Chapter 11—Translation of Foreign Financial Statements Key
1. The functional currency approach adopted by FASB 52 requires:
2. Exchange rates will not usually directly affect the cash flows of the parent entity in which of the following
cases?
3. When the functional currency is the foreign entity’s currency:
4. A U.S. firm owns 100% of a Japanese automobile manufacturer. The cost of automobile parts is typically
75% of the firm’s total product. In which of the following circumstances would neither the U.S. dollar nor the
Japanese yen be considered the functional currency?
5. In which of the following circumstances surrounding a Mexican subsidiary of an U.S. parent is the peso most
likely to be considered the functional currency?
6. Which of the following suggests that the foreign entity’s functional currency is the parent’s currency?
7. Changes in the functional currency of a subsidiary
8. If currency exchange rate changes impact potential cash flows available to the parent and the parent’s
economic well being:
9. If the translation process is sound, it should:
10. If a subsidiary’s functional currency is not the local currency in which it operates, but the parent’s reporting
currency:
11. The translation (remeasurement) adjustment reported in a translation when the functional currency is not the
foreign currency is included
12. When may the translation adjustment resulting from translating financial statements using the current or
functional method be recognized in income?
13. Which of the following correctly addresses how international accounting standards differ from U.S. GAAP
as they pertain to translation of foreign financial statements using the current or functional method?
14. When preparing a foreign affiliate’s financial statements for consolidation, the first step is to:
15. Which of the following best describes the normal required method of accounting for statements of foreign
entities whose functional currency is the foreign entity’s local currency, and in which a U.S. firm has an equity
interest?
16. Assuming that a foreign entity is deemed to be operating in an environment dominated by the local
currency, the entity’s assets are translated using
17. A foreign subsidiary of Dallas Jeans Corp. (a U.S. firm) has certain balance sheet accounts on December 31,
20X9. The functional currency and currency of record is the peso and the parent’s books are kept in U.S. dollars.
Information relating to these accounts in U.S. dollars is as follows:
Remeasured at
Current Rate
Historical Rate
Accounts Receivable
$175,000
$190,000
Inventories
400,000
450,000
Prepaid Insurance
40,000
45,000
Land
30,000
100,000
What amount should be included as total assets on Dallas Jean’s balance sheet on December 31, 20X9 as the result of the above information?
18. Patents are on the books of a British subsidiary of a U.S. firm at a value of 50,000 pounds. The patents were
acquired in 20X3 when the exchange rate was 1 pound = $1.50. The British subsidiary was acquired by the U.S.
firm in 20X0 when the exchange rate was 1 pound = $1.40. The exchange rate on December 31, 20X4, the date
of the most current balance sheet, is 1 pound = $1.55. The average rate of exchange for 20X4 is $1.53.
Assuming the pound is the functional currency of the subsidiary, what exchange rate will be used to translate
patents for the consolidated statements dated December 31, 20X4?
19. Assuming that the functional currency of a foreign subsidiary is the local currency, which of the following
accounts would be translated at the current rate?
20. Rhante is a German company wholly owned by a U.S. firm. Its inventory is valued at the lower of cost or
market, with cost being measured by the average cost method. Purchases of inventory occur evenly throughout
the period. In 2005 Rhante’s ending inventory was 50,000 euros at cost and 48,000 euros at market. Assume the
following exchange rates:
Jan. 1, 2005
1 euro = $1.40 U.S.
Dec. 31, 2005
1 euro = $1.53 U.S.
2005 average
1 euro = $1.45 U.S.
Determine the translated value of Rhante’s inventory to be included in the consolidated balance sheet for the U.S. parent given Rhante’s functional
currency is the euro.
21. Assuming that a foreign entity is deemed to be operating in an environment dominated by the local
currency, the entity’s capital stock is translated using
22. Sharp Company owns a Japanese subsidiary, whose functional currency is the yen. On October 15, 20X5,
when the rate of exchange was 121 yen to $1, the Japanese subsidiary declared and paid a dividend to Sharp of
24,000,000 yen. The dividend represented the net income of the foreign subsidiary for the six months ended
June 30, 20X5, during which time the weighted average of exchange rates was 125 yen to $1. The rate of
exchange in effect at December 31, 20X5, was 135 yen to $1. What rate of exchange should be used to translate
the dividend for the December 31, 20X5 financial statements?
23. Exchange gains and losses resulting from translating (not remeasuring) foreign currency financial
statements into U.S. dollars should be included as a(an)
24. Which of the following is not considered when directly computing the translation adjustment for foreign
financial statements?
25. The reconciliation of the annual translation adjustment usually includes all of the following, except:
26. Robbins Corporation has a wholly-owned foreign subsidiary, Bertke, Ltd. Bertke’s functional currency is
the currency of the country in which it is located. Information extracted from Bertke’s financial statements
follow:
20X3
Common stock, no par value
FC 100,000
Retained earnings
350,000
Net income
60,000
Dividends (declared September 30)
10,000
Robbins increased its investment in Bertke on March 31, 20X4. Exchange rate information for the period follows:
20X3
December 31
1 FC = $2.10
Average
2.12
March 31
2.08
September 30
2.07
The amount of the translation adjustment is:
27. A debit balance in a parent’s cumulative translation adjustment after the first year of owning a foreign
subsidiary suggests which of the following is true?
28. The eliminations and adjustment entries necessary to consolidate the parent and subsidiary financial
statements are translated as follows:
29. When an U.S. investor entity acquires interest in a foreign entity with the payment of foreign currency, the
determination of excess is calculated
30. When Palm, Inc. acquired its 100% investment in Star Co, a foreign entity, the excess of cost over book
value was 10,000FC. This excess was traceable to a 10-year patent. The elimination entry to distribute the
excess will include a(n)
31. A U.S. parent purchased a foreign subsidiary last year at a price in excess of the subsidiary’s book value.
The subsidiary’s functional currency is the foreign currency. This excess is assumed to be traceable to
undervalued equipment. When the parent company prepares its elimination entries for the excess, which of the
following combinations of exchange rates should be used?
Equipment Depreciation Expense
32. As part of the consolidation process for a partially-held foreign subsidiary, the elimination entry to distribute
the excess of cost over book value will include a credit to Cumulative Translation Adjustment-Parent
33. Consider the consolidation process for a foreign subsidiary: When the excess of cost over book value is
attributable to identifiable assets, those assets are adjusted in the “distribution” elimination entry by an amount
that is calculated as
34. When Palm, Inc. acquired its 100% investment in Star Co, a foreign entity, the excess of cost over book
value was 10,000FC. This excess was traceable to a 10-year patent. The elimination entry to amortize the
excess will include a(n)
35. Merritt Company prepares consolidated financial statements with its wholly-owned subsidiary, Simon
Ltd. Simon’s functional currency is the British pound. At the end of the fiscal year, Simon has GBP 50,000 of
inventory on hand that it purchased from Merritt when the exchange rate was $1.60 to 1 GBP. Merritt’s
standard gross profit percentage is 40%. The current rate at December 31 was $1.55 to 1 GBP and the average
rate for the year was $1.58 to 1 GBP.
The amount of intercompany profit that should be eliminated from inventory is:
36. Which of the following foreign currency transactions would be included in the equity section of a U.S. firm
along with the cumulative translation adjustments?
37. Kidney Company has a wholly-owned foreign subsidiary which has a $15,000 credit translation adjustment
in the current year. Kidney has taken out a loan denominated in the foreign currency in which the subsidiary
operates as a hedge of its net investment in the foreign entity. The value of the loan increased $18,000 in the
current year. What is the impact of the change in the loan value?
38. If a US. parent loans funds on a long-term basis to a subsidiary denominated in the subsidiary’s foreign
currency, the effect of rate changes on the loan:
39. Which of the following is true concerning the accounting for a foreign investment under the cost method?
40. If the functional currency is determined to not be the foreign entity’s local currency, translation is done
using
41. Assuming that the functional currency of a foreign subsidiary is not the local currency, which of the
following accounts would be remeasured at the historical rate?
42. Patents are on the books of a British subsidiary of a U.S. firm at a value of 50,000 pounds. The patents were
acquired in 20X3 when the exchange rate was 1 pound = $1.50. The British subsidiary was acquired by the U.S.
firm in 20X0 when the exchange rate was 1 pound = $1.40. The exchange rate on December 31, 20X4, the date
of the most current balance sheet, is 1 pound = $1.55. The average rate of exchange for 20X4 is $1.53.
Assuming the dollar is the functional currency of the subsidiary, what exchange rate will be used to remeasure
patents for the consolidated statements dated December 31, 20X4?
43. Patents are on the books of a British subsidiary of a U.S. firm at a value of 50,000 pounds. The patents were
acquired in 20X0 when the exchange rate was 1 pound = $1.50. The British subsidiary was acquired by the U.S.
firm in 20X3 when the exchange rate was 1 pound = $1.40. The exchange rate on December 31, 20X4, the date
of the most current balance sheet, is 1 pound = $1.55. The average rate of exchange for 20X4 is $1.53.
Assuming the dollar is the functional currency of the subsidiary, what exchange rate will be used to remeasure
patents for the consolidated statements dated December 31, 20X4?
44. A foreign subsidiary of Dallas Jeans Corp. (a U.S. firm) has certain balance sheet accounts on December 31,
20X9. The functional currency is the U.S. dollar and currency of record is the peso and the parent’s books are
kept in U.S. dollars. Information relating to these accounts in U.S. dollars is as follows:
Remeasured at
Current Rate
Historical Rate
Accounts Receivable
$175,000
$190,000
Inventories
400,000
450,000
Prepaid Insurance
40,000
45,000
Land
30,000
100,000
What amount should be included as total assets on Dallas Jean’s balance sheet on December 31, 20X9 as the result of the above information?
45. Sharp Company owns a Japanese subsidiary, whose functional currency is the U.S. dollar. On October 15,
20X5, when the rate of exchange was 121 yen to $1, the Japanese subsidiary declared and paid a dividend to
Sharp of 24,000,000 yen. The dividend represented the net income of the foreign subsidiary for the six months
ended June 30, 20X5, during which time the weighted average of exchange rates was 125 yen to $1. The rate of
exchange in effect at December 31, 20X5, was 135 yen to $1. What rate of exchange should be used to translate
the dividend for the December 31, 20X5 financial statements?
46. The adjustment resulting from the remeasurement of an entity operating in a highly inflationary
environment would appear
47. Rhante is a German company wholly owned by a U.S. firm. Its inventory is valued at the lower of cost or
market, with cost being measured by the average cost method. Purchases of inventory occur evenly throughout
the period. In 2005 Rhante’s ending inventory was 50,000 euros at cost and 48,000 euros at market. Assume the
following exchange rates:
Jan. 1, 2005
1 euro = $1.40 U.S.
Dec. 31, 2005
1 euro = $1.53 U.S.
2005 average
1 euro = $1.45 U.S.
Determine the remeasured value of Rhante’s inventory to be included in the consolidated balance sheet for the U.S. parent given Rhante’s functional
currency is the U.S. dollar.
48. Which of the following best describes the measurement of a gain or loss from the sale of a depreciable asset
by a foreign subsidiary whose functional currency is not the local currency?
49. Which of the following best describes the accounting for a foreign entity requiring translation or
remeasurement if the local economy is classified as highly inflationary?
50. Which of the following procedures would be necessary when a Swiss subsidiary maintains its books in
euros and its functional currency is Japanese Yen and its parent is a U.S. company?
51. In most cases, which of the following is not a component of translated retained earnings?
52. FASB standards require which of the following disclosures from firms involved in foreign currency
transactions?
53. In a company’s disclosure of foreign currency transactions and hedges and translation adjustments, all of the
following items should be disclosed except:
54. CableTech, a US corporation, owns 100% of the Canadian company, Fiber Quebec. The Canadian dollar is
the currency of record and the functional currency.
Required:
What currency exchange rate would be used to translate Fiber Quebec’s accounts into US Dollars? Choose from
current, simple average, weighted average, or historical.
a.
Prepaid Insurance
_______________________
b.
Land
_______________________
c.
Common Stock
_______________________
d.
Bonds Payable
_______________________
e.
Sales
_______________________
f.
Goodwill
_______________________
g.
Allowance for Doubtful Accounts
_______________________
h.
Deferred Income Taxes
_______________________
Prepaid Insurance
Current
b.
Land
Current
Common Stock
Historical
d.
Bonds Payable
Current
Sales
Weighted Average
Goodwill
Current
g.
Allowance for Doubtful Accounts
Current
h.
Deferred Income Taxes
Current
55. Complete the following worksheet, assuming that on January 1, 20X1, Weiss Corporation purchased Rock
Corporation. Rock’s functional currency is the FC.
Date
Relevant Exchange Rates
January 1, 20X1
1 FC = $0.25
January 1, 20X4
1 FC = $0.30
March 31, 20X4
1 FC = $0.40
December 31, 20X4
1 FC = $0.50
Weighted average 20X4
1 FC = $0.37
Rock Corporation
For the Year Ended December 31, 20X4
Rate
Dollars
Net sales
$
Costs and expenses
800,000
Net income
$
Retained earnings, beginning of year
$1,300,000
Net income
1,200,000
Subtotal
$
Dividends (declared on March 31)
1,000,000
Retained earnings, end of year
$
Assets:
Current assets
$
Plant assets (net)
(purchased January 1, 20X1)
55,000,000
Total assets
$
Liabilities and Stockholders’ Equity:
Current liabilities
$
Long-term debt
25,000,000
Common stock (issued January 1, 20X1)
5,000,000
Paid-in capital in excess of par
17,300,000
Retained earnings
6,700,000
Cumulative translation adjustments
Total liabilities and stockholders’ equity
$
56. Abercrombe Co., a U.S. firm, formed a German company in 20X4 by purchasing the common stock of the
newly formed Dolce Inc. The functional currency of Dolce is the euro. During their first three years, Dolce
experienced the following activity in retained earnings:
20X4
Net loss
100,000 euros
20X5
Net income
200,000 euros
January 1, 20X6
Dividend
50,000 euros
20X6
Net income
75,000 euros
The following exchange rates could be relevant:
Date
1 euro equal to
December 31, 20X3
$0.20
December 31, 20X4
$0.22
Average 20X4
$0.215
January 1, 20X6
$0.245
Average 20X5
$0.24
December 31, 20X6
$0.26
Average 20X6
$0.25
Required:
What is the translated December 31, 20X6, balance of the retained earnings for Dolce?
20X4 net loss (100,000 euros) ´ .215
$(21,500)
20X5 net income (200,000 euros) ´ .24
48,000
20X6 dividend (50,000 euros) ´ .245
(12,250)
20X6 net income 75,000 euros ´ .25
18,750
Translated balance on December 31, 20X6
$ 33,000
57. In January, 20X3, Dudwil Corporation acquired a foreign subsidiary, Holman Company, by paying cash for
all of the outstanding common stock of Holman. On the purchase date, Holman Company’s accounts were
stated fairly in local currency units (FC). Subsequent sales of Holman’s common stock have been purchased by
Dudwil to maintain its 100% ownership.
Holman’s trial balance, in functional currency units (same as the local currency units), on December 31, 20X7,
follows:
Debit
Credit
Cash
58,400
Marketable securities
32,500
Accounts receivable (net)
51,370
Inventories
108,000
Surrender value of life insurance
7,200
Intangible assets
123,900
Property, plant, and equipment
636,000
Accumulated depreciation
93,850
Accounts payable
74,000
Accrued interest payable
7,120
Notes payable
52,000
Bonds payable
80,000
Capital stock
83,000
Paid-in capital in excess of par
190,300
Retained earnings
390,400
Sales
936,300
Cost of goods sold
762,000
Interest expense
7,120
Depreciation expense
39,350
Amortization expense—intangibles
3,100
Other expenses
84,230
Gain on sale of equipment
2,400
Interest income
3,800
Total
1,913,170
1,913,170
The following additional information is available:
a.
Holman uses the LIFO inventory
method to account for its
inventory. Purchases took place
uniformly throughout 20X7. There
were no intercompany sales during
20X7.
b.
During 20X7, Holman declared
and paid a dividend of 7,000 FCs
at the end of each calendar quarter.
c.
The balances in the contributed
capital accounts result from the
following transactions:
Paid-in Capital
Date
Capital Stock
in Excess of Par
January 1, 20X3, issuance
40,000
FC
80,000
FC
June 30, 20X5, issuance
40,000
104,300
January 1, 20X6, issuance
10,000
20,000
August 1, 20X6, retirement
(7,000)
(14,000)
83,000
FC
190,300
FC
The August 1, 20X6, retirement of
stock involves stock originally
issued on January 1, 20X3.
d.
The December 31, 20X6, retained
earnings balance of 418,400 FC,
translated into dollars, is $179,460.
e.
Selected translation rates are as
follows:
Date
1 FC equal to
January 1, 20X3
$0.30
20X3 average
0.32
20X4 average
0.38
February 1, 20X5
0.42
June 30, 20X5
0.45
20X5 average
0.45
January 1, 20X6
0.50
February 1, 20X6
0.52
August 1, 20X6
0.60
December 31, 20X6
0.61
20X6 average
0.56
March 31, 20X7
0.63
June 30, 20X7
0.66
September 30, 20X7
0.70
December 31, 20X7
0.75
20X7 average
0.70
Required:
Prepare a schedule to translate the December 31, 20X7, trial balance of Holman Company from local currency units to dollars. The schedule should
show the trial balance in FCs, the exchange rates, and the trial balance. (Do not extend the trial balance to statement columns. Supporting schedules
should be in good form.)