Question 1

Which of the following would be restated using the current exchange rate under the temporal method?

Accepted Answer

The temporal method requires the restatement of inventory at the current exchange rate. Marketable securities carried at cost and common stock do not require restatement under this method.

Question 2

Paid-in capital accounts are translated using the historical exchange rate under:

Accepted Answer

Paid-in capital accounts are translated using the historical exchange rate under both the current rate and temporal methods because these accounts represent historical transactions and their values are not adjusted for changes in exchange rates over time.

Question 3

A foreign subsidiary's functional currency is its local currency and inflation of over 100 percent has been experienced over a three-year period.For consolidation purposes,SFAS No.52 requires the use of:

Accepted Answer

According to SFAS No. 52, for consolidation purposes, the temporal method should be used when a foreign subsidiary experiences significant inflation. The temporal method uses historical exchange rates for non-monetary assets and liabilities and the current exchange rate for monetary assets and liabilities. This method is preferred in inflationary economies because it recognizes the impact of inflation on non-monetary assets and liabilities. Therefore, choice B is the best choice in this scenario.

Question 4

When translating foreign currency financial statements for a company whose functional currency is the U.S.dollar,which of the following accounts is translated using historical exchange rates?

Accepted Answer

Under the current rate method, all assets and liabilities are translated using the current exchange rate, except for non-monetary assets and liabilities (such as equipment) which are translated using historical exchange rates. Therefore, Notes Payable and Equipment should be translated using different methods, with Notes Payable using current exchange rates and Equipment using historical exchange rates. Choice D is the only option that reflects this.

Question 5

Average exchange rates are used to translate certain items from foreign financial statements into U.S.dollars.Such averages are used in order to:

Accepted Answer

Average exchange rates are used to approximate the exchange rate in effect when the items were recognized in order to accurately translate foreign financial statements into U.S. dollars.

Question 6

The appropriate exchange rate for translating a plant asset in the balance sheet of a foreign subsidiary in which the functional currency is the U.S.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 U.S. 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 plant assets are long-term assets and their original cost is a more appropriate value to use for financial reporting purposes rather than the current or average exchange rates, as they may result in misleading financial statements. The forward rate is not used for translating balance sheet items.

Question 7

P Company acquired 90% of the outstanding common stock of S Company which is a foreign company.The acquisition was accounted for using the purchase method.In preparing consolidated statements,the paid-in capital of S Company should be converted at the:

Accepted Answer

In the purchase method of accounting for an acquisition, the assets and liabilities of the acquired company are recorded at their fair values at the date of acquisition. Therefore, the paid-in capital of S Company should be converted at the exchange rate effective on the date of purchase of the stock of S Company by P Company. This ensures that the investment is accurately reflected in the parent company's financial statements at its cost at the time of acquisition.

Question 8

Gains from remeasuring a foreign subsidiary's financial statements from the local currency,which is NOT the functional currency,into the parent company's currency should be reported as a(n):

Accepted Answer

Gains from remeasuring a foreign subsidiary's financial statements from the local currency into the parent company's currency are reported as part of continuing operations. This is because such gains or losses are considered to result from the normal operations of the business when the local currency is not the functional currency.

Question 9

Under the temporal method,monetary assets and liabilities are translated by using the exchange rate existing at the:

Accepted Answer

Under the temporal method, monetary assets and liabilities are translated using the exchange rate at the balance sheet date. This is because the balance sheet provides a snapshot of the company's financial position at a particular point in time and the exchange rate at that point in time should be used to reflect the true value of the monetary assets and liabilities.

Question 10

A wholly owned subsidiary of a U.S.parent company has certain expense accounts for the year ended December 31,2017,stated in local currency units (LCU)as follows:  Assume that the LCU is the subsidiary's functional currency and that the charges to the expense accounts occurred approximately evenly during the year.What total dollar amount should be included in the translated income statement to reflect these expenses?

Accepted Answer

The answer of A wholly owned subsidiary of a U.S.parent...

Question 11

The objective of remeasurement is to:

Accepted Answer

Remeasurement is a process used in accounting to convert the financial statements of a foreign entity from its functional currency into the reporting currency of the parent company. The objective is to reflect the financial statements as if they were originally maintained in the functional currency, not in the local currency or the currency of the entity's largest customer.

Question 12

In preparing consolidated financial statements of a U.S.parent company and a foreign subsidiary,the foreign subsidiary's functional currency is the currency:

Accepted Answer

The functional currency of a subsidiary is the currency in which it primarily generates and spends cash, which is typically the currency of the country in which the subsidiary operates. This should be used as the basis for preparing financial statements in accordance with GAAP.

Question 13

The process of translating the accounts of a foreign entity into its functional currency when they are stated in another currency is called:

Accepted Answer

The process described in the question is called remeasurement. Translation typically refers to the process of translating financial statements from one language to another, while verification refers to the process of checking the accuracy of financial information.

Question 14

Assuming no significant inflation,gains resulting from the process of translating a foreign entity's financial statements from the functional currency to U.S.dollars should be included as a(n):

Accepted Answer

Gains resulting from the translation of a foreign entity's financial statements are part of the cumulative translation adjustment (CTA) and should be recorded as a component of other comprehensive income. This is in accordance with ASC 830, Foreign Currency Matters. It is not considered an extraordinary item, part of continuing operations, or a deferred credit.

Question 15

The translation adjustment that results from translating the financial statements of a foreign subsidiary using the current rate method should be:

Accepted Answer

The translation adjustment resulting from translating the financial statements of a foreign subsidiary using the current rate method should be included as a separate item in the stockholders' equity section of the balance sheet. This adjustment represents the gain or loss resulting from the translation of the subsidiary's financial statements from the subsidiary's functional currency to the parent's reporting currency. It is not included in the determination of net income and is not deferred or amortized over a period.

Question 16

A foreign subsidiary's functional currency is its local currency which has not experienced significant inflation.The weighted average exchange rate for the current year would be the appropriate exchange rate for translating:

Accepted Answer

According to the current year's weighted average exchange rate, all financial items, including wages expense and sales to customers, should be translated. As the local currency has not experienced significant inflation, there is no need to adjust for inflation. Therefore, option A is correct.

Question 17

When the functional currency is identified as the U.S.dollar,land purchased by a foreign subsidiary after the controlling interest was acquired by the parent company should be translated using the:

Accepted Answer

When the functional currency is identified as the U.S. dollar, assets acquired by a foreign subsidiary, such as land, should be translated using the historical exchange rate in effect at the date of purchase. This approach maintains the historical cost principle.

Question 18

If the functional currency is determined to be the U.S.dollar and its financial statements are prepared in the local currency,SFAS 52,requires which of the following procedures to be followed?

Accepted Answer

When the functional currency is the U.S. dollar but the financial statements are prepared in a local currency, SFAS 52 requires the financial statements to be remeasured into U.S. dollars using the temporal method.

Question 19

The following balance sheet accounts of a foreign subsidiary at December 31,2017,have been translated into U.S.dollars as follows:  What total should be included in the translated balance sheet at December 31,2017,for the above items? Assume the U.S.dollar is the functional currency.

Accepted Answer

To calculate the total translated balance sheet, we need to add up the balances of all the accounts. 
($450,000 + $440,000 + $260,000 + $150,000) x 1.05 = $1,365,750 
However, since we are asked to round to the nearest thousand, the answer is $1,300,000 (C).

Question 20

Which of the following would be restated using the average exchange rate under the temporal method?

Accepted Answer

Under the temporal method, non-monetary items such as inventory (which affects cost of goods sold), and long-lived assets (which affects depreciation and amortization expense), are typically translated at historical exchange rates, not the average exchange rate.

Quiz 13: Translation of Financial Statements of Foreign Affiliates