Deck 8: Accounting for Foreign Investments

Question 1

Consolidated financial statements are required to be prepared when an entity controls one or more other entities (otherwise known as financial statements for a group).

Answer 1

True

Question 2

A functional currency is a reflection of the primary economic environment in which an entity operates.

Answer 2

True

Question 3

All of the following are primary indicators of the functional currency of a group EXCEPT:

A)The currency that mainly influences sales prices for goods and services.
B)The currency of the country whose competitive forces and regulations mainly determine the sales prices of its goods and services.
C)The currency in which receipts from operating activities are usually retained.
D)The currency that mainly influences labour, material and other costs of providing goods or services.

Answer 3

C

Question 4

Goodwill and fair value adjustments related to a foreign operation are treated as gains and losses of the foreign operation for the purposes of foreign currency translation.

Question 5

Each company in a group records its foreign currency transactions at the:

A)Rate when the transaction occurred.
B)Year end rate.
C)Year end rate or the rate when the transaction occurred.
D)Forward rate.

Question 6

When a subsidiary has foreign currency transactions, and records foreign currency gains or losses, the non-controlling interest will be allocated a portion of those gains or losses since it shares in the net income of the subsidiary.

Question 7

Each company in a group records its foreign currency transactions at the year end rate.

Question 8

In order to determine what is considered to be a "functional currency," it is imperative that a "foreign currency" be first identified.

Question 9

A Change in functional currency is said to occur if there are minor economic changes in an entity's operations and this new functional currency is accounted for prospectively.

Question 10

Monetary items are restated at the spot rate and any gain or loss is recorded in income.

Question 11

When the currency selected for presentation purposes differs from an entity's functional currency, the financial statements need to be translated into this selected presentation currency.

Question 12

Which of the following statements regarding the preparation of foreign currency adjustments for consolidation or the application of the equity method is FALSE?

A)Consolidation adjustments must be restated to the presentation currency.
B)Intracompany transactions are eliminated at the rate when the transaction occurred.
C)Monetary balances are eliminated using the rate when the transaction occurred.
D)Fair value adjustments must be reflected on the balances sheet at the closing rate for the year.

Question 13

Which of the following statements relating to a functional currency is FALSE?

A)Functional currency is determined on an entity by entity basis
B)Functional currency is a reflection of the primary economic environment in which an entity operates.
C)The primary economic environment is the one in which an entity primarily generates and expends cash.
D)In order to determine what is considered to be a "functional currency," it is imperative that a "foreign currency" be first identified.

Question 14

Hedging transactions with other entities within the group qualify for hedge accounting in the consolidated financial statements of the group.

Question 15

Monetary balances are eliminated using the rate when the transaction occurred.

Question 16

When an item is deemed to hedge a net investment in a foreign subsidiary, any gain or loss on the hedging items is recorded in income.

Question 17

Financial statements can be presented in any currency. When the currency selected for presentation purposes differs from an entity's functional currency, the financial statements need to be translated into this selected presentation currency. Which of the following statements regarding the translation of the financial statements into a presentation currency is FALSE?

A)Assets and liabilities (including comparatives)are translated at the closing rate at the date of the statement of financial position.
B)Income and expenses (including comparatives)for each statement of comprehensive income presented are translated at exchange rates at the dates the transactions took place.
C)Income and expenses (including comparatives)for each separate income statement presented are translated at exchange rates at the dates the transactions took place.
D)All resulting exchange differences are recognized in income.

Question 18

Intracompany transactions are eliminated at the rate when the transaction occurred.

Question 19

Fair value adjustments must be reflected on the balance sheet at the closing rate for the year.

Question 20

Consolidation adjustments must be restated to the presentation currency.

Question 21

When an item is deemed to hedge a net investment in a foreign subsidiary, any gain or loss on the hedging items is recorded in _________________.

A)Other Comprehensive income.
B)Income.
C)Other comprehensive income or income.
D)Equity.

Question 22

When the functional currency is different than the presentation currency, monetary items are restated _________________________ and any gain or loss is recorded in ________________.

A)at the spot rate; income.
B)at the closing rate at the financial statement date; comprehensive income.
C)at the closing rate at the financial statement date; income.
D)at the spot rate; other comprehensive income.

Question 23

When the functional currency is not the same as the presentation currency, the investee must translate the financial statements using the____________ for balance sheet accounts and ________________ for income statement accounts.

A)year-end closing rate; year-end closing rate
B)year-end closing rate; the rate when the transaction occurred
C)the rate when the transaction occurred; year-end closing rate
D)the rate when the transaction occurred; the rate when the transaction occurred.

Question 24

On consolidation using the Canadian dollar presentation, the appropriate exchange rate for translating a plant asset in the balance sheet of a foreign subsidiary in which the functional currency is the Canadian dollar is the:

A)Current exchange rate.
B)Average exchange rate for the current year.
C)Historical exchange rate in effect when the plant asset was acquired or the date of acquisition, whichever is later.
D)Forward rate.

Question 25

Whether the foreign operation's activities are relatively autonomous of those of the parent entity or whether they are carried out as an extension thereof is what type of indicator in determining the functional currency of a foreign operation?

A)Primary.
B)Secondary.
C)Additional.
D)Presentation.

Question 26

Which of the following statements regarding hedge accounting within a group is FALSE?

A)For hedge accounting purposes, only instruments that involve a party external to the reporting entity (i.e. external to the group or individual entity that is being reported on)can be designated as hedging instruments.
B)Although individual entities within a consolidated group or divisions within an entity may enter into hedging transactions with other entities within the group, any such intragroup transactions are eliminated on consolidation.
C)Hedging transactions with other entities within the group qualify for hedge accounting in the consolidated financial statements of the group.
D)Hedging transactions with other entities within the group may qualify for hedge accounting in the individual or separate financial statements of individual entities within the group provided that they are external to the individual entity that is being reported on.

Question 27

Under ASPE, the ______________ is assumed to be the reporting currency, although any currency can be determined to be the ______________ currency.

A)Canadian dollar; reporting
B)U)S. dollar; foreign
C)Canadian dollar; functional
D)U)S. dollar; reporting.

Question 28

When any fair value adjustments exist on the carrying amounts of assets and liabilities arising on the acquisition of a foreign operation, they are treated as assets and liabilities ________________ for the purposes of translation. Therefore, they are carried in the _______________ currency of the foreign operation and are translated at the closing rate (i.e. using the current rate method)for the purposes of presentation on consolidation.

A)of the foreign operation; functional
B)of the foreign operation; presentation
C)of the parent; functional
D)of the parent; presentation.

Question 29

A parent company may lend money to a foreign subsidiary where the settlement terms are neither planned nor likely to occur in the foreseeable future. This loan would likely be denominated on the individual company's financial statements in:

A)Either the parent company's functional currency or that of the subsidiary.
B)The parent company's functional currency.
C)The subsidiary company's functional currency.
D)The parent company's presentation currency.

Question 30

When the functional currency of a foreign subsidiary is identified as the Canadian dollar, and land purchased by the foreign subsidiary, after the controlling interest was acquired by the parent company who is presenting consolidated financial statements in the Canadian dollar, the land should be translated for consolidation using the

A)historical rate in effect when the land was purchased.
B)current rate in effect at the balance sheet date.
C)forward rate.
D)average exchange rate for the current period.

Question 31

Which of the following statements about a presentation currency is FALSE?

A)The functional currency must be the same as the presentation currency.
B)When a group is involved, one presentation currency must be selected for presentation of the entire group.
C)Entities may choose to present their financial statements in any currency based on management's monitoring of the performance and financial position of entities within such a group.
D)When the financial statements of foreign operations are included in the group's financial statements by consolidation, or the equity method, they are translated for presentation purposes into a single currency referred to as the presentation currency.

Question 32

When translating foreign currency financial statements for a company whose functional currency is the Canadian dollar, into a group financial statement presented in Canadian dollars, which of the following accounts is translated using historical exchange rates? Notes Payable Equipment

A)Yes Yes
B) Yes No
C) No No
D) No Yes

Question 33

Which of the following factors is a SECONDARY indicator used to choose a functional currency?

A)Currency in which the selling prices are denominated.
B)Ability of subsidiary to generate cash flows to service its debts.
C)Sources of competition and regulations.
D)Currency in which the cost of goods sold is denominated.

Question 34

Which of the following statements regarding the non-controlling interest is FALSE?

A)The non-controlling interest must be allocated a portion of the comprehensive income of the group as well as a portion of the net assets of the group.
B)When a subsidiary has foreign currency transactions, and records foreign currency gains or losses, the non-controlling interest will be allocated a portion of those gains or losses since it shares in the net income of the subsidiary.
C)For the purpose of the allocation to the non-controlling interest, the financial statement of the subsidiary is first translated into the functional currency.
D)In addition to foreign currency transactions, the subsidiary may have a functional currency that is different than the parent's functional currency.

Question 35

Consolidation adjustments must be restated to the _______________ currency.

A)functional
B)presentation
C)foreign
D)domestic.

Question 36

A Change in the functional currency of an entity occurs

A)Only if there are significant economic changes in an entity's operations and is accounted for prospectively.
B)Even if there are minor economic changes in an entity's operations and is accounted for prospectively.
C)Only if there are significant economic changes in an entity's operations and is accounted for retrospectively.
D)Even if there are minor economic changes in an entity's operations and is accounted for retrospectively.

Question 37

Which of the following statements regarding the preparation of foreign currency adjustments, for consolidation or the application of the equity method, is FALSE?

A)Consolidation adjustments must be restated to the presentation currency.
B)Intercompany transactions are eliminated at the rate when the transaction occurred.
C)Monetary balances are eliminated using the spot rate.
D)Fair value adjustments must be reflected on the balances sheet at the closing rate for the year.

Question 38

Upon consolidation, goodwill is re-translated at the ________ rate for the purposes of consolidation.

A)average
B)spot
C)closing
D)forward.

Question 39

Komota Ltd., a public Canadian corporation, has a subsidiary in Australia. It has been determined that the functional currency of the foreign operations is the Australian dollar. Which of the following statements is TRUE?

A)Komota's financial statements will have to be translated into the Australian dollar.
B)Komota's transactions with the subsidiary will need to be re-measured.
C)Komota will not be required to consolidate.
D)The presentation currency is the Canadian dollar.

Question 40

All of the following are considered to be consolidation adjustments EXCEPT

A)Eliminate intercompany balances and transactions.
B)Account for any fair value adjustments.
C)Translate balances into the presentation currency for the purposes of consolidation or the equity method.
D)Account for any non-controlling interests.

Question 41

How is the translation of the financial statements into a presentation currency completed?

Question 42

When would a change in the functional currency of an entity occur, and how is it accounted for?

Question 43

Assuming no significant inflation, gains resulting from the process of translating a foreign entity's financial statements from the functional currency to Canadian dollars should be included as a(n)

A)Other comprehensive income item.
B)Unusual item (net of tax).
C)Part of continuing operations.
D)Deferred credit.

Question 44

In preparing consolidated financial statements of a Canadian parent company and a foreign subsidiary, the foreign subsidiary's functional currency is the currency

A)Of the country the parent is located.
B)Of the country the subsidiary is located.
C)In which the subsidiary primarily generates and spends cash.
D)In which the subsidiary maintains its accounting records.

Question 45

What are the steps involved in the process of consolidation when an entity controls one or more other entities?

Question 46

When it is not clear what the functional currency is, an accountant must use professional judgment to choose the functional currency. What is the main criterion upon which the choice should be based?

A)Whether it faithfully represents the economic effects of the transactions and events.
B)Whether it faithfully represents the translation effects of the transactions and events.
C)Degree to which it minimizes accounting exposure.
D)Whether it faithfully represents the accounting effects of the transactions and events.

Question 47

The process of consolidation is very procedural, that is to say that there are several steps involved in the production of consolidated financial statements that reflect appropriate balances where transactions denominated in foreign currencies are concerned. Which of the following is Step 1?

A)Execute consolidation adjustments.
B)Eliminate intercompany balances and transactions.
C)Translation of foreign currency transactions into an entity's functional currency.
D)Translation of balances into the presentation currency for the purposes of consolidation or the equity method.

Question 48

Goodwill and fair value adjustments related to a foreign operation are treated as ___________ of the foreign operation for the purposes of foreign currency translation.

A)gains and losses
B)assets and liabilities
C)income
D)equity.

Question 49

Which of the following factors is a PRIMARY indicator used to choose a functional currency?

A)Sources of competitive forces and regulations.
B)Proportion of intercompany transactions.
C)Ability of subsidiary to generate cash flows to service its debts.
D)Autonomy of the subsidiary.

Question 50

In the determination of the functional currency, the currency that mainly influences labour, material and other costs of providing goods or services is a(n)_________________ indicator.

A)primary.
B)secondary.
C)additional.
D)presentation.

Question 51

When the functional currency is not clearly evident from the application of the primary indicators, then a secondary indicator such as the currency in which funds from _______ activities are generated should be considered.

A)financing
B)operating
C)investing
D)consolidating.

Question 52

The following balance sheet accounts of a foreign subsidiary at December 31, 2014, have been translated into Canadian dollars as follows: $\begin{array}{lrrr}&\text { Translated at }\\&\text { Current Rates }&\text {Historical Rates }\\\text { Accounts receivable, current } & \$ 600,000 & \$ 660,000 \\\text { Accounts receivable, long-term } & 300,000 & 324,000 \\\text { Inventories carried at market } & 180,000 & 198,000 \\\text { Goodwill } & 190,000 & 220,000\\&\$1,270,000&\$1,402,000\end{array}$
What total should be included in the translated balance sheet at December 31, 2014 for the above items? Assume the Canadian dollar is the functional currency.

A)$1,270,000
B)$1,288,000
C)$1,300,000
D)$1,354,000

Question 53

Crimson Lights Inc. (CL)is a 100% wholly owned subsidiary with operations in France. CL was purchased by a Canadian parent on January 1, 2012. The financial records of CL are maintained in euros and provide the following information with respect to equipment, and goodwill.
Equipment - purchased on January 1, 2012 for €250,000 - depreciated over 5 years on a straight-line basis.
Equipment - purchased on January 1, 2013 for €175,000 - depreciated over 5 years on a straight-line basis.
Goodwill - € 375,000
Foreign exchange rates were as follows:
January 1, 2012 €1 = 1.50
Average for 2012 €1 = 1.48
January 1, 2013 €1 = 1.46
Average for 2013 €1 = 1.45
January 1, 2014 €1 = 1.51
Average for 2014 €1 = 1.58
December 31, 2014 €1 = 1.62
Required:
Assume that CL's functional currency is the euro. Calculate the translated Canadian dollar balances for the following accounts at December 31, 2014.
a. Equipment
b. Accumulated depreciation - equipment
c. Depreciation expense
d. Goodwill

Question 54

When the functional currency is being determined for a foreign operation (i.e. a subsidiary, branch, associate or joint venture, of a parent entity), in addition to the primary and secondary indicators, all of the following factors should be considered in this determination EXCEPT

A)Whether the foreign operation's activities are relatively autonomous of those of the parent entity or whether they are carried out as an extension thereof.
B)The currency in which funds from financing activities are generated.
C)Whether transactions with the parent entity are a high or a low proportion of the foreign operation's activities.
D)Whether cash flows from the foreign operation's activities directly affect the cash flows of the parent entity and whether they are readily available for remittance to it.

Question 55

What are the primary indicators that need to be considered in the determination of a functional currency?

Question 56

On January 1, 2014, Tiller Inc. of Toronto purchased 75% of the outstanding shares of Robinson Limited of London, England. Robinson Limited's statements of financial position, statements of comprehensive income and changes in equity - retained earnings section for the year ended December 31, 2014 are below.
ROBINSON LIMITED
Statement of Financial Position
As at December 31, 2014
(in thousands of £'s)
$\begin{array}{|l|r|r|}\hline\text { Assets } & 2014 & 2013 \\\hline \text { Cash } & 50 & 20 \\\hline \text { Accounts Receivable } & 575 & 280\\\hline \text { Inventories } & 825 & 650 \\\hline \text { Equipment, net } & 2,670 & 2,937 \\\hline \text { Total assets } & 4,120 & 3,887 \\\hline\\\hline \text { Liabilities } & & \\\hline \text { Accounts payable } & 465 & 395 \\\hline \text { Bonds payable } & 1,290 & 1,290 \\\hline \text { Common shares } & 1,200 & 1,200 \\\hline \text { Retained Earnings } & 1,165 & 1,002 \\\hline \text { Total liabilities and } & \\\text { shareholders' equity } & 4.120&3,887\\\hline\end{array}$
ROBINSON LIMITED
Statement of Comprehensive Income
For the year ended December 31, 2014
(in thousands of £'s)
$\begin{array}{|l|r|} \hline& £\\\hline \text { Sales } & 2,170 \\\hline\\\hline \text { Cost of goods sold } & 1,203 \\\hline \text { Depreciation expense } & 267 \\\hline \text { Interest expense } & 80 \\\hline \text { Other expenses } & \underline{407} \\\hline & \underline{1,957} \\\hline \text { Comprehensive income } & \underline{213} \\\hline\end{array}$
ROBINSON LIMITED
Statement of Changes in Equity-Partial-Retained earnings section
For the year ended December 31, 2014
(in thousands of £)
$\begin{array}{|l|r|} \hline& £ \\\hline \text { Retained earnings - January 1,2014 } & 1,002 \\\hline \text { Comprehensive income for the year } & 213 \\\hline \text { Dividends paid } & (50) \\\hline \text { Retained earnings - December 31,2014 } & 1,165 \\\hline\end{array}$
Additional information:
1. Robinson was incorporated on January 1, 2010 when it acquired all its equipment for £4,005,000 and issued its 10 year bonds payable.
2. Robinson purchases and sales occurred evenly over the year. Inventories on hand at December 31, 2013 and December 2014 were purchased evenly over the last quarter of 2013 and 2014, respectively. Inventories as at January 1, 2014 were £650,000.
3. Dividends were paid on March 31, 2014.
4. Foreign exchanges rates are as follows:
$\begin{array}{ll}\text { January 1, } 2010 & £ 1=\mathrm{C} \$ 1.95 \\\text { Average for Oct to Dec, } 2013 & £ 1=\mathrm{C} \$ 1.64 \\\text { Average for 2013 } & £ 1=\mathrm{C} \$ 1.73 \\\text { December 31, 2013/January } 1,2014 & £ 1=\mathrm{C} \$ 1.67\\\text { March 31, 2014 } & £ 1=\mathrm{C} \$ 1.61 \\\text { Average for Oct to Dec, } 2014 & £ 1=\mathrm{C} \$ 1.55 \\\text { Average for 2014 } & £ 1=\mathrm{C} \$ 1.57 \\\text { December 31, 2014 } & £ 1=\mathrm{C} \$ 1.52\end{array}$
Required:

A)Translate Robinson's statement of comprehensive income for the year ended December 31, 2014 into Canadian dollars assuming its functional currency is Canadian dollars.
B)Calculate the translation gain or loss arising in 2014.