Deck 25: Translating the Financial Statements of Foreign Operations

Question 1

Distributions from retained profits are translated at:

A)the spot rate.
B)the rates current at the reporting date.
C)the rates current at the dates when the retained profits were created.
D)The standard is silent on this translation.

Answer 1

D

Question 2

IAS 21 prescribes alternative methods for the translation of the financial statements of foreign operations.It depends upon whether these operations are integrated or self-sustaining.

Answer 2

False

Question 3

The exchange rate used for the translation of the payment of dividends is the spot rate at the date when the retained earnings or reserves,from which the dividends were drawn,were created.

Answer 3

False

Question 4

When consolidating financial statements of foreign operations,we use the same rate each year for goodwill,so that the amount recognised on consolidation will not fluctuate from year to year.

Question 5

Under the translation method required by IAS 21,the approach to translating a foreign operation's financial statements includes:

A)translating post-acquisition changes in equity at the exchange rate current at the date of the change.
B)translating non-monetary assets at the spot exchange rate at the date of the purchase transaction.
C)translating revenue and expense items at the average rate for the period where the revenues and expense transactions have been evenly distributed over the period.
D)translating proposed distributions from retained profits at the exchange rate current when the distributions are completed in cash.

Question 6

When translating foreign subsidiary financial statements,net assets are translated at the ---- rate and the components of net assets are translated at the -----rate.

A)(a) current; (b) spot
B)(a) historical; (b) current
C)(a) current; (b) historical
D)(a) spot; (b) current

Question 7

If the exchange rate for US dollars relative to Euros goes from $1 = €2.10 to $1 = €2.20,the Euro has strengthened.

Question 8

As prescribed in IAS 21,in translating the accounts of a foreign operation from local currency to functional currency,the exchange rate to use for land is the exchange rate at the date of the transaction.

Question 9

The foreign exchange exposure of the parent entity in relation to its foreign operation relates to the net cash flows of the investment in the operation.

Question 10

Under the translation method required by IAS 21,the approach to translating a foreign operation's accounts includes:

A)Non-monetary items included in the statement of financial position are translated at the rate current at reporting date.
B)Equity at the date of investment is translated at the rate for the when the investment was acquired.
C)Revenue and expense items are translated at the exchange rates current at the applicable transaction dates statement of financial position.
D)all of the given answers.

Question 11

Exchange differences resulting from the translation of foreign operations to presentation currency are shown:

A)in the 'retained earnings' section of equity.
B)in the 'general reserve' section of equity.
C)in the 'asset revaluation reserve' section of equity.
D)none of the given answers.

Question 12

IAS 21 specifies that post-acquisition movements in equity other than retained profits or accumulated losses are translated at:

A)the spot rate.
B)the forward rate.
C)the market rate.
D)none of the given answers.

Question 13

As prescribed in IAS 21,translation of the financial statements of foreign operations to the presentation currency requires any gains or losses on translation be taken directly to reserves.

Question 14

Aus Co Ltd has a foreign operation based in Japan.The following information was extracted from the foreign operation's financial statements for the period ended 30 June 2015: $$\begin{array} { | l | r | } \hline & ¥ 000 \\\hline \text { Machinery (at cost purchased 1 July 2013) } & 85000 \\\hline \text { Inventory on hand (purchased last quarter 2015) } & 16000 \\\hline \text { Depreciation expense-machinery } & 8200 \\\hline \text { Land (purchased 1 July 2013, revalued 1 June 2015) } & 150000 \\\hline\end{array}$$ Exchange rate information is: $$\begin{array} { | l | r | } \hline 1 \text { July } 2013 & ¥ 1.00 = A S 0.0136 \\\hline \text { Average for year ended } 30 \text { June } 2015 & ¥ 1.00 = A \$ 0.0153 \\\hline 1 \text { June } 2015 & ¥ 1.00 = A S 0.0146 \\\hline \text { Last quarter } 2015 & ¥ 1.00 = A \$ 0.0150 \\\hline 30 \text { June } 2015 & ¥ 1.00 = A \$ 0.0165 \\\hline\end{array}$$ What is the amount at which each item would be translated (rounded to the nearest A$)?

A) $$\begin{array} { | l | r | } \hline & { \text { A\$ } } \\\hline \text { Machinery } & 1402500 \\\hline \text { Inventory on hand } & 264000 \\\hline \text { Depreciation expense-machinery } & 125460 \\\hline \text { Land } & 2475000 \\\hline\end{array}$$
B) $$\begin{array} { | l | r | } \hline & \text { A\$ } \\\hline \text { Machinery } & 1156000 \\\hline \text { Inventory on hand } & 240000 \\\hline \text { Depreciation expense-machinery } & 111520 \\\hline \text { Land } & 2190000 \\\hline\end{array}$$
C) $$\begin{array} { | l | r | } \hline & { \text { A\$} } \\\hline \text { Machinery } & 1402000 \\\hline \text { Inventory on hand } & 233600 \\\hline \text { Depreciation expense-machinery } & 111520 \\\hline \text { Land } & 2040000 \\\hline\end{array}$$
D) $$\begin{array} { | l | r | } \hline & { \text { AS } } \\\hline \text { Machinery } & 1156000 \\\hline \text { Inventory on hand } & 264000 \\\hline \text { Depreciation expense-machinery } & 135300 \\\hline \text { Land } & 2040000\\\hline\end{array}$$

Question 15

As prescribed in IAS 21,in translating the financial statements of a foreign operation from functional to presentation currency,the exchange rate to use for inventory is the average rate during the period the inventory was purchased.

Question 16

Exchange differences arising from translation to the presentation currency are not recognised in profit or loss because the changes in exchange rates have little or no direct effect on the present and future cash flows from operations.

Question 17

When translating the financial statements of a foreign operation to presentation currency,IAS 21 requires any gain or loss on translation of the financial statements to be:

A)recognised as a revenue or expense in the statement of comprehensive income.
B)transferred to a reserve in the equity section of the statement of financial position.
C)deferred and amortised over a period not greater than 20 years.
D)written off against the non-monetary assets of the foreign operation with any balance remaining recognised as a revenue or expense in the period.

Question 18

The amount of a foreign operation's post-acquisition retained earnings as translated into functional currency will depend on the amount translated from the statement of comprehensive income.

Question 19

If the assets of a foreign operation exceed its liabilities,and the value of the functional currency (for example the Euro)falls relative to the currency of the foreign operations,there will be:

A)a credit to the 'foreign currency translation reserve' in the consolidated financial statements.
B)a debit to the 'foreign currency translation reserve' in the consolidated financial statements.
C)a credit to 'foreign currency translation revenue' in the consolidated financial statements.
D)a debit to the 'foreign currency translation expense' in the consolidated financial statements.

Question 20

Under the translation method required by IAS 21,the approach to translating a foreign operation's financial statements includes:

A)translating monetary items at the closing rate of exchange .
B)translating non-monetary assets at the average exchange rate since the date of purchase of the asset.
C)translating transfers of post-acquisition equity items within the equity category at the rate of exchange current at the date the original equity item was first included in equity.
D)translating revenues and expenses at the average rate of exchange applied to equity items.

Question 21

As prescribed in IAS 21,when remeasuring financial statements of foreign operations to functional currency,which of the following identifies all items to be re-measured at historic rates?

A)cash, inventory and accounts receivable
B)payables, long-term loan and unearned revenue
C)inventory, goodwill, property plant and equipment
D)accounts receivable, accounts payable and accrued expenses

Question 22

In the process of consolidating the translated financial statements of a foreign operation,what will be the form of the journal entry required to eliminate the foreign currency effect of a purchase of inventory by the subsidiary from the parent entity? Assume that the value of the foreign currency of the foreign operation has increased relative to the reporting currency.

A) $\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Foreign currency loss (P\&L) } & \mathrm{X} & \\\hline \mathrm{Cr} & \text { Cost of goods sold } & & \mathrm{X} \\\hline\end{array}$
B) $\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Inventory } & \mathrm{X} & \\\hline \mathrm{Cr} & \text { Foreign currency gain (P\&L) } & & \mathrm{X} \\\hline\end{array}$
C) $\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Inventory } & \mathrm{X} & \\\hline \mathrm{Cr} & \text { Foreign currency translation reserve } & & \mathrm{X} \\\hline\end{array}$
D) $$\begin{array} { | l | l | r | r | } \hline \text { Dr } & \text { Foreign currency translation reserve } & \mathrm { X } & \\\hline \mathrm { Cr } & \text { Inventory } & & \mathrm { X } \\\hline\end{array}$$

Question 23

Yarra Manufacturing Plc is a British registered entity that has a branch in Singapore,Kew Plc.Kew Plc has a foreign operation in China.The foreign operation maintains its accounting records in Chinese yuan.The functional currency of the Chinese operation is Singapore dollar.The presentation currency of Kew Plc is British pound. At reporting date,the translation of the financial statements of the Chinese foreign operation resulted in a loss of S$6500 and the translation of the financial statements of Kew Plc to its presentation currency resulted to a gain of £4500.
Which of the following results is consistent with IAS 21 with respect to Yarra Manufacturing Plc?

A)Loss of S$6500 should be recognised in profit and loss.
B)Loss of S$6500 should be recognised in comprehensive income.
C)Gain of £4500 should be recognised in profit and loss.
D)Gain of £4500 should be recognised in comprehensive income.

Question 24

Yarra Manufacturing Plc is a British registered entity that has a branch in Singapore,Kew Plc.The Singapore branch has a foreign operation in China.The foreign operation maintains its accounting records in Chinese yuan.The functional currency of the Chinese operation is Singapore dollar.The presentation currency of Kew Plc is British pound. At reporting date,the translation of the financial statements of the Chinese foreign operation resulted in a loss of S$6500 and the translation of the financial statements of Kew Plc to its presentation currency resulted to a gain of £4500.
Which of the following results is consistent with IAS 21 with respect to Kew Plc?

A)Loss of S$6500 should be recognised in profit and loss.
B)Loss of S$6500 should be recognised in comprehensive income.
C)Gain of £4500 should be recognised in profit and loss.
D)Gain of £4500 should be recognised in comprehensive income.

Question 25

When a parent entity has an overseas subsidiary the first task before consolidation is to:

A)translate the financial statements from the functional currency to the presentation currency.
B)translate the financial statements from the presentation currency to the functional currency.
C)determine the functional currency of the overseas subsidiary.
D)determine the functional currency of the parent entity.

Question 26

In the process of consolidating the translated financial statements of a foreign operation,the elimination entry to record goodwill will be affected by the translation process in what way?

A)The elimination of the investment against the pre-acquisition capital and reserves and the calculation of goodwill will vary each year depending on the exchange rates at the end of the period that are used to calculate the foreign exchange gain or loss.
B)The elimination of the investment against the pre-acquisition capital and reserves and the calculation of goodwill will be the same unless inter-company transactions have to be eliminated, in which case the entry will have to be adjusted for the exchange rate differences on the inter-company transactions.
C)The elimination of the investment against the pre-acquisition capital and reserves and the calculation of goodwill will be the same each year the elimination entry is made.
D)The elimination of the investment against the pre-acquisition capital and reserves and the calculation of goodwill will be affected by any subsequent transfers between equity items that may arise as a result of bonus issues or transfers between reserves.

Question 27

Explain at what exchange rate income and expenses of a foreign operation are generally translated,and the exception that exists to the 'general rule'.

Question 28

When translating non-monetary liabilities into the functional currency,the translation rate used is:

A)the rate at date of valuation.
B)the closing rate.
C)the spot rate.
D)the average rate.

Question 29

Outline the approach to be taken when translating the accounts of a foreign subsidiary; that is,the various rates to be used for the various components of the financial statements.

Question 30

As prescribed in IAS 21,when re-measuring financial statements of foreign operations to presentation currency,which of the following identifies all items to be remeasured at historic rates?

A)cash, accounts receivable and accounts payable
B)inventory, goodwill, property plant and equipment
C)accounts payable, unearned revenue and note payable
D)gain on sale of non-current assets, dividend revenue and dividends paid

Question 31

In the process of consolidating the translated financial statements of a foreign operation,the calculation of minority interests will be affected by the translation process in what way?

A)The minority interests will be allocated a portion of the gain or loss on translation from the statement of comprehensive income.
B)The effect of transactions between the subsidiary and the minority interests will be eliminated after calculating the unrealised foreign exchange gain or loss implicit in the unrealised profit on the inter-company transaction.
C)The minority interests will be allocated a portion of the foreign currency translation reserve.
D)The calculation of the minority interests' is not affected.

Question 32

Aus Co Ltd has a foreign operation based in New Zealand.The following information was extracted from the foreign operation's financial statements for the period ended 30 June 2015: $$\begin{array} { | l | r | } \hline & \text { \$NZ 000 } \\\hline \text { Machinery (purchased 1 July 2013, revalued 1 June 2015) } & 13000 \\\hline \text { Inventory on hand (purchased last quarter 2015) } & 9800 \\\hline \text { Depreciation expense-machinery } & 700 \\\hline \text { Land (purchased 1 July 2013) } & 75000 \\\hline\end{array}$$ Exchange rate information is: $$\begin{array} { | l | l | } \hline 1 \text { July } 2013 & \text { A\$1.00 } = \$ N Z 1.1255 \\\hline \text { Average for year ended } 30 \text { June } 2015 & \text { A\$1.00 } = \$ N Z 1.2135 \\\hline 1 \text { June } 2015 & \text { AS1.00 } = \$ N Z 1.1024 \\\hline \text { Last quarter } 2015 & \text { A\$1.00 } = \$ N Z 1.2503 \\\hline 30 \text { June } 2015 & \text { AS1.00 } = \$ N Z 1.3250 \\\hline\end{array}$$ What is the amount at which each item will be translated (rounded to the nearest A$)?

A) $$\begin{array} { | l | r | } \hline & \text { A\$ } \\\hline \text { Machinery } & 17225000 \\\hline \text { Inventory on hand } & 1298500 \\\hline \text { Depreciation expense-machinery } & 849450 \\\hline \text { Land } & 99375000 \\\hline\end{array}$$
B) $$\begin{array} { | l | r | } \hline & { \text { AS } } \\\hline \text { Machinery } & 9811321 \\\hline \text { Inventory on hand } & 9396226 \\\hline \text { Depreciation expense-machinery } & 576844 \\\hline \text { Land } & 56603774 \\\hline\end{array}$$
C) $$\begin{array} { | l | r | } \hline &{ \text { AS } } \\\hline \text { Machinery } & 14331200 \\\hline \text { Inventory on hand } & 12252940 \\\hline \text { Depreciation expense-machinery } & 771680 \\\hline \text { Land } & 84412500 \\\hline\end{array}$$
D) $$\begin{array} { | l | r | } \hline & \text { AS } \\\hline \text { Machinery } & 11792453 \\\hline \text { Inventory on hand } & 7838119 \\\hline \text { Depreciation expense-machinery } & 634978 \\\hline \text { Land } & 66637050 \\\hline\end{array}$$

Question 33

Emu Co Ltd purchased a foreign operation based in Singapore on 1 July 2012.The following information was extracted from the foreign operation's financial statements for the period ended 30 June 2014: $$\begin{array} { | l | r | } \hline & { \$ S } \\\hline \text { Equipment (purchased 1 July 2012, revalued 1 June 2014) } & 650000 \\\hline \text { Debentures (issued 1 June 2014) } & 900000 \\\hline \text { Inventory on hand (purchased last quarter 2015) } & 68000 \\\hline \text { Depreciation expense-equipment } & 54000 \\\hline \text { Share capital at acquisition of foreign subsidiary } & 4000000 \\\hline \text { Sales revenue (earned evenly over the period) } & 850000 \\\hline\end{array}$$ Exchange rate information is: $$\begin{array} { | l | l | } \hline 1 \text { July } 2012 & \$ S 1.00 = A \$ 1.0520 \\\hline \text { Average for year ended } 30 \text { June } 2014 & \$ S 1.00 = A \$ 1.0700 \\\hline 1 \text { June 2014 } & \$ S 1.00 = A \$ 1.0735 \\\hline \text { Last quarter } 2014 & \$ S 1.00 = A \$ 1.0600 \\\hline 30 \text { June } 2014 & \$ S 1.00 = A \$ 1.0690 \\\hline\end{array}$$ What is the amount at which each item will be translated (rounded to the nearest A$)?

A) $\begin{array}{|l|r|}\hline &{\text { AS }} \\\hline \text { Equipment } & 697775 \\\hline \text { Debentures } & 962100 \\\hline \text { Inventory on hand } & 72080 \\\hline \text { Depreciation expense-equipment } & 57969 \\\hline \text { Share capital at acquisition of foreign subsidiary } & 420800 \\\hline \text { Sales revenue } & 909500\\\hline\end{array}$
B) $$\begin{array} { | l | r | } \hline & { \text { A\$ } } \\\hline \text { Equipment } & 694850 \\\hline \text { Debentures } & 962100 \\\hline \text { Inventory on hand } & 72692 \\\hline \text { Depreciation expense-equipment } & 57780 \\\hline \text { Share capital at acquisition of foreign subsidiary } & 420800 \\\hline \text { Sales revenue } & 909500\\\hline\end{array}$$
C) $$\begin{array} { | l | r | } \hline & { \text { A\$ } } \\\hline \text { Equipment } & 683800 \\\hline \text { Debentures } & 966150 \\\hline \text { Inventory on hand } & 72080 \\\hline \text { Depreciation expense-equipment } & 56808 \\\hline \text { Share capital at acquisition of foreign subsidiary } & 4276000 \\\hline \text { Sales revenue } & 908650 \\\hline\end{array}$$
D) $$\begin{array} { | l | r | } \hline & { \text { A\$ } } \\\hline \text { Equipment } & 695500 \\\hline \text { Debentures } & 963000 \\\hline \text { Inventory on hand } & 72760 \\\hline \text { Depreciation expense-equipment } & 57780 \\\hline \text { Share capital at acquisition of foreign subsidiary } & 4294000 \\\hline \text { Sales revenue } & 908650 \\\hline\end{array}$$