Deck 13: Translation of Financial Statements of Foreign Affiliates

Question 1

Which of the following would be restated using the current exchange rate under the temporal method?

A)Marketable securities carried at cost.
B)Inventory carried at market.
C)Common stock.
D)None of these.

Answer 1

B

Question 2

Paid-in capital accounts are translated using the historical exchange rate under:

A)the current rate method only.
B)the temporal method only.
C)both the current rate and temporal methods.
D)neither the current rate nor temporal methods.

Answer 2

C

Question 3

A foreign subsidiary's functional currency is its local currency and inflation of over 100 percent has been experienced over a three-year period.For consolidation purposes,SFAS No.52 requires the use of:

A)the current rate method only.
B)the temporal method only
C)both the current rate and temporal methods.
D)neither the current rate or the temporal method.

Answer 3

B

Question 4

When translating foreign currency financial statements for a company whose functional currency is the U.S.dollar,which of the following accounts is translated using historical exchange rates?

A)Notes Payable,Yes; Equipment,Yes
B)Notes Payable,Yes; Equipment,No
C)Notes Payable,No; Equipment,No
D)Notes Payable,No; Equipment,Yes

Question 5

Average exchange rates are used to translate certain items from foreign financial statements into U.S.dollars.Such averages are used in order to:

A)smooth out large translation gains and losses.
B)eliminate temporary fluctuation in exchange rates that may be reversed in the next fiscal period.
C)avoid using different exchange rates for some revenue and expense accounts.
D)approximate the exchange rate in effect when the items were recognized.

Question 6

The appropriate exchange rate for translating a plant asset in the balance sheet of a foreign subsidiary in which the functional currency is the U.S.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 7

P Company acquired 90% of the outstanding common stock of S Company which is a foreign company.The acquisition was accounted for using the purchase method.In preparing consolidated statements,the paid-in capital of S Company should be converted at the:

A)exchange rate effective when S Company was organized.
B)exchange rate effective on the date of purchase of the stock of S Company by P Company.
C)average exchange rate for the period S Company stock has been upheld by P Company.
D)current exchange rate.

Question 8

Gains from remeasuring a foreign subsidiary's financial statements from the local currency,which is NOT the functional currency,into the parent company's currency should be reported as a(n):

A)other comprehensive income item.
B)extraordinary item (net of tax).
C)part of continuing operations.
D)deferred credit.

Question 9

Under the temporal method,monetary assets and liabilities are translated by using the exchange rate existing at the:

A)beginning of the current year.
B)date the transaction occurred.
C)balance sheet date.
D)None of these.

Question 10

A wholly owned subsidiary of a U.S.parent company has certain expense accounts for the year ended December 31,2017,stated in local currency units (LCU)as follows: Assume that the LCU is the subsidiary's functional currency and that the charges to the expense accounts occurred approximately evenly during the year.What total dollar amount should be included in the translated income statement to reflect these expenses?

A)$687,500
B)$625,000
C)$550,000
D)$500,000

Question 11

The objective of remeasurement is to:

A)produce the same results as if the books were maintained in the currency of the foreign entity's largest customer.
B)produce the same results as if the books were maintained solely in the local currency.
C)produce the same results as if the books were maintained solely in the functional currency.
D)None of these.

Question 12

In preparing consolidated financial statements of a U.S.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 13

The process of translating the accounts of a foreign entity into its functional currency when they are stated in another currency is called:

A)verification.
B)translation.
C)remeasurement.
D)None of these.

Question 14

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

A)other comprehensive income item.
B)extraordinary item (net of tax).
C)part of continuing operations.
D)deferred credit.

Question 15

The translation adjustment that results from translating the financial statements of a foreign subsidiary using the current rate method should be:

A)included as a separate item in the stockholders' equity section of the balance sheet.
B)included in the determination of net income for the period it occurs.
C)deferred and amortized over a period not to exceed forty years.
D)deferred until a subsequent year when a loss occurs and offset against that loss.

Question 16

A foreign subsidiary's functional currency is its local currency which has not experienced significant inflation.The weighted average exchange rate for the current year would be the appropriate exchange rate for translating:

A)Wages expense,Yes; Sales to customers,Yes
B)Wages expense,Yes; Sales to customers,No
C)Wages expense,No; Sales to customers,No
D)Wages expense,No; Sales to customers,Yes

Question 17

When the functional currency is identified as the U.S.dollar,land purchased by a foreign subsidiary after the controlling interest was acquired by the parent company should be translated 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 18

If the functional currency is determined to be the U.S.dollar and its financial statements are prepared in the local currency,SFAS 52,requires which of the following procedures to be followed?

A)Translate the financial statements into U.S.dollars using the current rate method.
B)Remeasure the financial statements into U.S.dollars using the temporal method.
C)Translate the financial statements into U.S.dollars using the temporal method.
D)Remeasure the financial statements into U.S.dollars using the current rate method.

Question 19

The following balance sheet accounts of a foreign subsidiary at December 31,2017,have been translated into U.S.dollars as follows: What total should be included in the translated balance sheet at December 31,2017,for the above items? Assume the U.S.dollar is the functional currency.

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

Question 20

Which of the following would be restated using the average exchange rate under the temporal method?

A)cost of goods sold
B)depreciation expense
C)amortization expense
D)None of these

Question 21

Accounts are listed below for a foreign subsidiary that maintains its books in its local currency.The equity interest in the subsidiary was acquired in a purchase transaction.In the space provided,indicate the exchange rate that would be used to translate the accounts into dollars assuming the functional currency was identified (a)as the U.S.dollar and (b)as the foreign entity's local currency.Use the following letters to identify the exchange rate:
H - Historical exchange rate
C - Current exchange rate
A - Average exchange rate for the current period

Question 22

Pike Corporation,a U.S.Company,formed a subsidiary with a new company in London on January 1,2017,by investing 500,000 British pounds in exchange for all of the subsidiary's common stock.The subsidiary purchased land for 100,000 pounds and a building for 300,000 pounds on July 1,2017.The building is being depreciated over a 40-year life by the straight-line method.The inventory is valued on an average cost basis.The British pound is the subsidiary's functional currency and its reporting currency and has not experienced any abnormal inflation.Exchange rates for the pound on various dates were:
The subsidiary's adjusted trial balance is presented below for the year ended December 31,2017.
Required: Using the current rate method prepare the subsidiary's:
A.Translated workpapers (round to the nearest dollar)
B.Translated income statement
C.Translated balance sheet

Question 23

Pike Corporation,a U.S.Company,formed a subsidiary with a new company in London on January 1,2017,by investing 500,000 British pounds in exchange for all of the subsidiary's common stock.The subsidiary purchased land for 100,000 pounds and a building for 300,000 pounds on July 1,2017.The building is being depreciated over a 40-year life by the straight-line method.The inventory is valued on an average cost basis.The British pound is the subsidiary's functional currency and its reporting currency and has not experienced any abnormal inflation.Exchange rates for the pound on various dates were:
The subsidiary's adjusted trial balance is presented below for the year ended December 31,2017.
Required: Using the temporal method prepare the subsidiary's:
A.Translated workpapers (round to the nearest dollar)
B.Translated income statement
C.Translated balance sheet

Question 24

Dakota,Inc.owns a company that operates in France.Account balances in francs for the subsidiary are shown below:
Revenues were earned and operating expenses,except for depreciation and supplies used,were incurred evenly throughout the year.No purchases of supplies or plant assets were made during the year.
Required:
A.Prepare a schedule to compute the translation adjustment for the year,assuming the subsidiary's functional currency is the franc.
B.Prepare a schedule to compute the translation gain or loss,assuming the subsidiary's functional currency is the U.S.dollar.

Question 25

The translation process can be done using either the current rate method or the temporal method.Explain under what circumstances each of the methods is appropriate.

Question 26

Stiff Sails Corporation,a U.S.company,operates a 100%-owned British subsidiary,SeaBeWe Corporation.The U.S.dollar is the functional currency of the subsidiary.Financial statements for the subsidiary for the fiscal year-end December 31,2017,are as follows:
Other Information:
1.Equipment costing 340,000 pounds was acquired July 1,2015,and 38,000 was acquired June 30,2017.Depreciation for the period was as follows:
2.The beginning inventory was acquired when the exchange rate was $1.77.The inventory is valued on a FIFO basis.Purchases and the ending inventory were acquired evenly throughout the period.
3.Dividends were paid by the subsidiary on June 30 amounting to 156,000 pounds.
4.Sales were made and all expenses were incurred uniformly throughout the year.
5.Exchange rates for the pound on various dates were:
Required:
A.Prepare a schedule to determine the translation gain or loss for 2016,assuming the net monetary liability position on January 1,2017,was 180,000 pounds.
B.Compute the dollar amount that each of the following would be reported at in the 2017 financial statements:
1.Cost of Goods Sold.
2.Depreciation Expense.
3.Equipment.

Question 27

On January 1,2017,Roswell Systems,a U.S.-based company,purchased a controlling interest in Bern Management Consultants located in Bern,Switzerland.The acquisition was treated as a purchase transaction.The 2017 financial statements stated in Swiss francs are given below.
Required:
A.Translate the year-end balance sheet and income statement of the foreign subsidiary using the current rate method of translation.
B.Prepare a schedule to verify the translation adjustment.

Question 28

Use the information below to (a)translate the year-end financial statements of Perfect Company,the foreign subsidiary,using the temporal method,and (b)prepare a schedule to compute the translation gain or loss for Perfect Company.Round numbers to the nearest dollar.
On January 2,2017,Design Inc.,a U.S.parent company,purchased a 100% interest in Perfect Company,a subdivision located in Switzerland.The purchase method of accounting was used to account for the acquisition.The 2017 financial statements for Perfect Company,the subsidiary,in Swiss francs were as follows:
Sales were earned and operating expenses were incurred evenly during the year.
Exchange rates for the franc at various dates are:

Question 29

To accomplish the objectives of translation,two translation methods are used depending on the functional currency of the foreign entity.Describe the two translation methods.