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Multiple Choice Quiz
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1
Foreign subsidiaries of U.S. parent companies that operate in highly inflationary economies are required by GAAP to use which method for translating the financial statements:
A)Temporal Method, with the Translation Gain or Loss to be reported as part of Comprehensive Income.
B)Current Rate Method, with the Cumulative Translation Adjustment to be reported as part of Comprehensive Income.
C)Temporal Method, with the Translation Gain or Loss to be reported as part of Net Income.
D)Current Rate Method, with the Cumulative Translation Adjustment to be reported as part of Net Income.
E)Equity Method, with the Translation Gain or Loss to be reported as part of Non-Controlling Interest in Subsidiary.
2
A subsidiary of Harris Inc. is located in Germany. The functional currency of this subsidiary is the Euro (€). The subsidiary acquires inventory on October 31 of the previous year for 100,000 € which is sold on January 15 of the current year for 150,000 €. Collection of the money takes place on February 4 of the current year. Applicable exchange rates are as follows:

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What amount is reported for this inventory on the December 31 US $ balance sheet?
A)$123,000
B)$126,000
C)$131,000
D)$189,000
E)$226,935
3
A subsidiary of Shaw Inc. has one asset (Inventory) and one liability (Accounts Payable). The functional currency of this subsidiary is the Euro. The inventory was acquired for 90,000 € when the exchange rate was $1.30 = 1€. Accounts Payable, which has a balance of 50,000 €, was established when the exchange rate was $1.35 = 1 €. At year-end, the exchange rate was $1.25 = 1 €. Which one of the following statements is true for the consolidated financial statements?
A)The consolidated financial statements are not affected by this situation.
B)A debit translation adjustment must be reported.
C)A credit translation adjustment must be reported.
D)A transaction loss must be reported.
E)A transaction gain must be reported.
4
A U.S.-based company has a subsidiary located in Germany. The Euro (€) is the functional currency of the subsidiary. What exchange rate should be used to translate the following items reported in the subsidiary’s year-end financial statements?

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A)A
B)B
C)C
D)D
E)E
5
A U.S. company owns a foreign subsidiary. To prepare consolidated financial statements, when would the parent company convert the foreign subsidiary’s accounts into U.S. GAAP?
A)Prior to the beginning of the translation process.
B)After translation, but prior to consolidation.
C)After consolidation, but prior to reporting.
D)No adjustments are necessary, since most foreign countries already use GAAP.
E)No adjustment should be necessary. Foreign subsidiaries are required by the SEC to have an accounting system that is consistent with GAAP.
6
Packstone Inc. owns a subsidiary in UK. The subsidiary's functional currency is the pound. Therefore, translation is necessary in order to prepare consolidated financial statements. The subsidiary began in the current year with £500,000 in cash and no other assets or liabilities. On March 1, the subsidiary used £100,000 to purchase equipment. On April 20, the subsidiary used cash to purchase merchandise inventory costing £80,000. This merchandise was sold on May 16 for £120,000 in cash. On November 1, the subsidiary paid a cash dividend to Packstone in the amount of £60,000 and recorded depreciation on the equipment for the year of £50,000. The appropriate exchange rates were as follows:

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What is the translation adjustment to be reported in the stockholders' equity section of the consolidated balance sheet?
A)$–0–
B)$31,000 debit
C)$31,000 credit
D)$37,600 debit
E)$37,600 credit
7
A U.S. company would use the foreign currency as its foreign subsidiary’s functional currency, if the foreign subsidiary’s:
A)Financing is primarily from its parent.
B)Sales price is affected on a short-term basis by changes in the exchange rate.
C)Primary costs for its components are obtained from the parent’s country.
D)Sales market is primarily in its parent’s country.
E)Intra-entity transactions with the parent company are limited.
8
Which one of the following translation methods has as its basic assumption the premise that a company's net investment in a foreign operation is exposed to foreign exchange risk?
A)current rate method
B)average rate method
C)current/noncurrent method
D)monetary/nonmonetary method
E)temporal method
9
The primary currency of the foreign entity's operating environment is known as the:
A)translation currency.
B)functional currency.
C)reporting currency.
D)temporal currency.
E)prime-time currency.
10
Bean Inc. started the current year with two assets: Cash of ¥30,000 and Land which originally cost ¥50,000 when acquired two years ago on June 30. On August 18 of the current year, the company rendered services to a customer for ¥80,000, an amount that was immediately paid in cash. On November 15 of the current year, the company incurred an operating expense of ¥26,000, which was immediately paid. No other transactions occurred during the current year. Currency exchange rates were as follows:

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Assume that this company is a Japanese subsidiary of an American company. Also assume that the U.S. dollar is the functional currency of the parent and the subsidiary so that remeasurement is required. What is the remeasurement gain or loss for the current year?
A)$210.40 loss
B)$188.10 gain
C)$188.10 loss
D)$134.40 gain
E)$134.40 loss
11
A positive translation adjustment will occur when:
A)A net asset balance sheet exposure exists and the foreign currency appreciates.
B)A net asset balance sheet exposure exists and the foreign currency depreciates.
C)A net liability balance sheet exposure exists and the foreign currency appreciates.
D)A net liability balance sheet exposure exists and the foreign currency changes.
E)A remeasurement of financial statement using the temporal method occurs.
12
Certain balance sheet accounts of a foreign subsidiary of Parks, Inc. had been stated in U.S. dollars as follows:

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If a foreign currency is the functional currency of this subsidiary, what total should have been included in Tulip's balance sheet for the preceding items?
A)$61,000
B)$66,000
C)$60,000
D)$62,000
E)$61,500
13
Certain balance sheet accounts of a foreign subsidiary of Parks, Inc. had been stated in U.S. dollars as follows:

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If the U.S. dollar is the functional currency of this subsidiary, what total should have been included in Tulip's balance sheet for the items above?
A)$61,000
B)$66,000
C)$60,000
D)$62,000
E)$61,500
14
When the current exchange rate is used for translation and the foreign currency increases in value, if the liabilities increase, the company would recognize a:
A)positive translation adjustment.
B)negative translation adjustment.
C)positive remeasurement adjustment.
D)negative remeasurement adjustment.
E)remeasurement gain.
15
A U.S. company owns an entity located in Denmark that is relatively self-contained and integrated with the local economy. The foreign company uses the krone in its daily operations. The U. S. company has calculated a $50,000 translation adjustment related to the foreign entity. How would the company report this adjustment in its consolidated financial statements?
A)The parent would use the temporal method and report the translation adjustment in its income.
B)The parent would use the temporal method and report the translation adjustment in its other comprehensive income.
C)The parent would use the current rate method and report the translation adjustment in its income.
D)The parent would use the current rate method and report the translation adjustment in its other comprehensive income.
E)The parent can select the method it prefers.





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