Question 1

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

Accepted Answer

The answer of How is the translation of the financial...

Question 2

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

Accepted Answer

The answer of When would a change in the functional...

Question 3

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)

Accepted Answer

Gains resulting from the translation of a foreign entity's financial statements are considered a Foreign Currency Translation Adjustment and are included as an Other Comprehensive Income item.

Question 4

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

Accepted Answer

The functional currency is the currency of the primary economic environment in which the entity operates, typically the currency in which the entity primarily generates and spends cash.

Question 5

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

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The answer of What are the steps involved in the...

Question 6

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?

Accepted Answer

The main criterion upon which the choice should be based is whether it faithfully represents the economic effects of the transactions and events. This means that the functional currency should reflect the underlying activities and operations of the entity, and should provide a meaningful basis for measuring financial performance and making business decisions. Factors that may be considered in making this determination include the nature and extent of the entity's operations, the currency in which sales and expenses are denominated, and the currency in which capital is raised and repatriated. Ultimately, the choice of functional currency should be based on a careful analysis of the economic substance of the entity's activities, rather than the form or legal structure of the entity.

Question 7

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?

Accepted Answer

The first step in the process of consolidation is usually translating foreign currency transactions into an entity's functional currency. This is necessary to ensure that all transactions are expressed in a common currency before they can be consolidated with the financial statements of other entities.

Question 8

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

Accepted Answer

Goodwill and fair value adjustments related to a foreign operation are considered assets and liabilities of that foreign operation. This is because they are part of the net investment in the foreign operation and are translated at the closing rate in accordance with IAS 21, The Effects of Changes in Foreign Exchange Rates.

Question 9

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

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The answer of Which of the following factors is a...

Question 10

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.

Accepted Answer

The primary indicator in determining functional currency is the currency that mainly influences the costs of providing goods or services, including labor and material costs.

Question 11

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.

Accepted Answer

The answer of When the functional currency is not clearly...

Question 12

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.

Accepted Answer

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

Question 13

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

Accepted Answer

The answer of Crimson Lights Inc. (CL)is a 100% wholly...

Question 14

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

Accepted Answer

The currency in which funds from financing activities are generated is not considered a factor when determining the functional currency of a foreign operation. The other factors listed are considered in this determination.

Question 15

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

Accepted Answer

The answer of What are the primary indicators that need...

Question 16

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.

Accepted Answer

The answer of On January 1, 2014, Tiller Inc. of...

Quiz 8: Accounting for Foreign Investments