江西财经大学高级财务会计国际学院题库chapter_14

Advanced Accounting, 11e (Beams/Anthony/Bettinghaus/Smith)

Chapter 14 Foreign Currency Financial Statements

Multiple Choice Questions

1) A U.S. firm has a Belgian subsidiary that uses the British pound as its functional currency. According to GAAP, the U.S. dollar from Belgian unit's point of view will be

A) its only foreign currency.

B) its local currency.

C) its current rate method currency.

D) its reporting currency.

Answer: D

Objective: LO1

Difficulty: Easy

2) Selvey Inc. is a wholly-owned subsidiary of Parsfield Incorporated, a U.S. firm. The country where Selvey operates is determined to have a highly inflationary economy according to GAAP definitions. Therefore, for purposes of preparing consolidated financial statements, the functional currency is

A) its reporting currency.

B) its current rate method currency.

C) the US dollar.

D) its local currency.

Answer: C

Explanation: C) Selvey must use the functional currency of the reporting entity.

Objective: LO3

Difficulty: Easy

3) All of the following factors would be used to define a foreign entity's functional currency, except

A) high volume of intercompany transactions.

B) expenses for foreign entity primarily driven by local factors.

C) financing for foreign entity denominated in local currency.

D) foreign entity's status as a local tax haven for transfer pricing purposes.

Answer: D

Objective: LO1

Difficulty: Easy

4) The primary goal behind consolidating financial statements of a controlled subsidiary is

A) assuring that the subsidiary financial statements are the same under the temporal method or the current rate method.

B) assuring that the individual nature of the subsidiary entity is not lost in the consolidation.

C) representing the conversion of statements at the historical exchange rate.

D) representing the company's underlying economic condition.

Answer: D

Objective: LO2

Difficulty: Easy

5) Pelmer has a foreign subsidiary, Sapp Corporation of Germany, whose functional currency is the euro. Sapp's books are maintained in euros. On December 31, 2011, Sapp has an account receivable denominated in British pounds. Which one of the following statements is true?

A) Because all accounts of the subsidiary are translated into U.S. dollars at the current rate, the Account Receivable is not adjusted on the subsidiary's books before translation.

B) The Account Receivable is remeasured into the functional currency, thus eliminating the need for translation.

C) The Account Receivable is first adjusted to reflect the current exchange rate in euros and then translated at the current exchange rate into dollars.

D) The Account Receivable is adjusted to euros at the current exchange rate, and any resulting gain or loss is included as a translation adjustment in the stockholders' equity section of the subsidiary's separate balance sheet.

Answer: C

Objective: LO2

Difficulty: Moderate

6) Paskin Corporation's wholly-owned Canadian subsidiary has a Canadian dollar functional currency. In translating the subsidiary's account balances into U.S. dollars for reporting purposes, which one of the following accounts would be translated at historical exchange rates?

A) Accounts Receivable

B) Notes Payable

C) Capital Stock

D) Retained Earnings

Answer: C

Objective: LO2

Difficulty: Easy

7) A foreign entity is a subsidiary of a U.S. parent company and has always used the current rate method to translate its foreign financial statements on behalf of its parent company. Which one of the following statements is false?

A) The U.S. dollar is the functional currency of this company.

B) Changes in exchange rates between the subsidiary's country and the parent's country are not expected to affect the foreign entity's cash flows.

C) Translation adjustments are shown in stockholders' equity as increases or decreases in other comprehensive income.

D) Translation adjustments are not shown on the income statement.

Answer: A

Objective: LO2

Difficulty: Easy

8) Assume the functional currency of a foreign entity is the U.S. dollar, but the books are kept in euros. The objective of remeasurement of a foreign entity's accounts is to

A) produce the same results as if the foreign entity's books were maintained in the currency of the largest customer.

B) produce the same results as if the foreign entity's books were maintained solely in the local currency.

C) produce the same results as if the foreign entity's books were maintained solely in the U.S. dollar.

D) produce the results reflective of the foreign entity's economics in the local currency.

Answer: C

Objective: LO2

Difficulty: Easy

9) Which of the following assets and/or liabilities are considered monetary?

A) Intangible Assets and Plant, Property, and Equipment

B) Bonds Payable and Common Stock

C) Cash and Accounts Payable

D) Notes Receivable and Inventories carried at cost

Answer: C

Objective: LO2

Difficulty: Easy

10) Which of the following statements about the Current Rate method is false?

A) Translation involves restating the functional currency amounts into the reporting currency.

B) All assets and liabilities are translated at the current rate.

C) If the subsidiary maintains their books in their functional currency, the current rate method is used.

D) The effect of exchange rate changes are reported on the income statement as a foreign exchange gain or loss.

Answer: D

Objective: LO2

Difficulty: Easy

11) Accounts representing an allowance for uncollectible accounts are converted into U.S. dollars at

A) historical rates when the U.S. dollar is the functional currency.

B) current rates only when the U.S. dollar is the functional currency.

C) historical rates regardless of the functional currency.

D) current rates regardless of the functional currency.

Answer: D

Objective: LO2

Difficulty: Easy

12) Palk Corporation has a foreign subsidiary located in a country experiencing high rates of inflation. Information concerning this country's inflation rate experience is given below.

Change Annual rate

Date Index in index of Inflation

January 1, 2009 90

January 1, 2010 120 30 30/100 = 30.00%

January 1, 2011 150 30 30/130 = 23.08%

January 1, 2012 210 60 60/160 = 37.50%

The inflation rate that is used in determining if the subsidiary is operating in a highly inflationary economy is

A) 37.50%.

B) 90.58%.

C) 133.33%.

D) 350.00%.

Answer: C

Explanation: C) [(210 - 90)/90] × 100% = 133%

Objective: LO3

Difficulty: Moderate

13) At the time of a business acquisition,

A) identifiable assets and liabilities are allocated the portion of the translation or remeasurement adjustment that existed on the date of acquisition.

B) a foreign entity's assets and liabilities are translated into U.S. dollars using the current exchange rate in effect on that date.

C) the difference between investment fair value and translated net assets acquired is treated as a remeasurement gain or loss on the income statement.

D) the difference between investment fair value and translated net assets acquired is recorded as a cumulative translation adjustment on the balance sheet.

Answer: B

Objective: LO4

Difficulty: Easy

14) When translating foreign subsidiary income statements using the current rate method, why are some accounts translated at an average rate?

A) This approach improves matching.

B) This approach accentuates the conservatism principle.

C) This approach smoothes out highly volatile exchange rate fluctuations.

D) This approach approximates the effect of transactions which occur continuously during the period. Answer: D

Objective: LO5

Difficulty: Easy

15) The following assets of Poole Corporation's Romanian subsidiary have been converted into U.S. dollars at the following exchange rates:

Current Historical

Rates Rates

Accounts receivable $850,000 $875,000

Trademark 600,000 575,000

Property plant and equipment 1,200,000 900,000

Totals $2,650,000 $2,350,000

Assume the functional currency of the subsidiary is the U.S. dollar and the books are kept in a different currency. The assets should be reported in the consolidated financial statements of Poole Corporation and Subsidiary in the total amount of

A) $2,325,000.

B) $2,350,000.

C) $2,375,000.

D) $2,650,000.

Answer: A

Explanation: A) A/R $850,000 + Trademark $575,000 + Plant $900,000

Objective: LO5

Difficulty: Moderate

16) Which of the following foreign subsidiary accounts will have the same value on consolidated financial statements, regardless of whether the statements are remeasured or translated?

A) Trademark

B) Deferred Income

C) Accounts Receivable

D) Goodwill

Answer: C

Objective: LO2

Difficulty: Easy

17) Exchange gains or losses from remeasurement appear

A) in the continuing operations section of the consolidated income statement.

B) as an extraordinary item on the consolidated income statement.

C) as other comprehensive income typically reported in a statement of stockholders' equity.

D) as an adjustment to the beginning balance of retained earnings on the consolidated Statement of retained earnings.

Answer: A

Objective: LO6

Difficulty: Easy

18) A U.S. parent corporation loans funds to a foreign subsidiary to be used to purchase equipment. The loan is denominated in U.S. dollars and the functional currency of the subsidiary is the euro. This intercompany transaction is a foreign currency transaction of

A) neither the subsidiary nor the parent, as it is eliminated as part of the consolidation procedure.

B) the subsidiary but not the parent.

C) both the subsidiary and the parent.

D) the parent but not the subsidiary.

Answer: B

Objective: LO7

Difficulty: Moderate

19) A foreign subsidiary's accounts receivable balance should be translated for the consolidated financial statements at

A) the appropriate historical rate.

B) the prior year's forecast rate.

C) the future rate for the next year.

D) the spot rate at year-end.

Answer: D

Objective: LO8

Difficulty: Easy

20) If a U.S. company wants to hedge a prospective loss on its investment in a foreign entity that may result from a foreign currency fluctuation, the U.S. company should

A) purchase a forward to swap currency of the foreign entity's local country for U.S. currency.

B) purchase a call option to buy currency of the foreign entity's local country.

C) issue a loan in the foreign entity's local country.

D) borrow money in the foreign entity's local country.

Answer: D

Objective: LO9

Difficulty: Easy

Exercises

1) For each of the 12 accounts listed in the table below, select the correct exchange rate to use when either remeasuring or translating a foreign subsidiary for its U.S. parent company.

Codes

C = Current exchange rate

H = Historical exchange rate

A = Average exchange rate

U.S. dollar is The foreign

the functional currency is the

currency functional currency

1. Accounts receivable ________ ________

2. Marketable debt securities

carried at cost ________ ________

3. Inventories carried at cost ________ ________

4. Deferred income ________ ________

5. Goodwill ________ ________

6. Other paid-in capital ________ ________

7. Depreciation expense ________ ________

8. Refundable deposits ________ ________

9. Common stock ________ ________

10. Accumulated depreciation on

buildings ________ ________

11. Deferred income tax liabilities ________ ________

12. Accounts payable ________ ________

Answer: U.S. dollar is The foreign

the functional currency is the

currency functional currency

1. Accounts receivable C C

2. Marketable debt securities

carried at cost H C

3. Inventories carried at cost H C

4. Deferred income H C

5. Goodwill H C

6. Other paid-in capital H H

7. Depreciation expense H C

8. Refundable deposits C C

9. Common stock H H

10. Accumulated depreciation on

buildings H C

11. Deferred income tax liabilities C C

12. Accounts payable C C Objective: LO2

Difficulty: Moderate

2) On January 1, 2012, Planet Corporation, a U.S. company, acquired 100% of Star Corporation of Bulgaria, paying an excess of 90,000 Bulgarian lev over the book value of Star's net assets. The excess was allocated to undervalued equipment with a three-year remaining useful life. Star's functional currency is the Bulgarian lev. Star's books are maintained in the functional currency. Exchange rates for Bulgarian lev for 2012 are:

January 1, 2012 $.77

Average rate for 2012 .75

December 31, 2012 .73

Required:

1. Determine the depreciation expense stated in U.S. dollars on the excess allocated to equipment for 201

2.

2. Determine the unamortized excess allocated to equipment on December 31, 2012 in U.S. dollars.

3. If Star's functional currency was the U.S. dollar, what would be the depreciation expense on the excess allocated to the equipment for 2012?

Answer:

Requirement 1

Depreciation expense in 2012

90,000 lev/3 years × $.75/lev = $22,500 depreciation expense

Requirement 2

Unamortized excess at December 31, 2012

90,000 lev × 2/3 × $.73/lev = $43,800 unamortized excess on equipment

Requirement 3

Remeasured depreciation expense

90,000 lev × $.77/lev = $69,300 excess

$69,300/3 years = $23,100 depreciation expense

Objective: LO5

Difficulty: Moderate

3) Pan Corporation, a U.S. company, formed a British subsidiary on January 1, 2012 by investing 450,000 British pounds (￡) in exchange for all of the subsidiary's no-par common stock. The British subsidiary, Skillet Corporation, purchased real property on April 1, 2012 at a cost of ￡500,000, with ￡100,000 allocated to land and ￡400,000 allocated to a building. The building is depreciated over a 40-year estimated useful life on a straight-line basis with no salvage value. The British pound is Skillet's functional currency and its reporting currency. The British economy does not have high rates of inflation. Exchange rates for the pound on various dates were:

January 01, 2012 =1￡ =$1.60

April 01, 2012 =1￡ =$1.61

December 31, 2012 =1￡ =$1.68

2012 average rate =1￡ =$1.66

Skillet's adjusted trial balance is presented below for the year ended December 31, 2012.

In Pounds

Debits:

Cash ￡ 220,000

Accounts receivable 52,000

Inventory 59,000

Building 400,000

Land 100,000

Depreciation expense 7,500

Other expenses 110,000

Cost of goods sold 220,000

Total debits ￡ 1,168,500

Credits

Accumulated depreciation ￡7,500

Accounts payable 111,000

Common stock 450,000

Retained earnings 0

Equity adjustment 0

Sales revenue 600,000

Total credits ￡1,168,500

Required: Prepare Skillet's:

1. Translation working papers;

2. Translated income statement; and

3. Translated balance sheet.

Answer:

Requirement 1

Skillet Corporation

Translation Working Papers

Debits

Cash 220,000 × $1.68 =$369,600 Accounts receivable 52,000 × $1.68 =87,360 Inventory 59,000 × $1.68 =99,120 Building 400,000 × $1.68 =672,000 Land 100,000 × $1.68 =168,000 Depreciation expense 7,500 × $1.66 =12,450 Other expenses 110,000 × $1.66 =182,600 Cost of goods sold 220,000 × $1.66 =365,200

_________ Total debits $1,956,330

Credits

Accumulated depreciation 7,500 × $1.68 =$12,600 Accounts payable 111,000 × $1.68 =186,480 Common stock 450,000 × $1.60 =720,000 Sales revenue 600,000 × $1.66 =996,000 Retained earnings 0 Total credits $1,915,080

Credit differential $41,250

Requirement 2

Skillet Corporation

Translated Income Statement

For the Year Ended December 31, 2012

Sales revenue $996,000

Expenses:

Cost of goods sold (365,200) Depreciation expense (12,450) Other expenses (182,600)

________ Net income $435,750

Requirement 3

Skillet Corporation

Translated Balance Sheet

December 31, 2012

Cash $369,600 Accounts receivable 87,360 Inventory 99,120 Building-net 659,400 Land 168,000 Total assets $1,383,480 Accounts payable $186,480 Common stock 720,000 Retained earnings 435,750 Accumulated other comprehensive income 41,250 Total liabilities & equities $1,383,480 Objective: LO5

Difficulty: Moderate

4) Note to Instructor: This exam item is a continuation of Exercise 3 and proceeds forward with Skillet's second year of operations.

Skillet Corporation, a British subsidiary of Pan Corporation (a U.S. company) was formed by Pan on January 1, 2012 in exchange for all of the subsidiary's common stock. Skillet has now ended its second year of operations on December 31, 2013. Relevant exchange rates are:

January 01, 2013 =1￡ =$1.60

December 31, 2013 =1￡ =$1.75

2013 average rate =1￡ =$1.73

Skillet's adjusted trial balance is presented below for the calendar year 2013. The amount of equity adjustment carried over from 2012 is a credit balance of $41,250 (in dollars).

In Pounds

Debits:

Cash ￡75,000

Accounts receivable 362,000

Inventory 41,000

Building 400,000

Land 100,000

Depreciation expense 10,000

Other expenses 133,000

Cost of goods sold 380,000

Total debits ￡1,501,000

Credits

Accumulated depreciation ￡17,500

Accounts payable 154,750

Common stock 450,000

Retained earnings 262,500

Sales revenue 616,250

Total credits ￡1,501,000

Required: For Skillet's second year of operations, prepare the:

1. Translation working papers;

2. Translated income statement; and

3. Translated balance sheet.

Answer:

Requirement 1

Skillet Corporation

Translation Working Papers

Debits

Cash 75,000 × $1.75 =$131,250 Accounts receivable 362,000 × $1.75 =633,500 Inventory 41,000 × $1.75 =71,750 Building 400,000 × $1.75 =700,000 Land 100,000 × $1.75 =175,000 Depreciation expense 10,000 × $1.73 =17,300 Other expenses 133,000 × $1.73 =230,090 Cost of goods sold 380,000 × $1.73 =657,400

Total debits $2,616,290

Credits

Accumulated depreciation 17,500 × $1.75 =$30,625 Accounts payable 154,750 × $1.75 =270,812 Common stock 450,000 × $1.60 =720,000 Sales revenue 616,250 × $1.73 =1,066,113 Retained earnings 262,500 435,750 Accumulated other comprehensive income 41,250 Total credits $2,564,550 Credit differential $51,740

Requirement 2

Skillet Corporation

Translated Income Statement

for the year ended December 31, 2013

Sales revenue $1,066,113

Expenses:

Cost of goods sold (657,400) Depreciation expense (17,300) Other expenses (230,090) Net income $161,323 Retained earnings, January 1, 2013 435,750 Retained earnings, December 31, 2013 $597,073

Requirement 3

Skillet Corporation

Translated Balance Sheet

December 31, 2013

Cash $131,250 Accounts receivable 633,500 Inventory 71,750 Building-net 669,375 Land 175,000 Total assets $1,680,875 Accounts payable $270,812 Common stock 720,000 Retained earnings 597,073 Accum. other comprehensive income ($41,250 + $51,740) 92,990 Total liabilities & equities $1,680,875 Objective: LO5

Difficulty: Moderate

5) Note to Instructor: This exam item is similar to Exercise 3 except that the exchange rates have been changed and the temporal method is used instead of the current rate method.

The Polka Corporation, a U.S. corporation, formed a British subsidiary on January 1, 2011 by investing 550,000 British pounds (￡) in exchange for all of the subsidiary's no-par common stock. The British subsidiary, Stripe Corporation, purchased real property on April 1, 2011 at a cost of ￡500,000, with ￡100,000 allocated to land and ￡400,000 allocated to the building. The building is depreciated over a

40-year estimated useful life on a straight-line basis with no salvage value. The U.S. dollar is Stripe's functional currency, but it keeps its records in pounds. The British economy does not experience high rates of inflation. Exchange rates for the pound on various dates are:

January 01, 2011 =1￡ =$1.60

April 01, 2011 =1￡ =$1.62

December 31, 2011 =1￡ =$1.65

2011 average rate =1￡ =$1.64

Stripe's adjusted trial balance is presented below for the year ended December 31, 2011.

In Pounds

Debits:

Cash ￡ 200,000

Accounts receivable 72,000

Notes receivable 99,000

Building 400,000

Land 100,000

Depreciation expense 7,500

Other expenses 115,000

Salary expense 208,000

Total debits ￡1,201,500

Credits

Accumulated depreciation ￡7,500

Accounts payable 100,000

Common stock 550,000

Retained earnings 0

Equity adjustment 0

Sales revenue 544,000

Total credits ￡1,201,500

Required: Prepare Stripe's:

1. Remeasurement working papers;

2. Remeasured income statement; and

3. Remeasured balance sheet.

Answer:

Requirement 1

Stripe Corporation

Remeasurement Working Papers

Debits

Cash 200,000 × $1.65 =$330,000 Accounts receivable 72,000 × $1.65 =118,800

Notes receivable 99,000 × $1.65 =163,350 Building 400,000 × $1.62 =648,000

Land 100,000 × $1.62 =162,000 Depreciation expense 7,500 x $1.62 =12,150

Other expenses 115,000 × $1.64 =188,600 Salary expense 208,000 × $1.64 =341,120

_________

Total debits $1,964,020 Credits

Accumulated depreciation 7,500 × $1.62 =$12,150 Accounts payable 100,000 × $1.65 =165,000 Common stock 550,000 × $1.60 =880,000

Sales revenue 544,000 × $1.64 =892,160 Retained earnings 0 0 Total credits $1,949,310

Credit differential $14,710 Requirement 2

Stripe Corporation

Remeasured Income Statement

For the Year Ended December 31, 2011

Sales revenue $892,160 Expenses:

Salary expense (341,120) Depreciation expense (12,150) Other expenses (188,600) Income before exchange gains or losses $350,290 Exchange gains 14,710 Net income $365,000 Retained earnings, January 1, 2011 0 Retained earnings, December 31, 2011 $365,000

Requirement 3

Stripe Corporation

Remeasured Balance Sheet

December 31, 2011

Cash $330,000 Accounts receivable 118,800 Notes receivable 163,350 Building-net 635,850 Land 162,000 Total assets $1,410,000 Accounts payable $165,000 Common stock 880,000 Retained earnings 365,000 Total liabilities & equities $1,410,000 Objective: LO5

Difficulty: Moderate

6) Note to Instructor: This exam item is a continuation of Exercise 5 and proceeds forward with Stripe's second year of operations.

Stripe Corporation, a British subsidiary of Polka Corporation (a U.S. company) was formed by Polka on January 1, 2011 in exchange for all of the subsidiary's common stock. Stripe has now ended its second year of operations on December 31, 2012. Relevant exchange rates are:

January 01, 2011 = 1￡ = $1.60

April 01, 2011 = 1￡ = $1.62

December 31, 2012 = 1￡ = $1.57

2012 average rate = 1￡ = $1.56

Stripe's adjusted trial balance is presented below for the calendar year 2012.

In Pounds

Debits:

Cash ￡ 172,000

Accounts receivable 308,000

Notes receivable 98,000

Building 400,000

Land 100,000

Depreciation expense 10,000

Other expenses 117,000

Salary expense 376,000

Total debits ￡1,581,000

Credits

Accumulated depreciation ￡17,500

Accounts payable 200,000

Common stock 550,000

Retained earnings 213,500

Sales revenue 600,000

Total credits ￡1,581,000

Required: Prepare Stripe's:

1. Remeasurement working papers;

2. Remeasured income statement; and

3. Remeasured balance sheet.

Answer:

Requirement 1

Stripe Corporation

Remeasurement Working Papers

Debits

Cash 172,000 × $1.57 =$270,040 Accounts receivable 308,000 × $1.57 =483,560

Notes receivable 98,000 × $1.57 =153,860 Building 400,000 × $1.62 =648,000

Land 100,000 × $1.62 =162,000 Depreciation expense 10,000 × $1.62 =16,200

Other expenses 117,000 × $1.56 =182,520 Salary expense 376,000 × $1.56 =586,560

_________

Total debits $2,502,740 Credits

Accumulated depreciation 17,500 × $1.62 =$28,350 Accounts payable 200,000 × $1.57 =314,000 Common stock 550,000 × $1.60 =880,000

Sales revenue 600,000 × $1.56 =936,000 Retained earnings 213,500 365,000

Total credits $2,523,350

Debit differential $20,610 Requirement 2

Stripe Corporation

Translated Income Statement

For the Year Ended December 31, 2012

Sales revenue $936,000 Expenses:

Salary expense (586,560) Depreciation expense (16,200) Other expenses 182,520) Income before exchange gains or losses $150,720 Exchange loss (20,610) Net income $130,110 Retained earnings, January 1, 2012 365,000 Retained earnings, December 31, 2012 $495,110