Chapter 12
Multinational Accounting: Issues in Financial Reporting and Translation
of Foreign Entity Statements
Multiple Choice Questions
1. All of the following are benefits the U.S. will gain from the adoption of globally consistent
accounting standards except for:
A. Reduction in reporting costs as the need for multiple sets of financial statements decreases.
B. Increased quality of information available to investors.
C. Continued expansion of capital markets across national borders, facilitating more efficient use
of global capital.
D. Nearly seamless transition with minimal expenses related to corporate governance
considerations.
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2. Which of the following statements is true regarding the SEC's timeline for convergence?
A. The SEC has no immediate plans to converge GAAP reporting with IFRS standards.
B. The SEC has a plan in place to allow firms to begin filing in the United States based on IFRS
during the next several years.
C. The SEC has a plan in place to allow companies to choose to file statements under GAAP
reporting or IFRS standards indefinitely.
D. The SEC currently allows domestic companies to choose to file financial statements under
either GAAP or IFRS reporting standards.
3. All of the following describe the International Accounting Standard Board (IASB) except for:
A. The IASB is a privately funded accounting standards-setting body based in London.
B. The mission of the IASB is to develop a single set of high-quality, understandable and
enforceable global accounting standards.
C. Board members of the IASB come from diverse geographical countries that have adopted
IFRS.
D. IASB members serve a five-year term subject to one reappointment.
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4. Note: This is a Kaplan CPA Review Question
Mazeppa, Inc. is a multinational entity with its head office located in Toronto, Canada. Its main
foreign subsidiary is in Paris, France, but the primary economic environment in which the foreign
subsidiary generates and expends cash is in the United States. Based on this information, which
of the following statements is most likely true for Mazeppa, Inc.?
A. The functional currency is the Euro.
B. The local currency is the U.S. dollar.
C. The reporting currency is the Canadian dollar.
D. The reporting currency is the U.S. dollar.
5. Which of the following defines a foreign-based entity that uses a functional currency different from
the local currency?
I. A U.S. subsidiary in Britain maintains its accounting records in pounds sterling, with the majority
of its transactions denominated in pounds sterling.
II. A U.S. subsidiary in Peru conducts virtually all of its business in Latin America, and uses the
U.S. dollar as its major currency.
A. I.
B. II.
C. Both I and II.
D. Neither I nor II.
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6. If the restatement method for a foreign subsidiary involves remeasuring from the local currency
into the functional currency, then translating from functional currency to U.S. dollars, the
functional currency of the subsidiary is:
I. U.S. dollar.
II. Local currency unit.
III. A third country's currency.
A. I
B. III
C. II
D. Either I or II
7. In cases of operations located in highly inflationary economies:
A. The reporting currency of the U.S. parent—the U.S. dollar—should be used as the foreign
entity's functional currency.
B. The foreign currency should be used as the functional currency with a footnote to the financials
displaying what the earnings would have been using the U.S. dollar as the functional currency.
C. The foreign currency should be used as the functional currency with a single line item—foreign
translation—reporting the adjustment using the U.S. dollar as the functional currency.
D. None of these.
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8. The balance in Newsprint Corp.'s foreign exchange loss account was $10,000 on December 31,
20X8, before any necessary year-end adjustment relating to the following:
(1) Newsprint had a $15,000 debit resulting from the restatement in dollars of the accounts of its
wholly owned foreign subsidiary for the year ended December 31, 20X8.
(2) Newsprint had an account payable to an unrelated foreign supplier, payable in the supplier's
local currency unit (LCU) on January 15, 20X9. The U.S. dollar-equivalent of the payable was
$50,000 on the December 1, 20X8, invoice date and $53,000 on December 31, 20X8.
Based on the information provided, in Newsprint's 20X8 consolidated income statement, what
amount should be included as foreign exchange loss in computing net income, if the LCU is the
functional currency and the translation method is appropriate?
A. $28,000
B. $13,000
C. $25,000
D. $8,000
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9. The balance in Newsprint Corp.'s foreign exchange loss account was $10,000 on December 31,
20X8, before any necessary year-end adjustment relating to the following:
(1) Newsprint had a $15,000 debit resulting from the restatement in dollars of the accounts of its
wholly owned foreign subsidiary for the year ended December 31, 20X8.
(2) Newsprint had an account payable to an unrelated foreign supplier, payable in the supplier's
local currency unit (LCU) on January 15, 20X9. The U.S. dollar-equivalent of the payable was
$50,000 on the December 1, 20X8, invoice date and $53,000 on December 31, 20X8.
Based on the information provided, in Newsprint's 20X8 consolidated income statement, what
amount should be included as foreign exchange loss in computing net income, if the U.S. dollar is
the functional currency and the remeasurement method is appropriate?
A. $15,000
B. $10,000
C. $25,000
D. $28,000
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10. Infinity Corporation acquired 80 percent of the common stock of an Egyptian company on
January 1, 20X8. The goodwill associated with this acquisition was $18,350. Exchange rates at
various dates during 20X8 follow:
Goodwill suffered an impairment of 20 percent during the year. If the functional currency is the
Egyptian Pound, how much goodwill impairment loss should be reported on Infinity's consolidated
statement of income for 20X8?
A. $3,670
B. $3,700
C. $3,680
D. $3,690
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11. Infinity Corporation acquired 80 percent of the common stock of an Egyptian company on
January 1, 20X8. The goodwill associated with this acquisition was $18,350. Exchange rates at
various dates during 20X8 follow:
Goodwill suffered an impairment of 20 percent during the year. If the functional currency is the
U.S. dollar, how much goodwill impairment loss should be reported on Infinity's consolidated
statement of income for 20X8?
A. $3,680
B. $3,670
C. $3,690
D. $3,700
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12. Simon Company has two foreign subsidiaries. One is located in France, the other in England.
Simon has determined the U.S. dollar is the functional currency for the French subsidiary, while
the British pound is the functional currency for the English subsidiary. Both subsidiaries maintain
their books and records in their respective local currencies. What methods will Simon use to
convert each of the subsidiary's financial statements into U.S. dollars?
A. Option A
B. Option B
C. Option C
D. Option D
13. When the local currency of the foreign subsidiary is the functional currency, a foreign subsidiary's
inventory carried at cost would be converted to U.S. dollars by:
A. translation using historical exchange rates.
B. remeasurement using historical exchange rates.
C. remeasurement using the current exchange rate.
D. translation using the current exchange rate.
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14. When the local currency of the foreign subsidiary is the functional currency, a foreign subsidiary's
income statement accounts would be converted to U.S. dollars by:
A. translation using historical exchange rates.
B. remeasurement using current exchange rates at the time of statement preparation.
C. translation using average exchange rate for the period.
D. remeasurement using the current exchange rate at the time of statement preparation.
15. If the U.S. dollar is the currency in which the foreign affiliate's books and records are maintained,
and the U.S. dollar is also the functional currency,
A. the translation method should be used for restatement.
B. the remeasurement method should be used for restatement.
C. either translation or remeasurement could be used for restatement.
D. no restatement is required.
16. Under the temporal method, which of the following is usually used to translate monetary amounts
to the functional currency?
I. The current exchange rate
II The historical exchange rate
III. Average exchange rate
A. I
B. III
C. II
D. Either I or II
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17. All of the following stockholders' equity accounts of a foreign subsidiary are translated at historical
exchange rates except:
A. retained earnings.
B. common stock.
C. additional paid-in capital.
D. preferred stock.
18. Dividends of a foreign subsidiary are translated at:
A. the average exchange rate for the year.
B. the exchange rate on the date of declaration.
C. the current exchange rate on the date of preparation of the financial statement.
D. the exchange rate on the record date.
19. If the functional currency is the local currency of a foreign subsidiary, what exchange rates should
be used to translate the items below, assuming the foreign subsidiary is in a country which has
not experienced hyperinflation over three years?
A. Option A
B. Option B
C. Option C
D. Option D
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20. If the functional currency is the local currency of a foreign subsidiary, what exchange rates should
be used to translate the items below, assuming the foreign subsidiary is in a country which has
not experienced hyperinflation over three years?
A. Option A
B. Option B
C. Option C
D. Option D
21. Which combination of accounts and exchange rates is correct for the translation of a foreign
entity's financial statements from the functional currency to U.S. dollars?
A. Option A
B. Option B
C. Option C
D. Option D
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22. The assets listed below of a foreign subsidiary have been converted to U.S. dollars at both
current and historical exchange rates. Assuming that the local currency of the foreign subsidiary
is the functional currency, what total amount should appear for these assets on the U.S.
company's consolidated balance sheet?
A. $636,000
B. $648,000
C. $708,000
D. $960,000
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23. Dover Company owns 90% of the capital stock of a foreign subsidiary located in Italy. Dover's
accountant has just translated the accounts of the foreign subsidiary and determined that a debit
translation adjustment of $80,000 exists. If Dover uses the fully adjusted equity method for its
investment, what entry should Dover record in order to recognize the translation adjustment?
A. Option A
B. Option B
C. Option C
D. Option D
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24. For each of the items listed below, state whether they increase or decrease the balance in
cumulative translation adjustments (assuming a credit balance at the beginning of the year) when
the foreign currency strengthened relative to the U.S. dollar during the year.
A. Option A
B. Option B
C. Option C
D. Option D
25. The British subsidiary of a U.S. company reported cost of goods sold of 75,000 pounds (sterling)
for the current year ended December 31. The beginning inventory was 10,000 pounds, and the
ending inventory was 15,000 pounds. Spot rates for various dates are as follows:
Assuming the pound is the functional currency of the British subsidiary, the translated amount of
cost of goods sold that should appear in the consolidated income statement is:
A. $108,750.
B. $112,500.
C. $114,300.
D. $125,700.
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26. Seattle, Inc. owns an 80 percent interest in a Portuguese subsidiary. For 20X8, Seattle reported
income from operations of $2.0 million. The Portuguese company's income from operations, after
foreign currency translation, was $1.1 million. The foreign currency translation adjustment was
$120,000 (credit). Consolidated net income and consolidated comprehensive income for the year
are:
A. Option A
B. Option B
C. Option C
D. Option D
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27. On September 30, 20X8, Wilfred Company sold inventory to Jackson Corporation, its Canadian
subsidiary. The goods cost Wilfred $30,000 and were sold to Jackson for $40,000, payable in
Canadian dollars. The goods are still on hand at the end of the year on December 31. The
Canadian dollar (C$) is the functional currency of the Canadian subsidiary. The exchange rates
follow:
Based on the preceding information, at what dollar amount is the ending inventory shown in the
trial balance of the consolidated worksheet?
A. $45,000
B. $50,000
C. $40,000
D. $35,000
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28. On September 30, 20X8, Wilfred Company sold inventory to Jackson Corporation, its Canadian
subsidiary. The goods cost Wilfred $30,000 and were sold to Jackson for $40,000, payable in
Canadian dollars. The goods are still on hand at the end of the year on December 31. The
Canadian dollar (C$) is the functional currency of the Canadian subsidiary. The exchange rates
follow:
Based on the preceding information, what amount of unrealized intercompany gross profit is
eliminated in preparing the consolidated financial statements for the year?
A. $0
B. $5,000
C. $10,000
D. $15,000
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29. On September 30, 20X8, Wilfred Company sold inventory to Jackson Corporation, its Canadian
subsidiary. The goods cost Wilfred $30,000 and were sold to Jackson for $40,000, payable in
Canadian dollars. The goods are still on hand at the end of the year on December 31. The
Canadian dollar (C$) is the functional currency of the Canadian subsidiary. The exchange rates
follow:
Based on the preceding information, at what amount is the inventory shown on the consolidated
balance sheet for the year?
A. $45,000
B. $30,000
C. $40,000
D. $35,000
30. Note: This is a Kaplan CPA Review Question
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 20X1 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 in its income statement for the year ended December 31,
20X1?
A. $15,700
B. $0
C. $8,100
D. $7,600
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31. On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth
Company for $3,100,000. Any excess cost over book value is attributable to a patent with a 10year remaining life. At the date of acquisition, Perth's balance sheet contained the following
information:
Perth's income statement for 20X8 is as follows:
The balance sheet of Perth at December 31, 20X8, is as follows:
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Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various
dates for 20X8 follow:
Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income
taxes were incurred evenly throughout 20X8.
Refer to the above information. Assuming the local currency of the country in which Perth
Company is located is the functional currency, what are the translated amounts for the items
below in U.S. dollars?
A. Option A
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B. Option B
C. Option C
D. Option D
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32. On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth
Company for $3,100,000. Any excess cost over book value is attributable to a patent with a 10year remaining life. At the date of acquisition, Perth's balance sheet contained the following
information:
Perth's income statement for 20X8 is as follows:
The balance sheet of Perth at December 31, 20X8, is as follows:
12-23
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Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various
dates for 20X8 follow:
Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income
taxes were incurred evenly throughout 20X8.
Refer to the above information. Assuming Perth's local currency is the functional currency, what
is the amount of translation adjustments that result from translating Perth's trial balance into U.S.
dollars at December 31, 20X8?
A. $396,500 debit
B. $285,000 credit
C. $405,000 credit
D. $411,000 credit
12-24
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33. On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth
Company for $3,100,000. Any excess cost over book value is attributable to a patent with a 10year remaining life. At the date of acquisition, Perth's balance sheet contained the following
information:
Perth's income statement for 20X8 is as follows:
The balance sheet of Perth at December 31, 20X8, is as follows:
12-25
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Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various
dates for 20X8 follow:
Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income
taxes were incurred evenly throughout 20X8.
Refer to the above information. Assuming Perth's local currency is the functional currency, what
is the amount of patent amortization for 20X8 that results from Johnson's acquisition of Perth's
stock on January 2, 20X8. Round your answer to the nearest dollar.
A. $11,500
B. $11,884
C. $7,667
D. $9,394
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34. On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth
Company for $3,100,000. Any excess cost over book value is attributable to a patent with a 10year remaining life. At the date of acquisition, Perth's balance sheet contained the following
information:
Perth's income statement for 20X8 is as follows:
The balance sheet of Perth at December 31, 20X8, is as follows:
12-27
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Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various
dates for 20X8 follow:
Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income
taxes were incurred evenly throughout 20X8.
Refer to the above information. Assuming Perth's local currency is the functional currency, what
is the amount of translation adjustment that appears on Johnson's consolidated financial
statements at December 31, 20X8?
A. $419,184 credit
B. $416,884 credit
C. $405,884 debit
D. $398,500 credit
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35. On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth
Company for $3,100,000. Any excess cost over book value is attributable to a patent with a 10year remaining life. At the date of acquisition, Perth's balance sheet contained the following
information:
Perth's income statement for 20X8 is as follows:
The balance sheet of Perth at December 31, 20X8, is as follows:
12-29
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Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various
dates for 20X8 follow:
Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income
taxes were incurred evenly throughout 20X8.
Refer to the above information. Assuming Perth's local currency is the functional currency, what
is the balance in Johnson's investment in foreign subsidiary account at December 31, 2008?
A. $3,216,500
B. $3,560,000
C. $3,568,300
D. $3,577,694
12-30
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36. On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth
Company for $3,100,000. Any excess cost over book value is attributable to a patent with a 10year remaining life. At the date of acquisition, Perth's balance sheet contained the following
information:
Perth's income statement for 20X8 is as follows:
The balance sheet of Perth at December 31, 20X8, is as follows:
12-31
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Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various
dates for 20X8 follow:
Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income
taxes were incurred evenly throughout 20X8.
Refer to the above information. Assuming the U.S. dollar is the functional currency, what is
Johnson's remeasurement gain (loss) for 20X8? (Assume the ending inventory was acquired on
December 31, 20X8.)
A. $31,000 gain
B. $36,500 loss
C. $22,000 gain
D. $32,000 gain
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37. On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth
Company for $3,100,000. Any excess cost over book value is attributable to a patent with a 10year remaining life. At the date of acquisition, Perth's balance sheet contained the following
information:
Perth's income statement for 20X8 is as follows:
The balance sheet of Perth at December 31, 20X8, is as follows:
12-33
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Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various
dates for 20X8 follow:
Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income
taxes were incurred evenly throughout 20X8.
Refer to the above information. Assuming the U.S. dollar is the functional currency, what is the
amount of Perth's cost of goods sold remeasured in U.S. dollars?
A. $811,500
B. $843,500
C. $884,500
D. $799,500
12-34
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38. On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth
Company for $3,100,000. Any excess cost over book value is attributable to a patent with a 10year remaining life. At the date of acquisition, Perth's balance sheet contained the following
information:
Perth's income statement for 20X8 is as follows:
The balance sheet of Perth at December 31, 20X8, is as follows:
12-35
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Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various
dates for 20X8 follow:
Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income
taxes were incurred evenly throughout 20X8.
Refer to the above information. Assuming the U.S. dollar is the functional currency, what is the
amount of patent amortization for 20X8 that results from Johnson's acquisition of Perth's stock on
January 2, 20X8?
A. $11,884
B. $11,770
C. $12,550
D. $11,500
12-36
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39. On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth
Company for $3,100,000. Any excess cost over book value is attributable to a patent with a 10year remaining life. At the date of acquisition, Perth's balance sheet contained the following
information:
Perth's income statement for 20X8 is as follows:
The balance sheet of Perth at December 31, 20X8, is as follows:
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Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various
dates for 20X8 follow:
Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income
taxes were incurred evenly throughout 20X8.
Refer to the above information. Assuming the U.S. dollar is the functional currency, what is
Perth's net income for 20X8 in U.S. dollars (include the remeasurement gain or loss in Perth's net
income)?
A. $238,000
B. $228,000
C. $219,500
D. $202,000
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40. On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth
Company for $3,100,000. Any excess cost over book value is attributable to a patent with a 10year remaining life. At the date of acquisition, Perth's balance sheet contained the following
information:
Perth's income statement for 20X8 is as follows:
The balance sheet of Perth at December 31, 20X8, is as follows:
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Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various
dates for 20X8 follow:
Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income
taxes were incurred evenly throughout 20X8.
Refer to the above information. Assuming the U.S. dollar is the functional currency, what is the
balance in Johnson's investment in foreign subsidiary account at December 31, 2008?
A. $3,303,400
B. $3,294,500
C. $3,323,400
D. $3,314,500
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41. Michigan-based Leo Corporation acquired 100 percent of the common stock of a British company
on January 1, 20X8, for $1,100,000. The British subsidiary's net assets amounted to 500,000
pounds on the date of acquisition. On January 1, 20X8, the book values of its identifiable assets
and liabilities approximated their fair values. As a result of an analysis of functional currency
indicators, Leo determined that the British pound was the functional currency. On December 31,
20X8, the British subsidiary's adjusted trial balance, translated into U.S. dollars, contained
$17,000 more debits than credits. The British subsidiary reported income of 33,000 pounds for
20X8 and paid a cash dividend of 8,000 pounds on October 25, 20X8. Included on the British
subsidiary's income statement was depreciation expense of 3,500 pounds. Leo uses the fully
adjusted equity method of accounting for its investment in the British subsidiary and determined
that goodwill in the first year had an impairment loss of 25 percent of its initial amount. Exchange
rates at various dates during 20X8 follow:
Based on the preceding information, what amount should Leo record as "income from subsidiary"
based on the British subsidiary's reported net income?
A. $72,930
B. $52,500
C. $72,600
D. $69,300
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42. Michigan-based Leo Corporation acquired 100 percent of the common stock of a British company
on January 1, 20X8, for $1,100,000. The British subsidiary's net assets amounted to 500,000
pounds on the date of acquisition. On January 1, 20X8, the book values of its identifiable assets
and liabilities approximated their fair values. As a result of an analysis of functional currency
indicators, Leo determined that the British pound was the functional currency. On December 31,
20X8, the British subsidiary's adjusted trial balance, translated into U.S. dollars, contained
$17,000 more debits than credits. The British subsidiary reported income of 33,000 pounds for
20X8 and paid a cash dividend of 8,000 pounds on October 25, 20X8. Included on the British
subsidiary's income statement was depreciation expense of 3,500 pounds. Leo uses the fully
adjusted equity method of accounting for its investment in the British subsidiary and determined
that goodwill in the first year had an impairment loss of 25 percent of its initial amount. Exchange
rates at various dates during 20X8 follow:
Based on the preceding information, the receipt of the dividend will result in a credit to the
investment account for:
A. $16,800
B. $17,680
C. $18,000
D. $17,600
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43. Michigan-based Leo Corporation acquired 100 percent of the common stock of a British company
on January 1, 20X8, for $1,100,000. The British subsidiary's net assets amounted to 500,000
pounds on the date of acquisition. On January 1, 20X8, the book values of its identifiable assets
and liabilities approximated their fair values. As a result of an analysis of functional currency
indicators, Leo determined that the British pound was the functional currency. On December 31,
20X8, the British subsidiary's adjusted trial balance, translated into U.S. dollars, contained
$17,000 more debits than credits. The British subsidiary reported income of 33,000 pounds for
20X8 and paid a cash dividend of 8,000 pounds on October 25, 20X8. Included on the British
subsidiary's income statement was depreciation expense of 3,500 pounds. Leo uses the fully
adjusted equity method of accounting for its investment in the British subsidiary and determined
that goodwill in the first year had an impairment loss of 25 percent of its initial amount. Exchange
rates at various dates during 20X8 follow:
Based on the preceding information, on Leo's consolidated balance sheet at December 31, 20X8,
what amount should be reported for the goodwill acquired on January 1, 20X8?
A. $36,845
B. $39,286
C. $36,905
D. $36,607
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44. Michigan-based Leo Corporation acquired 100 percent of the common stock of a British company
on January 1, 20X8, for $1,100,000. The British subsidiary's net assets amounted to 500,000
pounds on the date of acquisition. On January 1, 20X8, the book values of its identifiable assets
and liabilities approximated their fair values. As a result of an analysis of functional currency
indicators, Leo determined that the British pound was the functional currency. On December 31,
20X8, the British subsidiary's adjusted trial balance, translated into U.S. dollars, contained
$17,000 more debits than credits. The British subsidiary reported income of 33,000 pounds for
20X8 and paid a cash dividend of 8,000 pounds on October 25, 20X8. Included on the British
subsidiary's income statement was depreciation expense of 3,500 pounds. Leo uses the fully
adjusted equity method of accounting for its investment in the British subsidiary and determined
that goodwill in the first year had an impairment loss of 25 percent of its initial amount. Exchange
rates at various dates during 20X8 follow:
Based on the preceding information, in the stockholders' equity section of Leo's consolidated
balance sheet at December 31, 20X8, Leo should report the translation adjustment as a
component of other comprehensive income of:
A. $19,440
B. $17,000
C. $18,786
D. $19,380
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45. Nichols Company owns 90% of the capital stock of a foreign subsidiary located in Ireland. As a
result of translating the subsidiary's accounts, a debit of $160,000 was needed in the translation
adjustments account so that the foreign subsidiary's debits and credits were equal in U.S. dollars.
How should Nichols report its translation adjustments on its consolidated financial statements?
A. As a $144,000 increase in the stockholders' equity section of the balance sheet.
B. As a $144,000 reduction in consolidated comprehensive net income.
C. As a $160,000 debit in stockholders' equity section of the balance sheet.
D. As a $160,000 reduction in consolidated comprehensive net income.
46. Elan, a U.S. corporation, completed the December 31, 20X8, foreign currency translation of its 70
percent owned Swiss subsidiary's trial balance using the current rate method. The translation
resulted in a debit adjustment of $25,000. The subsidiary had reported net income of 800,000
Swiss francs for 20X8 and paid dividends of 50,000 Swiss francs on September 1, 20X8. The
translation rates for the year were:
The January 1 balance of the Investment in the Swiss subsidiary account was $1,600,000. Elan
acquired its interest in the Swiss subsidiary at book value with no differential or goodwill recorded
at acquisition.
Elan's Investment in Swiss subsidiary account at December 31, 20X8, is:
A. $1,881,050.
B. $1,916,050.
C. $1,923,950.
D. $2,051,500.
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47. On January 1, 20X8, Transport Corporation acquired 75 percent interest in Steamship Company
for $300,000. Steamship is a Norwegian company. The local currency is the Norwegian kroner
(NKr). The acquisition resulted in an excess of cost-over-book value of $25,000 due solely to a
patent having a remaining life of 5 years. Transport uses the fully adjusted equity method to
account for its investment. Steamship's December 31, 20X8, trial balance has been translated
into U.S. dollars, requiring a translation adjustment debit of $8,000. Steamship's net income
translated into U.S. dollars is $35,000. It declared and paid an NKr 20,000 dividend on June 1,
20X8. Relevant exchange rates are as follows:
Assume the kroner is the functional currency.
Based on the preceding information, in the journal entry to record the receipt of dividend from
Steamship,
A. Investment in Steamship Company will be credited for $3,450.
B. Cash will be debited for $3,300.
C. Investment in Steamship Company will be credited for $4,000.
D. Cash will be debited for $3,600.
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48. On January 1, 20X8, Transport Corporation acquired 75 percent interest in Steamship Company
for $300,000. Steamship is a Norwegian company. The local currency is the Norwegian kroner
(NKr). The acquisition resulted in an excess of cost-over-book value of $25,000 due solely to a
patent having a remaining life of 5 years. Transport uses the fully adjusted equity method to
account for its investment. Steamship's December 31, 20X8, trial balance has been translated
into U.S. dollars, requiring a translation adjustment debit of $8,000. Steamship's net income
translated into U.S. dollars is $35,000. It declared and paid an NKr 20,000 dividend on June 1,
20X8. Relevant exchange rates are as follows:
Assume the kroner is the functional currency.
Based on the preceding information, in the journal entry to record parent's share of subsidiary's
translation adjustment:
A. Other Comprehensive Income—Translation Adjustment will be debited for $8,000.
B. Other Comprehensive Income—Translation Adjustment will be credited for $6,000.
C. Investment in Steamship Company will be credited for $6,000.
D. Investment in Steamship Company will be debited for $8,000.
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49. On January 1, 20X8, Transport Corporation acquired 75 percent interest in Steamship Company
for $300,000. Steamship is a Norwegian company. The local currency is the Norwegian kroner
(NKr). The acquisition resulted in an excess of cost-over-book value of $25,000 due solely to a
patent having a remaining life of 5 years. Transport uses the fully adjusted equity method to
account for its investment. Steamship's December 31, 20X8, trial balance has been translated
into U.S. dollars, requiring a translation adjustment debit of $8,000. Steamship's net income
translated into U.S. dollars is $35,000. It declared and paid an NKr 20,000 dividend on June 1,
20X8. Relevant exchange rates are as follows:
Assume the kroner is the functional currency.
Based on the preceding information, what amount of translation adjustment is required for
increase in differential?
A. $3,000
B. $5,500
C. $4,500
D. $5,000
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50. On January 1, 20X8, Transport Corporation acquired 75 percent interest in Steamship Company
for $300,000. Steamship is a Norwegian company. The local currency is the Norwegian kroner
(NKr). The acquisition resulted in an excess of cost-over-book value of $25,000 due solely to a
patent having a remaining life of 5 years. Transport uses the fully adjusted equity method to
account for its investment. Steamship's December 31, 20X8, trial balance has been translated
into U.S. dollars, requiring a translation adjustment debit of $8,000. Steamship's net income
translated into U.S. dollars is $35,000. It declared and paid an NKr 20,000 dividend on June 1,
20X8. Relevant exchange rates are as follows:
Assume the kroner is the functional currency.
Based on the preceding information, in the journal entry to record the amortization of the patent
for 20X8 on the parent's books, Investment in Steamship Company will be debited for:
A. $5,000
B. $5,500
C. $4,500
D. $3,000
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51. Note: This is a Kaplan CPA Review Question
Certain balance sheet accounts of a foreign subsidiary of Rowan, Inc. (Rowan) at December 31,
20X6, have been translated into U.S. dollars as follows:
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, 20X6 consolidated balance
sheet for the above accounts?
A. $450,000
B. $475,000
C. $455,000
D. $495,000
52. Which combination of accounts and exchange rates is correct for the remeasurement of a foreign
entity's financial statements from its local currency to U.S. dollars?
A. Option A
B. Option B
C. Option C
D. Option D
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53. Mercury Company is a subsidiary of Neptune Company and is located in Valparaíso, Chile, where
the currency is the Chilean Peso. Data on Mercury's inventory and purchases are as follows:
The beginning inventory was acquired during the fourth quarter of 20X7, and the ending inventory
was acquired during the fourth quarter of 20X8. Purchases were made evenly over the year.
Exchange rates were as follows:
Refer the information provided above. Assuming the U.S. dollar is the functional currency, what is
the amount of Mercury's cost of goods sold remeasured in U.S. dollars?
A. $1,680
B. $1,712
C. $1,700
D. $1,692
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54. Mercury Company is a subsidiary of Neptune Company and is located in Valparaíso, Chile, where
the currency is the Chilean Peso. Data on Mercury's inventory and purchases are as follows:
The beginning inventory was acquired during the fourth quarter of 20X7, and the ending inventory
was acquired during the fourth quarter of 20X8. Purchases were made evenly over the year.
Exchange rates were as follows:
Based on the preceding information, the translation of cost of goods sold for 20X8, assuming that
the Spanish peseta is the functional currency is:
A. $1,700.
B. $1,760.
C. $1,680.
D. $1,692.
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55. The British subsidiary of a U.S. company reported cost of goods sold of 75,000 pounds (sterling)
for the current year ended December 31. The beginning inventory was 10,000 pounds, and the
ending inventory was 15,000 pounds. Spot rates for various dates are as follows:
Assuming the dollar is the functional currency of the British subsidiary, the remeasured amount of
cost of goods sold that should appear in the consolidated income statement is:
A. $108,750.
B. $112,500.
C. $114,250.
D. $125,700.
56. Note: This is a Kaplan CPA Review Question
Gains from remeasuring a foreign subsidiary's financial statements from the local currency, which
is not the functional currency, into the company's functional currency should be reported as a(an)
A. Deferred foreign exchange gain.
B. Part of continuing operations.
C. Separate component of stockholders' equity.
D. Extraordinary item, net of income taxes.
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57. The gain or loss on the effective portion of a U.S. parent company's hedge of a net investment in
a foreign entity should be treated as:
A. an adjustment to the retained earnings account in the stockholders' equity section of its
balance sheet.
B. other comprehensive income.
C. a translation gain or loss in the computation of net income for the reporting period.
D. an adjustment to a valuation account in the asset section of its balance sheet.
58. Which of the following describes a situation when a parent company would not consolidate a
foreign subsidiary?
A. Restrictions on foreign exchange in the foreign country.
B. Restrictions on transfers of property in the foreign country.
C. Other governmentally imposed uncertainties.
D. All of these.
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59. Note: This is a Kaplan CPA Review Question
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?
A. The translation loss less the exchange gain is reported separately as other comprehensive
income.
B. The translation loss less the exchange gain is reported in the income statement.
C. The translation loss is reported separately in the stockholders' equity section of the balance
sheet and the exchange gain is reported in the income statement.
D. The translation loss is reported in the income statement and the exchange gain is reported
separately in the stockholders' equity section of the balance sheet.
Essay Questions
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60. Briefly explain the following terms associated with accounting for foreign entities:
a) Functional Currency
b) Translation
c) Remeasurement
61. Parisian Co. is a French company located in Paris. Yankee Corp., located in New York City,
acquires Parisian Co. Parisian has the Euro as its local currency and the Swiss Franc as its
functional currency. Yankee has the U.S. dollar as its local currency and the U.S. dollar as its
functional currency.
Required:
a) The year-end consolidated financial statements will be prepared in which currency?
b) Explain which method is appropriate to use to use at year-end: Translation or
Remeasurement?
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62. Prepare a schedule providing a proof of the translation adjustment using the information provided
below.
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63. On January 1, 2008, Pace Company acquired all of the outstanding stock of Spin PLC, a British
Company, for $350,000. Spin's net assets on the date of acquisition were 250,000 pounds (£).
On January 1, 2008, the book and fair values of the Spin's identifiable assets and liabilities
approximated their fair values except for property, plant, and equipment and trademarks. The fair
value of Spin's property, plant, and equipment exceeded its book value by $25,000. The
remaining useful life of Spin's equipment at January 1, 2008, was 10 years. The remainder of the
differential was attributable to a trademark having an estimated useful life of 5 years. Spin's trial
balance on December 31, 2008, in pounds, follows:
Additional Information
1. Spin uses the FIFO method for its inventory. The beginning inventory was acquired on
December 31, 2007, and ending inventory was acquired on December 26, 2008. Purchases of
£300,000 were made evenly throughout 2008.
2. Spin acquired all of its property, plant, and equipment on March 1, 2006, and uses straight-line
depreciation.
3. Spin's sales were made evenly throughout 2008, and its operating expenses were incurred
evenly throughout 2008.
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4. The dividends were declared and paid on November 1, 2008.
5. Pace's income from its own operations was $150,000 for 2008, and its total stockholders'
equity on January 1, 2008, was $1,000,000. Pace declared $50,000 of dividends during 2008.
6. Exchange rates were as follows:
Required:
1) Prepare a schedule translating the trial balance from British pounds into U.S. dollars. Assume
the pound is the functional currency.
2) Assume that Pace uses the fully adjusted equity method. Record all journal entries that relate
to its investment in the British subsidiary during 2008. Provide the necessary documentation and
support for the amounts in the journal entries, including a schedule of the translation adjustment
related to the differential.
3) Prepare a schedule that determines Pace's consolidated comprehensive income for 2008.
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64. On January 1, 2008, Pace Company acquired all of the outstanding stock of Spin PLC, a British
Company, for $350,000. Spin's net assets on the date of acquisition were 250,000 pounds (£).
On January 1, 2008, the book and fair values of the Spin's identifiable assets and liabilities
approximated their fair values except for property, plant, and equipment and trademarks. The fair
value of Spin's property, plant, and equipment exceeded its book value by $25,000. The
remaining useful life of Spin's equipment at January 1, 2008, was 10 years. The remainder of the
differential was attributable to a trademark having an estimated useful life of 5 years. Spin's trial
balance on December 31, 2008, in pounds, follows:
Additional Information
1. Spin uses the FIFO method for its inventory. The beginning inventory was acquired on
December 31, 2007, and ending inventory was acquired on December 26, 2008. Purchases of
£300,000 were made evenly throughout 2008.
2. Spin acquired all of its property, plant, and equipment on March 1, 2006, and uses straight-line
depreciation.
3. Spin's sales were made evenly throughout 2008, and its operating expenses were incurred
evenly throughout 2008.
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4. The dividends were declared and paid on November 1, 2008.
5. Pace's income from its own operations was $150,000 for 2008, and its total stockholders'
equity on January 1, 2008, was $1,000,000. Pace declared $50,000 of dividends during 2008.
6. Exchange rates were as follows:
Assume the U.S. dollar is the functional currency, not the pound. Prepare a schedule providing a
proof of the remeasurement gain or loss. Assume that the British subsidiary had the following
monetary assets and liabilities at January 1, 2008:
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65. On January 1, 2008, Pace Company acquired all of the outstanding stock of Spin PLC, a British
Company, for $350,000. Spin's net assets on the date of acquisition were 250,000 pounds (£).
On January 1, 2008, the book and fair values of the Spin's identifiable assets and liabilities
approximated their fair values except for property, plant, and equipment and trademarks. The fair
value of Spin's property, plant, and equipment exceeded its book value by $25,000. The
remaining useful life of Spin's equipment at January 1, 2008, was 10 years. The remainder of the
differential was attributable to a trademark having an estimated useful life of 5 years. Spin's trial
balance on December 31, 2008, in pounds, follows:
Additional Information
1. Spin uses the FIFO method for its inventory. The beginning inventory was acquired on
December 31, 2007, and ending inventory was acquired on December 26, 2008. Purchases of
£300,000 were made evenly throughout 2008.
2. Spin acquired all of its property, plant, and equipment on March 1, 2006, and uses straight-line
depreciation.
3. Spin's sales were made evenly throughout 2008, and its operating expenses were incurred
evenly throughout 2008.
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4. The dividends were declared and paid on November 1, 2008.
5. Pace's income from its own operations was $150,000 for 2008, and its total stockholders'
equity on January 1, 2008, was $1,000,000. Pace declared $50,000 of dividends during 2008.
6. Exchange rates were as follows:
Assume the U.S. dollar is the functional currency, not the pound.
Required:
1) Prepare a schedule remeasuring the trial balance from British pound into U.S. dollars.
2) Assume that Pace uses the fully adjusted equity method. Record all journal entries that relate
to its investment in the British subsidiary during 2008. Provide the necessary documentation and
support for the amounts in the journal entries.
3) Prepare a schedule that determines Pace's consolidated net income for 2008.
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Chapter 12 Multinational Accounting: Issues in Financial Reporting and
Translation of Foreign Entity Statements Answer Key
Multiple Choice Questions
1.
All of the following are benefits the U.S. will gain from the adoption of globally consistent
accounting standards except for:
A. Reduction in reporting costs as the need for multiple sets of financial statements
decreases.
B. Increased quality of information available to investors.
C. Continued expansion of capital markets across national borders, facilitating more efficient
use of global capital.
D. Nearly seamless transition with minimal expenses related to corporate governance
considerations.
AACSB: Reflective Thinking
AICPA BB: Global
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-01 Understand and explain the benefits and ramifications of convergence to international financial
reporting standards (IFRS) and the expected timeline to global convergence.
Topic: IFRS vs. GAAP
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2.
Which of the following statements is true regarding the SEC's timeline for convergence?
A. The SEC has no immediate plans to converge GAAP reporting with IFRS standards.
B. The SEC has a plan in place to allow firms to begin filing in the United States based on
IFRS during the next several years.
C. The SEC has a plan in place to allow companies to choose to file statements under GAAP
reporting or IFRS standards indefinitely.
D. The SEC currently allows domestic companies to choose to file financial statements under
either GAAP or IFRS reporting standards.
AACSB: Reflective Thinking
AICPA BB: Global
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-01 Understand and explain the benefits and ramifications of convergence to international financial
reporting standards (IFRS) and the expected timeline to global convergence.
Topic: Convergence
3.
All of the following describe the International Accounting Standard Board (IASB) except for:
A. The IASB is a privately funded accounting standards-setting body based in London.
B. The mission of the IASB is to develop a single set of high-quality, understandable and
enforceable global accounting standards.
C. Board members of the IASB come from diverse geographical countries that have adopted
IFRS.
D. IASB members serve a five-year term subject to one reappointment.
AACSB: Reflective Thinking
AICPA BB: Global
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-01 Understand and explain the benefits and ramifications of convergence to international financial
reporting standards (IFRS) and the expected timeline to global convergence.
12-65
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Topic: IFRS vs. GAAP
4.
Note: This is a Kaplan CPA Review Question
Mazeppa, Inc. is a multinational entity with its head office located in Toronto, Canada. Its main
foreign subsidiary is in Paris, France, but the primary economic environment in which the
foreign subsidiary generates and expends cash is in the United States. Based on this
information, which of the following statements is most likely true for Mazeppa, Inc.?
A. The functional currency is the Euro.
B. The local currency is the U.S. dollar.
C. The reporting currency is the Canadian dollar.
D. The reporting currency is the U.S. dollar.
AACSB: Reflective Thinking
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-01 Understand and explain the benefits and ramifications of convergence to international financial
reporting standards (IFRS) and the expected timeline to global convergence.
Learning Objective: 12-02 Determine the functional currency and understand the ramifications of different functional currency
designations.
Topic: Currency Definitions
Topic: Determination of the Functional Currency
12-66
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5.
Which of the following defines a foreign-based entity that uses a functional currency different
from the local currency?
I. A U.S. subsidiary in Britain maintains its accounting records in pounds sterling, with the
majority of its transactions denominated in pounds sterling.
II. A U.S. subsidiary in Peru conducts virtually all of its business in Latin America, and uses the
U.S. dollar as its major currency.
A. I.
B. II.
C. Both I and II.
D. Neither I nor II.
AACSB: Reflective Thinking
AICPA BB: Global
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-02 Determine the functional currency and understand the ramifications of different functional currency
designations.
Topic: Determination of the Functional Currency
12-67
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
6.
If the restatement method for a foreign subsidiary involves remeasuring from the local
currency into the functional currency, then translating from functional currency to U.S. dollars,
the functional currency of the subsidiary is:
I. U.S. dollar.
II. Local currency unit.
III. A third country's currency.
A. I
B. III
C. II
D. Either I or II
AACSB: Reflective Thinking
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-02 Determine the functional currency and understand the ramifications of different functional currency
designations.
Topic: Determination of the Functional Currency
12-68
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
7.
In cases of operations located in highly inflationary economies:
A. The reporting currency of the U.S. parent—the U.S. dollar—should be used as the foreign
entity's functional currency.
B. The foreign currency should be used as the functional currency with a footnote to the
financials displaying what the earnings would have been using the U.S. dollar as the
functional currency.
C. The foreign currency should be used as the functional currency with a single line item—
foreign translation—reporting the adjustment using the U.S. dollar as the functional
currency.
D. None of these.
AACSB: Reflective Thinking
AICPA FN: Reporting
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-02 Determine the functional currency and understand the ramifications of different functional currency
designations.
Topic: Functional Currency Designation in Highly Inflationary Economies
12-69
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
8.
The balance in Newsprint Corp.'s foreign exchange loss account was $10,000 on December
31, 20X8, before any necessary year-end adjustment relating to the following:
(1) Newsprint had a $15,000 debit resulting from the restatement in dollars of the accounts of
its wholly owned foreign subsidiary for the year ended December 31, 20X8.
(2) Newsprint had an account payable to an unrelated foreign supplier, payable in the
supplier's local currency unit (LCU) on January 15, 20X9. The U.S. dollar-equivalent of the
payable was $50,000 on the December 1, 20X8, invoice date and $53,000 on December 31,
20X8.
Based on the information provided, in Newsprint's 20X8 consolidated income statement, what
amount should be included as foreign exchange loss in computing net income, if the LCU is
the functional currency and the translation method is appropriate?
A. $28,000
B. $13,000
C. $25,000
D. $8,000
AACSB: Analytic
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-03 Understand and explain the differences between translation and remeasurment.
Topic: Translation Versus Remeasurement of Foreign Financial Statements
12-70
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9.
The balance in Newsprint Corp.'s foreign exchange loss account was $10,000 on December
31, 20X8, before any necessary year-end adjustment relating to the following:
(1) Newsprint had a $15,000 debit resulting from the restatement in dollars of the accounts of
its wholly owned foreign subsidiary for the year ended December 31, 20X8.
(2) Newsprint had an account payable to an unrelated foreign supplier, payable in the
supplier's local currency unit (LCU) on January 15, 20X9. The U.S. dollar-equivalent of the
payable was $50,000 on the December 1, 20X8, invoice date and $53,000 on December 31,
20X8.
Based on the information provided, in Newsprint's 20X8 consolidated income statement, what
amount should be included as foreign exchange loss in computing net income, if the U.S.
dollar is the functional currency and the remeasurement method is appropriate?
A. $15,000
B. $10,000
C. $25,000
D. $28,000
AACSB: Analytic
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-03 Understand and explain the differences between translation and remeasurment.
Topic: Translation Versus Remeasurement of Foreign Financial Statements
12-71
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
10.
Infinity Corporation acquired 80 percent of the common stock of an Egyptian company on
January 1, 20X8. The goodwill associated with this acquisition was $18,350. Exchange rates
at various dates during 20X8 follow:
Goodwill suffered an impairment of 20 percent during the year. If the functional currency is the
Egyptian Pound, how much goodwill impairment loss should be reported on Infinity's
consolidated statement of income for 20X8?
A. $3,670
B. $3,700
C. $3,680
D. $3,690
AACSB: Analytic
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-03 Understand and explain the differences between translation and remeasurment.
Topic: Translation Versus Remeasurement of Foreign Financial Statements
12-72
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
11.
Infinity Corporation acquired 80 percent of the common stock of an Egyptian company on
January 1, 20X8. The goodwill associated with this acquisition was $18,350. Exchange rates
at various dates during 20X8 follow:
Goodwill suffered an impairment of 20 percent during the year. If the functional currency is the
U.S. dollar, how much goodwill impairment loss should be reported on Infinity's consolidated
statement of income for 20X8?
A. $3,680
B. $3,670
C. $3,690
D. $3,700
AACSB: Analytic
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-03 Understand and explain the differences between translation and remeasurment.
Topic: Translation Versus Remeasurement of Foreign Financial Statements
12-73
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
12.
Simon Company has two foreign subsidiaries. One is located in France, the other in England.
Simon has determined the U.S. dollar is the functional currency for the French subsidiary,
while the British pound is the functional currency for the English subsidiary. Both subsidiaries
maintain their books and records in their respective local currencies. What methods will Simon
use to convert each of the subsidiary's financial statements into U.S. dollars?
A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Reflective Thinking
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-03 Understand and explain the differences between translation and remeasurment.
Topic: Translation Versus Remeasurement of Foreign Financial Statements
12-74
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
13.
When the local currency of the foreign subsidiary is the functional currency, a foreign
subsidiary's inventory carried at cost would be converted to U.S. dollars by:
A. translation using historical exchange rates.
B. remeasurement using historical exchange rates.
C. remeasurement using the current exchange rate.
D. translation using the current exchange rate.
AACSB: Reflective Thinking
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-03 Understand and explain the differences between translation and remeasurment.
Topic: Translation Versus Remeasurement of Foreign Financial Statements
14.
When the local currency of the foreign subsidiary is the functional currency, a foreign
subsidiary's income statement accounts would be converted to U.S. dollars by:
A. translation using historical exchange rates.
B. remeasurement using current exchange rates at the time of statement preparation.
C. translation using average exchange rate for the period.
D. remeasurement using the current exchange rate at the time of statement preparation.
AACSB: Reflective Thinking
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-03 Understand and explain the differences between translation and remeasurment.
Topic: Translation Versus Remeasurement of Foreign Financial Statements
12-75
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
15.
If the U.S. dollar is the currency in which the foreign affiliate's books and records are
maintained, and the U.S. dollar is also the functional currency,
A. the translation method should be used for restatement.
B. the remeasurement method should be used for restatement.
C. either translation or remeasurement could be used for restatement.
D. no restatement is required.
AACSB: Reflective Thinking
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-03 Understand and explain the differences between translation and remeasurment.
Topic: Translation Versus Remeasurement of Foreign Financial Statements
16.
Under the temporal method, which of the following is usually used to translate monetary
amounts to the functional currency?
I. The current exchange rate
II The historical exchange rate
III. Average exchange rate
A. I
B. III
C. II
D. Either I or II
AACSB: Reflective Thinking
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-03 Understand and explain the differences between translation and remeasurment.
Topic: Translation Versus Remeasurement of Foreign Financial Statements
12-76
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
17.
All of the following stockholders' equity accounts of a foreign subsidiary are translated at
historical exchange rates except:
A. retained earnings.
B. common stock.
C. additional paid-in capital.
D. preferred stock.
AACSB: Reflective Thinking
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-04 Make calculations and translate financial statements of a foreign subsidiary.
Topic: Translation of Functional Currency Statements into the Reporting Currency of the US Company
18.
Dividends of a foreign subsidiary are translated at:
A. the average exchange rate for the year.
B. the exchange rate on the date of declaration.
C. the current exchange rate on the date of preparation of the financial statement.
D. the exchange rate on the record date.
AACSB: Reflective Thinking
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-04 Make calculations and translate financial statements of a foreign subsidiary.
Topic: Translation of Functional Currency Statements into the Reporting Currency of the US Company
12-77
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
19.
If the functional currency is the local currency of a foreign subsidiary, what exchange rates
should be used to translate the items below, assuming the foreign subsidiary is in a country
which has not experienced hyperinflation over three years?
A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Reflective Thinking
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-04 Make calculations and translate financial statements of a foreign subsidiary.
Topic: Translation of Functional Currency Statements into the Reporting Currency of the US Company
12-78
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
20.
If the functional currency is the local currency of a foreign subsidiary, what exchange rates
should be used to translate the items below, assuming the foreign subsidiary is in a country
which has not experienced hyperinflation over three years?
A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Reflective Thinking
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-04 Make calculations and translate financial statements of a foreign subsidiary.
Topic: Translation of Functional Currency Statements into the Reporting Currency of the US Company
12-79
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
21.
Which combination of accounts and exchange rates is correct for the translation of a foreign
entity's financial statements from the functional currency to U.S. dollars?
A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Reflective Thinking
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-04 Make calculations and translate financial statements of a foreign subsidiary.
Topic: Translation of Functional Currency Statements into the Reporting Currency of the US Company
12-80
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
22.
The assets listed below of a foreign subsidiary have been converted to U.S. dollars at both
current and historical exchange rates. Assuming that the local currency of the foreign
subsidiary is the functional currency, what total amount should appear for these assets on the
U.S. company's consolidated balance sheet?
A. $636,000
B. $648,000
C. $708,000
D. $960,000
AACSB: Analytic
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-04 Make calculations and translate financial statements of a foreign subsidiary.
Topic: Translation of Functional Currency Statements into the Reporting Currency of the US Company
12-81
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
23.
Dover Company owns 90% of the capital stock of a foreign subsidiary located in Italy. Dover's
accountant has just translated the accounts of the foreign subsidiary and determined that a
debit translation adjustment of $80,000 exists. If Dover uses the fully adjusted equity method
for its investment, what entry should Dover record in order to recognize the translation
adjustment?
A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Analytic
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-04 Make calculations and translate financial statements of a foreign subsidiary.
Topic: Translation of Functional Currency Statements into the Reporting Currency of the US Company
12-82
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
24.
For each of the items listed below, state whether they increase or decrease the balance in
cumulative translation adjustments (assuming a credit balance at the beginning of the year)
when the foreign currency strengthened relative to the U.S. dollar during the year.
A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Reflective Thinking
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-04 Make calculations and translate financial statements of a foreign subsidiary.
Topic: Translation of Functional Currency Statements into the Reporting Currency of the US Company
12-83
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
25.
The British subsidiary of a U.S. company reported cost of goods sold of 75,000 pounds
(sterling) for the current year ended December 31. The beginning inventory was 10,000
pounds, and the ending inventory was 15,000 pounds. Spot rates for various dates are as
follows:
Assuming the pound is the functional currency of the British subsidiary, the translated amount
of cost of goods sold that should appear in the consolidated income statement is:
A. $108,750.
B. $112,500.
C. $114,300.
D. $125,700.
AACSB: Analytic
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-04 Make calculations and translate financial statements of a foreign subsidiary.
Topic: Translation of Functional Currency Statements into the Reporting Currency of the US Company
12-84
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
26.
Seattle, Inc. owns an 80 percent interest in a Portuguese subsidiary. For 20X8, Seattle
reported income from operations of $2.0 million. The Portuguese company's income from
operations, after foreign currency translation, was $1.1 million. The foreign currency
translation adjustment was $120,000 (credit). Consolidated net income and consolidated
comprehensive income for the year are:
A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Analytic
AICPA FN: Reporting
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-04 Make calculations and translate financial statements of a foreign subsidiary.
Topic: Translation of Functional Currency Statements into the Reporting Currency of the US Company
12-85
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
27.
On September 30, 20X8, Wilfred Company sold inventory to Jackson Corporation, its
Canadian subsidiary. The goods cost Wilfred $30,000 and were sold to Jackson for $40,000,
payable in Canadian dollars. The goods are still on hand at the end of the year on December
31. The Canadian dollar (C$) is the functional currency of the Canadian subsidiary. The
exchange rates follow:
Based on the preceding information, at what dollar amount is the ending inventory shown in
the trial balance of the consolidated worksheet?
A. $45,000
B. $50,000
C. $40,000
D. $35,000
AACSB: Analytic
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-04 Make calculations and translate financial statements of a foreign subsidiary.
Topic: Translation of Functional Currency Statements into the Reporting Currency of the US Company
12-86
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
28.
On September 30, 20X8, Wilfred Company sold inventory to Jackson Corporation, its
Canadian subsidiary. The goods cost Wilfred $30,000 and were sold to Jackson for $40,000,
payable in Canadian dollars. The goods are still on hand at the end of the year on December
31. The Canadian dollar (C$) is the functional currency of the Canadian subsidiary. The
exchange rates follow:
Based on the preceding information, what amount of unrealized intercompany gross profit is
eliminated in preparing the consolidated financial statements for the year?
A. $0
B. $5,000
C. $10,000
D. $15,000
AACSB: Analytic
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-04 Make calculations and translate financial statements of a foreign subsidiary.
Topic: Translation of Functional Currency Statements into the Reporting Currency of the US Company
12-87
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
29.
On September 30, 20X8, Wilfred Company sold inventory to Jackson Corporation, its
Canadian subsidiary. The goods cost Wilfred $30,000 and were sold to Jackson for $40,000,
payable in Canadian dollars. The goods are still on hand at the end of the year on December
31. The Canadian dollar (C$) is the functional currency of the Canadian subsidiary. The
exchange rates follow:
Based on the preceding information, at what amount is the inventory shown on the
consolidated balance sheet for the year?
A. $45,000
B. $30,000
C. $40,000
D. $35,000
AACSB: Analytic
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-04 Make calculations and translate financial statements of a foreign subsidiary.
Topic: Translation of Functional Currency Statements into the Reporting Currency of the US Company
12-88
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution
in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
30.
Note: This is a Kaplan CPA Review Question
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 20X1 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 in its income statement for the year
ended December 31, 20X1?
A. $15,700
B. $0
C. $8,100
D. $7,600
AACSB: Analytic
AICPA FN: Reporting
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-04 Make calculations and translate financial statements of a foreign subsidiary.
Learning Objective: 12-06 Make calculations and remeasure financial statements of a foreign subsidiary.
Learning Objective: 12-08 Understand other issues related to foreign operations including the hedging of a net investment in a
foreign subsidiary.
Topic: Remeasurement of the Books of Record into the Functional Currency
Topic: Translation When a Third Currency is the Functional Currency
Topic: Translation of Functional Currency Statements into the Reporting Currency of the US Company
12-89
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
31.
On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth
Company for $3,100,000. Any excess cost over book value is attributable to a patent with a
10-year remaining life. At the date of acquisition, Perth's balance sheet contained the following
information:
Perth's income statement for 20X8 is as follows:
The balance sheet of Perth at December 31, 20X8, is as follows:
12-90
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various
dates for 20X8 follow:
Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income
taxes were incurred evenly throughout 20X8.
Refer to the above information. Assuming the local currency of the country in which Perth
Company is located is the functional currency, what are the translated amounts for the items
below in U.S. dollars?
A. Option A
12-91
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B. Option B
C. Option C
D. Option D
AACSB: Analytic
AICPA FN: Reporting
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-04 Make calculations and translate financial statements of a foreign subsidiary.
Topic: Translation of Functional Currency Statements into the Reporting Currency of the US Company
12-92
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution
in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
32.
On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth
Company for $3,100,000. Any excess cost over book value is attributable to a patent with a
10-year remaining life. At the date of acquisition, Perth's balance sheet contained the following
information:
Perth's income statement for 20X8 is as follows:
The balance sheet of Perth at December 31, 20X8, is as follows:
12-93
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various
dates for 20X8 follow:
Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income
taxes were incurred evenly throughout 20X8.
Refer to the above information. Assuming Perth's local currency is the functional currency,
what is the amount of translation adjustments that result from translating Perth's trial balance
into U.S. dollars at December 31, 20X8?
A. $396,500 debit
B. $285,000 credit
C. $405,000 credit
D. $411,000 credit
AACSB: Analytic
12-94
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-04 Make calculations and translate financial statements of a foreign subsidiary.
Topic: Translation of Functional Currency Statements into the Reporting Currency of the US Company
12-95
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
33.
On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth
Company for $3,100,000. Any excess cost over book value is attributable to a patent with a
10-year remaining life. At the date of acquisition, Perth's balance sheet contained the following
information:
Perth's income statement for 20X8 is as follows:
The balance sheet of Perth at December 31, 20X8, is as follows:
12-96
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Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various
dates for 20X8 follow:
Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income
taxes were incurred evenly throughout 20X8.
Refer to the above information. Assuming Perth's local currency is the functional currency,
what is the amount of patent amortization for 20X8 that results from Johnson's acquisition of
Perth's stock on January 2, 20X8. Round your answer to the nearest dollar.
A. $11,500
B. $11,884
C. $7,667
D. $9,394
AACSB: Analytic
12-97
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-04 Make calculations and translate financial statements of a foreign subsidiary.
Topic: Translation of Functional Currency Statements into the Reporting Currency of the US Company
12-98
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
34.
On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth
Company for $3,100,000. Any excess cost over book value is attributable to a patent with a
10-year remaining life. At the date of acquisition, Perth's balance sheet contained the following
information:
Perth's income statement for 20X8 is as follows:
The balance sheet of Perth at December 31, 20X8, is as follows:
12-99
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various
dates for 20X8 follow:
Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income
taxes were incurred evenly throughout 20X8.
Refer to the above information. Assuming Perth's local currency is the functional currency,
what is the amount of translation adjustment that appears on Johnson's consolidated financial
statements at December 31, 20X8?
A. $419,184 credit
B. $416,884 credit
C. $405,884 debit
D. $398,500 credit
AACSB: Analytic
12-100
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
AICPA FN: Decision Making
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 12-04 Make calculations and translate financial statements of a foreign subsidiary.
Topic: Translation of Functional Currency Statements into the Reporting Currency of the US Company
12-101
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
35.
On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth
Company for $3,100,000. Any excess cost over book value is attributable to a patent with a
10-year remaining life. At the date of acquisition, Perth's balance sheet contained the following
information:
Perth's income statement for 20X8 is as follows:
The balance sheet of Perth at December 31, 20X8, is as follows:
12-102
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various
dates for 20X8 follow:
Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income
taxes were incurred evenly throughout 20X8.
Refer to the above information. Assuming Perth's local currency is the functional currency,
what is the balance in Johnson's investment in foreign subsidiary account at December 31,
2008?
A. $3,216,500
B. $3,560,000
C. $3,568,300
D. $3,577,694
AACSB: Analytic
12-103
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 12-05 Prepare consolidated financial statements including a foreign subsidiary after translation.
Topic: Translation and Consolidation of a Foreign Subsidiary
12-104
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
36.
On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth
Company for $3,100,000. Any excess cost over book value is attributable to a patent with a
10-year remaining life. At the date of acquisition, Perth's balance sheet contained the following
information:
Perth's income statement for 20X8 is as follows:
The balance sheet of Perth at December 31, 20X8, is as follows:
12-105
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Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various
dates for 20X8 follow:
Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income
taxes were incurred evenly throughout 20X8.
Refer to the above information. Assuming the U.S. dollar is the functional currency, what is
Johnson's remeasurement gain (loss) for 20X8? (Assume the ending inventory was acquired
on December 31, 20X8.)
A. $31,000 gain
B. $36,500 loss
C. $22,000 gain
D. $32,000 gain
AACSB: Analytic
12-106
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 12-06 Make calculations and remeasure financial statements of a foreign subsidiary.
Topic: Remeasurement of the Books of Record into the Functional Currency
12-107
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
37.
On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth
Company for $3,100,000. Any excess cost over book value is attributable to a patent with a
10-year remaining life. At the date of acquisition, Perth's balance sheet contained the following
information:
Perth's income statement for 20X8 is as follows:
The balance sheet of Perth at December 31, 20X8, is as follows:
12-108
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Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various
dates for 20X8 follow:
Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income
taxes were incurred evenly throughout 20X8.
Refer to the above information. Assuming the U.S. dollar is the functional currency, what is the
amount of Perth's cost of goods sold remeasured in U.S. dollars?
A. $811,500
B. $843,500
C. $884,500
D. $799,500
AACSB: Analytic
AICPA FN: Measurement
12-109
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-06 Make calculations and remeasure financial statements of a foreign subsidiary.
Topic: Remeasurement of the Books of Record into the Functional Currency
12-110
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
38.
On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth
Company for $3,100,000. Any excess cost over book value is attributable to a patent with a
10-year remaining life. At the date of acquisition, Perth's balance sheet contained the following
information:
Perth's income statement for 20X8 is as follows:
The balance sheet of Perth at December 31, 20X8, is as follows:
12-111
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Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various
dates for 20X8 follow:
Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income
taxes were incurred evenly throughout 20X8.
Refer to the above information. Assuming the U.S. dollar is the functional currency, what is the
amount of patent amortization for 20X8 that results from Johnson's acquisition of Perth's stock
on January 2, 20X8?
A. $11,884
B. $11,770
C. $12,550
D. $11,500
AACSB: Analytic
12-112
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-06 Make calculations and remeasure financial statements of a foreign subsidiary.
Topic: Remeasurement of the Books of Record into the Functional Currency
12-113
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
39.
On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth
Company for $3,100,000. Any excess cost over book value is attributable to a patent with a
10-year remaining life. At the date of acquisition, Perth's balance sheet contained the following
information:
Perth's income statement for 20X8 is as follows:
The balance sheet of Perth at December 31, 20X8, is as follows:
12-114
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Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various
dates for 20X8 follow:
Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income
taxes were incurred evenly throughout 20X8.
Refer to the above information. Assuming the U.S. dollar is the functional currency, what is
Perth's net income for 20X8 in U.S. dollars (include the remeasurement gain or loss in Perth's
net income)?
A. $238,000
B. $228,000
C. $219,500
D. $202,000
AACSB: Analytic
12-115
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
AICPA FN: Reporting
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-06 Make calculations and remeasure financial statements of a foreign subsidiary.
Topic: Remeasurement of the Books of Record into the Functional Currency
12-116
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
40.
On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth
Company for $3,100,000. Any excess cost over book value is attributable to a patent with a
10-year remaining life. At the date of acquisition, Perth's balance sheet contained the following
information:
Perth's income statement for 20X8 is as follows:
The balance sheet of Perth at December 31, 20X8, is as follows:
12-117
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Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various
dates for 20X8 follow:
Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income
taxes were incurred evenly throughout 20X8.
Refer to the above information. Assuming the U.S. dollar is the functional currency, what is the
balance in Johnson's investment in foreign subsidiary account at December 31, 2008?
A. $3,303,400
B. $3,294,500
C. $3,323,400
D. $3,314,500
AACSB: Analytic
AICPA FN: Reporting
12-118
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 12-07 Prepare consolidated financial statements including a foreign subsidiary after remeasurement.
Topic: Remeasurement: Subsequent Consolidation Worksheet
41.
Michigan-based Leo Corporation acquired 100 percent of the common stock of a British
company on January 1, 20X8, for $1,100,000. The British subsidiary's net assets amounted to
500,000 pounds on the date of acquisition. On January 1, 20X8, the book values of its
identifiable assets and liabilities approximated their fair values. As a result of an analysis of
functional currency indicators, Leo determined that the British pound was the functional
currency. On December 31, 20X8, the British subsidiary's adjusted trial balance, translated
into U.S. dollars, contained $17,000 more debits than credits. The British subsidiary reported
income of 33,000 pounds for 20X8 and paid a cash dividend of 8,000 pounds on October 25,
20X8. Included on the British subsidiary's income statement was depreciation expense of
3,500 pounds. Leo uses the fully adjusted equity method of accounting for its investment in the
British subsidiary and determined that goodwill in the first year had an impairment loss of 25
percent of its initial amount. Exchange rates at various dates during 20X8 follow:
Based on the preceding information, what amount should Leo record as "income from
subsidiary" based on the British subsidiary's reported net income?
A. $72,930
B. $52,500
C. $72,600
D. $69,300
AACSB: Analytic
AICPA FN: Measurement
Blooms: Understand
12-119
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Difficulty: 2 Medium
Learning Objective: 12-05 Prepare consolidated financial statements including a foreign subsidiary after translation.
Topic: Translation and Consolidation of a Foreign Subsidiary
42.
Michigan-based Leo Corporation acquired 100 percent of the common stock of a British
company on January 1, 20X8, for $1,100,000. The British subsidiary's net assets amounted to
500,000 pounds on the date of acquisition. On January 1, 20X8, the book values of its
identifiable assets and liabilities approximated their fair values. As a result of an analysis of
functional currency indicators, Leo determined that the British pound was the functional
currency. On December 31, 20X8, the British subsidiary's adjusted trial balance, translated
into U.S. dollars, contained $17,000 more debits than credits. The British subsidiary reported
income of 33,000 pounds for 20X8 and paid a cash dividend of 8,000 pounds on October 25,
20X8. Included on the British subsidiary's income statement was depreciation expense of
3,500 pounds. Leo uses the fully adjusted equity method of accounting for its investment in the
British subsidiary and determined that goodwill in the first year had an impairment loss of 25
percent of its initial amount. Exchange rates at various dates during 20X8 follow:
Based on the preceding information, the receipt of the dividend will result in a credit to the
investment account for:
A. $16,800
B. $17,680
C. $18,000
D. $17,600
AACSB: Analytic
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
12-120
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Learning Objective: 12-05 Prepare consolidated financial statements including a foreign subsidiary after translation.
Topic: Translation and Consolidation of a Foreign Subsidiary
43.
Michigan-based Leo Corporation acquired 100 percent of the common stock of a British
company on January 1, 20X8, for $1,100,000. The British subsidiary's net assets amounted to
500,000 pounds on the date of acquisition. On January 1, 20X8, the book values of its
identifiable assets and liabilities approximated their fair values. As a result of an analysis of
functional currency indicators, Leo determined that the British pound was the functional
currency. On December 31, 20X8, the British subsidiary's adjusted trial balance, translated
into U.S. dollars, contained $17,000 more debits than credits. The British subsidiary reported
income of 33,000 pounds for 20X8 and paid a cash dividend of 8,000 pounds on October 25,
20X8. Included on the British subsidiary's income statement was depreciation expense of
3,500 pounds. Leo uses the fully adjusted equity method of accounting for its investment in the
British subsidiary and determined that goodwill in the first year had an impairment loss of 25
percent of its initial amount. Exchange rates at various dates during 20X8 follow:
Based on the preceding information, on Leo's consolidated balance sheet at December 31,
20X8, what amount should be reported for the goodwill acquired on January 1, 20X8?
A. $36,845
B. $39,286
C. $36,905
D. $36,607
AACSB: Analytic
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-05 Prepare consolidated financial statements including a foreign subsidiary after translation.
12-121
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Topic: Translation and Consolidation of a Foreign Subsidiary
44.
Michigan-based Leo Corporation acquired 100 percent of the common stock of a British
company on January 1, 20X8, for $1,100,000. The British subsidiary's net assets amounted to
500,000 pounds on the date of acquisition. On January 1, 20X8, the book values of its
identifiable assets and liabilities approximated their fair values. As a result of an analysis of
functional currency indicators, Leo determined that the British pound was the functional
currency. On December 31, 20X8, the British subsidiary's adjusted trial balance, translated
into U.S. dollars, contained $17,000 more debits than credits. The British subsidiary reported
income of 33,000 pounds for 20X8 and paid a cash dividend of 8,000 pounds on October 25,
20X8. Included on the British subsidiary's income statement was depreciation expense of
3,500 pounds. Leo uses the fully adjusted equity method of accounting for its investment in the
British subsidiary and determined that goodwill in the first year had an impairment loss of 25
percent of its initial amount. Exchange rates at various dates during 20X8 follow:
Based on the preceding information, in the stockholders' equity section of Leo's consolidated
balance sheet at December 31, 20X8, Leo should report the translation adjustment as a
component of other comprehensive income of:
A. $19,440
B. $17,000
C. $18,786
D. $19,380
AACSB: Analytic
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-05 Prepare consolidated financial statements including a foreign subsidiary after translation.
12-122
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Topic: Translation and Consolidation of a Foreign Subsidiary
45.
Nichols Company owns 90% of the capital stock of a foreign subsidiary located in Ireland. As a
result of translating the subsidiary's accounts, a debit of $160,000 was needed in the
translation adjustments account so that the foreign subsidiary's debits and credits were equal
in U.S. dollars. How should Nichols report its translation adjustments on its consolidated
financial statements?
A. As a $144,000 increase in the stockholders' equity section of the balance sheet.
B. As a $144,000 reduction in consolidated comprehensive net income.
C. As a $160,000 debit in stockholders' equity section of the balance sheet.
D. As a $160,000 reduction in consolidated comprehensive net income.
AACSB: Analytic
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-05 Prepare consolidated financial statements including a foreign subsidiary after translation.
Topic: Translation and Consolidation of a Foreign Subsidiary
12-123
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
46.
Elan, a U.S. corporation, completed the December 31, 20X8, foreign currency translation of its
70 percent owned Swiss subsidiary's trial balance using the current rate method. The
translation resulted in a debit adjustment of $25,000. The subsidiary had reported net income
of 800,000 Swiss francs for 20X8 and paid dividends of 50,000 Swiss francs on September 1,
20X8. The translation rates for the year were:
The January 1 balance of the Investment in the Swiss subsidiary account was $1,600,000.
Elan acquired its interest in the Swiss subsidiary at book value with no differential or goodwill
recorded at acquisition.
Elan's Investment in Swiss subsidiary account at December 31, 20X8, is:
A. $1,881,050.
B. $1,916,050.
C. $1,923,950.
D. $2,051,500.
AACSB: Analytic
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-05 Prepare consolidated financial statements including a foreign subsidiary after translation.
Topic: Translation and Consolidation of a Foreign Subsidiary
12-124
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
47.
On January 1, 20X8, Transport Corporation acquired 75 percent interest in Steamship
Company for $300,000. Steamship is a Norwegian company. The local currency is the
Norwegian kroner (NKr). The acquisition resulted in an excess of cost-over-book value of
$25,000 due solely to a patent having a remaining life of 5 years. Transport uses the fully
adjusted equity method to account for its investment. Steamship's December 31, 20X8, trial
balance has been translated into U.S. dollars, requiring a translation adjustment debit of
$8,000. Steamship's net income translated into U.S. dollars is $35,000. It declared and paid an
NKr 20,000 dividend on June 1, 20X8. Relevant exchange rates are as follows:
Assume the kroner is the functional currency.
Based on the preceding information, in the journal entry to record the receipt of dividend from
Steamship,
A. Investment in Steamship Company will be credited for $3,450.
B. Cash will be debited for $3,300.
C. Investment in Steamship Company will be credited for $4,000.
D. Cash will be debited for $3,600.
AACSB: Analytic
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-05 Prepare consolidated financial statements including a foreign subsidiary after translation.
Topic: Translation and Consolidation of a Foreign Subsidiary
12-125
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
48.
On January 1, 20X8, Transport Corporation acquired 75 percent interest in Steamship
Company for $300,000. Steamship is a Norwegian company. The local currency is the
Norwegian kroner (NKr). The acquisition resulted in an excess of cost-over-book value of
$25,000 due solely to a patent having a remaining life of 5 years. Transport uses the fully
adjusted equity method to account for its investment. Steamship's December 31, 20X8, trial
balance has been translated into U.S. dollars, requiring a translation adjustment debit of
$8,000. Steamship's net income translated into U.S. dollars is $35,000. It declared and paid an
NKr 20,000 dividend on June 1, 20X8. Relevant exchange rates are as follows:
Assume the kroner is the functional currency.
Based on the preceding information, in the journal entry to record parent's share of
subsidiary's translation adjustment:
A. Other Comprehensive Income—Translation Adjustment will be debited for $8,000.
B. Other Comprehensive Income—Translation Adjustment will be credited for $6,000.
C. Investment in Steamship Company will be credited for $6,000.
D. Investment in Steamship Company will be debited for $8,000.
AACSB: Analytic
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-05 Prepare consolidated financial statements including a foreign subsidiary after translation.
Topic: Translation and Consolidation of a Foreign Subsidiary
12-126
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
49.
On January 1, 20X8, Transport Corporation acquired 75 percent interest in Steamship
Company for $300,000. Steamship is a Norwegian company. The local currency is the
Norwegian kroner (NKr). The acquisition resulted in an excess of cost-over-book value of
$25,000 due solely to a patent having a remaining life of 5 years. Transport uses the fully
adjusted equity method to account for its investment. Steamship's December 31, 20X8, trial
balance has been translated into U.S. dollars, requiring a translation adjustment debit of
$8,000. Steamship's net income translated into U.S. dollars is $35,000. It declared and paid an
NKr 20,000 dividend on June 1, 20X8. Relevant exchange rates are as follows:
Assume the kroner is the functional currency.
Based on the preceding information, what amount of translation adjustment is required for
increase in differential?
A. $3,000
B. $5,500
C. $4,500
D. $5,000
AACSB: Analytic
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-05 Prepare consolidated financial statements including a foreign subsidiary after translation.
Topic: Translation and Consolidation of a Foreign Subsidiary
12-127
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
50.
On January 1, 20X8, Transport Corporation acquired 75 percent interest in Steamship
Company for $300,000. Steamship is a Norwegian company. The local currency is the
Norwegian kroner (NKr). The acquisition resulted in an excess of cost-over-book value of
$25,000 due solely to a patent having a remaining life of 5 years. Transport uses the fully
adjusted equity method to account for its investment. Steamship's December 31, 20X8, trial
balance has been translated into U.S. dollars, requiring a translation adjustment debit of
$8,000. Steamship's net income translated into U.S. dollars is $35,000. It declared and paid an
NKr 20,000 dividend on June 1, 20X8. Relevant exchange rates are as follows:
Assume the kroner is the functional currency.
Based on the preceding information, in the journal entry to record the amortization of the
patent for 20X8 on the parent's books, Investment in Steamship Company will be debited for:
A. $5,000
B. $5,500
C. $4,500
D. $3,000
AACSB: Analytic
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-05 Prepare consolidated financial statements including a foreign subsidiary after translation.
Topic: Translation and Consolidation of a Foreign Subsidiary
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51.
Note: This is a Kaplan CPA Review Question
Certain balance sheet accounts of a foreign subsidiary of Rowan, Inc. (Rowan) at December
31, 20X6, have been translated into U.S. dollars as follows:
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, 20X6 consolidated balance
sheet for the above accounts?
A. $450,000
B. $475,000
C. $455,000
D. $495,000
AACSB: Analytic
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-05 Prepare consolidated financial statements including a foreign subsidiary after translation.
Topic: Translation and Consolidation of a Foreign Subsidiary
12-129
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52.
Which combination of accounts and exchange rates is correct for the remeasurement of a
foreign entity's financial statements from its local currency to U.S. dollars?
A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Reflective Thinking
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-06 Make calculations and remeasure financial statements of a foreign subsidiary.
Topic: Remeasurement of the Books of Record into the Functional Currency
12-130
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53.
Mercury Company is a subsidiary of Neptune Company and is located in Valparaíso, Chile,
where the currency is the Chilean Peso. Data on Mercury's inventory and purchases are as
follows:
The beginning inventory was acquired during the fourth quarter of 20X7, and the ending
inventory was acquired during the fourth quarter of 20X8. Purchases were made evenly over
the year. Exchange rates were as follows:
Refer the information provided above. Assuming the U.S. dollar is the functional currency,
what is the amount of Mercury's cost of goods sold remeasured in U.S. dollars?
A. $1,680
B. $1,712
C. $1,700
D. $1,692
AACSB: Analytic
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-06 Make calculations and remeasure financial statements of a foreign subsidiary.
Topic: Remeasurement of the Books of Record into the Functional Currency
12-131
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54.
Mercury Company is a subsidiary of Neptune Company and is located in Valparaíso, Chile,
where the currency is the Chilean Peso. Data on Mercury's inventory and purchases are as
follows:
The beginning inventory was acquired during the fourth quarter of 20X7, and the ending
inventory was acquired during the fourth quarter of 20X8. Purchases were made evenly over
the year. Exchange rates were as follows:
Based on the preceding information, the translation of cost of goods sold for 20X8, assuming
that the Spanish peseta is the functional currency is:
A. $1,700.
B. $1,760.
C. $1,680.
D. $1,692.
AACSB: Analytic
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-05 Prepare consolidated financial statements including a foreign subsidiary after translation.
Topic: Translation and Consolidation of a Foreign Subsidiary
12-132
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55.
The British subsidiary of a U.S. company reported cost of goods sold of 75,000 pounds
(sterling) for the current year ended December 31. The beginning inventory was 10,000
pounds, and the ending inventory was 15,000 pounds. Spot rates for various dates are as
follows:
Assuming the dollar is the functional currency of the British subsidiary, the remeasured
amount of cost of goods sold that should appear in the consolidated income statement is:
A. $108,750.
B. $112,500.
C. $114,250.
D. $125,700.
AACSB: Analytic
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-06 Make calculations and remeasure financial statements of a foreign subsidiary.
Topic: Remeasurement of the Books of Record into the Functional Currency
12-133
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
56.
Note: This is a Kaplan CPA Review Question
Gains from remeasuring a foreign subsidiary's financial statements from the local currency,
which is not the functional currency, into the company's functional currency should be reported
as a(an)
A. Deferred foreign exchange gain.
B. Part of continuing operations.
C. Separate component of stockholders' equity.
D. Extraordinary item, net of income taxes.
AACSB: Reflective Thinking
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-06 Make calculations and remeasure financial statements of a foreign subsidiary.
Topic: Remeasurement of the Books of Record into the Functional Currency
57.
The gain or loss on the effective portion of a U.S. parent company's hedge of a net investment
in a foreign entity should be treated as:
A. an adjustment to the retained earnings account in the stockholders' equity section of its
balance sheet.
B. other comprehensive income.
C. a translation gain or loss in the computation of net income for the reporting period.
D. an adjustment to a valuation account in the asset section of its balance sheet.
AACSB: Reflective Thinking
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-08 Understand other issues related to foreign operations including the hedging of a net investment in a
foreign subsidiary.
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Topic: Hedge of a Net Investment in a Foreign Subsidiary
58.
Which of the following describes a situation when a parent company would not consolidate a
foreign subsidiary?
A. Restrictions on foreign exchange in the foreign country.
B. Restrictions on transfers of property in the foreign country.
C. Other governmentally imposed uncertainties.
D. All of these.
AACSB: Reflective Thinking
AICPA FN: Reporting
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-08 Understand other issues related to foreign operations including the hedging of a net investment in a
foreign subsidiary.
Topic: Foreign Investments and Unconsolidated Subsidiaries
12-135
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59.
Note: This is a Kaplan CPA Review Question
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?
A. The translation loss less the exchange gain is reported separately as other comprehensive
income.
B. The translation loss less the exchange gain is reported in the income statement.
C. The translation loss is reported separately in the stockholders' equity section of the
balance sheet and the exchange gain is reported in the income statement.
D. The translation loss is reported in the income statement and the exchange gain is reported
separately in the stockholders' equity section of the balance sheet.
AACSB: Reflective Thinking
AICPA FN: Reporting
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 12-08 Understand other issues related to foreign operations including the hedging of a net investment in a
foreign subsidiary.
Topic: Hedge of a Net Investment in a Foreign Subsidiary
Essay Questions
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60.
Briefly explain the following terms associated with accounting for foreign entities:
a) Functional Currency
b) Translation
c) Remeasurement
a) Functional currency is the currency of the primary economic environment in which the entity
operates; normally that is the currency of the environment in which an entity primarily
generates and receives cash. The functional currency is used to differentiate between two
types of foreign operations, those that are self-contained and integrated into a local
environment, and those that are an extension of the parent and integrated with the parent.
b) Translation is the most common method used and is applied when the local currency is the
foreign entity's functional currency. To translate the financial statements, the company will use
the current rate, which is the exchange rate on the balance sheet date, to convert the local
currency balance sheet account balances into U.S. dollars. Any translation adjustment that
occurs is a component of comprehensive income. Because revenues and expenses are
assumed to occur uniformly over the period, revenues and expenses on the income statement
are translated using the average rate for the reporting period.
c) Remeasurement is the restatement of the foreign entity's financial statements from the local
currency that the entity used into the foreign entity's functional currency. Remeasurement is
required only when the functional currency is different from the currency used to maintain the
books and records of the foreign entity. Monetary assets and liabilities are translated at the
current rate. Non-monetary assets and liabilities, including inventories, are translated at their
historical rates. The income statement items other than cost of goods sold is translated at
average rates. Any resulting adjustment is taken into current period income.
AACSB: Communication
AICPA BB: Global
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-02 Determine the functional currency and understand the ramifications of different functional currency
12-137
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designations.
Learning Objective: 12-03 Understand and explain the differences between translation and remeasurment.
Topic: Determination of the Functional Currency
Topic: Translation Versus Remeasurement of Foreign Financial Statements
61.
Parisian Co. is a French company located in Paris. Yankee Corp., located in New York City,
acquires Parisian Co. Parisian has the Euro as its local currency and the Swiss Franc as its
functional currency. Yankee has the U.S. dollar as its local currency and the U.S. dollar as its
functional currency.
Required:
a) The year-end consolidated financial statements will be prepared in which currency?
b) Explain which method is appropriate to use to use at year-end: Translation or
Remeasurement?
a) The consolidated financial statements will be reported in Yankee's functional currency-the
U.S. dollar.
b) Parisian's financial statements will need to be remeasured first from the Euro to the Swiss
Franc. Then the financial statements' valued in the Swiss Franc will be translated to the U.S.
dollar.
AACSB: Communication
AICPA BB: Critical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-03 Understand and explain the differences between translation and remeasurment.
Topic: Translation Versus Remeasurement of Foreign Financial Statements
12-138
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62.
Prepare a schedule providing a proof of the translation adjustment using the information
provided below.
AACSB: Analytic
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 12-04 Make calculations and translate financial statements of a foreign subsidiary.
Topic: Translation of Functional Currency Statements into the Reporting Currency of the US Company
12-139
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
63.
On January 1, 2008, Pace Company acquired all of the outstanding stock of Spin PLC, a
British Company, for $350,000. Spin's net assets on the date of acquisition were 250,000
pounds (£). On January 1, 2008, the book and fair values of the Spin's identifiable assets and
liabilities approximated their fair values except for property, plant, and equipment and
trademarks. The fair value of Spin's property, plant, and equipment exceeded its book value
by $25,000. The remaining useful life of Spin's equipment at January 1, 2008, was 10 years.
The remainder of the differential was attributable to a trademark having an estimated useful
life of 5 years. Spin's trial balance on December 31, 2008, in pounds, follows:
Additional Information
1. Spin uses the FIFO method for its inventory. The beginning inventory was acquired on
December 31, 2007, and ending inventory was acquired on December 26, 2008. Purchases of
£300,000 were made evenly throughout 2008.
2. Spin acquired all of its property, plant, and equipment on March 1, 2006, and uses straightline depreciation.
3. Spin's sales were made evenly throughout 2008, and its operating expenses were incurred
evenly throughout 2008.
12-140
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4. The dividends were declared and paid on November 1, 2008.
5. Pace's income from its own operations was $150,000 for 2008, and its total stockholders'
equity on January 1, 2008, was $1,000,000. Pace declared $50,000 of dividends during 2008.
6. Exchange rates were as follows:
Required:
1) Prepare a schedule translating the trial balance from British pounds into U.S. dollars.
Assume the pound is the functional currency.
2) Assume that Pace uses the fully adjusted equity method. Record all journal entries that
relate to its investment in the British subsidiary during 2008. Provide the necessary
documentation and support for the amounts in the journal entries, including a schedule of the
translation adjustment related to the differential.
3) Prepare a schedule that determines Pace's consolidated comprehensive income for 2008.
12-141
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12-142
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
12-143
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
12-144
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
AACSB: Analytic
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 12-05 Prepare consolidated financial statements including a foreign subsidiary after translation.
Topic: Translation and Consolidation of a Foreign Subsidiary
12-145
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
64.
On January 1, 2008, Pace Company acquired all of the outstanding stock of Spin PLC, a
British Company, for $350,000. Spin's net assets on the date of acquisition were 250,000
pounds (£). On January 1, 2008, the book and fair values of the Spin's identifiable assets and
liabilities approximated their fair values except for property, plant, and equipment and
trademarks. The fair value of Spin's property, plant, and equipment exceeded its book value
by $25,000. The remaining useful life of Spin's equipment at January 1, 2008, was 10 years.
The remainder of the differential was attributable to a trademark having an estimated useful
life of 5 years. Spin's trial balance on December 31, 2008, in pounds, follows:
Additional Information
1. Spin uses the FIFO method for its inventory. The beginning inventory was acquired on
December 31, 2007, and ending inventory was acquired on December 26, 2008. Purchases of
£300,000 were made evenly throughout 2008.
2. Spin acquired all of its property, plant, and equipment on March 1, 2006, and uses straightline depreciation.
3. Spin's sales were made evenly throughout 2008, and its operating expenses were incurred
evenly throughout 2008.
12-146
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4. The dividends were declared and paid on November 1, 2008.
5. Pace's income from its own operations was $150,000 for 2008, and its total stockholders'
equity on January 1, 2008, was $1,000,000. Pace declared $50,000 of dividends during 2008.
6. Exchange rates were as follows:
Assume the U.S. dollar is the functional currency, not the pound. Prepare a schedule providing
a proof of the remeasurement gain or loss. Assume that the British subsidiary had the
following monetary assets and liabilities at January 1, 2008:
12-147
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AACSB: Analytic
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 12-06 Make calculations and remeasure financial statements of a foreign subsidiary.
Topic: Remeasurement of the Books of Record into the Functional Currency
12-148
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
65.
On January 1, 2008, Pace Company acquired all of the outstanding stock of Spin PLC, a
British Company, for $350,000. Spin's net assets on the date of acquisition were 250,000
pounds (£). On January 1, 2008, the book and fair values of the Spin's identifiable assets and
liabilities approximated their fair values except for property, plant, and equipment and
trademarks. The fair value of Spin's property, plant, and equipment exceeded its book value
by $25,000. The remaining useful life of Spin's equipment at January 1, 2008, was 10 years.
The remainder of the differential was attributable to a trademark having an estimated useful
life of 5 years. Spin's trial balance on December 31, 2008, in pounds, follows:
Additional Information
1. Spin uses the FIFO method for its inventory. The beginning inventory was acquired on
December 31, 2007, and ending inventory was acquired on December 26, 2008. Purchases of
£300,000 were made evenly throughout 2008.
2. Spin acquired all of its property, plant, and equipment on March 1, 2006, and uses straightline depreciation.
3. Spin's sales were made evenly throughout 2008, and its operating expenses were incurred
evenly throughout 2008.
12-149
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4. The dividends were declared and paid on November 1, 2008.
5. Pace's income from its own operations was $150,000 for 2008, and its total stockholders'
equity on January 1, 2008, was $1,000,000. Pace declared $50,000 of dividends during 2008.
6. Exchange rates were as follows:
Assume the U.S. dollar is the functional currency, not the pound.
Required:
1) Prepare a schedule remeasuring the trial balance from British pound into U.S. dollars.
2) Assume that Pace uses the fully adjusted equity method. Record all journal entries that
relate to its investment in the British subsidiary during 2008. Provide the necessary
documentation and support for the amounts in the journal entries.
3) Prepare a schedule that determines Pace's consolidated net income for 2008.
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2) Journal entries for 2008:
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AACSB: Analytic
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 12-07 Prepare consolidated financial statements including a foreign subsidiary after remeasurement.
Topic: Remeasurement: Subsequent Consolidation Worksheet
12-153
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