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CHAPTER 6Foreign Currency Financial StatementsSUMMARY OF ITEMS BY TOPICTrue- FalseConceptual Multiple ChoiceComputational Multiple Choice ProblemsShort Answer Basics of multinational operations1-3 284-Objectives is FAS 52 4-7 64-66 288-Currencies 8-18 67-72 294-Steps in converting foreign financial ...

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CHAPTER 6 Foreign Currency Financial Statements SUMMARY OF ITEMS BY TOPIC

Basics of multinational operations Objectives is FAS 52

TrueFalse 1-3

Conceptual Multiple Choice

Computational Multiple Choice

Problems

Short Answer 284-287

4-7

64-66

288-293

Currencies

8-18

67-72

294-297

Steps in converting foreign financial statements Consolidating at acquisition date Temporal method, trial balance conversion into U.S. dollars Temporal method, equity method journal entries Temporal method, consolidation process Current rate method, trial balance conversion into U.S. dollars Current rate method, equity method journal entries Current rate method, consolidation process

19-23

73-75

298-300

24-27

76-79

106-114

216-223

301

28-41

80-94

115-139

224-236

302-307

42-43

95

140-152

237-243

153-156

244-253

44-45 46-55

96-102

157-179

254-266

308

56-60

103-105

180-207

267-273

309-311

208-215

274-283

312

61-63

True-False Statements 1.

Multinational operations result from activities conducted outside of the country where an entity is headquartered.

2.

Unless a company both purchases and sells outside the country where it is headquartered, it is not involved in multinational operations.

3.

Multinational operations do not have to result in the creation of a foreign currency transaction.

4.

The criteria used to determine whether a U.S. entity has to be included in the consolidated financial statements are the same criteria used to determine whether a foreign entity has to be included in the consolidated financial statements.

5.

The functional currency is always the parent currency.

6.

One objective of Financial Accounting Standard Number 52 is that the financial results should be converted in a manner that they will always appear as if the accounting records had been maintained in the U.S. dollar.

7.

The financial records of a foreign entity must be modified to conform to U.S. GAAP for the foreign entity to be included in the consolidated financial statements.

8.

A foreign entity’s local currency is the currency of the country where the entity is located.

9.

Most companies will use the currency of the country where the headquarters is located to maintain the financial records.

10.

A foreign entity’s functional currency must either be the local currency of foreign entity or the parent’s reporting currency.

11.

The parent’s reporting currency is the currency in which the parent company prepares the consolidated financial statements.

12.

A foreign currency is any currency other than the functional currency.

13.

One criteria indicating the that the foreign entity’s local currency is the functional currency is when the foreign entity generally purchases goods and services in the local market and pays for these purchases with the local currency.

14.

One criteria indicating that the foreign entity’s local currency is the functional currency is when the foreign entity engages in a large number of intercompany transactions with the parent.

15.

One criteria indicating that the parent’s reporting currency is the functional currency is when the parent provides financing for the subsidiary and local operations do not generate sufficient cash flows to service the debt.

16.

One criteria indicating that the parent’s reporting currency is the functional currency is when there is an active local sales market for the foreign entity.

17.

A foreign entity located in a country with a highly inflationary economy must use the parent currency as the functional currency because the foreign currency is too unstable a measuring unit to be the functional currency.

18.

The primary reason that a foreign entity located in a country with a highly inflationary economy must use the U.S. dollar as the functional currency is that the use of the foreign currency as the functional currency could result in distorted asset and liability values.

19.

Remeasurement of a foreign entity’s financial information is always required.

20.

A foreign entity’s financial information must be modified so as to conform to U.S. GAAP prior to applying either the temporal or current rate methods.

21.

The methodology for remeasuring a foreign entity’s financial information into the functional currency is called the temporal method.

22.

The methodology for translating a foreign entity’s financial information into the parent’s reporting currency is called the historical rate method.

23.

The objective of the current rate method is to convert the foreign entity’s trial balance amounts into the investor’s reporting currency with as little change as possible in the relationships that exist among the values in the functional currency trial balance.

24.

The investment amount in a foreign entity can be recorded in the investor’s financial records in either the U.S. dollar or the foreign currency unit.

25.

The two methods for converting a foreign entity’s financial information into the parent’s reporting currency will result in different values on the consolidated balance sheet at the acquisition date.

26.

Only one exchange rate is used to convert a foreign entity’s financial information into the investor’s reporting currency at the investment date.

27.

At the acquisition date, the worksheet elimination necessary to consolidate a parent and a foreign subsidiary appears identical to the worksheet elimination to consolidate a domestic subsidiary at the acquisition date.

28.

The temporal method of converting a foreign subsidiary trial balance into U.S. dollars distinguishes between monetary accounts and nonmonetary accounts.

29.

When applying the temporal method of converting a foreign subsidiary’s trial balance into U.S. dollars, all balance sheet accounts classified as nonmonetary except cash and marketable securities.

30.

The temporal method of converting a foreign subsidiary’s trial balance into U.S. dollars requires the tracking of the exchange rate that exists when a nonmonetary asset is acquired.

31.

The temporal method of converting a foreign subsidiary’s trial balance into U.S. dollars requires the same exchange rate to be used to convert plant assets and the accompanying depreciation expense and accumulated depreciation.

32.

The exchange rate used to convert a nonmonetary asset from foreign currency units into U.S. dollar when applying the temporal method is called the spot rate.

33.

When applying the temporal method to convert a foreign subsidiary’s trial balance into U.S. dollars, all nonmonetary accounts will require the use of multiple exchange rates.

34.

When applying the temporal method to convert a foreign subsidiary’s trial balance into U.S. dollars, the inventory turnover ratio will be the same whether calculated in foreign currency units or in U.S. dollars.

35.

The temporal method of converting a foreign subsidiary’s trial balance into U.S. dollars requires the exchange rate in existence when a nonmonetary asset is acquire to always be used to convert that asset’s value into U.S. dollars.

36.

The temporal method of converting a foreign subsidiary’s trial balance into U.S. dollars permits the use of the average exchange rate when assets are acquired evenly throughout the year.

37.

When applying the temporal method to convert a foreign subsidiary’s trial balance into U.S. dollars, the monetary accounts are converted using the acquisition date exchange rate.

38.

When applying the temporal method to convert a foreign subsidiary’s trial balance into U.S. dollars, the owners’ equity accounts are viewed as monetary accounts and are converted using the balance sheet date exchange rate.

39.

When applying the temporal method to convert a foreign subsidiary’s trial balance into U.S. dollars, the trial balance in dollars will not balance in U.S. dollars without making an adjustment.

40.

The adjustment needed to have the U.S. dollar trial balance in balance when applying the temporal method is called the translation adjustment.

41.

The remeasurement gain or loss found on the temporal method trial balance is a component of the subsidiary’s income statement.

42.

All foreign subsidiaries require more equity method journal entries than domestic subsidiaries.

43.

The remeasurement gain or loss created on a foreign subsidiary’s trial balance when applying the temporal method is included in the subsidiary’s net income.

44.

The worksheet eliminations prepared to consolidate a foreign subsidiary when the temporal method is applied to convert the foreign trial balance into U.S. dollars are identical to the worksheet eliminations that would be prepared to consolidate a domestic subsidiary.

45.

The worksheet eliminations prepared to consolidate a foreign subsidiary when the temporal method is applied differ from the worksheet eliminations necessary to consolidate a domestic subsidiary because of the change in the exchange rate.

46.

When applying the current rate method to convert a foreign entity’s trial balance into U.S. dollars, all assets and liabilities are converted using the balance sheet date exchange rate except plant assets which have to be converted using the exchange rate that exists on the date the plant asset is acquired.

47.

One result of converting all asset and liability accounts into U.S. dollars using the balance sheet date exchange rate when applying the current rate method is that the relationships that exist among balance sheet accounts is unchanged.

48.

When applying the current rate method to convert a foreign entity’s trial balance into U.S. dollars, income statement accounts will always be converted by using the average exchange rate for the year.

49.

The average exchange rate is generally used to convert a foreign subsidiary’s income statement accounts into U.S. dollars when applying the current rate method.

50.

Stockholders’ equity accounts are converted from a foreign currency into U.S. dollars using the balance sheet date exchange rate when applying the current rate method.

51.

One exchange rate is used to convert all of a foreign subsidiary’s dividends on its trial balance into U.S. dollars.

52.

The U.S. dollar amount of a foreign subsidiary’s retained earnings balance can only be determined using a single exchange rate in the period the subsidiary is acquired.

53.

The dollar amount needed to bring a foreign subsidiary’s converted trial balance back into balance in U.S. dollars when applying the current rate method is part of the subsidiary’s income statement

54.

The dollar amount needed to bring a foreign subsidiary’s converted trial balance back into balance in U.S. dollars when applying the current rate method is called the cumulative translation adjustment.

55.

The full amount of the cumulative translation adjustment on a subsidiary’s trial balance is always recorded on the parent’s financial records.

56.

When applying the current rate method to convert a foreign subsidiary’s trial balance into U.S. dollars, the parent recognizes its ownership percentage of the subsidiary’s translated income as investment income.

57.

When applying the current rate method to convert a foreign subsidiary’s trial balance into U.S. dollars, the parent records all of the change in the cumulative translation adjustment on its financial records.

58.

The purchase differential amortization of a foreign subsidiary is always calculated in the U.S. dollar.

59.

The purchase differential amortization recorded when the current rate method is applied to convert a foreign subsidiary’s financial information into U.S. dollars is based on the average exchange rate for the period.

60.

The cumulative translation adjustment recognized as a result of the purchase differential translation equals the amount by which the beginning purchase differential (U.S. dollar) minus the purchase differential amortization (U.S. dollar) does not equal the ending purchase differential (U.S. dollar).

61.

The consolidation of a foreign subsidiary when the current rate method is applied may require up to four worksheet eliminations.

62.

The consolidation worksheet eliminations prepared for a foreign subsidiary and its U.S. parent when the current rate method is applied removes all of the cumulative translation adjustment from the consolidated balance sheet. 63. When consolidating a foreign subsidiary after applying the current rate method, the consolidation process may require an additional worksheet elimination to allocate the cumulative translation adjustment with regard to the purchase differential to the parent and the noncontrolling interest.

True-False Statement Solutions 1. T 2. F, Multinational operations exist when an entity conducts any activities outside of the country where an entity is headquartered. 3. T 4. T 5. F, The functional currency is the currency of the primary economic environment in which the entity operates. 6. F, When the functional currency is the foreign currency, the conversion should not restate the financial statements elements as if the foreign entity’s operations were conducted in the U.S. dollar. However, when the functional currency is the U.S. dollar, the conversion process should restate the foreign entity’s trial balance as if the operations were conducted in U.S. dollars. 7. T 8. T 9. T 10. F, The functional currency is typically either the foreign entity’s local currency or the parent’s reporting currency but it can be a currency other than these two. 11. T 12. T 13. T

14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24.

25.

26. 27. 28. 29. 30. 31. 32. 33. 34. 35.

36. 37. 38.

F, Criteria indicating that the parent’s reporting currency is the functional currency include when the existence of an extensive relationship between the foreign entity and the parent and when intercompany transactions are common. T F, Criteria indicating that the local currency is the functional currency include when there is an active local sales market and the foreign entity does not primarily make sales in the parent’s country or parent’s currency T T F, Remeasurement is required when the for entity’s financial information is not maintained in the entity’s functional currency. T T F, The methodology for translating a foreign entity’s financial information into the parent’s reporting currency is called the current rate method. T F, All amounts recorded in the financial records of a U.S. company are stated in U.S. dollars. If the investment is made in a foreign currency, it must be converted into U.S. dollars by applying the exchange rate that exists on the investment date to the foreign currency units expended. F, The exchange rate used to convert all financial statement amounts at the acquisition date is the same, i.e., the exchange rate that exists at the investment date. As a result, the temporal and current rate methods result in the same consolidated balance sheet at the acquisition date. T T T F, Monetary accounts are all accounts that are fixed in units of currency. While cash and marketable securities are monetary accounts, others include accounts and notes receivable and payable as well as sales and some expenses. T T F, The historical exchange rate is used to convert nonmonetary accounts from foreign currency units into U.S. dollars when applying the temporal method. F, Use of multiple exchange rates to convert nonmonetary accounts is only necessary when there have been transactions in the account since the acquisition date and the exchange rate has changed from the acquisition date exchange rate. T F, The exchange rate in existence when a nonmonetary asset is acquired will be used to convert the asset’s value into U.S. dollars unless the nonmonetary asset was owned when the subsidiary was acquired by the parent. In that instance, the acquisition date exchange rate is used to convert the nonmonetary asset cost from foreign currency into U.S. dollars. T F, Monetary accounts are converted into U.S. dollars using the balance sheet date exchange rate except when consolidation occurs at the acquisition date. F, The equity accounts are converted using the acquisition date exchange rate unless there have been equity transactions subsequent to the acquisition date. The exception is

39. 40. 41. 42. 43. 44. 45.

46. 47. 48.

49. 50. 51. 52. 53.

54. 55. 56. 57. 58. 59. 60. 61. 62.

Retained Earnings which is a combination of exchange rates after the first year of ownership. T F, The adjustment needed to balance the U.S. dollar trial balance when applying the temporal method is called the remeasurement gain or loss. T F, The number of equity method journal entries is the same for a domestic subsidiary and a foreign subsidiary when the foreign subsidiary’s financial records are converted into U.S. dollars by applying the temporal method. T T F, The remeasurement gain or loss created as a result of changes in the exchange rate are subsumed in the subsidiary’s net income when the temporal method is applied so the worksheet eliminations prepared to consolidate a foreign subsidiary when the temporal method is applied are identical to the worksheet eliminations needed to consolidate a domestic subsidiary. F, When applying the current rate method, all assets and liabilities are converted into U.S. dollars using the balance sheet date exchange rate. T F, Generally the average exchange rate for the year is used. One exception to this pertains to plant assets acquired during the year. The average exchange rate from the purchase date till the end of the year would be used to convert the depreciation expense on these assets. T F, Equity accounts are generally converted into U.S. dollars by using the historical exchange when the subsidiary was acquired by the parent. F, A single exchange rate is used when there is only one dividend payment otherwise a separate exchange rate is used for each dividend payment. T F, The current rate method is applied when the subsidiary is operating basically independent from the parent. As a result, the change in the value of the subsidiary’s assets and liabilities will not likely have a direct cash flow effect so the cumulative translation adjustment is placed in the equity portion of the balance sheet. T F, The parent records its ownership interest in the change in the ...