Xena Corporation has a foreign subsidiary, Zeta Corporation, located in Japan. At the end of fiscal 2006, Zeta has:
$\begin{array}{ll}
\text { Non-monetary assets } & 55 \text { million Yen } \
\text { Monetary assets } & 20 \text { million Yen } \
\text { Non-monetary liabilities } & 30 \text { million Yen } \
\text { Monetary liabilities } & 25 \text { million Yen }
\end{array}$
-Assume Xena uses the current rate method for translating Zeta's financial statements from the yen into U.S. dollars. If the yen appreciates relative to the dollar, which of the following is true?

Question

Xena Corporation has a foreign subsidiary, Zeta Corporation, located in Japan. At the end of fiscal 2006, Zeta has:
 $\begin{array}{ll}
\text { Non-monetary assets } & 55 \text { million Yen } \
\text { Monetary assets } & 20 \text { million Yen } \
\text { Non-monetary liabilities } & 30 \text { million Yen } \
\text { Monetary liabilities } & 25 \text { million Yen }
\end{array}$
-Assume Xena uses the current rate method for translating Zeta's financial statements from the yen into U.S. dollars. If the yen appreciates relative to the dollar, which of the following is true?

Quizplus · Accepted Answer

Under the current rate method, all assets and liabilities are translated at the current exchange rate. Non-monetary items are translated at historical rates. When the yen appreciates, the value of monetary assets and liabilities in U.S. dollars increases. Since Zeta has more monetary liabilities (25 million Yen) than monetary assets (20 million Yen), the net exposure is a liability position. An appreciation of the yen would increase the U.S. dollar equivalent of the net liability position, leading to a translation adjustment. This adjustment is recorded in the equity section of the balance sheet, not on the income statement, as a foreign currency translation gain or loss. In this case, because the liabilities exceed the assets and the yen appreciates, it would typically result in a translation loss. However, the question asks which statement is true regarding the recording of gains or losses, and the correct process is that such gains or losses are recorded in the equity section of the balance sheet. Therefore, the focus is on the location of the recording rather than the nature of the gain or loss.

Xena Corporation Has a Foreign Subsidiary, Zeta Corporation, Located in Japan