Deck 10: Foreign Currency Transactions and Translation

Question 1

The process by which one currency is expressed or restated in terms of another is known as

A) translation.
B) conversion.
C) mark-to-market.
D) inversion.

Answer 1

A

Question 2

The process by which one currency is changed into another is known as

A) translation.
B) conversion.
C) restatement.
D) mark-to-market.

Answer 2

B

Question 3

The exchange rate which is a contract rate between the company and the foreign exchange trader at the bank for delivery in the future is the

A) spot rate
B) forward rate.
C) future spot rate.
D) current rate.

Answer 3

B

Question 4

Assume that Lewis International sells running shoes to a British importer on June 1 and that the sale is denominated at £75,000 and will be collected on July 15. Assume the treatment of FASB Statement 52 and that no forward contract is entered into. Also assume that Lewis closes its books at the end of each month. The following are the relevant exchange rates.
$\begin{array}{ll}\text { Spot rate on June 1 } & \$ 1.6200 \\ \text { Forward rate for July } & \\ 15 \text { delivery } & \$ 1.6000 \\ \text { Spot rate on June 30 } & \$ 1.6100 \\ \text { Spot rate on July 15 } & \$ 1.5950\end{array}$

-What is the dollar value of the sale as carried on the books on June 30?

A) $120,750
B) $120,000
C) $119,625
D) $121,500

Question 5

Remeasurement does not require the temporal rate method.

Question 6

The current rate method would most likely have a translation adjustment.

Question 7

The spot rate is

A) the rate quoted for delivery within two business days.
B) usually higher than the forward rate.
C) a contract rate between the corporation and the foreign exchange trader at the bank for future delivery.
D) usually at a premium for sales and a discount for purchases.

Question 8

Assume that Lewis International sells running shoes to a British importer on June 1 and that the sale is denominated at £75,000 and will be collected on July 15. Assume the treatment of FASB Statement 52 and that no forward contract is entered into. Also assume that Lewis closes its books at the end of each month. The following are the relevant exchange rates.
$\begin{array}{ll}\text { Spot rate on June 1 } & \$ 1.6200 \\ \text { Forward rate for July } & \\ 15 \text { delivery } & \$ 1.6000 \\ \text { Spot rate on June 30 } & \$ 1.6100 \\ \text { Spot rate on July 15 } & \$ 1.5950\end{array}$

-What is the amount of the foreign exchange gain or loss that it will recognize on July 15?

A) $1875 loss
B) $ 750 loss
C) $1125 loss
D) $ 750 gain
E) gain or loss is deferred

Question 9

Assume that Lewis International sells running shoes to a British importer on June 1 and that the sale is denominated at £75,000 and will be collected on July 15. Assume the treatment of FASB Statement 52 and that no forward contract is entered into. Also assume that Lewis closes its books at the end of each month. The following are the relevant exchange rates.
$\begin{array}{ll}\text { Spot rate on June 1 } & \$ 1.6200 \\ \text { Forward rate for July } & \\ 15 \text { delivery } & \$ 1.6000 \\ \text { Spot rate on June 30 } & \$ 1.6100 \\ \text { Spot rate on July 15 } & \$ 1.5950\end{array}$

-Assuming the tax treatment for foreign currency transactions, what is the foreign exchange gain or loss on June 30?

A) $ 750 loss
B) $ 750 gain
C) $1125 loss
D) $1875 loss
E) gain or loss is deferred

Question 10

Assume that Lewis International sells running shoes to a British importer on June 1 and that the sale is denominated at £75,000 and will be collected on July 15. Assume the treatment of FASB Statement 52 and that no forward contract is entered into. Also assume that Lewis closes its books at the end of each month. The following are the relevant exchange rates.
$\begin{array}{ll}\text { Spot rate on June 1 } & \$ 1.6200 \\ \text { Forward rate for July } & \\ 15 \text { delivery } & \$ 1.6000 \\ \text { Spot rate on June 30 } & \$ 1.6100 \\ \text { Spot rate on July 15 } & \$ 1.5950\end{array}$

-What is the amount of the foreign exchange gain or loss that it will recognize on June 30?

A) $1500 loss
B) $ 750 loss
C) $1125 loss
D) $1875 loss
E) gain or loss is deferred

Question 11

IAS 21 and SFAS 52 are similar.

Question 12

Outright forward transactions do not involve the exchange of currency three or more days after the date on which the traders agree to the transaction.

Question 13

Assume that Lewis International sells running shoes to a British importer on June 1 and that the sale is denominated at £75,000 and will be collected on July 15. Assume the treatment of FASB Statement 52 and that no forward contract is entered into. Also assume that Lewis closes its books at the end of each month. The following are the relevant exchange rates.
$\begin{array}{ll}\text { Spot rate on June 1 } & \$ 1.6200 \\ \text { Forward rate for July } & \\ 15 \text { delivery } & \$ 1.6000 \\ \text { Spot rate on June 30 } & \$ 1.6100 \\ \text { Spot rate on July 15 } & \$ 1.5950\end{array}$

-How much cash will Lewis receive on July 15?

A) $120,750
B) $120,000
C) $119,625
D) $121,500

Question 14

The functional currency is the currency of the primary economic environment in which the company operates.

Question 15

Assume that Lewis International sells running shoes to a British importer on June 1 and that the sale is denominated at £75,000 and will be collected on July 15. Assume the treatment of FASB Statement 52 and that no forward contract is entered into. Also assume that Lewis closes its books at the end of each month. The following are the relevant exchange rates.
$\begin{array}{ll}\text { Spot rate on June 1 } & \$ 1.6200 \\ \text { Forward rate for July } & \\ 15 \text { delivery } & \$ 1.6000 \\ \text { Spot rate on June 30 } & \$ 1.6100 \\ \text { Spot rate on July 15 } & \$ 1.5950\end{array}$

-Assuming the tax treatment for foreign currency transactions, what is the foreign exchange gain or loss on July 15?

A) $1875 loss
B) $1125 loss
C) $ 375 loss
D) $ 750 loss
E) gain or loss is deferred

Question 16

The local currency and the reporting currency are always the same.

Question 17

IAS 21 and SFAS 52 have the one transaction perspective.

Question 18

In the current rate method the assets are translated at market on the balance sheet date.

Question 19

Options are the right but not the obligation to trade foreign currency in the future.

Question 20

No foreign exchange accounting problem arises as long as the transactions are denominated in the firm's domestic currency.

Question 21

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 according to the IASC?

A) the temporal method.
B) the temporal method after adjusting for inflation.
C) the current rate method.
D) the current rate method after adjusting for inflation.

Question 22

According to FASB Statement No. 8,

A) translation losses had to be recognized, whereas gains were deferred.
B) both the temporal and current rate methods were permitted.
C) long-term debt had to be carried at current rates, but the non-monetary assets purchased with the debt were carried at historical rates.
D) cost of goods sold was translated at the average exchange rate for the period.

Question 23

According to the current-rate method of translating foreign currency financial statements,

A) current assets and liabilities are translated at current exchange rates, and other assets, liabilities and owner's equity are translated at historical exchange rates.
B) only those assets carried at past exchange prices should be translated at the historical rate.
C) only owner's equity is translated at historical exchange rates.
D) translation losses are taken to income, but translation gains are deferred.

Question 24

Which foreign currency translation standard uses the following objective:
"1) Provide information that is generally compatible with the expected economic effects of a rate change on an enterprise's cash flows and equity.
2) Reflect in consolidated statements the financial results and relationships of the individual consolidated entities as measured in their functional currencies in conformity with generally accepted accounting principles."

A) Accounting Research Study #12
B) FASB Statement 8
C) FASB Statement 52
D) International Accounting Standard 14.

Question 25

If a U.S.-based company has a subsidiary in Germany, and the German subsidiary imports components from Britain, the British pound would most likely be considered (from the standpoint of the German subsidiary)

A) the local currency.
B) a foreign currency.
C) the functional currency.
D) the reporting currency.

Question 26

According to IAS 21,

A) a forward contract may be used to set the value of a nonmonetary asset whose purchase was hedged by the forward contract.
B) a forward contract can hedge the value of a commitment but not a transaction.
C) the current rate method may be used but not the temporal method.
D) long-term monetary items may be translated at the historical rate.
E) Two of the above.

Question 27

The reporting currency is

A) the currency in which the parent company prepares its financial statements.
B) any currency other than the parent currency.
C) the currency of the primary economic environment in which the firm operates.
D) the currency in the country where the foreign firm is operating.

Question 28

The functional currency is

A) the U.S. dollar.
B) any currency other than the parent currency.
C) the currency of the primary economic environment in which the firm operates.
D) the currency in the country where the foreign firm is operating as long as it is also the reporting currency.

Question 29

Which foreign currency translation standard uses the following objective: "for the purpose of preparing an enterprise's financial statements, the objective of translation is to measure and express (a) in dollars and (b) in conformity with U.S. generally accepted accounting principles (GAAP) the assets, liabilities, revenues, or expenses that are measured or denominated in foreign currency."

A) Accounting Research Study #12
B) FASB Statement 8
C) FASB Statement 52
D) International Accounting Standard 14.

Question 30

The local currency is

A) the currency in which the parent company prepares its financial statements.
B) any currency other than the parent currency.
C) the currency of the primary economic environment in which the firm operates.
D) the currency of the country where the foreign firm is operating.

Question 31

The currency of the country where the foreign company is operating is the

A) base currency.
B) parent currency.
C) local currency.
D) third country currency.

Question 32

The currency of the primary economic environment in which the firm operates is the

A) functional currency.
B) reporting currency.
C) historical currency.
D) base currency.

Question 33

The translation method in which current assets and liabilities are translated at current exchange rates and other assets, liabilities and owner's equity are translated at historical exchange rates is known as the

A) current-noncurrent method.
B) monetary-nonmonetary method.
C) temporal method.
D) current rate method.

Question 34

The translation methodology that translates only owner's equity at historical exchange rates is the

A) current-noncurrent method.
B) monetary-nonmonetary method.
C) temporal method.
D) current rate method.

Question 35

The translation methodology which assumes that the only assets that should be translated at the historical rate are those carried at past exchange prices is the

A) current-noncurrent method.
B) monetary-nonmonetary method.
C) temporal method.
D) current rate method.

Question 36

The translation method which uses as the basis for its logic that financial assets and liabilities have similar attributes and should be translated at the same exchange rate is the

A) current-noncurrent method.
B) monetary-nonmonetary method.
C) temporal method.
D) current rate method.

Question 37

From the standpoint of the parent company, a foreign currency is

A) the currency in which the parent company prepares its financial statements.
B) any currency other than the parent currency.
C) the currency of the primary economic environment in which the firm operates.
D) the currency in the country where the foreign firm is operating.

Question 38

According to the temporal method of translating foreign currency financial statements,

A) current assets and liabilities are translated at current exchange rates, and other assets, liabilities and owner's equity are translated at historical exchange rates.
B) only those assets carried at past exchange prices should be translated at the historical rate.
C) only owner's equity is translated at historical exchange rates.
D) the entire income statement should be at the current rate

Question 39

The currency in which the parent company prepares its financial statements is the

A) functional currency.
B) reporting currency.
C) historical currency.
D) base currency.

Question 40

According to the current-rate method of translating financial statements,

A) all balance sheet accounts except capital stock are translated at the historical exchange rate.
B) every income-statement account is multiplied by the average exchange rate.
C) translation gains or losses are taken to the income statement.
D) all balance sheet accounts are translated at the current exchange rate.

Question 41

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

A) the current rate method
B) the consolidation method
C) the temporal method
D) the conversion method

Question 42

According to FASB Statement No. 52,

A) translation losses had to be recognized, whereas gains were deferred.
B) both the temporal and current rate methods were permitted.
C) the choice of translation methodology is independent of the choice of functional currency.
D) the temporal method is the only translation method allowed.

Question 43

The temporal method of translating financial statements is used when

A) the local currency is the functional currency.
B) the local currency is the reporting currency.
C) the parent's reporting currency is the functional currency.
D) the subsidiary's reporting currency is the functional currency.

Question 44

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?

A) $1,130,952
B) $1,179,469
C) $1,175,883
D) $1,185,012

Question 45

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

A) the local currency is the functional currency.
B) the local currency is the foreign currency.
C) the parent's reporting currency is the functional currency.
D) you are translating current financial statements.

Question 46

According to the current rate method of translation,

A) Transaction gains and losses are taken to income, but translation gains and losses are taken to the owners' equity section of the balance sheet.
B) Transaction and translation gains and losses are taken to the income statement.
C) Transaction and translation gains and losses are taken to the owners' equity section of the balance sheet.
D) Transaction gains and losses are taken to the owners' equity section of the balance sheet, but translation gains and losses are taken to the income statement.

Question 47

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

A) The aggregate transaction gain or loss included in income.
B) The beginning and ending amount of cumulative translation adjustments.
C) The average exchange rate movement of countries whose operations are material to the parent company's results.
D) The aggregate adjustment for the period resulting from translation adjustments.

Question 48

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

A) translation gain in the income statement.
B) translation loss in the income statement.
C) translation gain in the accumulated translation adjustment account in owners' equity.
D) translation loss in the accumulated translation adjustment account in owners' equity.

Question 49

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

A) temporal method
B) current rate method
C) monetary/nonmonetary method
D) the current rate method if the rate of inflation is the foreign country is 25% per month.

Question 50

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

A) the current rate method
B) the consolidation method
C) the temporal method
D) the transcription method

Question 51

According to the temporal method of translation,

A) Transaction gains and losses are taken to income, but translation gains and losses are taken to the owners' equity section of the balance sheet.
B) Transaction and translation gains and losses are taken to the income statement.
C) Transaction and translation gains and losses are taken to the owners' equity section of the balance sheet.
D) Transaction gains and losses are taken to the owners' equity section of the balance sheet, but translation gains and losses are taken to the income statement.

Question 52

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?

A) the temporal method.
B) the temporal method after adjusting for inflation.
C) the current rate method.
D) the current rate method after adjusting for inflation.

Question 53

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

A) translation gain in the income statement.
B) translation loss in the income statement.
C) translation gain in the accumulated translation adjustment account in owners' equity.
D) translation loss in the accumulated translation adjustment account in owners' equity.

Question 54

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

A) translation gain in the income statement.
B) translation loss in the income statement.
C) translation gain in the accumulated translation adjustment account in owners' equity.
D) translation loss in the accumulated translation adjustment account in owners' equity.

Question 55

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?

A) $1,130,952
B) $1,179,469
C) $1,175,883
D) $1,185,012