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Quiz 8 Chapter
13
Translation of
Financial Statements of Foreign Affiliates
Multiple Choice
1. 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?
Notes Payable Equipment
a. Yes Yes
b. Yes No
c. No No
d. No Yes
2. Under the temporal method, monetary
assets and liabilities are translated by using the exchange rate existing at
the:
a. beginning of the current year.
b. date the transaction occurred.
c. balance sheet date.
d. None of these.
3. The process of translating the accounts
of a foreign entity into its functional currency when they are stated in
another currency is called:
a. verification.
b. translation.
c. remeasurement.
d. None of these.
4. Which of the following would be
restated using the average exchange rate under the temporal method?
a. cost of goods sold
b. depreciation expense
c. amortization expense
d. None of these
5. Paid-in capital accounts are translated
using the historical exchange rate under:
a. the current rate method only.
b. the temporal method only.
c. both the current rate and temporal methods.
d. neither the current rate nor temporal
methods.
6. Which of the following would be
restated using the current exchange rate under the temporal method?
a. Marketable securities carried at cost.
b. Inventory carried at market.
c. Common stock.
d. None of these.
7. The translation adjustment that results
from translating the financial statements of a foreign subsidiary using the
current rate method should be:
a. included as a separate item in the
stockholders' equity section of the balance sheet.
b. included in the determination of net income
for the period it occurs.
c. deferred and amortized over a period not to
exceed forty years.
d. deferred until a subsequent year when a loss
occurs and offset against that loss.
8. Average exchange rates are used to translate
certain items from foreign financial statements into U.S. dollars. Such
averages are used in order to:
a. smooth out large translation gains and
losses.
b. eliminate temporary fluctuation in exchange
rates that may be reversed in the next fiscal period.
c. avoid using different exchange rates for some
revenue and expense accounts.
d. approximate the exchange rate in effect when
the items were recognized.
9. 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:
a. historical rate in effect when the land was
purchased.
b. current rate in effect at the balance sheet
date.
c. forward rate.
d. average exchange rate for the current period.
10. 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:
a. current exchange rate.
b. average exchange rate for the current year.
c. historical exchange rate in effect when the
plant asset was acquired or the date of acquisition, whichever is later.
d. forward rate.
11. The following balance sheet accounts of a
foreign subsidiary at December 31, 2011, have been translated into U.S. dollars
as follows:
Translated at
Current
Rates Historical Rates
Accounts
receivable, current $ 600,000 $ 660,000
Accounts
receivable, long-term 300,000 324,000
Inventories
carried at market 180,000 198,000
Goodwill 190,000 220,000
$1,270,000 $1,402,000
What total should be included in the
translated balance sheet at December 31, 2011, for the above items? Assume the
U.S. dollar is the functional currency.
a. $1,270,000
b. $1,288,000
c. $1,300,000
d. $1,354,000
12. 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
Wages expense Sales to customers
a. Yes Yes
b. Yes No
c. No No
d. No Yes
13. A wholly owned subsidiary of a U.S.
parent company has certain expense accounts for the year ended December 31,
2011, stated in local currency units (LCU) as follows:
LCU
Depreciation of
equipment (related assets
were purchased
January 1, 2009) 375,000
Provision for
doubtful accounts 250,000
Rent 625,000
The exchange rates at various dates are
as follows:
Dollar
equivalent
of
1 LCU
December 31,
2011 $0.50
Average for year
ended December 31, 2011 0.55
January 1, 2009 0.40
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?
a. $687,500
b. $625,000
c. $550,000
d. $500,000
14. 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?
a. Translate the financial statements into U.S.
dollars using the current rate method.
b. Remeasure the financial statements into U.S.
dollars using the temporal method.
c. Translate the financial statements into U.S.
dollars using the temporal method.
d. Remeasure the financial statements into U.S.
dollars using the current rate method.
15. 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:
a. exchange rate effective when S Company was
organized.
b. exchange rate effective on the date of
purchase of the stock of S Company by P Company.
c. average exchange rate for the period S
Company stock has been upheld by P Company.
d. current exchange rate.
16. In preparing consolidated financial
statements of a U.S. parent company and a foreign subsidiary, the foreign
subsidiary’s functional currency is the currency:
a. of the country
the parent is located.
b. of the country
the subsidiary is located.
c. in which the
subsidiary primarily generates and spends cash.
d. in which the
subsidiary maintains its accounting records.
17. 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):
a. other
comprehensive income item.
b. extraordinary
item (net of tax).
c. part of continuing
operations.
d. deferred credit.
18. 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):
a. other comprehensive
income item.
b. extraordinary
item (net of tax).
c. part of
continuing operations.
d. deferred credit.
19. 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:
a. the current rate
method only.
b. the temporal
method only
c. both the current
rate and temporal methods.
d. neither the
current rate or the temporal method.
20. The objective of remeasurement is to:
a. produce the same results as if the
books were maintained in the currency of the foreign entity’s largest customer.
b. produce the same results as if the
books were maintained solely in the local currency.
c. produce the same results as if the
books were maintained solely in the functional currency.
d. None of the above.
Problems
13-1 Ramsey, Inc. owns a company that operates
in France. Account balances in francs for the subsidiary are shown below:
2011
January
1 December 31
Cash and
Receivables 24,000 26,000
Supplies 1,000 500
Property, Plant,
and Equipment 52,500 49,000
Accounts Payable (11,500) (5,500)
Long-term Notes
Payable (19,000) (11,000)
Common Stock (30,000) (30,000)
Retained
Earnings (17,000) (17,000)
Dividends-Declared
& Paid on Dec 31 ---- 3,000
Revenues ---- (30,000)
Operating
Expenses ---- 15,000
Totals -0- -0
Exchange rates for 2011 were as follows:
January 1 $0.22
Average for the
year 0.19
December 31 0.18
Revenues were earned and operating
expenses, except for depreciation and supplies used, were incurred evenly
throughout the year. No purchases of supplies or plant assets were made during
the year.
Required:
A. Prepare a schedule to compute the
translation adjustment for the year, assuming the subsidiary's functional
currency is the franc.
B. Prepare a schedule to compute the
translation gain or loss, assuming the subsidiary's functional currency is the
U.S. dollar.
13-2 Sloop Sails Corporation, a U.S. company,
operates a 100%-owned British subsidiary, Sewart Corporation. The U.S. dollar
is the functional currency of the subsidiary. Financial statements for the
subsidiary for the fiscal year-end December 31, 2011, are as follows:
Sewart
Corporation
Income Statement
Pounds
Sales 650,000
Cost of Goods Sold
Beginning
Inventory 310,000
Purchases 265,000
Goods Available
For Sale 575,000
Less: Ending
Inventory 285,000
Cost of Goods
Sold 290,000
Depreciation 79,000
Selling and
Admin. Expenses 155,000
Income Taxes 32,000 556,000
Net Income 94,000
Sewart
Corporation
Partial Balance
Sheet
Current Assets Current
Liabilities
Cash 155,000 Notes Payable 78,000
Accts. Rec. 171,000 Accts. Payable 165,000
Inventories 285,000 Other Current Liab.
51,000
611,000 294,000
Long-term
Liab. 250,000
(issued
July 1, 2009)
Other Information:
1. Equipment costing 340,000 pounds was acquired
July 1, 2009, and 38,000 was acquired June 30, 2011. Depreciation for the
period was as follows:
Equipment – 2009 acquisitions 66,000
– 2011
acquisitions 6,000
2. The beginning inventory was acquired when the
exchange rate was $1.77. The inventory is valued on a FIFO basis. Purchases and
the ending inventory were acquired evenly throughout the period.
3. Dividends were paid by the subsidiary on June
30 amounting to 156,000 pounds.
4. Sales were made and all expenses were
incurred uniformly throughout the year.
5. Exchange rates for the pound on various dates
were:
July 1, 2009 $1.79
Jan. 1, 2011 1.75
June 30, 2011 1.74
Dec. 31, 2011 1.71
Average for 2011 1.73
13-2 (Continued)
Required:
A. Prepare a schedule to determine the
translation gain or loss for 2010, assuming the net monetary liability position
on January 1, 2011, was 180,000 pounds.
B. Compute the dollar amount that each of
the following would be reported at in the 2011 financial statements:
1. Cost of Goods Sold.
2. Depreciation Expense.
3. Equipment.
13-3 Accounts are listed below for a foreign
subsidiary that maintains its books in its local currency. The equity interest in the subsidiary was
acquired in a purchase transaction. In
the space provided, indicate the exchange rate that would be used to translate
the accounts into dollars assuming the functional currency was identified (a)
as the U.S. dollar and (b) as the foreign entity's local currency. Use the following letters to identify the
exchange rate:
H – Historical exchange rate
C – Current exchange rate
A – Average exchange rate for the
current period
Exchange
rate if the
functional
currency is:
Account U.S.
Dollar Local currency
1.
Bonds
Payable (issued 01/01/08) ___________
______________
2.
Office
Supplies ___________
______________
3.
Dividends
Declared ___________ ______________
4.
Common
Stock ___________ ______________
5.
Additional
Paid-In Capital ___________ ______________
6.
Inventory
Carried at Cost ___________ ______________
7.
Short-term
Notes Payable ___________ ______________
8.
Accumulated
Depreciation ___________ ______________
9.
Cash ___________ ______________
10.
Marketable
Securities (carried
at market) ___________ ______________
11.
Cost
of Goods Sold ___________ ______________
12.
Sales ___________ ______________
13.
Accounts
Receivable ___________ ______________
14.
Depreciation
Expense ___________ ______________
15.
Income
Tax Expense ___________ ______________
Use the
following information to answer Problems 13-4 and 13-5.
On January 2, 2011, Promo Inc., a U.S.
parent company, purchased a 100% interest in Spot Company, a subdivision
located in Switzerland. The purchase method of accounting was used to account
for the acquisition. The 2011 financial statements for Spot Company, the
subsidiary, in Swiss francs were as follows:
Comparative
Balance Sheets
Jan.
2 Dec. 31
Cash 15,000 33,000
Accounts
receivable 45,000 49,500
Plant and
equipment (net) (purchased 6/30/08) 75,000 67,500
Land (purchased
6/30/08) 45,000 45,000
Total 180,000 195,000
Accounts payable 13,500 18,000
Long-term notes
payable (issued 6/30/08) 31,500 27,000
Common stock
(issued 6/30/08) 90,000 90,000
Retained
earnings 45,000 60,000
Total 180,000 195,000
Income Statement
Revenues 180,000
Operating expenses
including depreciation
of 7,500 francs
135,000
Net income 45,000
Beginning
retained earnings 45,000
90,000
Dividends
declared and paid 30,000
Ending retained
earnings 60,000
Sales were earned and operating expenses
were incurred evenly during the year.
Exchange rates for the franc at various
dates are:
January 2, 2011 0.8600
December 31,
2011 0.8830
Average for 2011 0.8715
December 10,
2011, dividend payment date 0.8810
June 30, 2008 0.8316
13-4 Use the above information to answer the
following question:
Required:
Translate
the year-end financial statements of Spot Company, the foreign subsidiary,
using the temporal method. Round numbers to the nearest dollar.
13-5 Use the above information to answer the
following question:
Required:
Prepare
a schedule to compute the translation gain or loss for Spot Company, assuming
the temporal method of translation. Round numbers to the nearest dollar.
13-6
Bass
Corporation, a U.S. Company, formed a subsidiary with a new company in London
on January 1, 2011, by investing 500,000 British pounds in exchange for all of
the subsidiary’s common stock. The subsidiary purchased land for 100,000 pounds
and a building for 300,000 pounds on July 1, 2011. The building is being
depreciated over a 40-year life by the straight-line method. The inventory is
valued on an average cost basis. The British pound is the subsidiary’s
functional currency and its reporting currency and has not experienced any
abnormal inflation. Exchange rates for the pound on various dates were:
January 1, 2011 1 pound = 1.81
July 1, 2011 1 pound = 1.86
December 31, 2011 1 pound = 1.83
2011 average rate 1 pound = 1.82
The subsidiary’s adjusted trial
balance is presented below for the year ended December 31, 2011.
Debits In
Pounds
Cash 200,000
Accounts receivable 60,000
Inventory 80,000
Land 100,000
Building 300,000
Depreciation expense 3,750
Cost of goods sold 213,750
Other expenses 90,000
Total debits 1,047,500
Credits
Accumulated depreciation 3,750
Accounts payable 84,000
Accrued liabilities 16,750
Common stock 500,000
Retained earnings - 0 -
Sales revenue 443,000
Total credits 1,047,500
Required:
Prepare
the subsidiary’s:
A.
Translated
workpapers (round to the nearest dollar)
B.
Translated
income statement
C.
Translated
balance sheet
13-7
Using
the information provided in Problem 13-6, use the temporal method instead of
the current rate method.
Required: Prepare the
subsidiary’s:
A.
Translated
workpapers (round to the nearest dollar)
B.
Translated
income statement
C.
Translated
balance sheet
13-8
On
January 1, 2011, Roswell Systems, a U.S.-based company, purchased a controlling
interest in Swiss Management Consultants located in Zurich, Switzerland. The
acquisition was treated as a purchase transaction. The 2011 financial
statements stated in Swiss francs are given below.
SWISS MANAGEMENT
CONSULTANTS
Comparative
Balance Sheets
January 1 and
December 31, 2011
Jan. 1 Dec. 31
Cash and
Receivables 30,000 84,000
Net Property,
Plant, and Equipment 60,000 56,000
Totals 90,000 140,000
Accounts and
Notes Payable 45,000 50,000
Common Stock 30,000 30,000
Retained
Earnings 15,000 60,000
Totals 90,000 140,000
SWISS MANAGEMENT
CONSULTANTS
Consolidated
Income and Retained Earnings Statement
For the Year
Ended December 31, 2011
Revenues 112,000
Operating Expenses including depreciation of 5,000
francs 45,000
Net income 67,000
Dividends Declared and Paid 22,000
Increase in Retained Earnings 45,000
Direct exchange rates for Swiss franc are:
U.S. Dollars per Franc
January
1, 2011 $0.9987
December
31, 2011 0.9321
Average
for 2011 0.9654
Dividend
declaration and payment date 0.9810
Required:
A. Translate the year-end balance sheet and
income statement of the foreign subsidiary using the current rate method of
translation.
B. Prepare a schedule to verify the
translation adjustment.
Short Answer
1. To
accomplish the objectives of translation, two translation methods are used
depending on the functional currency of the foreign entity. Describe the two
translation methods.
2. The
translation process can be done using either the current rate method or the
temporal method. Explain under what circumstances each of the methods is
appropriate.
Short Answer
Questions from the Textbook
1. What
requirements must be satisfied if a foreign subsidiary is to be consolidated?
2. What
is meant by an entity’s functional currency and what are the economic
indicators identified by the FASB to provide guidance in selecting the
functional currency?
3. The
__________is the functional currency of a foreign subsidiary with operations
that are relatively self-contained and integrated within the country in which
it is located. In such cases, the__________ method of translation would be used
to translate the accounts into dollars.
4. The
__________is the functional currency of a foreign subsidiary that is a direct
and integral component or extension of a U.S. parent company. In such cases,
the __________method of translation is used to translate (remeasure) the
accounts into dollars.
5. Which
method of translation is used to convert the financial statements when a
foreign subsidiary operates in a highly inflationary economy?
6. Define
remeasurement.
7. Under
the current rate method, how are assets and liabilities that are stated in a
foreign currency translated?
8. Under
the current rate method, describe how the various balance sheet accounts are
translated (including the equity accounts) and how this translation affects the
computation of various ratios (such as debt to equity or the current ratio). In
particular, discuss whether or not the ratios will change when computed in
local currencies and compared to their calculations (after translation) using
the parent’s currency.
9. What
is the objective of the temporal method of translation?
10. Assuming
that the temporal method is used, how are revenue and expense items in foreign
currency financial statements converted?
11. A
translation adjustment results from the process of translating financial statements
of a foreign subsidiary from its functional currency into dollars. Where is the
translation adjustment reported in the financial statements if the current rate
method is used to translate the accounts?
Business Ethics
Question from the Textbook
The Shady Tree
Company is preparing to announce their quarterly earnings numbers. The company
expectsto beat the analysts’ forecast of earnings by at least5cents a share. In
anticipation of the increase instockvalue and before the release of the
earnings numbers, the company issued stock options to the top executives in the
firm, with the option price equal to today’s market price.
1. This type of executive stock option is
often re-ferred to as “spring-loading.” Do you think this practice should be
allowed? Does it provide in-formation about the integrity of the firm or is
this just good business practice?
2. Do you think this practice violates the
insider trading rules?
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