Advanced Accounting 12th Edition, Hoyle TB Download

ADVANCED ACCOUNTING 12TH EDITION
HOYLE
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Chapter 10
Translation of Foreign Currency Financial Statements
Multiple Choice Questions
1. In accounting, the term translation refers to
A. the calculation of gains or losses from hedging transactions.
B. the calculation of exchange rate gains or losses on individual transactions in foreign

currencies.
C. the procedure required to identify a company's functional currency.
D. the calculation of gains or losses from all transactions for the year.
E. a procedure to prepare a foreign subsidiary's financial statements for consolidation.
10-1
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2. What is a company's functional currency?
A. the currency of the primary economic environment in which it operates.
B. the currency of the country where it has its headquarters.
C. the currency in which it prepares its financial statements.
D. the reporting currency of its parent for a subsidiary.
E. the currency it chooses to designate as such.
3. According to U.S. GAAP for a local currency perspective, which method is usually required for
translating a foreign subsidiary's financial statements into the parent's reporting currency?
A. the temporal method.
B. the current rate method.
C. the current/noncurrent method.
D. the monetary/nonmonetary method.
E. the noncurrent rate method.
4. In translating a foreign subsidiary's financial statements, which exchange rate does the
current method require for the subsidiary's assets and liabilities?
A. the exchange rate in effect when each asset or liability was acquired.
B. the average exchange rate for the current year.
C. a calculated exchange rate based on market value.
D. the exchange rate in effect as of the balance sheet date.
E. the exchange rate in effect at the start of the current year.
10-2
5. The translation adjustment from translating a foreign subsidiary's financial statements should
be shown as
A. an asset or liability (depending on the balance) in the consolidated balance sheet.
B. a revenue or expense (depending on the balance) in the consolidated income statement.
C. a component of stockholders' equity in the consolidated balance sheet.
D. a component of cash flows from financing activities in the consolidated statement of cash
flows.
E. an element of the notes which accompany the consolidated financial statements.
6. Westmore Ltd., is a British subsidiary of a U.S. company. Westmore's functional currency is

the pound sterling (≤). The following exchange rates were in effect during 2013:
Westmore reported sales of ≤1,500,000 during 2013. What amount (rounded) would have
been included for this subsidiary in calculating consolidated sales?
A. $2,415,000.
B. $2,400,000.
C. $2,385,000.
D. $943,396.
E. $931,677.
10-3
On December 31, 2013, Westmore had accounts receivable of ≤280,000. What amount
(rounded) would have been included for this subsidiary in calculating consolidated accounts
receivable?
A. $173,913.
B. $176,100.
C. $445,200.
D. $448,000.
E. $450,800.
10-4
8. Gunther Co. established a subsidiary in Mexico on January 1, 2013. The subsidiary engaged in
the following transactions during 2013:
What amount of foreign exchange gain or loss would have been recognized in Gunther's
consolidated income statement for 2013?
A. $800,000 gain.
B. $760,000 gain.
C. $320,000 loss.
D. $280,000 loss.
E. $440,000 loss.
10-5
9. Darron Co. was formed on January 1, 2013 as a wholly owned foreign subsidiary of a U.S.
corporation. Darron's functional currency was the stickle (§). The following transactions and
events occurred during 2013:
What exchange rate should have been used in translating Darron's revenues and expenses for
2013?
A. $1 = §.48.
B. $1 = §.44.
C. $1 = §.46.
D. $1 = §.42.
E. $1 = §.45.
10-6
corporation. Darron's functional currency was the stickle (§). The following transactions and
What was the amount of the translation adjustment for 2013?
A. $52,000 decrease in relative value of net assets.
B. $60,800 decrease in relative value of net assets.
C. $61,200 decrease in relative value of net assets.
D. $466,400 increase in relative value of net assets.
E. $26,000 increase in relative value of net assets.
10-7
11. Sinkal Co. was formed on January 1, 2013 as a wholly owned foreign subsidiary of a U.S.
corporation. Sinkal's functional currency was the stickle (§). The following transactions and
12. Which accounts are translated using current exchange rates?
A. all revenues and expenses.
B. all assets and liabilities.
C. cash, receivables, and most liabilities.
D. all current assets and liabilities.
E. all noncurrent assets and liabilities.
10-8
13. Which accounts are remeasured using current exchange rates?
14. For a foreign subsidiary that uses the U.S. dollar as its functional currency, what method is
required to ready the financial statements for consolidation?
A. Current/Noncurrent Method.
B. Monetary/Nonmonetary Method.
C. Current Rate Method.
D. Temporal Method.
E. Indirect Method.
15. Dilty Corp. owned a subsidiary in France. Dilty concluded that the subsidiary's functional
currency was the U.S. dollar.
Which one of the following statements would justify this conclusion?
A. Most of the subsidiary's sales and purchases were with companies in the U.S.
B. Dilty's functional currency is the dollar and Dilty is the parent.
C. Dilty's other subsidiaries all had the dollar as their functional currency.
D. Generally accepted accounting principles require that the subsidiary's functional currency
must be the dollar if consolidated financial statements are to be prepared.
E. Dilty is located in the U.S.
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What must Dilty do to ready the subsidiary's financial statements for consolidation?
A. first translate them, then remeasure them.
B. first remeasure them, then translate them.
C. state all of the subsidiary's accounts in U.S. dollars using the exchange rate in effect at the
balance sheet date.
D. translate them.
E. remeasure them.
17. Certain balance sheet accounts of a foreign subsidiary of the Tulip Co. had been stated in U.S.
dollars as follows:
If the subsidiary's local currency is its functional currency, what total amount should be
included in Tulip's balance sheet in U.S. dollars?
A. $609,000.
B. $658,000.
C. $602,000.
D. $630,000.
E. $616,000.
10-10
18. Certain balance sheet accounts of a foreign subsidiary of the Tulip Co. had been stated in U.S.
dollars as follows:
If the U.S. dollar is the functional currency of this subsidiary, what total amount should be
A. $609,000.
B. $658,000.
C. $602,000.
D. $630,000.
E. $616,000.
10-11
19. A subsidiary of Porter Inc., a U.S. company, was located in a foreign country. The functional
currency of this subsidiary was the Stickle (§), the local currency where the subsidiary is
located. The subsidiary acquired inventory on credit on November 1, 2012, for §120,000 that
was sold on January 17, 2013 for §156,000. The subsidiary paid for the inventory on January
31, 2013. Currency exchange rates between the dollar and the Stickle were as follows:
What amount would have been reported for this inventory in Porter's consolidated balance
sheet at December 31, 2012?
A. $24,000.
B. $26,400.
C. $22,800.
D. $27,600.
E. $28,800.
10-12
located. The subsidiary acquired inventory on credit on November 1, 2012, for §120,000 that
was sold on January 17, 2013 for §156,000. The subsidiary paid for the inventory on January
31, 2013. Currency exchange rates between the dollar and the Stickle were as follows:
What amount would have been reported for cost of goods sold on Porter's consolidated
income statement at December 31, 2013?
A. $24,000.
B. $26,400.
C. $22,800.
D. $27,600.
E. $28,800.
10-13
21. A U.S. company's foreign subsidiary had the following amounts in stickles (§) in 2013:
The average exchange rate during 2013 was §1 = $.96. The beginning inventory was acquired
when the exchange rate was §1 = $1.20. The ending inventory was acquired when the
exchange rate was §1 = $.90. The exchange rate at December 31, 2013 was §1 = $.84.
Assuming that the foreign country had a highly inflationary economy, at what amount should
the foreign subsidiary's cost of goods sold have been reflected in the 2013 U.S. dollar income
statement?
A. $11,253,600.
B. $11,577,600.
C. $11,649,600.
D. $11,613,600.
E. $11,523,600.
10-14
22. A U.S. company's foreign subsidiary had the following amounts in stickles (§), the functional
currency, in 2013:
exchange rate was §1 = $.90. The exchange rate at December 31, 2013 was §1 = $.84. At
what amount should the foreign subsidiary's cost of goods sold have been reflected in the
2013 U.S. dollar income statement?
A. $11,253,600.
B. $11,577,600.
C. $11,520,000.
D. $11,613,600.
E. $11,523,600.
10-15
23. A U.S. company's foreign subsidiary had the following amounts in stickles (§), the functional
currency, in 2013:
exchange rate was §1 = $.90. The exchange rate at December 31, 2013 was §1 = $.84.
Assuming that the foreign nation for the subsidiary had a highly inflationary economy, at what
amount should that foreign subsidiary's purchases have been reflected in the 2013 U.S. dollar
income statement?
A. $11,865,600.
B. $11,577,600.
C. $11,520,000.
D. $11,613,600.
E. $11,523,600.
24. A historical exchange rate for common stock of a foreign subsidiary is best described as
A. The rate at date of the acquisition business combination.
B. The rate when the common stock was originally issued for the acquisition transaction.
C. The average rate from date of acquisition to the date of the balance sheet.
D. The rate from the prior year's balances.
E. The January 1 exchange rate.
10-16
25. A net asset balance sheet exposure exists and the foreign currency appreciates. Which of the
following statements is true?
A. There is no translation adjustment.
B. There is a transaction loss.
C. There is a transaction gain.
D. There is a negative translation adjustment.
E. There is a positive translation adjustment.
26. A net asset balance sheet exposure exists and the foreign currency depreciates. Which of the
following statements is true?
27. A net liability balance sheet exposure exists and the foreign currency appreciates. Which of
the following statements is true?
10-17
28. A net liability balance sheet exposure exists and the foreign currency depreciates. Which of
29. Which method of translating a foreign subsidiary's financial statements is correct?
A. Historical rate method.
B. Working capital method.
C. Current rate method.
D. Remeasurement.
E. Temporal method.
30. Which method of remeasuring a foreign subsidiary's financial statements is correct?
D. Translation.
E. Temporal method.
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31. Under the temporal method, inventory at market would be remeasured at what rate?
A. Beginning of the year rate.
B. Average rate.
C. Current rate.
D. Historical rate.
E. Composite amount.
32. Under the current rate method, inventory at market would be translated at what rate?
B. Average rate.
C. Current rate.
D. Historical rate.
33. Under the temporal method, common stock would be remeasured at what rate?
B. Average rate.
C. Current rate.
D. Historical rate.
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34. Under the current rate method, common stock would be translated at what rate?
B. Average rate.
C. Current rate.
D. Historical rate.
35. Under the current rate method, property, plant & equipment would be translated at what
rate?
B. Average rate.
C. Current rate.
D. Historical rate.
36. Under the temporal method, property, plant & equipment would be remeasured at what rate?
B. Average rate.
C. Current rate.
D. Historical rate.
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37. Under the current rate method, retained earnings would be translated at what rate?
B. Average rate.
C. Current rate.
D. Historical rate.
38. Under the temporal method, retained earnings would be remeasured at what rate?
B. Average rate.
C. Current rate.
D. Historical rate.
39. Under the current rate method, depreciation expense would be translated at what rate?
B. Average rate.
C. Current rate.
D. Historical rate.
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40. Under the temporal method, depreciation expense would be remeasured at what rate?
B. Average rate.
C. Current rate.
D. Historical rate.
41. Under the temporal method, how would cost of goods sold be remeasured?
B. Average rate.
C. Current rate.
D. A single historical rate.
E. A combination of historical rates.
42. Under the current rate method, how would cost of goods sold be translated?
B. Average rate.
C. Current rate.
D. Historical rate.
10-22
43. Where is the disposition of a translation loss reported in the parent company's financial
statements?
A. Net loss in the income statement.
B. Cumulative translation adjustment as a deferred asset.
C. Cumulative translation adjustment as a deferred liability.
D. Accumulated other comprehensive income.
E. Retained earnings.
44. Where is the disposition of a remeasurement gain or loss reported in the parent company's
financial statements?
A. Net income/loss in the income statement.
D. Other comprehensive income.
45. A highly inflationary economy is defined as
A. Cumulative 5-year inflation in excess of 100%.
B. Cumulative 3-year inflation in excess of 100%.
C. Cumulative 5-year inflation in excess of 90%.
D. Cumulative 3-year inflation in excess of 90%.
E. Any country designated as a company operating in a third-world economy.
10-23
46. If a subsidiary is operating in a highly inflationary economy, how are the financial statements
to be restated?
A. Historical rate.
B. Working capital rate.
C. Translation.
D. Remeasurement.
E. Current rate.
47. When consolidating a foreign subsidiary, which of the following statements is true?
A. Parent reports a cumulative translation adjustment from adjusting its investment account
under the equity method.
B. Parent reports a gain or loss in net income from adjusting its investment account under the
equity method.
C. Subsidiary's cumulative translation adjustment is carried forward to the consolidated

balance sheet.
D. Subsidiary's income/loss is carried forward to the consolidated balance sheet.
E. All foreign currency gains/losses are eliminated in the consolidated income statement and
balance sheet.
48. When preparing a consolidating statement of cash flows, which of the following statements is
false?
A. All operating activity items are translated at an average exchange rate for the period.
B. A change in accounts receivable is translated using the current rate.
C. A change in long-term debt is translated using the historical rate at the date of the change.
D. Dividends paid are translated using the historical rate at the date of the payment.
E. All items follow translation rates used for the balance sheet and the income statement.
10-24
49. When preparing a consolidation worksheet for a parent and its foreign subsidiary accounted
for under the equity method, which of the following statements is false?
A. The cumulative translation adjustment included in the Investment in Subsidiary account is

eliminated.
B. The excess of fair value over book value since the date of acquisition is revalued for the
change in exchange rate.
C. The amount of equity income recognized by the parent in the current year is eliminated.
D. The allocations of excess of fair value over book value at the date of acquisition are
eliminated.
E. The subsidiary's stockholders' equity accounts as of the beginning of the year are
eliminated.
10-25
50. Esposito is an Italian subsidiary of a U.S. company.
Esposito's ending inventory is valued at the average cost for the last quarter of the year.
The following account balances are available for Esposito for 2013:
Compute the cost of goods sold for 2013 in U.S. dollars using the temporal method.
A. $376,650.
B. $387,750.
C. $388,800.
D. $400,950.
E. $409,050.
10-26
Compute the cost of goods sold for 2013 in U.S. dollars using the current rate method.
A. $376,550.
B. $387,750.
C. $388,800.
D. $400,950.
E. $409,050.
10-27
Compute ending inventory for 2013 under the temporal method.
A. $13,950.
B. $14,100.
C. $14,400.
D. $14,850.
E. $15,150.
10-28
Compute ending inventory for 2013 under the current rate method.
A. $13,950.
B. $14,100.
C. $14,400.
D. $14,850.
E. $15,150.
10-29
54. A foreign subsidiary uses the first-in first-out inventory method. The following inventory
balances are given at December 31, 2013 in local currency units (LCU):
Compute the December 31, 2013, inventory balance using the lower of cost or market method
under the temporal method.
A. $429,000.
B. $457,600.
C. $596,400.
D. $568,000.
E. $426,000.
10-30
Compute the December 31, 2013, inventory balance using the current rate method.
A. $454,400.
B. $457,600.
C. $596,400.
D. $568,000.
E. $426,000.
10-31
56. Perez Company, a Mexican subsidiary of a U.S. company, sold equipment costing 200,000
pesos with accumulated depreciation of 75,000 pesos for 140,000 pesos on March 1, 2013.
The equipment was purchased on January 1, 2012. Relevant exchange rates for the peso are
as follows:
The financial statements for Perez are translated by its U.S. parent. What amount of gain or
loss would be reported in its translated income statement?
A. $1,530.
B. $1,575.
C. $1,590.
D. $1,090.
E. $1,650.
10-32
The equipment was purchased on January 1, 2012. Relevant exchange rates for the peso are
as follows:
The financial statements for Perez are remeasured by its U.S. parent. What amount of gain or
loss would be reported in its translated income statement?
A. $1,530.
B. $1,575.
C. $1,590.
D. $1,090.
E. $1,650.
10-33
58. Certain balance sheet accounts of a foreign subsidiary of Parker Company at December 31,
2013, have been restated into U.S. dollars as follows:
Assuming the functional currency of the subsidiary is the U.S. dollar, what total should be
included in Parker's consolidated balance sheet at December 31, 2013, for the above items?
A. $407,500.
B. $418,000.
C. $396,000.
D. $403,500.
E. $398,500.
10-34
Assuming the functional currency of the subsidiary is the local currency, what total should be
included in Parker's consolidated balance sheet at December 31, 2013, for the above items?
A. $407,500.
B. $418,000.
C. $396,000.
D. $403,500.
E. $398,500.
10-35
If the current rate used to restate these amounts is $.95, what was the average historical rate
used to arrive at the total amount for historical rates?
A. $0.9000.
B. $1.0000.
C. $0.9500.
D. $0.9474.
E. $1.0556.
10-36
61. Kennedy Company acquired all of the outstanding common stock of Hastie Company of
Canada for U.S. $350,000 on January 1, 2013, when the exchange rate for the Canadian dollar
(CAD) was U.S. $.70. The fair value of the net assets of Hastie was equal to their book value
of CAD 450,000 on the date of acquisition. Any acquisition consideration excess over fair value
was attributed to an unrecorded patent with a remaining life of five years. The functional
currency of Hastie is the Canadian dollar.
For the year ended December 31, 2013, Hastie's trial balance net income was translated at
U.S. $25,000. The average exchange rate for the Canadian dollar during 2013 was U.S. $.68,
and the 2013 year-end exchange rate was U.S. $.65.
Calculate the U.S. dollar amount allocated to the patent at January 1, 2013.
A. $50,000.
B. $35,000.
C. $34,000.
D. $32,500.
E. $28,200.
10-37
Amortization of the patent, translated, for 2013 would be
A. $7,000.
B. $10,000.
C. $6,800.
D. $9,000.
E. $6,500.
10-38
Compute the amount of the patent reported in the consolidated balance sheet at December
31, 2013.
A. $28,200.
B. $25,700.
C. $35,000.
D. $27,200.
E. $26,000.
10-39
Kennedy's share of Hastie's net income for 2013 would be
A. $18,000.
B. $15,000.
C. $18,200.
D. $16,000.
E. $18,500.
10-40
65. Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2012. Selected
account balances are available for the year ended December 31, 2013, and are stated in Euro,
the local currency.
Assume the functional currency is the Euro; compute the U.S. income statement amount for
sales for 2013.
A. $364,000.
B. $372,000.
C. $380,000.
D. $360,000.
E. $404,000.
10-41
the local currency.
Assume the functional currency is the Euro; compute the U.S. balance sheet amount for
inventory at December 31, 2013.
A. $18,800.
B. $19,600.
C. $18,000.
D. $20,200.
E. $19,000.
10-42
the local currency.
equipment for 2013.
A. $81,900.
B. $90,900.
C. $83,700.
D. $88,200.
E. $85,500.
10-43
the local currency.
Assume the functional currency is the Euro; compute the U.S. Statement of Retained Earnings
amount reported for Dividends in 2013.
A. $19,000.
B. $20,200.
C. $18,600.
D. $19,400.
E. $19,600.
10-44
the local currency.
accumulated depreciation for 2013.
A. $40,950.
B. $41,850.
C. $45,450.
D. $42,750.
E. $44,100.
10-45
the local currency.
Assume the functional currency is the Euro; compute the U.S. income statement amount for
depreciation expense for 2013.
A. $8,190.
B. $8,370.
C. $8,820.
D. $9,090.
E. $8,550.
10-46
the local currency.
Assume the functional currency is the U.S. Dollar; compute the U.S. income statement amount
for sales for 2013.
A. $364,000.
B. $372,000.
C. $380,000.
D. $360,000.
E. $404,000.
10-47
the local currency.
Assume the functional currency is the U.S. Dollar; compute the U.S. balance sheet amount for
inventory, at cost, for 2013.
A. $18,800.
B. $19,600.
C. $18,000.
D. $20,200.
E. $19,000.
10-48
the local currency.
equipment for 2013.
A. $81,900.
B. $90,900.
C. $83,700.
D. $88,200.
E. $85,500.
10-49
the local currency.
Assume the functional currency is the U.S. Dollar; compute the U.S. statement of retained
earnings amount for dividends for 2013.
A. $19,000.
B. $20,200.
C. $18,600.
D. $19,400.
E. $19,600.
10-50
the local currency.
A. $40,950.
B. $41,850.
C. $45,450.
D. $42,750.
E. $44,100.
10-51
the local currency.
Assume the functional currency is the U.S. Dollar; compute the U.S. income statement amount
for depreciation expense for 2013.
A. $8,190.
B. $8,370.
C. $8,820.
D. $9,090.
E. $8,550.
Essay Questions
10-52
77. A foreign subsidiary was acquired on January 1, 2013. Determine the exchange rate used to
restate the following accounts at December 31, 2013. Land was purchased on October 1,
2013. Relevant exchange dates follow:
(A) January 1, 2013

(B) October 1, 2013
(C) December 31, 2013
(D) Average, 2013
(E) Composite, using multiple dates.
Identify the exchange rate used to translate items 1-5 when the functional currency is the
foreign currency:
____ 1. Land.
____ 2. Equipment.
____ 3. Bonds payable.
____ 4. Common stock.
____ 5. Retained earnings.
Identify the exchange rate used to remeasure the items 6-10 when the functional currency is
the U.S. dollar:
____ 6. Land.
____ 7. Equipment.
10-53
78. In translating a foreign subsidiary's financial statements, what exchange rate should be used
for the subsidiary's revenues and expenses?
79. How can a parent corporation determine the functional currency for a foreign subsidiary that
conducts business in more than one country?
80. What exchange rate should be used to translate (a) revenues and expenses that occur
throughout the year and (b) a gain or loss that occurs on a specific day?
10-54
81. Perkle Co. owned a subsidiary in Belgium; the subsidiary's functional currency was the
Belgian franc. During 2013, Perkle engaged in hedging transactions to offset part of the
subsidiary's net asset position. How should the effects of exchange rate fluctuations on the
currency hedge be accounted for?
82. Under what circumstances would the remeasurement of a foreign subsidiary's financial
statements be required?
10-55
83. A foreign subsidiary of a U.S. corporation purchased equipment on January 4, 2010.
(A.) How would depreciation expense on the equipment be translated for 2013?
(B.) How would depreciation expense on the equipment be remeasured for 2013?
84. What exchange rate would be used to translate the asset and liability account balances of a
foreign subsidiary? What justification can be given for using this exchange rate?
10-56
85. Farley Brothers, a U.S. company, had a subsidiary in Italy. Under what conditions would the
U.S. dollar be the functional currency for this subsidiary?
86. What is the justification for the remeasurement of foreign currency transactions?
87. Contrast the purpose of remeasurement with the purpose of translation.
10-57
Short Answer Questions
88. On January 1, 2013, Fandu Corp. began operations of a foreign subsidiary. On April 1, 2013,
the subsidiary purchased inventory costing 150,000 stickles. One-fourth of this inventory
remained unsold at the end of 2013 while 40% of the liability from the purchase had not yet
been paid. The pertinent indirect exchange rates were:
Required:
What should have been the December 31, 2013 inventory and accounts payable balances for
this foreign subsidiary as translated into U.S. dollars? (Round your answers to the nearest
whole dollar.)
10-58
89. On January 1, 2013, Veldon Co., a U.S. corporation with the U.S. dollar as its functional
currency, established Malont Co. as a subsidiary. Malont is located in the country of Sorania,
and its functional currency is the stickle (§). Malont engaged in the following transactions
during 2013:
Required:
Calculate the translation adjustment for Malont. (Round your answers to the nearest whole
dollar.)
10-59
90. Ginvold Co. began operating a subsidiary in a foreign country on January 1, 2013 by acquiring
all of the common stock for §50,000 Stickles, the local currency. This subsidiary immediately
borrowed §120,000 on a five-year note with ten percent interest payable annually beginning
on January 1, 2014. A building was then purchased for §170,000 on January 1, 2013. This
property had a ten-year anticipated life and no salvage value and was to be depreciated using
the straight-line method. The building was immediately rented for three years to a group of
local doctors for §6,000 per month. By year-end, payments totaling §60,000 had been
received. On October 1, §5,000 were paid for a repair made on that date and it was the only
transaction of this kind for the year. A cash dividend of §6,000 was transferred back to
Ginvold on December 31, 2013. The functional currency for the subsidiary was the Stickle (§).
Currency exchange rates were as follows:
Prepare an income statement for this subsidiary in stickles and then translate these amounts
into U.S. dollars.
10-60
Prepare a statement of retained earnings for this subsidiary in stickles and then translate the
amounts into U.S. dollars.
10-61
Prepare a balance sheet for this subsidiary in stickles and then translate the amounts into
U.S. dollars.
10-62
Prepare a statement of cash flows for this subsidiary in stickles and then translate the
10-63
94. Boerkian Co. started 2013 with two assets: Cash of §26,000 (Stickles) and Land that
originally cost §72,000 when acquired on April 4, 2010. On May 1, 2013, the company
rendered services to a customer for §36,000, an amount immediately paid in cash. On
October 1, 2013, the company incurred an operating expense of §22,000 that was
immediately paid. No other transactions occurred during the year so an average exchange rate
is not necessary. Currency exchange rates were as follows:
Assume that Boerkian was a foreign subsidiary of a U.S. multinational company and the
stickle (§) was the functional currency of the subsidiary. Calculate the translation adjustment
for this subsidiary for 2013 and state whether this is a positive or a negative adjustment.
10-64
Assume Boerkian was a foreign subsidiary of a U.S. multinational company and the U.S. dollar
was the functional currency of the subsidiary. Prepare a schedule of changes in the net
monetary assets of Boerkian for the year 2013 and properly label the resulting gain or loss.
10-65
Required:
Assume that Boerkian was a foreign subsidiary of a U.S. multinational company and the local
currency of the subsidiary (stickle) is the functional currency. On the December 31, 2013
balance sheet, what was the translated value of the Land account?
10-66
Assume that Boerkian was a foreign subsidiary of a U.S. multinational company and the U.S.
dollar is the functional currency. On the December 31, 2013 balance sheet, what was the
remeasured value of the Land account?
10-67
Chapter 10 Translation of Foreign Currency Financial Statements
Answer Key
Multiple Choice Questions
1. In accounting, the term translation refers to
A. the calculation of gains or losses from hedging transactions.
B. the calculation of exchange rate gains or losses on individual transactions in foreign

currencies.
C. the procedure required to identify a company's functional currency.
D. the calculation of gains or losses from all transactions for the year.
E. a procedure to prepare a foreign subsidiary's financial statements for consolidation.
AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal
methods.
Topic: Translation Methods
10-68
2. What is a company's functional currency?
A. the currency of the primary economic environment in which it operates.
B. the currency of the country where it has its headquarters.
C. the currency in which it prepares its financial statements.
D. the reporting currency of its parent for a subsidiary.
E. the currency it chooses to designate as such.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using
the current rate method and when they are to be translated using the temporal method.
Topic: Two Translation Combinations
10-69
3. According to U.S. GAAP for a local currency perspective, which method is usually required
for translating a foreign subsidiary's financial statements into the parent's reporting
currency?
A. the temporal method.
B. the current rate method.
C. the current/noncurrent method.
D. the monetary/nonmonetary method.
E. the noncurrent rate method.
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AICPA BB: Global
Blooms: Remember
Difficulty: 1 Easy
10-70
4. In translating a foreign subsidiary's financial statements, which exchange rate does the
current method require for the subsidiary's assets and liabilities?
A. the exchange rate in effect when each asset or liability was acquired.
B. the average exchange rate for the current year.
C. a calculated exchange rate based on market value.
D. the exchange rate in effect as of the balance sheet date.
E. the exchange rate in effect at the start of the current year.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
Difficulty: 1 Easy
methods.
10-71
5. The translation adjustment from translating a foreign subsidiary's financial statements
should be shown as
A. an asset or liability (depending on the balance) in the consolidated balance sheet.
B. a revenue or expense (depending on the balance) in the consolidated income

statement.
C. a component of stockholders' equity in the consolidated balance sheet.
D. a component of cash flows from financing activities in the consolidated statement of

cash flows.
E. an element of the notes which accompany the consolidated financial statements.
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Blooms: Remember
Difficulty: 1 Easy
methods.
10-72
Westmore reported sales of ≤1,500,000 during 2013. What amount (rounded) would have
been included for this subsidiary in calculating consolidated sales?
A. $2,415,000.
B. $2,400,000.
C. $2,385,000.
D. $943,396.
E. $931,677.
≤1,500,000 × $1.59 (Avg Rate) = $2,385,000
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Blooms: Apply
Difficulty: 2 Medium
methods.
Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using
the current rate method and calculate the related translation adjustment.
Topic: Translation of Financial Statements - Current Rate Method
10-73
On December 31, 2013, Westmore had accounts receivable of ≤280,000. What amount
(rounded) would have been included for this subsidiary in calculating consolidated
accounts receivable?
A. $173,913.
B. $176,100.
C. $445,200.
D. $448,000.
E. $450,800.
≤280,000 × $1.61 = $450,800
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Blooms: Apply
methods.
10-74
8. Gunther Co. established a subsidiary in Mexico on January 1, 2013. The subsidiary engaged
in the following transactions during 2013:
What amount of foreign exchange gain or loss would have been recognized in Gunther's
consolidated income statement for 2013?
A. $800,000 gain.
B. $760,000 gain.
C. $320,000 loss.
D. $280,000 loss.
E. $440,000 loss.
10-75
AACSB: Analytic
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AICPA BB: Global
Blooms: Apply
Difficulty: 3 Hard
methods.
Learning Objective: 10-04 Remeasure a foreign subsidiary's financial statements using the temporal method and calculate
the associated remeasurement gain or loss.
Topic: Remeasurement of Financial Statements - Temporal Method
10-76
corporation. Darron's functional currency was the stickle (§). The following transactions
and events occurred during 2013:
What exchange rate should have been used in translating Darron's revenues and expenses
for 2013?
A. $1 = §.48.
B. $1 = §.44.
C. $1 = §.46.
D. $1 = §.42.
E. $1 = §.45.
Average Rate for Revenues & Expenses [$1 = §.44]
10-77
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Blooms: Apply
Difficulty: 1 Easy
methods.
10-78
corporation. Darron's functional currency was the stickle (§). The following transactions
[§1,000,000 × [$.42 - $.48] ($.06) = ($60,000)] + [§20,000 × [$.42 - $.46] ($.04)] =

($800) = ($60,800) Loss in Relative Asset Value
10-79
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Blooms: Apply
Difficulty: 3 Hard
methods.
10-80
11. Sinkal Co. was formed on January 1, 2013 as a wholly owned foreign subsidiary of a U.S.
corporation. Sinkal's functional currency was the stickle (§). The following transactions
[§1,000,000 × [$.42 - $.48] ($.06) = ($60,000)] + [§20,000 × [$.42 - $.46] ($.04)] =

($800) = ($60,800) Loss in Relative Asset Value
10-81
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Blooms: Apply
Difficulty: 3 Hard
methods.
12. Which accounts are translated using current exchange rates?
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Blooms: Remember
methods.
10-82
13. Which accounts are remeasured using current exchange rates?
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Blooms: Remember
methods.
10-83
14. For a foreign subsidiary that uses the U.S. dollar as its functional currency, what method is
required to ready the financial statements for consolidation?
A. Current/Noncurrent Method.
B. Monetary/Nonmonetary Method.
C. Current Rate Method.
D. Temporal Method.
E. Indirect Method.
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Blooms: Understand
10-84
Which one of the following statements would justify this conclusion?
A. Most of the subsidiary's sales and purchases were with companies in the U.S.
B. Dilty's functional currency is the dollar and Dilty is the parent.
C. Dilty's other subsidiaries all had the dollar as their functional currency.
D. Generally accepted accounting principles require that the subsidiary's functional

currency must be the dollar if consolidated financial statements are to be prepared.
E. Dilty is located in the U.S.
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Blooms: Analyze
10-85
What must Dilty do to ready the subsidiary's financial statements for consolidation?
A. first translate them, then remeasure them.
B. first remeasure them, then translate them.
C. state all of the subsidiary's accounts in U.S. dollars using the exchange rate in effect at
the balance sheet date.
D. translate them.
E. remeasure them.
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Blooms: Evaluate
Difficulty: 1 Easy
10-86
17. Certain balance sheet accounts of a foreign subsidiary of the Tulip Co. had been stated in
U.S. dollars as follows:
If the subsidiary's local currency is its functional currency, what total amount should be
A. $609,000.
B. $658,000.
C. $602,000.
D. $630,000.
E. $616,000.
If LC is the Functional Currency, Current Rates Used for All Items = $602,000
10-87
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Blooms: Apply
Difficulty: 1 Easy
methods.
10-88
18. Certain balance sheet accounts of a foreign subsidiary of the Tulip Co. had been stated in
U.S. dollars as follows:
If the U.S. dollar is the functional currency of this subsidiary, what total amount should be
A. $609,000.
B. $658,000.
C. $602,000.
D. $630,000.
E. $616,000.
If the Dollar is the Functional Currency, Current Rates Used for Receivables at their
Historical Rate ($280,000 + $140,000 + $77,000 + $119,000) = $616,000
10-89
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Blooms: Apply
methods.
10-90
located. The subsidiary acquired inventory on credit on November 1, 2012, for §120,000
that was sold on January 17, 2013 for §156,000. The subsidiary paid for the inventory on
January 31, 2013. Currency exchange rates between the dollar and the Stickle were as
follows:
What amount would have been reported for this inventory in Porter's consolidated balance
sheet at December 31, 2012?
A. $24,000.
B. $26,400.
C. $22,800.
D. $27,600.
E. $28,800.
§120,000 × $.20 = $24,000
10-91
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Blooms: Apply
Difficulty: 1 Easy
methods.
10-92
located. The subsidiary acquired inventory on credit on November 1, 2012, for §120,000
that was sold on January 17, 2013 for §156,000. The subsidiary paid for the inventory on
January 31, 2013. Currency exchange rates between the dollar and the Stickle were as
follows:
What amount would have been reported for cost of goods sold on Porter's consolidated
income statement at December 31, 2013?
A. $24,000.
B. $26,400.
C. $22,800.
D. $27,600.
E. $28,800.
§120,000 × $.24 = $28,800
10-93
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Blooms: Apply
methods.
10-94
21. A U.S. company's foreign subsidiary had the following amounts in stickles (§) in 2013:
The average exchange rate during 2013 was §1 = $.96. The beginning inventory was
acquired when the exchange rate was §1 = $1.20. The ending inventory was acquired
when the exchange rate was §1 = $.90. The exchange rate at December 31, 2013 was §1
= $.84. Assuming that the foreign country had a highly inflationary economy, at what
amount should the foreign subsidiary's cost of goods sold have been reflected in the 2013
U.S. dollar income statement?
A. $11,253,600.
B. $11,577,600.
C. $11,649,600.
D. $11,613,600.
E. $11,523,600.
Beginning Inventory [(§240,000 × $1.20) $288,000] - Purchases [Beginning Inventory

§240,000 - COGS §12,000,000 - Ending Inventory §600,000 = §12,360,000 × $.96 =
$11,865,600] - Ending Inventory [(§600,000 × $.90) $540,000] = COGS $11,613,600
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Blooms: Apply
Difficulty: 3 Hard
methods.
10-95
22. A U.S. company's foreign subsidiary had the following amounts in stickles (§), the
functional currency, in 2013:
= $.84. At what amount should the foreign subsidiary's cost of goods sold have been
reflected in the 2013 U.S. dollar income statement?
A. $11,253,600.
B. $11,577,600.
C. $11,520,000.
D. $11,613,600.
E. $11,523,600.
§12,000,000 × $.96 = $11,520,000
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Blooms: Apply
Difficulty: 3 Hard
methods.
10-96
23. A U.S. company's foreign subsidiary had the following amounts in stickles (§), the
functional currency, in 2013:
= $.84. Assuming that the foreign nation for the subsidiary had a highly inflationary
economy, at what amount should that foreign subsidiary's purchases have been reflected
in the 2013 U.S. dollar income statement?
A. $11,865,600.
B. $11,577,600.
C. $11,520,000.
D. $11,613,600.
E. $11,523,600.
Beginning Inventory §240,000 - COGS §12,000,000 - Ending Inventory §600,000 =

Purchases §12,360,000 × $.96 = $11,865,600
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Blooms: Apply
Difficulty: 3 Hard
methods.
10-97
24. A historical exchange rate for common stock of a foreign subsidiary is best described as
A. The rate at date of the acquisition business combination.
B. The rate when the common stock was originally issued for the acquisition transaction.
C. The average rate from date of acquisition to the date of the balance sheet.
D. The rate from the prior year's balances.
E. The January 1 exchange rate.
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Blooms: Analyze
methods.
10-98
25. A net asset balance sheet exposure exists and the foreign currency appreciates. Which of
AACSB: Analytic
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Blooms: Analyze
methods.
10-99
26. A net asset balance sheet exposure exists and the foreign currency depreciates. Which of
AACSB: Analytic
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Blooms: Analyze
methods.
10-100
27. A net liability balance sheet exposure exists and the foreign currency appreciates. Which of
AACSB: Analytic
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Blooms: Analyze
methods.
10-101
28. A net liability balance sheet exposure exists and the foreign currency depreciates. Which of
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Blooms: Analyze
methods.
10-102
29. Which method of translating a foreign subsidiary's financial statements is correct?
D. Remeasurement.
E. Temporal method.
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Blooms: Remember
Difficulty: 1 Easy
10-103
30. Which method of remeasuring a foreign subsidiary's financial statements is correct?
D. Translation.
E. Temporal method.
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AICPA BB: Global
Blooms: Remember
Difficulty: 1 Easy
10-104
31. Under the temporal method, inventory at market would be remeasured at what rate?
B. Average rate.
C. Current rate.
D. Historical rate.
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AICPA BB: Global
Blooms: Remember
methods.
10-105
32. Under the current rate method, inventory at market would be translated at what rate?
B. Average rate.
C. Current rate.
D. Historical rate.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
methods.
10-106
33. Under the temporal method, common stock would be remeasured at what rate?
B. Average rate.
C. Current rate.
D. Historical rate.
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AICPA BB: Global
Blooms: Remember
Difficulty: 1 Easy
methods.
10-107
34. Under the current rate method, common stock would be translated at what rate?
B. Average rate.
C. Current rate.
D. Historical rate.
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Blooms: Remember
Difficulty: 1 Easy
methods.
10-108
35. Under the current rate method, property, plant & equipment would be translated at what
rate?
B. Average rate.
C. Current rate.
D. Historical rate.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
methods.
10-109
36. Under the temporal method, property, plant & equipment would be remeasured at what
rate?
B. Average rate.
C. Current rate.
D. Historical rate.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
methods.
10-110
37. Under the current rate method, retained earnings would be translated at what rate?
B. Average rate.
C. Current rate.
D. Historical rate.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
methods.
10-111
38. Under the temporal method, retained earnings would be remeasured at what rate?
B. Average rate.
C. Current rate.
D. Historical rate.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
methods.
10-112
39. Under the current rate method, depreciation expense would be translated at what rate?
B. Average rate.
C. Current rate.
D. Historical rate.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
methods.
10-113
40. Under the temporal method, depreciation expense would be remeasured at what rate?
B. Average rate.
C. Current rate.
D. Historical rate.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
methods.
10-114
41. Under the temporal method, how would cost of goods sold be remeasured?
B. Average rate.
C. Current rate.
D. A single historical rate.
E. A combination of historical rates.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
methods.
10-115
42. Under the current rate method, how would cost of goods sold be translated?
B. Average rate.
C. Current rate.
D. Historical rate.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
methods.
10-116
43. Where is the disposition of a translation loss reported in the parent company's financial
statements?
A. Net loss in the income statement.
D. Accumulated other comprehensive income.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
10-117
44. Where is the disposition of a remeasurement gain or loss reported in the parent company's
financial statements?
A. Net income/loss in the income statement.
D. Other comprehensive income.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
10-118
45. A highly inflationary economy is defined as
A. Cumulative 5-year inflation in excess of 100%.
B. Cumulative 3-year inflation in excess of 100%.
C. Cumulative 5-year inflation in excess of 90%.
D. Cumulative 3-year inflation in excess of 90%.
E. Any country designated as a company operating in a third-world economy.
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Blooms: Remember
10-119
46. If a subsidiary is operating in a highly inflationary economy, how are the financial
statements to be restated?
A. Historical rate.
B. Working capital rate.
C. Translation.
D. Remeasurement.
E. Current rate.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
10-120
47. When consolidating a foreign subsidiary, which of the following statements is true?
A. Parent reports a cumulative translation adjustment from adjusting its investment

account under the equity method.
B. Parent reports a gain or loss in net income from adjusting its investment account under
the equity method.
C. Subsidiary's cumulative translation adjustment is carried forward to the consolidated

balance sheet.
D. Subsidiary's income/loss is carried forward to the consolidated balance sheet.
E. All foreign currency gains/losses are eliminated in the consolidated income statement
and balance sheet.
AACSB: Analytic
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Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 10-06 Prepare a consolidation worksheet for a parent and its foreign subsidiary.
Topic: Consolidation of a Foreign Subsidiary
10-121
48. When preparing a consolidating statement of cash flows, which of the following statements
is false?
A. All operating activity items are translated at an average exchange rate for the period.
B. A change in accounts receivable is translated using the current rate.
C. A change in long-term debt is translated using the historical rate at the date of the
change.
D. Dividends paid are translated using the historical rate at the date of the payment.
E. All items follow translation rates used for the balance sheet and the income statement.
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Blooms: Remember
10-122
49. When preparing a consolidation worksheet for a parent and its foreign subsidiary
accounted for under the equity method, which of the following statements is false?
A. The cumulative translation adjustment included in the Investment in Subsidiary account

is eliminated.
B. The excess of fair value over book value since the date of acquisition is revalued for the
change in exchange rate.
C. The amount of equity income recognized by the parent in the current year is eliminated.
D. The allocations of excess of fair value over book value at the date of acquisition are
eliminated.
E. The subsidiary's stockholders' equity accounts as of the beginning of the year are
eliminated.
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Blooms: Analyze
10-123
Compute the cost of goods sold for 2013 in U.S. dollars using the temporal method.
A. $376,650.
B. $387,750.
C. $388,800.
D. $400,950.
E. $409,050.
Begin Inventory (€20,000 × $.93 = $18,600) + Purchases (€400,000 × $.96 = $384,000) -

End Inventory (€15,000 × $.99 = $14,850) = COGS $387,750
10-124
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Blooms: Apply
methods.
10-125
Compute the cost of goods sold for 2013 in U.S. dollars using the current rate method.
A. $376,550.
B. $387,750.
C. $388,800.
D. $400,950.
E. $409,050.
€405,000 × $.96 = $388,800
10-126
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Blooms: Apply
methods.
10-127
Compute ending inventory for 2013 under the temporal method.
A. $13,950.
B. $14,100.
C. $14,400.
D. $14,850.
E. $15,150.
€15,000 × $.99 = $14,850
10-128
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Blooms: Apply
methods.
10-129
Compute ending inventory for 2013 under the current rate method.
A. $13,950.
B. $14,100.
C. $14,400.
D. $14,850.
E. $15,150.
€15,000 × $1.01 = $15,150
10-130
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Blooms: Apply
methods.
10-131
Compute the December 31, 2013, inventory balance using the lower of cost or market
method under the temporal method.
A. $429,000.
B. $457,600.
C. $596,400.
D. $568,000.
E. $426,000.
Inventory at Cost 320,000 LCU × $1.43 = $457,600
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Blooms: Apply
Difficulty: 3 Hard
methods.
10-132
Compute the December 31, 2013, inventory balance using the current rate method.
A. $454,400.
B. $457,600.
C. $596,400.
D. $568,000.
E. $426,000.
Inventory at Cost 320,000 LCU × $1.42 = $454,400
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methods.
10-133
The equipment was purchased on January 1, 2012. Relevant exchange rates for the peso
are as follows:
The financial statements for Perez are translated by its U.S. parent. What amount of gain
or loss would be reported in its translated income statement?
A. $1,530.
B. $1,575.
C. $1,590.
D. $1,090.
E. $1,650.
[Sales Price MNP 140,000 × .106 = $14,840] - [BV as Historical Cost MNP 200,000 - Acc.
Deprec. MNP 75,000 = MNP 125,000 × .106 = $13,250] = $1,590 Gain
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Blooms: Apply
methods.
10-134
The equipment was purchased on January 1, 2012. Relevant exchange rates for the peso
are as follows:
The financial statements for Perez are remeasured by its U.S. parent. What amount of gain
or loss would be reported in its translated income statement?
A. $1,530.
B. $1,575.
C. $1,590.
D. $1,090.
E. $1,650.
[Sales Price MNP 140,000 × .106 = $14,840] - [BV as Historical Cost MNP 200,000 - Acc.
Deprec. MNP 75,000 = MNP 125,000 × .110 = $13,750] = $1,090 Gain
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Blooms: Apply
methods.
10-135
Assuming the functional currency of the subsidiary is the U.S. dollar, what total should be
included in Parker's consolidated balance sheet at December 31, 2013, for the above
items?
A. $407,500.
B. $418,000.
C. $396,000.
D. $403,500.
E. $398,500.
If the Dollar is the Functional Currency, Current Rates Used for All Items except PP&E at
their Historical Values ($47,500 + $95,000 + $76,000 + $54,000 + $135,000) = $407,500
10-136
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Blooms: Apply
methods.
10-137
Assuming the functional currency of the subsidiary is the local currency, what total should
be included in Parker's consolidated balance sheet at December 31, 2013, for the above
items?
A. $407,500.
B. $418,000.
C. $396,000.
D. $403,500.
E. $398,500.
If LC is the Functional Currency, Current Rates Used for All Items = $418,000
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Blooms: Apply
Difficulty: 1 Easy
methods.
10-138
If the current rate used to restate these amounts is $.95, what was the average historical
rate used to arrive at the total amount for historical rates?
A. $0.9000.
B. $1.0000.
C. $0.9500.
D. $0.9474.
E. $1.0556.
$418,000/$.95 = $440,000; $396,000/$440,000 = $.90
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Blooms: Apply
10-139
Canada for U.S. $350,000 on January 1, 2013, when the exchange rate for the Canadian
dollar (CAD) was U.S. $.70. The fair value of the net assets of Hastie was equal to their
book value of CAD 450,000 on the date of acquisition. Any acquisition consideration excess
over fair value was attributed to an unrecorded patent with a remaining life of five years.
The functional currency of Hastie is the Canadian dollar.
Calculate the U.S. dollar amount allocated to the patent at January 1, 2013.
A. $50,000.
B. $35,000.
C. $34,000.
D. $32,500.
E. $28,200.
$350,000 - FV of Assets (C$450,000 × $.70) $315,000 = $35,000 Patent Value
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Blooms: Apply
10-140
Amortization of the patent, translated, for 2013 would be
A. $7,000.
B. $10,000.
C. $6,800.
D. $9,000.
E. $6,500.
Patent Value $35,000/$.70 = Patent Value C$50,000/5 yrs = C$10,000 per year × $.68 =
$6,800 Translated
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AICPA BB: Global
Blooms: Apply
Difficulty: 3 Hard
methods.
10-141
Compute the amount of the patent reported in the consolidated balance sheet at
December 31, 2013.
A. $28,200.
B. $25,700.
C. $35,000.
D. $27,200.
E. $26,000.
Patent Value C$50,000 - Amortization for 2013 C$10,000 = BV C$40,000 × $.65 = $26,000
Translated
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Blooms: Apply
methods.
10-142
Kennedy's share of Hastie's net income for 2013 would be
A. $18,000.
B. $15,000.
C. $18,200.
D. $16,000.
E. $18,500.
Translated Net Income $25,000 - Translated Amortization $6,800 = $18,200 Parent's Share
of Net Income for 2013
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AACSB: Diversity
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Blooms: Apply
Difficulty: 3 Hard
10-143
65. Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2012.
Selected account balances are available for the year ended December 31, 2013, and are
stated in Euro, the local currency.
Assume the functional currency is the Euro; compute the U.S. income statement amount
for sales for 2013.
A. $364,000.
B. $372,000.
C. $380,000.
D. $360,000.
E. $404,000.
€400,000 × $.95 = $380,000
10-144
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AACSB: Diversity
AICPA BB: Global
Blooms: Apply
Difficulty: 1 Easy
methods.
10-145
inventory at December 31, 2013.
A. $18,800.
B. $19,600.
C. $18,000.
D. $20,200.
E. $19,000.
€20,000 × $1.01 = $20,200
10-146
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
Difficulty: 1 Easy
methods.
10-147
equipment for 2013.
A. $81,900.
B. $90,900.
C. $83,700.
D. $88,200.
E. $85,500.
€90,000 × $1.01 = $90,900
10-148
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AACSB: Diversity
AICPA BB: Global
Blooms: Apply
methods.
10-149
Assume the functional currency is the Euro; compute the U.S. Statement of Retained
Earnings amount reported for Dividends in 2013.
A. $19,000.
B. $20,200.
C. $18,600.
D. $19,400.
E. $19,600.
€20,000 × $.97 = $19,400
10-150
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
Difficulty: 1 Easy
methods.
10-151
A. $40,950.
B. $41,850.
C. $45,450.
D. $42,750.
E. $44,100.
€45,000 × $1.01 = $45,450
10-152
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
methods.
10-153
Assume the functional currency is the Euro; compute the U.S. income statement amount
for depreciation expense for 2013.
A. $8,190.
B. $8,370.
C. $8,820.
D. $9,090.
E. $8,550.
€9,000 × $.95 = $8,550
10-154
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
methods.
10-155
Assume the functional currency is the U.S. Dollar; compute the U.S. income statement
amount for sales for 2013.
A. $364,000.
B. $372,000.
C. $380,000.
D. $360,000.
E. $404,000.
€400,000 × $.95 = $380,000
10-156
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
Difficulty: 1 Easy
methods.
10-157
Assume the functional currency is the U.S. Dollar; compute the U.S. balance sheet amount
for inventory, at cost, for 2013.
A. $18,800.
B. $19,600.
C. $18,000.
D. $20,200.
E. $19,000.
€20,000 × $.94 = $18,800
10-158
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
Difficulty: 1 Easy
methods.
10-159
for equipment for 2013.
A. $81,900.
B. $90,900.
C. $83,700.
D. $88,200.
E. $85,500.
€90,000 × $.91 = $81,900
10-160
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
methods.
10-161
Assume the functional currency is the U.S. Dollar; compute the U.S. statement of retained
earnings amount for dividends for 2013.
A. $19,000.
B. $20,200.
C. $18,600.
D. $19,400.
E. $19,600.
€20,000 × $.97 = $19,400
10-162
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
Difficulty: 1 Easy
methods.
10-163
for accumulated depreciation for 2013.
A. $40,950.
B. $41,850.
C. $45,450.
D. $42,750.
E. $44,100.
€45,000 × $.91 = $40,950
10-164
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
methods.
10-165
Assume the functional currency is the U.S. Dollar; compute the U.S. income statement
amount for depreciation expense for 2013.
A. $8,190.
B. $8,370.
C. $8,820.
D. $9,090.
E. $8,550.
€9,000 × $.91 = $8,190
10-166
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
methods.
Essay Questions
10-167
77. A foreign subsidiary was acquired on January 1, 2013. Determine the exchange rate used to
restate the following accounts at December 31, 2013. Land was purchased on October 1,
2013. Relevant exchange dates follow:
(A) January 1, 2013

(B) October 1, 2013
(C) December 31, 2013
(D) Average, 2013
(E) Composite, using multiple dates.
Identify the exchange rate used to translate items 1-5 when the functional currency is the
foreign currency:
____ 1. Land.
____ 2. Equipment.
Identify the exchange rate used to remeasure the items 6-10 when the functional currency
is the U.S. dollar:
____ 6. Land.
____ 7. Equipment.
(1.) C; (2) C; (3.) C; (4.) A; (5.) E; (6.) B; (7.) A; (8.) C; (9.) A; (10.) E
10-168
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AICPA BB: Global
Blooms: Remember
methods.
78. In translating a foreign subsidiary's financial statements, what exchange rate should be
used for the subsidiary's revenues and expenses?
The historical rate that was in effect when the revenues and expenses were incurred
should be used unless those revenues and expenses occur throughout the year, and then a
weighted average exchange rate for the year may be used.
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AICPA BB: Global
Blooms: Remember
methods.
10-169
79. How can a parent corporation determine the functional currency for a foreign subsidiary
that conducts business in more than one country?
If the foreign subsidiary has distinct and separable operations in different countries, each
of these operations can use a different currency. If the subsidiary does not have distinct
operations in different countries, the currency in which the most transactions are carried
out should be selected.
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AICPA BB: Global
Blooms: Understand
10-170
80. What exchange rate should be used to translate (a) revenues and expenses that occur
throughout the year and (b) a gain or loss that occurs on a specific day?
Revenues and expenses occurring throughout the year may be translated using the average
exchange rate for the year. A gain or loss occurring on a specific date should be translated
using the rate in effect on that day.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
Difficulty: 1 Easy
methods.
10-171
81. Perkle Co. owned a subsidiary in Belgium; the subsidiary's functional currency was the
Belgian franc. During 2013, Perkle engaged in hedging transactions to offset part of the
subsidiary's net asset position. How should the effects of exchange rate fluctuations on the
currency hedge be accounted for?
Any effect on the contract resulting from exchange rate fluctuations is classified as a
translation adjustment, rather than as a foreign exchange gain or loss.
AACSB: Diversity
AICPA BB: Global
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 10-05 Understand the rationale for hedging a net investment in a foreign operation and describe the
treatment of gains and losses on hedges used for this purpose.
Topic: Hedging Balance Sheet Exposure
10-172
82. Under what circumstances would the remeasurement of a foreign subsidiary's financial
statements be required?
The remeasurement of a foreign subsidiary's financial statements is required in the

following situations:
(A.) when the subsidiary's functional currency is the U.S. dollar.

(B.) when the subsidiary operates in a highly inflationary economy.
(C.) when the local currency is not the functional currency and the statements first need to
be remeasured from one foreign currency to another foreign currency.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
10-173
83. A foreign subsidiary of a U.S. corporation purchased equipment on January 4, 2010.
(A.) How would depreciation expense on the equipment be translated for 2013?
(B.) How would depreciation expense on the equipment be remeasured for 2013?
(A.) Depreciation expense would be translated using the average exchange rate for 2013.
(B.) Depreciation expense would be remeasured using the exchange rate in effect when
the equipment was purchased.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
methods.
10-174
84. What exchange rate would be used to translate the asset and liability account balances of
a foreign subsidiary? What justification can be given for using this exchange rate?
Assets and liabilities are translated using the current exchange rate, the rate in effect at
the balance sheet date. This rate is chosen because assets and liabilities are expected to
affect future cash flows. Therefore, they should be translated using the most up-to-date
exchange rates available.
AACSB: Diversity
AICPA BB: Global
Blooms: Understand
Difficulty: 1 Easy
methods.
10-175
85. Farley Brothers, a U.S. company, had a subsidiary in Italy. Under what conditions would the
U.S. dollar be the functional currency for this subsidiary?
To determine the subsidiary's functional currency, Farley Brothers should look at the
volume of the subsidiary's transactions in various currencies. If most of the subsidiary's
sales and purchases are in dollars, the dollar may be the logical choice for the functional
currency. If there are many transactions between the subsidiary and the parent, and if most
of the subsidiary's financing comes from the U.S., the dollar may be a better choice than
the euro.
AACSB: Diversity
AICPA BB: Global
Blooms: Understand
Difficulty: 1 Easy
methods.
10-176
86. What is the justification for the remeasurement of foreign currency transactions?
Remeasurement is needed for transactions denominated in a currency other than the

entity's functional currency. A U.S. company that engages in transactions in other countries
may have to remeasure some of its transactions. The implicit justification for
remeasurement is that foreign currency transactions which affect monetary assets and
liabilities have a direct effect on the entity's cash flows. There will be direct effects on
future cash flows in the functional currency, and thus an effect on net income.
AACSB: Diversity
AICPA BB: Global
Blooms: Understand
10-177
87. Contrast the purpose of remeasurement with the purpose of translation.
The purpose of translation is to transform a subsidiary's financial statements, prepared in

its functional currency, into the reporting currency of the parent. The purpose of
remeasurement is to restate transactions from one currency into the functional currency of
the entity. Remeasurement is also required when a subsidiary's financial statements have
been denominated in a currency other than the subsidiary's functional currency.
AACSB: Diversity
AICPA BB: Global
Blooms: Understand
methods.
Short Answer Questions
10-178
88. On January 1, 2013, Fandu Corp. began operations of a foreign subsidiary. On April 1, 2013,
the subsidiary purchased inventory costing 150,000 stickles. One-fourth of this inventory
remained unsold at the end of 2013 while 40% of the liability from the purchase had not yet
been paid. The pertinent indirect exchange rates were:
Required:
What should have been the December 31, 2013 inventory and accounts payable balances
for this foreign subsidiary as translated into U.S. dollars? (Round your answers to the
nearest whole dollar.)
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Blooms: Apply
methods.
10-179
89. On January 1, 2013, Veldon Co., a U.S. corporation with the U.S. dollar as its functional
currency, established Malont Co. as a subsidiary. Malont is located in the country of
Sorania, and its functional currency is the stickle (§). Malont engaged in the following
transactions during 2013:
Required:
Calculate the translation adjustment for Malont. (Round your answers to the nearest whole
dollar.)
10-180
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
10-181
90. Ginvold Co. began operating a subsidiary in a foreign country on January 1, 2013 by
acquiring all of the common stock for §50,000 Stickles, the local currency. This subsidiary
immediately borrowed §120,000 on a five-year note with ten percent interest payable
annually beginning on January 1, 2014. A building was then purchased for §170,000 on
January 1, 2013. This property had a ten-year anticipated life and no salvage value and was
to be depreciated using the straight-line method. The building was immediately rented for
three years to a group of local doctors for §6,000 per month. By year-end, payments
totaling §60,000 had been received. On October 1, §5,000 were paid for a repair made on
that date and it was the only transaction of this kind for the year. A cash dividend of
§6,000 was transferred back to Ginvold on December 31, 2013. The functional currency for
the subsidiary was the Stickle (§). Currency exchange rates were as follows:
Prepare an income statement for this subsidiary in stickles and then translate these
10-182
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AICPA BB: Global
Blooms: Apply
methods.
10-183
Prepare a statement of retained earnings for this subsidiary in stickles and then translate
the amounts into U.S. dollars.
10-184
AACSB: Analytic
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Blooms: Apply
methods.
10-185
10-186
Prepare a balance sheet for this subsidiary in stickles and then translate the amounts into
U.S. dollars.
Ginvold Co. Subsidiary

Balance Sheet
December 31, 2013
10-187
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AICPA BB: Global
Blooms: Apply
methods.
10-188
10-189
Prepare a statement of cash flows for this subsidiary in stickles and then translate the
Ginvold Co. Subsidiary

Statement of Cash Flows
For the Year Ended, December 31, 2013
10-190
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
10-191
immediately paid. No other transactions occurred during the year so an average exchange
rate is not necessary. Currency exchange rates were as follows:
stickle (§) was the functional currency of the subsidiary. Calculate the translation
adjustment for this subsidiary for 2013 and state whether this is a positive or a negative
adjustment.
10-192
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
10-193
Assume Boerkian was a foreign subsidiary of a U.S. multinational company and the U.S.
dollar was the functional currency of the subsidiary. Prepare a schedule of changes in the
net monetary assets of Boerkian for the year 2013 and properly label the resulting gain or
loss.
10-194
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
Difficulty: 3 Hard
10-195
Required:
local currency of the subsidiary (stickle) is the functional currency. On the December 31,
2013 balance sheet, what was the translated value of the Land account?
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
methods.
10-196
U.S. dollar is the functional currency. On the December 31, 2013 balance sheet, what was
the remeasured value of the Land account?
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
methods.
10-197

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ADVANCED ACCOUNTING 12TH EDITION

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Translation of Foreign Currency Financial Statements

Multiple Choice Questions

1. In accounting, the term translation refers to

A. the calculation of gains or losses from hedging transactions.

B. the calculation of exchange rate gains or losses on individual transactions in foreign

C. the procedure required to identify a company's functional currency.

E. a procedure to prepare a foreign subsidiary's financial statements for consolidation.

A. the currency of the primary economic environment in which it operates.

B. the currency of the country where it has its headquarters.

C. the currency in which it prepares its financial statements.

D. the reporting currency of its parent for a subsidiary.

E. the currency it chooses to designate as such.

A. the temporal method.

B. the current rate method.

C. the current/noncurrent method.

D. the monetary/nonmonetary method.

E. the noncurrent rate method.

B. the average exchange rate for the current year.

C. a calculated exchange rate based on market value.

D. the exchange rate in effect as of the balance sheet date.

E. the exchange rate in effect at the start of the current year.

A. an asset or liability (depending on the balance) in the consolidated balance sheet.

B. a revenue or expense (depending on the balance) in the consolidated income statement.

C. a component of stockholders' equity in the consolidated balance sheet.

E. an element of the notes which accompany the consolidated financial statements.

6. Westmore Ltd., is a British subsidiary of a U.S. company. Westmore's functional currency is

What was the amount of the translation adjustment for 2013?

A. $52,000 decrease in relative value of net assets.

B. $60,800 decrease in relative value of net assets.

C. $61,200 decrease in relative value of net assets.

D. $466,400 increase in relative value of net assets.

E. $26,000 increase in relative value of net assets.

What was the amount of the translation adjustment for 2013?

A. $52,000 decrease in relative value of net assets.

B. $60,800 decrease in relative value of net assets.

C. $61,200 decrease in relative value of net assets.

D. $466,400 increase in relative value of net assets.

E. $26,000 increase in relative value of net assets.

12. Which accounts are translated using current exchange rates?

A. all revenues and expenses.

B. all assets and liabilities.

C. cash, receivables, and most liabilities.

D. all current assets and liabilities.

E. all noncurrent assets and liabilities.

A. all revenues and expenses.

B. all assets and liabilities.

C. cash, receivables, and most liabilities.

D. all current assets and liabilities.

E. all noncurrent assets and liabilities.

C. Current Rate Method.

Which one of the following statements would justify this conclusion?

B. Dilty's functional currency is the dollar and Dilty is the parent.

E. Dilty is located in the U.S.

A. first translate them, then remeasure them.

B. first remeasure them, then translate them.

A. The rate at date of the acquisition business combination.

D. The rate from the prior year's balances.