Question 1

_____ Which exchange rates are used to express the following accounts in dollars when the current rate method is used? (Assume that valuation in the local currency is at market value, which conforms to the rules of FAS 115, "Accounting for Certain Investments in Debt and Equity Securities.")

Accepted Answer

The answer of _____ Which exchange rates are used to...

Question 2

_____ Which exchange rates are used to express the following accounts in dollars under the current rate method of translation?

Accepted Answer

The answer of _____ Which exchange rates are used to...

Question 3

_____ Which exchange rates are used to express the following accounts in dollars under the current rate method of translation?

Accepted Answer

The answer of _____ Which exchange rates are used to...

Question 4

_____ Which exchange rates are used to express the following accounts in dollars under the current rate method of translation?

Accepted Answer

The answer of _____ Which exchange rates are used to...

Question 5

_____ Which exchange rates are used to express the following accounts (resulting from financing inflows) in dollars under the current rate method of translation?

Accepted Answer

The answer of _____ Which exchange rates are used to...

Question 6

_____ Under FAS 52, how is the effect of an exchange rate change for the current year reported when the current rate method of translation is used?
A) Currently in the earnings.
B) Currently in earnings as an extraordinary item if material.
C) As a direct charge or credit to Other Comprehensive Income.
D) Deferred in the asset or liability section of the balance sheet.
E) None of the above.

Accepted Answer

Under FAS 52, when the current rate method of translation is used, the effect of an exchange rate change for the current year is reported as a direct charge or credit to Other Comprehensive Income, not in the current earnings.

Question 7

_____ Which of the following is not an allowable reason for eliminating the balance in the AOCI-Cumulative Translation Adjustment account?
A) Sale of the investment (the common stock).
B) Liquidation of the subsidiary (through sale of its assets).
C) Stability has existed for the exchange rate for three years or more.
D) The foreign government has permanently seized the subsidiary's assets.
E) None of the above.

Accepted Answer

Stability in the exchange rate for three years or more is not considered an allowable reason for eliminating the balance in the AOCI-Cumulative Translation Adjustment account. The other options represent events that could justify such elimination.

Question 8

_____ During 2006, the Japanese yen strengthened. Under the current rate method, a favorable reporting result occurred as a result of this 2006 exchange rate change. What was the subsidiary's average financial position during 2006?
A) A net monetary asset position.
B) A net monetary liability position.
C) A net investment (net asset) position.
D) A net liability position.

Accepted Answer

Under the current rate method, when the local currency strengthens, a net investment (net asset) position results in a favorable translation adjustment. This indicates that the subsidiary had a net asset position during 2006.

Question 9

_____ During 2006, the Swiss franc weakened. Under the current rate method, an unfavorable reporting result occurred as a result of this 2006 exchange rate change. What was the subsidiary's average financial position during 2006?
A) A net monetary asset position.
B) A net monetary liability position.
C) A net investment (net asset) position.
D) A net liability position.

Accepted Answer

Under the current rate method, a weakening of the local currency (Swiss franc) results in an unfavorable translation effect if the subsidiary has a net investment (net asset) position, as the value of the net assets decreases when translated into the parent company's currency.

Question 10

_____ During 2006, the Mexican peso weakened. A favorable reporting result occurred as a result of this 2006 exchange rate change. What was the subsidiary's average financial position during 2006?
A) A net monetary asset position.
B) A net monetary liability position.
C) A net investment (net asset) position.
D) A net liability position.

Accepted Answer

The answer of _____ During 2006, the Mexican peso weakened....

Question 11

_____ Patonics has a long-term intercompany receivable on its books resulting from a loan made to a foreign subsidiary several years ago. No due date is specified inasmuch as settlement is not planned in the foreseeable future. The receivable is denominated in U.S. dollars. During 2006, the U.S. dollar strengthened. Patonics uses the foreign currency unit of measure approach. At 12/31/06, Patonics should
A) Adjust the intercompany receivable downward and debit OCI-Translation Adjustment.
B) Adjust the intercompany receivable downward and debit FX Transaction Loss.
C) Adjust the intercompany receivable downward and debit Investment in Subsidiary.
D) Make no adjustment to the Intercompany Receivable account.
E) None of the above.

Accepted Answer

Since the receivable is denominated in U.S. dollars and Patonics uses the foreign currency unit of measure approach, there is no need to adjust the intercompany receivable for changes in exchange rates. The value of the receivable in U.S. dollars remains constant regardless of fluctuations in currency exchange rates.

Question 12

_____ Parrco has a long-term intercompany receivable on its books resulting from a loan made to a foreign subsidiary several years ago. No due date is specified inasmuch as settlement is not planned in the foreseeable future. The receivable is denominated in Swiss francs. During 2006, the U.S. dollar strengthened. Parrco uses the foreign currency unit of measure approach. At 12/31/06, Parrco should
A) Adjust the intercompany receivable downward and debit OCI-Translation Adjustment.
B) Adjust the intercompany receivable downward and debit FX Transaction Loss.
C) Adjust the intercompany receivable downward and debit Investment in Subsidiary.
D) Make no adjustment to the Intercompany Receivable account.
E) None of the above.

Accepted Answer

The receivable is denominated in Swiss francs, and the U.S. dollar strengthened during 2006. This means that the value of the receivable in U.S. dollars has decreased. Parrco uses the foreign currency unit of measure approach, which means that the receivable is recorded in U.S. dollars. Therefore, Parrco should adjust the intercompany receivable downward and debit OCI-Translation Adjustment.

Question 13

_____ Penex has an intercompany receivable denominated in foreign currency from its foreign subsidiary. Penex uses the foreign currency unit of measure approach. In which account should Penex make adjustments to reflect the current exchange rate?

Accepted Answer

The answer of _____ Penex has an intercompany receivable denominated...

Question 14

_____ At 12/31/06, Pivax had a $60,000 dividend receivable from its foreign subsidiary. The dividend of 100,000 LCU is denominated in LCU and was declared on 12/28/06, when the direct exchange rate was $.60. The dividend was remitted to Pivax on 1/8/07, when the direct exchange rate was $.62. The direct exchange rate at 12/31/06 was $.59. Pivax uses the foreign currency unit of measure approach. At 12/31/06, Pivax should
A) Adjust the Dividend Receivable account downward and debit OCI-Translation Adjustment for $1,000.
B) Adjust the Dividend Receivable account downward and debit Foreign Currency Transaction Loss for $1,000.
C) Make no adjustment to the Dividend Receivable account.
D) Adjust the Dividend Receivable account upward by $2,000.
E) None of the above.

Accepted Answer

Under the foreign currency unit of measure approach, changes in exchange rates between the declaration date and the balance sheet date are recognized as foreign currency transaction gains or losses. The dividend was declared at a rate of $.60, but the rate at 12/31/06 was $.59. This means the value of the dividend receivable in USD has decreased from $60,000 (100,000 LCU * $.60) to $59,000 (100,000 LCU * $.59), resulting in a $1,000 loss. This loss is recognized in the income statement, not as an OCI-Translation Adjustment.

Question 15

_____ Pavax has intercompany sales to its foreign subsidiary and uses the foreign currency unit of measure approach. Pavax should calculate the amount of any unrealized intercompany profit using the
A) Current exchange rate.
B) Average exchange rate.
C) Historical exchange rate.
D) Nominal exchange rate.
E) None of the above.

Accepted Answer

The historical exchange rate should be used to calculate unrealized intercompany profit because it reflects the rate at the time the transaction occurred, ensuring accurate profit measurement.

Question 16

_____ A foreign subsidiary has the foreign currency as its functional currency. The parent enters into an FX forward to hedge its net investment. What will occur or be the accounting treatment?
A) There will always be an offsetting effect.
B) There may or may not be an offsetting effect.
C) Any gain or loss on the forward exchange contract must be recognized currently in earnings.
D) Any gain or loss on the forward exchange contract will be deferred on the parent's books and treated as an adjustment to the Investment in Subsidiary account.
E) None of the above.

Accepted Answer

The answer of _____ A foreign subsidiary has the foreign...

Question 17

_____ A parent owns a foreign subsidiary that has as its functional currency the local currency. To avoid reporting a possible negative effect in the U.S. dollar financial statements from an adverse change in the exchange rate, the parent should hedge which of the following items?
A) The net investment (net asset) position.
B) The net monetary asset position.
C) The net monetary liability position.
D) The net monetary position whether it be positive or negative.

Accepted Answer

Hedging the net investment (net asset) position in a foreign subsidiary is a strategy to protect against potential negative impacts on the U.S. dollar financial statements due to adverse changes in the exchange rate. This approach focuses on the overall investment in the subsidiary rather than just monetary assets or liabilities.

Question 18

_____ A parent owns a foreign subsidiary that has as its functional currency the local currency. During 2006, the foreign subsidiary had (a) a net asset position of 500,000 LCUs and (b) a net monetary asset position of 400,000 LCUs. Which of the following gains or losses on hedging transactions can be charged or credited to the parent's OCI-Translation Adjustment account?

Accepted Answer

The answer of _____ A parent owns a foreign subsidiary...

Question 19

_____ Under FAS 52, how is the effect of an exchange rate change reported when the current rate method of translation is used?
A) Report as a deferred gain or loss in the balance sheet.
B) Report currently in earnings.
C) Report in Other Comprehensive Income.
D) Report in the "Owner Changes in Net Assets" section of the statement of comprehensive income.
E) Report as an extraordinary item.

Accepted Answer

Under FAS 52, when using the current rate method of translation, the effect of an exchange rate change is reported in Other Comprehensive Income (OCI). This approach separates the impact of currency translation from the regular operations reflected in the net income, recognizing it instead as a component of OCI until realized.

Question 20

_____ Pakex's French subsidiary, Sakex, sold inventory on credit to a British customer on 12/22/06. The sale was denominated in pounds, and the customer paid in full in March 2007. From the sales date to 12/31/06, the pound strengthened relative to the franc (which is Sakex's functional currency). Sakex's gain should be reported as
A) An offset to the uncollected receivable.
B) A separate component of stockholders' equity (bypassing earnings).
C) A deferred credit reported immediately below liabilities.
D) An adjustment to the recorded sales amount.
E) An FX gain in the current income statement.

Accepted Answer

The gain from the strengthening of the pound relative to the franc (Sakex's functional currency) from the sales date to the year-end should be recognized as a foreign exchange (FX) gain in the current income statement. This is because changes in exchange rates affecting receivables denominated in a foreign currency are recognized in the income statement in the period in which the exchange rate changes.

Quiz 15: Translating Foreign Currency Statements: The Current Rate Method

_____ Which exchange rates are used to express the following accounts in dollars when the current rate method is used? (Assume that valuation in the local currency is at market value, which conforms to the rules of FAS 115, "Accounting for Certain Investments in Debt and Equity Securities.")

_____ Which exchange rates are used to express the following accounts in dollars under the current rate method of translation?

_____ Which exchange rates are used to express the following accounts in dollars under the current rate method of translation?

_____ Which exchange rates are used to express the following accounts in dollars under the current rate method of translation?

_____ Which exchange rates are used to express the following accounts (resulting from financing inflows) in dollars under the current rate method of translation?

_____ Under FAS 52, how is the effect of an exchange rate change for the current year reported when the current rate method of translation is used?

_____ Which of the following is not an allowable reason for eliminating the balance in the AOCI-Cumulative Translation Adjustment account?

_____ During 2006, the Japanese yen strengthened. Under the current rate method, a favorable reporting result occurred as a result of this 2006 exchange rate change. What was the subsidiary's average financial position during 2006?

_____ During 2006, the Swiss franc weakened. Under the current rate method, an unfavorable reporting result occurred as a result of this 2006 exchange rate change. What was the subsidiary's average financial position during 2006?

_____ During 2006, the Mexican peso weakened. A favorable reporting result occurred as a result of this 2006 exchange rate change. What was the subsidiary's average financial position during 2006?

_____ Penex has an intercompany receivable denominated in foreign currency from its foreign subsidiary. Penex uses the foreign currency unit of measure approach. In which account should Penex make adjustments to reflect the current exchange rate?

_____ Pavax has intercompany sales to its foreign subsidiary and uses the foreign currency unit of measure approach. Pavax should calculate the amount of any unrealized intercompany profit using the

_____ A foreign subsidiary has the foreign currency as its functional currency. The parent enters into an FX forward to hedge its net investment. What will occur or be the accounting treatment?

_____ A parent owns a foreign subsidiary that has as its functional currency the local currency. To avoid reporting a possible negative effect in the U.S. dollar financial statements from an adverse change in the exchange rate, the parent should hedge which of the following items?

_____ Under FAS 52, how is the effect of an exchange rate change reported when the current rate method of translation is used?