Chapter 10
Translation of Foreign Currency Financial Statements

Multiple Choice Questions

1. In accounting, the term translation refers to
E. A procedure to prepare a foreign subsidiary's financial statements for consolidation

2. What is a company's functional currency?
A. The currency of the primary economic environment in which it operates

3. According to SFAS 52, which method is usually required for translating a foreign subsidiary's financial statements into the parent's reporting currency?
B. The current rate method

4. In translating a foreign subsidiary's financial statements, which exchange rate does the current method require for the subsidiary's assets and liabilities?
D. The exchange rate in effect as of the balance sheet date

5. The translation adjustment from translating a foreign subsidiary's financial statements should be shown as
C. A component of stockholders' equity on the consolidated balance sheet

 Westmore, Ltd. is a British subsidiary of a U.S. company. Westmore's functional currency is the pound sterling. The following exchange rates were in effect during 2008:
 6. Westmore reported sales of 1,500,000 during 2008. What amount (rounded) would have been included for this subsidiary in calculating consolidated sales?
A. $2,380,952

7. On December 31, Westmore had accounts receivable of 280,000. What amount (rounded) would have been included for this subsidiary in calculating consolidated accounts receivable?
B. $451,613

8. Gunther Co. established a subsidiary in Mexico on January 1, 2008. The subsidiary engaged in the following transactions during 2008:
1-Jan	Sold common stock to gunter for 5,000 pesos. Purchased inventory
	throughout the year, 8,000,000 pesos (1/4 remainded at year end)
	Sales troughout the year totaled 12,000,000 pesos.
31-Dec	Purchased equipment for 1,000,000 pesos.

Gunther concluded that the subsidiary's functional currency was the dollar.
Exchange rates for 2008 were:
1-Jan		1 peso = $0.20
31-Jan		1 peso = $0.19
31-Dec		1 peso = $0.16
w.a. for yr		1 peso = $0.18

What amount of foreign exchange gain or loss would have been recognized on Gunther's consolidated income statement for 2008?
E. $250,000 loss

Darron Co. was formed on January 1, 2009 as a wholly owned foreign subsidiary of a U.S. corporation. Darron's functional currency was the stickle (§). The following transactions and events occurred during 2007:
9. What exchange rate should have been used in translating Darron's revenues and expenses for 2009?
B. $1 = §.44

10. What was the amount of the translation adjustment for 2009?
B. $302,137 increase in relative value of net assets

11. Which of the following translation methods was originally mandated by SFAS No. 8?
D. Temporal Method

12. Which accounts are re-measured using current exchange rates?
D. All current assets and liabilities

13. For a foreign subsidiary that uses the U.S. dollar as its functional currency, what translation method is required?
D. Temporal Method

Dilty Corp. owned a subsidiary in France. Dilty concluded that the subsidiary's functional currency was the U.S. dollar.
14. Which one of the following statements would justify this conclusion?
A. Most of the subsidiary's sales and purchases were with companies in the U.S.

15. What must Dilty do to ready the subsidiary's financial statements for consolidation?
E. Re-measure them

Certain balance sheet accounts of a foreign subsidiary of the Tulip Co. had been stated in U.S. dollars as follows:
16. If a foreign currency is the functional currency of this subsidiary, what total should have been included in Tulip's balance sheet for the preceding items?
C. $602,000

17. If the U.S. dollar is the functional currency of this subsidiary, what total should have been included in Tulip's balance sheet for the items above?
E. $616,000

 A subsidiary of Porter Inc., a U.S. company, was located in a foreign country. The functional currency of this subsidiary was the stickle (§). The subsidiary acquired inventory on credit on November 1, 2008, for §120,000 that was sold on January 17, 2009 for §156,000. The subsidiary paid for the inventory on January 31, 2009. Currency exchange rates between the dollar and the stickle were as follows:
18. What figure would have been reported for this inventory on Porter's consolidated balance sheet at December 31, 2008?
A. $24,000

19. What figure would have been reported for cost of goods sold on Porter's consolidated income statement at December 31, 2009?
E. $28,800

20. A U.S. company's foreign subsidiary had the following amounts in stickles (§) in 2009:
The average exchange rate during 2009 was §1 = $.96. The beginning inventory was acquired when the exchange rate was §1 = $1.20. The ending inventory was acquired when the exchange rate was §1 = $.90. The exchange rate at December 31, 2009 was §1 = $.84. Assuming that the foreign country had a highly inflationary economy, at what amount should the foreign subsidiary's cost of goods sold have been reflected in the 2009 U.S. dollar income statement?
D. $11,613,600

21. A historical exchange rate for a foreign subsidiary is best described as
A. The rate at date of acquisition for a purchase transaction

22. A net asset balance sheet exposure exists and the foreign currency appreciates. Which of the following statements is true?
E. There is a positive translation adjustment

23. A net asset balance sheet exposure exists and the foreign currency depreciates. Which of the following statements is true?
D. There is a negative translation adjustment

24. A net liability balance sheet exposure exists and the foreign currency appreciates. Which of the following statements is true?
D. There is a negative translation adjustment

25. A net liability balance sheet exposure exists and the foreign currency depreciates. Which of the following statements is true?
E. There is a positive translation adjustment

26. Which method of translating a foreign subsidiary's financial statements is correct?
C. Current rate method

 27. Which method of re-measuring a foreign subsidiary's financial statements is correct?
E. Temporal method

28. Under the temporal method, inventory at market would be restated at what rate?
C. Current rate

29. Under the current rate method, inventory at market would be restated at what rate?
C. Current rate

30. Under the temporal method, common stock would be restated at what rate?
D. Historical rate

31. Under the current rate method, common stock would be restated at what rate?
D. Historical rate

32. Under the current rate method, property, plant & equipment would be restated at what rate?
C. Current rate

33. Under the temporal method, property, plant & equipment would be restated at what rate?
D. Historical rate

34. Under the current rate method, retained earnings would be restated at what rate?
E. Composite amount

35. Under the temporal method, retained earnings would be restated at what rate?
E. Composite amount

36. Under the current rate method, depreciation expense would be restated at what rate?
B. Average rate

37. Under the temporal method, depreciation expense would be restated at what rate?
D. Historical rate

38. Under the temporal method, how would cost of goods sold be restated?
E. Composite amount

39. Under the current rate method, how would cost of goods sold be restated?
B. Average rate

40. How is the disposition of the translated gain or loss reported on the parent company's financial statements?
D. Other comprehensive income

41. How is the disposition of the re-measurement gain or loss reported on the parent company's financial statements?
A. Net income/loss on the income statement

 42. A highly inflationary economy is defined as
B. Cumulative 3-year inflation in excess of 100%

 43. If a subsidiary is operating in a highly inflationary economy, how are the financial statements to be restated?
D. Re-measurement

44. When consolidating a foreign subsidiary, which of the following statements is true?
A. Parent reports a cumulative translation adjustment using the equity method

45. When preparing a consolidating statement of cash flows, which of the following statements is false?
A. Subsidiary dividends are deducted as a financing activity

 The following account balances are available for Esposito, an Italian U.S. subsidiary for 2009:
 46. Compute the cost of goods sold for 2009 in U.S. dollars using the temporal method.
B. $387,750

47. Compute the cost of goods sold for 2009 in U.S. dollars using the current rate method.
C. $388,800

48. Compute ending inventory for 2009 under the temporal method.
D. $14,850

49. Compute ending inventory for 2009 under the current rate method.
E. $15,150

The following inventory balances for 2008 in local currency units (LCU) are given:
50. Compute the December 31, 2008, inventory balance using the lower of cost or market method under the temporal method.
A. $429,000

51. Compute the December 31, 2008, inventory balance using the current rate method.
A. $454,400

Perez Company, a Mexican subsidiary of a U.S. company, sold equipment costing 200,000 pesos with accumulated depreciation of 75,000 pesos for 140,000 pesos on March 1, 2009. The equipment was purchased on January 1, 2008, when the exchange rate for the peso was $.11. Relevant exchange rates for the peso are as follows:
52. The financial statements for Perez are translated by its U.S. parent. What amount of gain or loss would be reported in its translated income statement?
C. $1,590

53. The financial statements for Perez are re-measured by its U.S. parent. What amount of gain or loss would be reported in its translated income statement?
D. $1,090

Certain balance sheet accounts of a foreign subsidiary of Parker Company at December 31, 2008, have been restated into U.S. dollars as follows:
54. Assuming the functional currency of the subsidiary is the U.S. dollar, what total should be included in Parker's consolidated balance sheet at December 31, 2008, for the above items?
A. $407,500

55. Assuming the functional currency of the subsidiary is the local currency, what total should be included in Parker's consolidated balance sheet at December 31, 2008, for the above items?
B. $418,000

56. If the current rate used to restate these balances is $.95, what was the historical rate used to restate the same balances?
A. $.90

Kennedy Company acquired all of the outstanding common stock of Hastie Company of Canada for U.S. $350,000 on January 1, 2009, when the exchange rate for the Canadian dollar was U.S. $.70. The fair value of the net assets of Hastie was equal to their book value of C$450,000 (Canadian dollars) on the date of acquisition. Any excess cost over fair value was attributed to an unrecorded patent with a remaining life of five years. The functional currency of Hastie is the Canadian dollar.
For the year ended December 31, 2009, Hastie's translated net income was $25,000. The average exchange rate for the Canadian dollar during 2009 was U.S. $.68 and the 2009 year-end exchange rate was U.S. $.65.
 57. Calculate the U.S. $ amount allocated to the patent at January 1, 2009.
B. $35,000

58. Amortization of the patent, translated, for 2009 would be
C. $6,800

59. Compute the amount of the patent reported on the consolidated balance sheet at December 31, 2009.
E. $26,000

60. Kennedy's share of Hastie's net income for 2009 would be
C. $18,200

Quadros Inc., a Portugese firm was acquired by a U.S. company on January 1, 2007. Selected account balances are available for the year ended December 31, 2008 and are stated in euro, the local currency.
61. Assume the functional currency is the euro, compute the restated amount for sales for 2008.
C. $380,000

62. Assume the functional currency is the euro, compute the restated amount for inventory for 2008.
D. $20,200

63. Assume the functional currency is the euro, compute the restated amount for equipment for 2008.
B. $90,900

64. Assume the functional currency is the euro, compute the restated amount for dividends for 2008.
D. $19,400

65. Assume the functional currency is the euro, compute the restated amount for accumulated depreciation for 2008.
C. $45,450

66. Assume the functional currency is the euro, compute the restated amount for depreciation expense for 2008.
E. $8,550

67. Assume the functional currency is the U.S. dollar, compute the restated amount for sales for 2008.
C. $380,000

68. Assume the functional currency is the U.S. dollar, compute the restated amount for inventory for 2008.
B. $19,600

69. Assume the functional currency is the U.S. dollar, compute the restated amount for equipment for 2008.
A. $81,900

70. Assume the functional currency is the U.S. dollar, compute the restated amount for dividends for 2008.
D. $19,400

71. Assume the functional currency is the U.S. dollar, compute the restated amount for accumulated depreciation for 2008.
A. $40,950

72. Assume the functional currency is the U.S. dollar, compute the restated amount for depreciation expense for 2008.
A. $8,190

73. When translating Quadros' financial statements, which of the following statements is true?
C. There will be a positive cumulative translation adjustment reported on the consolidated balance sheet

 Essay Questions
 75. In translating a foreign subsidiary's financial statements, what exchange rate should be used for the subsidiary's revenues and expenses?
The historical rate that was in effect when the revenues and expenses were incurred should be used unless those revenues and expenses occur throughout the year, then a weighted average exchange rate for the year may be used.

 76. How can a parent corporation determine the functional currency for a foreign subsidiary that conducts business in more than one country?
If the foreign subsidiary has distinct and separable operations in different countries, each of these operations can use a different currency. If the subsidiary does not have distinct operations in different countries, the currency in which the most transactions are carried out should be selected.

77. What exchange rate should be used to translate (a) revenues and expenses that occur throughout the year and (b) a gain or loss that occurs on a specific day?
Revenues and expenses occurring throughout the year may be translated using the average exchange rate for the year. A gain or loss occurring on a specific date should be translated using the rate in effect on that day.

78. Perkle Co. owned a subsidiary in Belgium; the subsidiary's functional currency was the Belgian franc. During 2009, Perkle engaged in hedging transactions to offset part of the subsidiary's net asset position. How should the effects of exchange rate fluctuations on the currency hedge be accounted for?
Any effect on the contract resulting from exchange rate fluctuations is classified as a translation adjustment, rather than as a foreign exchange gain or loss.

79. Under what circumstances would the translation of a foreign subsidiary's financial statements not be required?
The translation of a foreign subsidiary's financial statements is not required in the following two situations:
(A.) when the subsidiary's functional currency is the U.S. dollar.
(B.) when the subsidiary operates in a highly inflationary economy.

80. A foreign subsidiary of a U.S. corporation purchased equipment on January 4, 2005.
(A.) How would depreciation expense on the equipment be translated for 2008?
(B.) How would depreciation expense on the equipment be re-measured for 2008?
(A.) Depreciation expense would be translated using the average exchange rate for 2008.
(B.) Depreciation expense would be re-measured using the exchange rate in effect when the equipment was purchased.

81. What exchange rate would be used to translate the asset and liability account balances of a foreign subsidiary? What justification can be given for using this exchange rate?
Assets and liabilities are translated using the current exchange rate, the rate in effect at the balance sheet date. This rate is chosen because assets and liabilities are expected to affect future cash flows. Therefore, they should be translated using the most up-to-date exchange rates available.

82. Farley Brothers, a U.S. company, had a subsidiary in Italy. Under what conditions would the U.S. dollar be the functional currency for this subsidiary?
To determine the subsidiary's functional currency, Farley Brothers should look at the volume of the subsidiary's transactions in various currencies. If most of the subsidiary's sales and purchases are in dollars, the dollar may be the logical choice for the functional currency. If there are many transactions between the subsidiary and the parent and if most of the subsidiary's financing comes from the U.S., the dollar may be a better choice than the lira or other European currencies.

83. What is the justification for the re-measurement of foreign currency transactions?
Re-measurement is needed for transactions denominated in a currency other than the entity's functional currency. A U.S. company which engages in transactions in other countries may have to re-measure some of its transactions. The implicit justification for re-measurement is that foreign currency transactions which affect monetary assets and liabilities have a direct effect on the entity's cash flows. There will be direct effects on future cash flows in the functional currency and thus an effect on net income.

84. Contrast the purpose of re-measurement with the purpose of translation.
The purpose of translation is to transform a subsidiary's financial statements, prepared in its functional currency, into the reporting currency of the parent. The purpose of re-measurement is to restate transactions from one currency into the functional currency of the entity. Re-measurement is also required when a subsidiary's financial statements have been denominated in a currency other than the subsidiary's functional currency.

85. On January 1, 2008, Fandu Corp. started a foreign subsidiary. On April 1, 2008, the subsidiary purchased inventory costing 150,000 stickles. One-fourth of this inventory remained unsold at the end of 2008 while 40% of the liability from the purchase had not yet been paid. The pertinent exchange rates were:
Required:
What should have been the December 31, 2008 inventory and accounts payable balances for this foreign subsidiary as translated into U.S. dollars? (Round your answers to the nearest whole dollar.)
Inventory (150,000 x ¼ x (1/3.6))     	 	$10,417
Accounts payable (150,000 x 40% x (1/3.6)) 	$16,667