Question 1

When an item is deemed to hedge a net investment in a foreign subsidiary, any gain or loss on the hedging items is recorded in _________________.

Accepted Answer

When an item is deemed to hedge a net investment in a foreign subsidiary, any gain or loss on the hedging items is recorded in Other Comprehensive Income. This is because the objective of the hedge is to reduce the volatility of the foreign currency translation adjustments in Other Comprehensive Income, rather than to generate income or expenses in the current period.

Question 2

When the functional currency is different than the presentation currency, monetary items are restated _________________________ and any gain or loss is recorded in ________________.

Accepted Answer

Monetary items are restated at the closing rate at the financial statement date, and any resulting exchange gain or loss is recognized in income, according to International Financial Reporting Standards (IFRS) and generally accepted accounting principles (GAAP).

Question 3

When the functional currency is not the same as the presentation currency, the investee must translate the financial statements using the____________ for balance sheet accounts and ________________ for income statement accounts.

Accepted Answer

When the functional currency and presentation currency differ, the investee must translate the financial statements using the year-end closing rate for the balance sheet accounts and the rate when the transaction occurred for income statement accounts. Therefore, option B is the best choice.

Question 4

On consolidation using the Canadian dollar presentation, the appropriate exchange rate for translating a plant asset in the balance sheet of a foreign subsidiary in which the functional currency is the Canadian dollar is the:

Accepted Answer

The appropriate exchange rate for translating a plant asset in the balance sheet of a foreign subsidiary in which the functional currency is the Canadian dollar is the historical exchange rate in effect when the plant asset was acquired or the date of acquisition, whichever is later. This is because the historical rate reflects the value of the asset at the time of acquisition and is therefore the most relevant rate for balance sheet purposes. The current rate, average rate, and forward rate are not appropriate for this purpose as they do not reflect the historical cost of the asset.

Question 5

Whether the foreign operation's activities are relatively autonomous of those of the parent entity or whether they are carried out as an extension thereof is what type of indicator in determining the functional currency of a foreign operation?

Accepted Answer

The answer of Whether the foreign operation's activities are relatively...

Question 6

Which of the following statements regarding hedge accounting within a group is FALSE?

Accepted Answer

For hedge accounting purposes, intragroup transactions generally do not qualify for hedge accounting in the consolidated financial statements because they are eliminated in consolidation. Hedge accounting requires the hedging instrument to involve a party external to the entity being reported on.

Question 7

Under ASPE, the ______________ is assumed to be the reporting currency, although any currency can be determined to be the ______________ currency.

Accepted Answer

Under ASPE (Accounting Standards for Private Enterprises in Canada), the Canadian dollar is assumed to be the reporting currency, although entities can determine any currency to be their reporting currency based on their specific circumstances.

Question 8

When any fair value adjustments exist on the carrying amounts of assets and liabilities arising on the acquisition of a foreign operation, they are treated as assets and liabilities ________________ for the purposes of translation. Therefore, they are carried in the _______________ currency of the foreign operation and are translated at the closing rate (i.e. using the current rate method)for the purposes of presentation on consolidation.

Accepted Answer

Fair value adjustments on the carrying amounts of assets and liabilities from the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation itself. Therefore, they are carried in the functional currency of the foreign operation and translated at the closing rate using the current rate method for consolidation purposes.

Question 9

A parent company may lend money to a foreign subsidiary where the settlement terms are neither planned nor likely to occur in the foreseeable future. This loan would likely be denominated on the individual company's financial statements in:

Accepted Answer

The loan can be denominated in either the parent company's functional currency or that of the subsidiary, depending on various factors such as the agreement terms, the functional currency of both entities, and the management's intention regarding the settlement of the loan.

Question 10

When the functional currency of a foreign subsidiary is identified as the Canadian dollar, and land purchased by the foreign subsidiary, after the controlling interest was acquired by the parent company who is presenting consolidated financial statements in the Canadian dollar, the land should be translated for consolidation using the

Accepted Answer

When translating assets for consolidation, the historical exchange rate at the date of the transaction is used for non-monetary assets such as land. This is because the historical rate reflects the exchange rate at the time the asset was actually acquired, providing a more accurate representation of the cost in the functional currency.

Question 11

Which of the following statements about a presentation currency is FALSE?

Accepted Answer

The functional currency and the presentation currency do not have to be the same. The functional currency is the currency of the primary economic environment in which the entity operates, while the presentation currency is the currency in which the financial statements are presented to users. However, if the functional currency and the presentation currency are different, the financial statements are translated into the presentation currency for reporting purposes.

Question 12

When translating foreign currency financial statements for a company whose functional currency is the Canadian dollar, into a group financial statement presented in Canadian dollars, which of the following accounts is translated using historical exchange rates? Notes Payable Equipment

Accepted Answer

Equipment is translated using historical exchange rates because it is a non-monetary asset, while notes payable, a monetary liability, is translated using the current exchange rate.

Question 13

Which of the following factors is a SECONDARY indicator used to choose a functional currency?

Accepted Answer

Secondary indicators for determining a functional currency include the ability of a subsidiary to generate cash flows to service its debts, as it reflects the currency that influences the financing activities.

Question 14

Which of the following statements regarding the non-controlling interest is FALSE?

Accepted Answer

The statement in C is false because for the purpose of consolidation and allocation to the non-controlling interest, the financial statements of the subsidiary are translated into the presentation currency of the parent company, not just into the functional currency. The functional currency is relevant for the subsidiary's own financial reporting before consolidation.

Question 15

Consolidation adjustments must be restated to the _______________ currency.

Accepted Answer

Consolidation adjustments must be restated to the presentation currency to ensure that the consolidated financial statements are presented in a single currency, facilitating comparability and understanding for the users of the financial statements.

Question 16

A Change in the functional currency of an entity occurs

Accepted Answer

A change in the functional currency of an entity is a significant event that occurs only if there are significant changes in the economic environment or operations of the entity. Such a change is accounted for prospectively, meaning from the point of the change forward, not altering past financial statements.

Question 17

Which of the following statements regarding the preparation of foreign currency adjustments, for consolidation or the application of the equity method, is FALSE?

Accepted Answer

Monetary balances are not eliminated during the consolidation process or when applying the equity method; instead, they are translated using the spot rate at the balance sheet date. The elimination process refers to intercompany transactions and balances, not the translation of monetary balances.

Question 18

Upon consolidation, goodwill is re-translated at the ________ rate for the purposes of consolidation.

Accepted Answer

Upon consolidation, goodwill is re-translated at the closing rate for the purposes of consolidation. This is because the closing rate is the appropriate exchange rate to use for translating the foreign subsidiary's assets, liabilities, and equity for consolidation purposes. The closing rate is the exchange rate at the end of the reporting period, which reflects the most accurate and up-to-date valuation of the foreign currency denominated items.

Question 19

Komota Ltd., a public Canadian corporation, has a subsidiary in Australia. It has been determined that the functional currency of the foreign operations is the Australian dollar. Which of the following statements is TRUE?

Accepted Answer

The presentation currency is the currency in which the financial statements are presented. Since Komota Ltd. is a Canadian corporation, it is logical that its presentation currency is the Canadian dollar, regardless of the functional currency of its foreign operations.

Question 20

All of the following are considered to be consolidation adjustments EXCEPT

Accepted Answer

Consolidation adjustments are made to eliminate intercompany balances and transactions, account for fair value adjustments, and account for non-controlling interests. Translating balances into the presentation currency is not considered a consolidation adjustment but rather a translation adjustment for reporting purposes.

Quiz 8: Accounting for Foreign Investments