method of translation?

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

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

_____ Which of the following is the prescribed manner of reporting for the earnings and losses of foreign subsidiaries?

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

The translation method that fits under the foreign currency unit of measure approach is the _____________________________ method.

_____ On 12/31/06, Polbex's payable to a foreign vendor was properly reported at $294,000 in its balance sheet after recording an $8,000 downward adjustment as a result of a change in the exchange rate. On 1/7/07, the settlement required $295,000. Polbex owns a foreign subsidiary that has a foreign currency as its functional currency. For 2006, an adverse result of $60,000 occurred in translation for this subsidiary. What amount should be reported in earnings in the 2006 consolidated income statement?

_____ At 12/31/06, Pivax had a $60,000 dividend receivable from its foreign subsidiary. The dividend of 100,000 LCU is denominated in LCU and was declared on 12/28/06, when the direct exchange rate was $.60. The dividend was remitted to Pivax on 1/8/07, when the direct exchange rate was $.62. The direct exchange rate at 12/31/06 was $.59. Pivax uses the foreign currency unit of measure approach. At 12/31/06, Pivax should

Under the foreign currency unit of measure approach, an increase in the direct exchange rate always 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?