Question 1

In preparing consolidated financial statements of a U.S.parent company and a foreign subsidiary, the foreign subsidiary's functional currency is the currency:

Accepted Answer

The foreign subsidiary's functional currency is the currency in which the subsidiary primarily generates and spends cash, as it reflects the economic environment in which the subsidiary operates. This currency will be used to measure the subsidiary's financial results and position and will be the basis for the consolidation of the subsidiary's financial statements with those of its parent company.

Question 2

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?

Accepted Answer

When the functional currency is the U.S. dollar but the financial statements are prepared in a local currency, SFAS 52 requires the financial statements to be remeasured into U.S. dollars using the temporal method.

Question 3

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):

Accepted Answer

Gains resulting from the process of translating a foreign entity's financial statements from the functional currency to U.S.dollars are considered a foreign currency translation adjustment and are included as an other comprehensive income item. This is because they do not arise from the normal operations of the company and are not considered part of continuing operations. Additionally, they are not considered an extraordinary item. There is no indication that they should be treated as a deferred credit.

Question 4

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:

Accepted Answer

In the purchase method of accounting for an acquisition, the assets and liabilities of the acquired company are recorded at their fair values at the date of acquisition. Therefore, the paid-in capital of S Company should be converted at the exchange rate effective on the date of purchase of the stock of S Company by P Company. This ensures that the investment is accurately reflected in the parent company's financial statements at its cost at the time of acquisition.

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:

Accepted Answer

Average exchange rates are used to approximate the exchange rate in effect when the items were recognized. This helps to ensure that the translated financial statements are not materially misstated due to fluctuations in exchange rates during the reporting period.

Question 6

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:

Accepted Answer

According to SFAS No. 52, the temporal method should be used when the local currency of the foreign subsidiary is experiencing hyperinflation. This is because the temporal method uses historical exchange rates to account for inflation in the subsidiary's financial statements, which is appropriate in a hyperinflationary environment. Using the current rate method may not accurately reflect the impact of inflation on the subsidiary's financial statements. Therefore, the best choice is to use the temporal method only.

Question 7

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

Accepted Answer

The process of translating the accounts of a foreign entity into its functional currency when they are stated in another currency is called remeasurement. Remeasurement involves converting the foreign entity's financial statements from the foreign currency to the functional currency of the parent company. Verification involves checking the accuracy of financial statements, and translation typically refers to converting financial statements into another language.

Question 8

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

Accepted Answer

According to the current rate method, the translation adjustment resulting from the translation of financial statements of a foreign subsidiary should be included as a separate item in the stockholders' equity section of the balance sheet.

Question 9

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):

Accepted Answer

Gains from remeasuring a foreign subsidiary's financial statements are included in the income statement as part of continuing operations, as they reflect the impact of exchange rate changes on the subsidiary's financial results.

Question 10

The objective of remeasurement is to:

Accepted Answer

Remeasurement aims to reflect the financial statements as if they were originally recorded in the functional currency, which is the currency of the primary economic environment in which the entity operates.

Question 11

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

Accepted Answer

Under the temporal method, monetary assets and liabilities are translated using the exchange rate existing at the balance sheet date. This is because the balance sheet date represents the current value of the assets and liabilities.

Question 12

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:

Accepted Answer

When the functional currency is identified as the U.S. dollar, assets acquired by a foreign subsidiary, such as land, should be translated using the historical exchange rate in effect at the date of purchase. This approach maintains the historical cost principle.

Question 13

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

Accepted Answer

The answer of A foreign subsidiary's functional currency is its...

Question 14

A wholly owned subsidiary of a U.S.parent company has certain expense accounts for the year ended December 31, 2014, stated in local currency units (LCU) as follows:
LCU 
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?

Accepted Answer

The answer of A wholly owned subsidiary of a U.S.parent...

Question 15

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:

Accepted Answer

When translating a plant asset in the balance sheet of a foreign subsidiary in which the functional currency is the U.S. dollar, the appropriate exchange rate is the historical exchange rate in effect when the plant asset was acquired, or the date of acquisition, whichever is later. This is because the plant asset is a non-monetary asset and is measured at its historical cost. Therefore, the appropriate exchange rate is the one that was in effect at the time of acquisition, as this reflects the actual cost incurred by the subsidiary to acquire the asset.

Question 16

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?

Accepted Answer

The answer of When translating foreign currency financial statements for...

Question 17

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

Accepted Answer

The temporal method adjusts the historical cost of an asset or liability to reflect changes in the exchange rate between the acquisition date and the balance sheet date. Marketable securities carried at cost and common stock are not affected by changes in exchange rates, so they would not be restated under the temporal method. Inventory, on the other hand, is valued at the lower of cost or market, and market values can be affected by changes in exchange rates. Therefore, inventory carried at market would be restated using the current exchange rate.

Question 18

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

Accepted Answer

Paid-in capital accounts are translated using the historical exchange rate under both the current rate and temporal methods because these accounts represent historical transactions and their values are not adjusted for changes in exchange rates over time.

Question 19

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

Accepted Answer

Under the temporal method, non-monetary items such as inventory (which affects cost of goods sold), and long-lived assets (which affects depreciation and amortization expense), are typically translated at historical exchange rates, not the average exchange rate.

Question 20

The following balance sheet accounts of a foreign subsidiary at December 31, 2014, have been translated into U.S.dollars as follows:  What total should be included in the translated balance sheet at December 31, 2014, for the above items? Assume the U.S.dollar is the functional currency.

Accepted Answer

The answer of The following balance sheet accounts of a...

Quiz 13: The Translation of Financial Statements of Foreign Affiliates