Question 1

On January 1,2008,Pace Company acquired all of the outstanding stock of Spin PLC,a British Company,for $350,000.Spin's net assets on the date of acquisition were 250,000 pounds (£).On January 1,2008,the book and fair values of the Spin's identifiable assets and liabilities approximated their fair values except for property,plant,and equipment and trademarks.The fair value of Spin's property,plant,and equipment exceeded its book value by $25,000.The remaining useful life of Spin's equipment at January 1,2008,was 10 years.The remainder of the differential was attributable to a trademark having an estimated useful life of 5 years.Spin's trial balance on December 31,2008,in pounds,follows:
  
Additional Information
1.Spin uses the FIFO method for its inventory.The beginning inventory was acquired on December 31,2007,and ending inventory was acquired on December 26,2008.Purchases of £300,000 were made evenly throughout 2008.
2.Spin acquired all of its property,plant,and equipment on March 1,2006,and uses straight-line depreciation.
3.Spin's sales were made evenly throughout 2008,and its operating expenses were incurred evenly throughout 2008.
4.The dividends were declared and paid on November 1,2008.
5.Pace's income from its own operations was $150,000 for 2008,and its total stockholders' equity on January 1,2008,was $1,000,000.Pace declared $50,000 of dividends during 2008.
6.Exchange rates were as follows:
Assume the U.S.dollar is the functional currency,not the pound.Prepare a schedule providing a proof of the remeasurement gain or loss.Assume that the British subsidiary had the following monetary assets and liabilities at January 1,2008:

Problem 74 (continued):

Accepted Answer

The answer of On January 1,2008,Pace Company acquired all of...

Question 2

South Company is a subsidiary of North Company and is located in Malaysia, where the currency is the ringgit. Data on South's inventory and purchases are as follows:
  The beginning inventory was acquired during the fourth quarter of 20X3, and the ending inventory was acquired during the fourth quarter of 20X4. Purchases were made evenly during 20X4. Exchange rates were as follows:
 
-Based on the preceding information and assuming the U.S.dollar is the functional currency,what is the amount of South's costs of goods sold remeasured in U.S.dollars?

Accepted Answer

A)  $28,480 
B)  $28,510 
C)  $28, 540 
D)  $28,570

Question 3

Michigan-based Leo Corporation acquired 100 percent of the common stock of a British company on January 1, 20X8, for $1,100,000. The British subsidiary's net assets amounted to 500,000 pounds on the date of acquisition. On January 1, 20X8, the book values of its identifiable assets and liabilities approximated their fair values. As a result of an analysis of functional currency indicators, Leo determined that the British pound was the functional currency. On December 31, 20X8, the British subsidiary's adjusted trial balance, translated into U.S. dollars, contained $17,000 more debits than credits. The British subsidiary reported income of 33,000 pounds for 20X8 and paid a cash dividend of 8,000 pounds on October 25, 20X8. Included on the British subsidiary's income statement was depreciation expense of 3,500 pounds. Leo uses the fully adjusted equity method of accounting for its investment in the British subsidiary and determined that goodwill in the first year had an impairment loss of 25 percent of its initial amount. Exchange rates at various dates during 20X8 follow:
 
-Based on the preceding information,in the stockholders' equity section of Leo's consolidated balance sheet at December 31,20X8,Leo should report the translation adjustment as a component of other comprehensive income of:

Accepted Answer

A)  $19,440 
B)  $17,000 
C)  $18,786 
D)  $19,380

Question 4

If the functional currency is the local currency of a foreign subsidiary,what exchange rates should be used to translate the items below,assuming the foreign subsidiary is in a country which has not experienced hyperinflation over three years?

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Question 5

Mercury Company is a subsidiary of Neptune Company and is located in Valparaíso, Chile, where the currency is the Chilean Peso. Data on Mercury's inventory and purchases are as follows:
  The beginning inventory was acquired during the fourth quarter of 20X7, and the ending inventory was acquired during the fourth quarter of 20X8. Purchases were made evenly over the year. Exchange rates were as follows:
 
-Based on the preceding information,the translation of cost of goods sold for 20X8,assuming that the Spanish peseta is the functional currency is:

Accepted Answer

A)  $1,700. 
B)  $1,760. 
C)  $1,680. 
D)  $1,692.

Question 6

Which of the following describes a situation when a parent company would not consolidate a foreign subsidiary?

Accepted Answer

A)  Restrictions on foreign exchange in the foreign country. 
B)  Restrictions on transfers of property in the foreign country. 
C)  Other governmentally imposed uncertainties. 
D)  All of the above

Question 7

The functional currency of Nash,Inc.'s subsidiary is the French franc.Nash borrowed French francs as a partial hedge of its investment in the subsidiary.In preparing consolidated financial statements,Nash's translation loss on its investment in the subsidiary exceeded its exchange gain on the borrowing.How should the effects of the loss and gain be reported in Nash's consolidated financial statements?

Accepted Answer

A)  The translation loss less the exchange gain is reported separately as other comprehensive income. 
B)  The translation loss less the exchange gain is reported in the income statement. 
C)  The translation loss is reported separately in the stockholders' equity section of the balance sheet and the exchange gain is reported in the income statement. 
D)  The translation loss is reported in the income statement and the exchange gain is reported separately in the stockholders' equity section of the balance sheet.

Question 8

Which combination of accounts and exchange rates is correct for the translation of a foreign entity's financial statements from the functional currency to U.S.dollars?

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Question 9

Mazeppa,Inc.is a multinational entity with its head office located in Toronto,Canada.Its main foreign subsidiary is in Paris,France,but the primary economic environment in which the foreign subsidiary generates and expends cash is in the United States.Based on this information,which of the following statements is most likely true for Mazeppa,Inc.?

Accepted Answer

A)  The functional currency is the Euro. 
B)  The local currency is the U.S. dollar. 
C)  The reporting currency is the Canadian dollar. 
D)  The reporting currency is the U.S. dollar.

Question 10

On January 1, 20X8, Transport Corporation acquired 75 percent interest in Steamship Company for $300,000. Steamship is a Norwegian company. The local currency is the Norwegian kroner (NKr). The acquisition resulted in an excess of cost-over-book value of $25,000 due solely to a patent having a remaining life of 5 years. Transport uses the fully adjusted equity method to account for its investment. Steamship's December 31, 20X8, trial balance has been translated into U.S. dollars, requiring a translation adjustment debit of $8,000. Steamship's net income translated into U.S. dollars is $35,000. It declared and paid an NKr 20,000 dividend on June 1, 20X8. Relevant exchange rates are as follows:
  Assume the kroner is the functional currency.
-Based on the preceding information,in the journal entry to record parent's share of subsidiary's translation adjustment:

Accepted Answer

A)  Other Comprehensive Income - Translation Adjustment will be debited for $8,000. 
B)  Other Comprehensive Income - Translation Adjustment will be credited for $6,000. 
C)  Investment in Steamship Company will be credited for $6,000. 
D)  Investment in Steamship Company will be debited for $8,000.

Question 11

Michigan-based Leo Corporation acquired 100 percent of the common stock of a British company on January 1, 20X8, for $1,100,000. The British subsidiary's net assets amounted to 500,000 pounds on the date of acquisition. On January 1, 20X8, the book values of its identifiable assets and liabilities approximated their fair values. As a result of an analysis of functional currency indicators, Leo determined that the British pound was the functional currency. On December 31, 20X8, the British subsidiary's adjusted trial balance, translated into U.S. dollars, contained $17,000 more debits than credits. The British subsidiary reported income of 33,000 pounds for 20X8 and paid a cash dividend of 8,000 pounds on October 25, 20X8. Included on the British subsidiary's income statement was depreciation expense of 3,500 pounds. Leo uses the fully adjusted equity method of accounting for its investment in the British subsidiary and determined that goodwill in the first year had an impairment loss of 25 percent of its initial amount. Exchange rates at various dates during 20X8 follow:
 
-Based on the preceding information,on Leo's consolidated balance sheet at December 31,20X8,what amount should be reported for the goodwill acquired on January 1,20X8?

Accepted Answer

A)  $36,845 
B)  $39,286 
C)  $36,905 
D)  $36,607

Question 12

If the U.S.dollar is the currency in which the foreign affiliate's books and records are maintained,and the U.S.dollar is also the functional currency,

Accepted Answer

A)  the translation method should be used for restatement. 
B)  the remeasurement method should be used for restatement. 
C)  either translation or remeasurement could be used for restatement. 
D)  no restatement is required.

Question 13

On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth Company for $3,100,000. Any excess cost over book value is attributable to a patent with a 10-year remaining life. At the date of acquisition, Perth's balance sheet contained the following information:
Perth's income statement for 20X8 is as follows:
   The balance sheet of Perth at December 31, 20X8, is as follows:
Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various dates for 20X8 follow:
Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income taxes were incurred evenly throughout 20X8.
  
-Refer to the above information.Assuming the local currency of the country in which Perth Company is located is the functional currency,what are the translated amounts for the items below in U.S.dollars?

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Question 14

The Canadian subsidiary of a U.S.company reported cost of goods sold of 50,000 C$,for the current year ended December 31.The beginning inventory was 15,000 C$,and the ending inventory was 10,000 C$.Spot rates for various dates are as follows:

Assuming the Canadian dollar is the functional currency of the Canadian subsidiary,the translated amount of cost of goods sold that should appear in the consolidated income statement is

Accepted Answer

A)  $50,000 
B)  $55,300 
C)  $56,000 
D)  $56,500

Question 15

On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth Company for $3,100,000. Any excess cost over book value is attributable to a patent with a 10-year remaining life. At the date of acquisition, Perth's balance sheet contained the following information:
Perth's income statement for 20X8 is as follows:
   The balance sheet of Perth at December 31, 20X8, is as follows:
Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various dates for 20X8 follow:
Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income taxes were incurred evenly throughout 20X8.
  
-Refer to the above information.Assuming the U.S.dollar is the functional currency,what is Perth's net income for 20X8 in U.S.dollars (include the remeasurement gain or loss in Perth's net income)?

Accepted Answer

A)  $238,000 
B)  $228,000 
C)  $219,500 
D)  $202,000

Exam 12: Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements

If the functional currency is the local currency of a foreign subsidiary,what exchange rates should be used to translate the items below,assuming the foreign subsidiary is in a country which has not experienced hyperinflation over three years?

Which of the following describes a situation when a parent company would not consolidate a foreign subsidiary?

Which combination of accounts and exchange rates is correct for the translation of a foreign entity's financial statements from the functional currency to U.S.dollars?

If the U.S.dollar is the currency in which the foreign affiliate's books and records are maintained,and the U.S.dollar is also the functional currency,