Question 1

Discuss the factors that may be considered in determining if a Mexican subsidiary of a U.S. firm has the peso or the dollar as its functional currency. The subsidiary only manufactures component parts that are shipped to the U.S. firm's final production plant in Detroit.

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Question 2

List the two primary objectives of translating foreign financial statements according to the FASB #52, which emphasizes the concept of the functional currency.

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Question 3

A foreign subsidiary operates in a highly inflationary economy. The company's December 31, 20X2, trial balance includes the following:  
Relevant exchange rates are as follows:  
Required: 
a.Discuss the criteria that must be satisfied in order to qualify as a highly inflationary economy.
b.Discuss how the remeasurement of statements of companies operating in such economies affects net income.
c.Calculate the dollar value of the trial balance accounts as of December 31, 20X2.

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Question 4

Complete the following table:

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Question 5

Foreign firms operating in highly inflationary economies received special treatment under generally accepted accounting principles (GAAP) relative to translating their financial statements.
Required:
a.How does the FASB define a highly inflationary economy?
b.Why is the method typically used for translating foreign entities not permitted for these firms?
c.What method is used for remeasuring or translating the statements of these firms?

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Question 6

Kerry Manufacturing Company is a German subsidiary of a U.S. company. Kerry records its operations and prepares financial statements in euros. However, its functional currency is the British pound. Kerry was organized and acquired by the U.S. company on June 1, 20X4. The cumulative translation adjustment as of December 31, 20X6, was $79,860. The value of the subsidiary's retained earnings expressed in British pounds and U.S. dollars as of December 31, 20X7, was 365,000 pounds and $618,000, respectively. On March 1, 20X7, Kerry declared a dividend of 120,000 euros. The trial balance of Kerry in euros as of December 31, 20X7, is as follows:  
The marketable securities were acquired on November 1, 20X6, and the prepaid insurance was acquired on December 1, 20X7. The cost of goods sold and the ending inventory are calculated by the weighted-average method. The underlying costs have been incurred uniformly throughout the year. On June 1, 20X4, 60% of the depreciable assets existed, and the balance was acquired on March 1, 20X6. The depreciable assets are amortized over a 10-year period by the straight-line method. Of the total depreciation expense, 80% is traceable to the cost of goods sold and the balance is in general expenses. On November 1, 20X6, Kerry received a customer prepayment valued at 3,000,000 euros. On February 1, 20X7, 2,040,000 euros of the prepayment was earned. The balance remains unearned as of December 31, 20X7.
Relevant exchange rates are as follows:  
Required:
Prepare a remeasured and translated trial balance of the Kerry Manufacturing Company as of December 31, 20X7. Provide supporting schedules.

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Question 7

Company A, an American company, owns Company B, a Canadian subsidiary. Company A borrowed 1,000,000 Canadian dollars as a hedge on its net investment in Company B. For 20X3, Company A recorded an exchange gain of $40,000 due to exchange rate changes. The 20X3 translation adjustment for Company B was a debit of $42,000.
Required:
Describe the accounting treatment required for the hedge on Company A's books.

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Question 8

A Kuwaiti subsidiary of Hiawatha Corp. (a U.S. firm) has certain balance sheet accounts on December 31, 20X4. The functional currency is the U.S. dollar and currency of record is the dinar and the parents books are kept in U.S. dollars.
Information relating to these account in U.S. dollars is as follows:  
Required:
From the above information, prepare the asset portion of the subsidiary's trial balance.

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Question 9

A French subsidiary of a U.S. firm keeps accounting records in euros. The U.S. dollar is considered the subsidiary's functional currency. Assume the following exchange rates:  
Required:
Remeasure the following items from the December 31, 20X6 trial balance of the subsidiary: 
a.Sales made evenly throughout 20X6 = 100,000 euros
b.Cost of goods sold = 30,000 euros5,000 euros purchased July 1, 20X525,000 euros purchased July 1, 20X6
c.Salary expense for 20X6 = 40,000 euros
d.Land = 1,000,000 euros200,000 euros purchased January 1, 20X5800,000 euros purchased July 1, 20X6

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Question 10

For each of the following account balances, identify the exchange rate used to translate or remeasure. The choices are current exchange rate, historical rate, weighted average, other (specify).

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Question 11

On January 1, 20X2, U.S.A. Inc. created an Algerian subsidiary, Niko, Inc. The books are kept in Algerian dinars, but the functional currency is the U.S. dollar. Dividends are paid on December 31, and income is earned evenly throughout the year. The earnings and dividends of Niko in dinars are as follows:  
Required:
Calculate the balance in retained earnings for Niko in dollars as of December 31, 20X4.

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Question 12

Hylie, a U.S. corporation, owns 100% of Frosan, a French firm. Assume that the dollar is the functional currency, although the books are kept in euros.
Required:
What currency exchange rate would be used to remeasure Frosan's balance sheet into U.S. dollars? Choose from current, simple average, weighted average, or historical.

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Question 13

Assume Champ Company will be translating the accounts of its foreign subsidiary, Collier, Ltd. for inclusion in the consolidated financial statements.
1) What are the steps to be taken?
2) Assuming the functional currency is the currency of the country in which Collier is located, what rates should be used/
3) Where should the adjustment resulting from the translation process be recognized?

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Quiz 11: Translation of Foreign Financial Statements

Discuss the factors that may be considered in determining if a Mexican subsidiary of a U.S. firm has the peso or the dollar as its functional currency. The subsidiary only manufactures component parts that are shipped to the U.S. firm's final production plant in Detroit.

List the two primary objectives of translating foreign financial statements according to the FASB #52, which emphasizes the concept of the functional currency.

Complete the following table:

For each of the following account balances, identify the exchange rate used to translate or remeasure. The choices are current exchange rate, historical rate, weighted average, other (specify).