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Chapter 3. Financial Accounting and Repo... > Module 18 Miscellaneous: E. Foreign ...

Module 18 Miscellaneous: E. Foreign Currency Translation

Multiple-Choice Questions (1-9)

1.Certain balance sheet accounts of a foreign subsidiary of Rowan, Inc., at December 31, 2006, have been translated into US dollars as follows:

 Translated at
 Current ratesHistorical rates
Note receivable, long-term$240,000$200,000
Prepaid rent85,00080,000
Patent150,000170,000
 $475,000$450,000


The subsidiary’s functional currency is the currency of the country in which it is located. What total amount should be included in Rowan’s December 31, 2006 consolidated balance sheet for the above accounts?

  1. $450,000

  2. $455,000

  3. $475,000

  4. $495,000

2.A wholly owned subsidiary of Ward, Inc. has certain expense accounts for the year ended December 31, 2006, stated in local currency units (LCU) as follows:

 LCU
Depreciation of equipment (related assets were purchased January 1, 2004)120,000
Provision for doubtful accounts80,000
Rent200,000


The exchange rates at various dates are as follows:

 Dollar equivalent of 1 LCU
December 31, 2006$.40
Average for year ended 12/31/06.44
January 1, 2004.50


Assume that the LCU is the subsidiary’s functional currency and that the charges to the expense accounts occurred approximately evenly during the year. What total dollar amount should be included in Ward’s 2006 consolidated income statement to reflect these expenses?

  1. $160,000

  2. $168,000

  3. $176,000

  4. $183,200

3.Which of the following should be reported as a stockholders’ equity account?
  1. Discount on convertible bonds.

  2. Premium on convertible bonds.

  3. Cumulative foreign exchange translation loss.

  4. Organization costs.

4.A foreign subsidiary’s functional currency is its local currency, which has not experienced significant inflation. The weighted-average exchange rate for the current year would be the appropriate exchange rate for translating

 Sales to customersWages expense
a.NoNo
b.YesYes
c.NoYes
d.YesNo


5.The functional currency of Nash, Inc.’s subsidiary is the French franc. Nash borrowed French francs as a partial hedge of its investment in the subsidiary. In preparing consolidated financial statements, Nash’s translation loss on its investment in the subsidiary exceeded its exchange gain on the borrowing. How should the effects of the loss and gain be reported in Nash’s consolidated financial statements?
  1. The translation loss less the exchange gain is reported as other comprehensive income.

  2. The translation loss less the exchange gain is reported in net income.

  3. The translation loss is reported as other comprehensive income and the exchange gain is reported in net income.

  4. The translation loss is reported in net income and the exchange gain is reported as other comprehensive income.

6.A balance arising from the translation or remeasurement of a subsidiary’s foreign currency financial statements is reported in the consolidated income statement when the subsidiary’s functional currency is the

 Foreign currencyUS dollar
a.NoNo
b.NoYes
c.YesNo
d.YesYes


7.When remeasuring foreign currency financial statements into the functional currency, which of the following items would be remeasured using historical exchange rate?
  1. Inventories carried at cost.

  2. Marketable equity securities reported at market values.

  3. Bonds payable.

  4. Accrued liabilities.

8.Park Co.’s wholly owned subsidiary, Schnell Corp., maintains its accounting records in German marks. Because all of Schnell’s branch offices are in Switzerland, its functional currency is the Swiss franc. Remeasurement of Schnell’s 2006 financial statements resulted in a $7,600 gain, and translation of its financial statements resulted in an $8,100 gain. What amount should Park report as a foreign exchange gain as net income in its income statement for the year ended December 31, 2006?
  1. $0

  2. $ 7,600

  3. $ 8,100

  4. $15,700

9.In preparing consolidated financial statements of a US parent company with a foreign subsidiary, the foreign subsidiary’s functional currency is the currency
  1. In which the subsidiary maintains its accounting records.

  2. Of the country in which the subsidiary is located.

  3. Of the country in which the parent is located.

  4. Of the environment in which the subsidiary primarily generates and expends cash.

Simulation Problems

Simulation Problem 1


  

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