Question 1

According to which method is the foreign currency translation gain or loss taken to stockholders' equity?

Accepted Answer

Under the current rate method, the translation gain or loss is taken to stockholders' equity as a component of comprehensive income.

Question 2

According to FASB Statement No. 52,

Accepted Answer

FASB Statement No. 52 permits both the temporal and the current rate methods for translation of financial statements of foreign entities. These methods are based on different principles and are used depending on the specific circumstances of the foreign entity and its functional currency. The choice of the translation methodology depends on factors such as the economic environment in which the foreign entity operates, the nature of its assets and liabilities, and the reporting currency of its financial statements.

Question 3

The temporal method of translating financial statements is used when

Accepted Answer

The temporal method of translating financial statements is used when the parent's reporting currency is the functional currency. This method is used to translate monetary assets and liabilities at the current exchange rate and non-monetary assets and liabilities at historical rates.

Question 4

Assume that U.S. parent company ABC has a subsidiary XYZ in Outer Mongolia. XYZ's total assets are as follows in Mongolian marks:

$ \begin{array}{ll}\text { Cash and receivables } & 500,000 \ \text { Inventory } & 500,000 \ \text { Fixed assets (net) } & 900,000\end{array} $
The relevant exchange rates are:
OMM 1.6800 closing rate on the balance sheet date
OMM 1.5500 exchange rate when the fixed assets were acquired
OMM 1.6300 average exchange rate for the period
OMM 1.6600 average exchange rate when ending inventory was acquired.
What is the total value of assets if the functional currency is the U.S. dollar?

Accepted Answer

To calculate the total value of assets in U.S. dollars, we apply the appropriate exchange rates to each asset category based on their nature and the relevant accounting standards. - Cash and receivables are translated at the closing rate: $500,000 \div 1.6800 = \$297,619$- Inventory is translated at the rate when the ending inventory was acquired: $500,000 \div 1.6600 = \$301,205$- Fixed assets are translated at the historical rate (when they were acquired): $900,000 \div 1.5500 = \$580,645$Adding these together gives the total value of assets in U.S. dollars: \$297,619 + \$301,205 + \$580,645 = \$1,179,469.

Question 5

The current-rate method of translating financial statements is used when

Accepted Answer

The current-rate method is used when the local currency is the functional currency, meaning the financial statements of a foreign subsidiary are translated into the parent company's reporting currency using the current exchange rate for all assets and liabilities.

Question 6

According to the current rate method of translation,

Accepted Answer

Under the current rate method, transaction gains and losses (from foreign currency transactions) are recognized in the income statement, while translation gains and losses (from translating financial statements of foreign operations) are recognized in other comprehensive income and accumulated in the equity section of the balance sheet, not affecting net income directly.

Question 7

According to FASB Statement No. 52, which of the following does not have to be disclosed?

Accepted Answer

FASB Statement No. 52 does not require the disclosure of the average exchange rate movement of countries whose operations are material to the parent company's results. It focuses on the financial impact of foreign currency translation, including gains or losses and adjustments, but not on average exchange rate movements.

Question 8

In general, if the Japanese subsidiary of a U.S. company firm translates its financial statements according to the current rate method during a period when the value of the Japanese yen is falling against the reporting currency (the U.S. dollar) , the subsidiary will recognize a

Accepted Answer

When the yen depreciates against the dollar, the value of the subsidiary's assets and liabilities, when translated into dollars, decreases. This results in a translation loss, which is recorded in the accumulated translation adjustment account in owners' equity, not in the income statement.

Question 9

If the functional currency of a foreign subsidiary is the currency of the country where the subsidiary is located, the translation method that should be selected is the

Accepted Answer

If the functional currency of a foreign subsidiary is the currency of the country where the subsidiary is located, and the subsidiary's financial statements are translated into the reporting currency of the parent company, the appropriate translation method is the current rate method. Under this method, assets and liabilities are translated using the current exchange rate at the balance sheet date, while income and expenses are translated using the exchange rates prevailing at the time of the transactions. The monetary/nonmonetary method is used when an entity's financial statements have both monetary and nonmonetary items, while the temporal method is used when a foreign subsidiary's functional currency is different from its reporting currency and the subsidiary operates in a highly inflationary economy. Option D is incorrect, as the inflation rate in the foreign country is not relevant when selecting the appropriate translation method.

Question 10

According to which method is the translation gain or loss taken to the income statement?

Accepted Answer

The temporal method takes into account the fluctuations in exchange rates and assigns the translation gain or loss to the income statement. The current rate method, on the other hand, assigns the translation gain or loss to the comprehensive income section of the statement of changes in equity, while the consolidation method involves combining financial statements of subsidiaries into one set of financial statements for the parent company. The transcription method is not a recognized method of financial reporting.

Question 11

According to the temporal method of translation,

Accepted Answer

Under the temporal method, both transaction and translation gains and losses are recognized in the income statement.

Question 12

If a parent company has a subsidiary in a country where the cumulative rate of inflation for the past three years is around 100 percent, which translation methodology would they use under FASB Statement No. 52?

Accepted Answer

Under FASB Statement No. 52, the temporal method is used in hyperinflationary economies, which is defined as cumulative inflation of approximately 100% or more over a three-year period.

Question 13

In general, if the Japanese subsidiary of a U.S. company firm translates its financial statements according to the current rate method during a period when the value of the Japanese yen is rising against the reporting currency (the U.S. dollar) , the subsidiary will recognize a

Accepted Answer

Under the current rate method, translation gains or losses due to changes in exchange rates are not recognized in the income statement but are instead recorded in the accumulated translation adjustment account within the equity section of the balance sheet. If the value of the Japanese yen is rising against the U.S. dollar, it would result in a translation gain.

Question 14

In general, if a foreign firm translates its financial statements according to the temporal method during a period when the value of the foreign currency is rising against the reporting currency, the firm will recognize a

Accepted Answer

When the value of the foreign currency is rising against the reporting currency, a foreign firm translating its financial statements according to the temporal method would experience a translation loss on the income statement. This is because the value of assets and liabilities denominated in the foreign currency will increase when translated into the reporting currency, and this increase will result in a lower net income.

Question 15

Assume that U.S. parent company ABC has a subsidiary XYZ in Outer Mongolia. XYZ's total assets are as follows in Mongolian marks: $ \begin{array}{ll}\text { Cash and receivables } & 500,000 \ \text { Inventory } & 500,000 \ \text { Fixed assets (net) } & 900,000\end{array} $
The relevant exchange rates are:
OMM 1.6800 closing rate on the balance sheet date
OMM 1.5500 exchange rate when the fixed assets were acquired
OMM 1.6300 average exchange rate for the period
OMM 1.6600 average exchange rate when ending inventory was acquired.
What is the total value of assets if the functional currency is the Outer Mongolian mark?

Accepted Answer

When the functional currency is the Outer Mongolian mark, the assets are translated using the closing rate. Total assets in Mongolian marks are 1,900,000 (500,000 + 500,000 + 900,000). Using the closing rate of 1.6800, the total value in USD is 1,900,000 / 1.6800 = $1,130,952.

Quiz 10: Foreign Currency Transactions and Translation