CH.

5 Test bank
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.
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 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 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
translated into U.S. dollars as follows:
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

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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.
LCU
Depreciation of equipment (related assets were
375,000
purchased January 1, 2009)
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
beincluded in the translated income statement to reflect these expenses
a) $687,500
b) $625,000
c) $550,000
d) $500,000

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:
Wages expense Sales to customers
A. Yes Yes
B. Yes No
C. No No
D. No Yes

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.
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 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

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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) c c
2. Office Supplies H c
3. Dividends Declared H H
4. Common Stock H H
5. Additional Paid-In Capital H H

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 6. Inventory Carried at Cost H c
7. Short-term Notes Payable c c
8. Accumulated Depreciation H c
9. Cash c c
10. Marketable Securities (carried at market) c c
11. Cost of Goods Sold H A
12. Sales A A
13. Accounts Receivable c c
14. Depreciation Expense H A
15. Income Tax Expense A A

Use the following information to answer Problems 13-4 and 13-5:

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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.

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Answer

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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)
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B. Translated income statement
C. Translated balance sheet
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