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12) The temporal rate method is the most prevalent method today for the translation of financial
statements.
13) The biggest advantage of the current rate method of reporting translation adjustments is the
fact that the gain or loss goes directly to the reserve account on the consolidated balance sheet
and does not pass through the consolidated income statement.
14) Under the temporal rate method, specific assets and liabilities are translated at exchange rates
consistent with the timing of the item's creation.
15) The temporal method of foreign currency translation gains or losses resulting from
remeasurement are carried directly to current consolidated income and thus introduces volatility
to consolidated earnings.
16) : The current rate method and the temporal method are two basic methods for translation that
are employed worldwide
17) Under U.S. accounting and translation practices, use of the current rate method is termed
"translation" while use of the temporal method is termed "remeasurement."
18) If the financial statements of the foreign subsidiary are maintained in the local currency and
the U.S. dollar is the functional currency, they are remeasured by the temporal method.
19) Translation gains or losses can be quite different from operating gains or losses not only in
magnitude but also in sign.
20) The two methods for the translation of foreign subsidiary financial statements are the current
rate and temporal methods. Briefly, describe how each of these methods translates the foreign
subsidiary financial statements into the parent company's consolidated statements. Identify when
each technique should be used and the major advantage(s) of each.
Answer: The current rate method translates almost all line items from the foreign subsidiary to
the parent consolidated statements at the current exchange rate. This is the most commonly used
11.3 U.S. Translation Procedures
1) If the European subsidiary of a U.S. firm has net exposed assets of €750,000, and the euro
drops in value from $1.30/euro to $1.20/€ the U.S. firm has a translation:
A) gain of $75,000.
B) loss of $75,000.
C) gain of $625,000.
D) loss of €576,923.
2) If the European subsidiary of a U.S. firm has net exposed assets of €200,000, and the euro
increases in value from $1.22/€ to $1.26/€ the U.S. firm has a translation:
A) gain of $8,000.
B) loss of $8,000.
C) gain of $252,000.
D) loss of €252,000.
3) If the British subsidiary of a European firm has net exposed assets of £125,000, and the pound
increases in value from €1.40/£ to €1.44/£, the European firm has a translation:
A) loss of €5,000.
B) gain of €5,000.
C) gain of £5,000.
D) loss of £5,000.
4) If the British subsidiary of a European firm has net exposed assets of £250,000, and the pound
drops in value from €1.35/£ to €1.30/£, the European firm has a translation:
A) gain of €12,500.
B) loss of €12,500.
C) loss of £12,500.
D) gain of £12,500.
5) The value contribution of a subsidiary of a multinational firm to the firm can be reported in
the income statement or balance sheet of the consolidated firm. Explain the reporting of the
changes in the value of a subsidiary as a result of the change in an exchange rate - changes to the
income and the assets of the subsidiary - in the consolidated financial statements of the parent
company.
Answer: The earnings of the subsidiary, once remeasured into the home currency of the parent
1) The main technique to minimize translation exposure is called a/an ________ hedge.
A) balance sheet
B) income statement
C) forward
D) translation
2) A balance sheet hedge requires that the amount of exposed foreign currency assets and
liabilities:
A) have a 2:1 ratio of assets to liabilities.
B) have a 2:1 ratio of liabilities to assets.
C) have a 2:1 ratio of liabilities to equity.
D) be equal.
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Copyright © 2016 Pearson Education, Inc.
3) If a firm's balance sheet has an equal amount of exposed foreign currency assets and liabilities
and the firm translates by the temporal method, then:
A) the net exposed position is called monetary balance.
B) the change is value of liabilities and assets due to a change in exchange rates will be of equal
but opposite direction.
C) Both A and B are true.
D) none of the above
4) If a firm's subsidiary is using the local currency as the functional currency, which of the
following is NOT a circumstance that could justify the use of a balance sheet hedge?
A) The foreign subsidiary is about to be liquidated, so that the value of its Cumulative
Translation Adjustment (CTA) would be realized.
B) The firm has debt covenants or bank agreements that state the firm's debt/equity ratio will be
maintained within specific limits.
C) The foreign subsidiary is operating is a hyperinflationary environment.
D) All of the above are appropriate reasons to use a balance sheet hedge.
5) If the parent firm and all subsidiaries denominate all exposed assets and liabilities in the
parent's reporting currency this will ________ exposure but each subsidiary would have
________ exposure.
A) maximize translation; no transaction
B) eliminate translation; transaction
C) maximize transaction; no translation
D) eliminate transaction; translation
6) A Canadian subsidiary of a U.S. parent firm is instructed to bill an export to the parent in U.S.
dollars. The Canadian subsidiary records the accounts receivable in Canadian dollars and notes a
profit on the sale of goods. Later, when the U.S. parent pays the subsidiary the contracted U.S.
dollar amount, the Canadian dollar has appreciated 10% against the U.S. dollar. In this example,
the Canadian subsidiary will record a:
A) 10% foreign exchange loss on the U.S. dollar accounts receivable.
B) 10% foreign exchange gain on the U.S. dollar accounts receivable.
C) Since the Canadian firm is a U.S. subsidiary, neither a gain nor loss will be recorded.
D) Any gain or loss will be recorded only by the parent firm.
7) ________ gains and losses are "realized" whereas ________ gains and losses are only "paper."
A) Translation; transaction
B) Transaction; translation
C) Translation; operating
D) none of the above
8) It is possible that efforts to decrease translation exposure may result in an increase in
transaction exposure.
9) One possible reason for a balance sheet hedge could be because the foreign subsidiary is about
to be liquidated, so that value of its Cumulative Translation Adjustment (CTA) would be
realized.
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10) One possible reason for a balance sheet hedge could be because the firm has debt covenants
or bank agreements that state the firm's debt/equity ratios will be maintained within specific
limits.
11) If management expects a foreign currency to depreciate, it could minimize translation
exposure by increasing net exposed assets.
12) If management anticipates an appreciation of the foreign currency, it should decrease net
exposed assets to benefit from a gain.
13) Describe a balance sheet hedge and give at least two examples of when such a hedge could
be justified.
Answer: A balance sheet hedge attempts to equalize the amount of assets and liabilities of a
