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Question : 11.The following balance sheet accounts of a foreign subsidiary at

11.The following balance sheet accounts of a foreign subsidiary at December 31, 2004, have been translated into U.S. dollars as follows:

       Translated at        

Current RatesHistorical Rates

Accounts receivable, current$400,000$440,000

Accounts receivable, long-term200,000216,000

Inventories carried at market120,000132,000

Goodwill  160,000  180,000

$880,000$968,000

What total should be included in the translated balance sheet at December 31, 2004, for the above items?  Assume the U.S. dollar is the functional currency.

a.$880,000

b.$892,000

c.$900,000

d.$936,000

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

Wages expenseSales to customers

a.YesYes

b.YesNo

c.NoNo

d.NoYes

13.A wholly owned subsidiary of a U.S. parent company has certain expense accounts for the year ended December 31, 2004, stated in local currency units (LCU) as follows:

 LCU 

Depreciation of equipment (related assets

were purchased January 1, 2002)180,000

Provision for doubtful accounts120,000

Rent300,000

The exchange rates at various dates are as follows:

Dollar equivalent

of 1 LCU

December 31, 2004$.50

Average for year ended 12/31/04.55

January 1, 2002.40

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

a.$330,000

b.$303,000

c.$297,000

d.$300,000

14.If the functional currency is determined to be the U.S. dollar and its financial statements are prepared in the local currency, SFAS 52, requires which of the following procedures to be followed?

a.Translate the financial statements into U.S. dollars using the current rate method.

b.Remeasure the financial statements into U.S. dollars using the temporal method.

c.Translate the financial statements into U.S. dollars using the temporal method.

d.Remeasure the financial statements into U.S. dollars using the current rate method.

15.P Company acquired 90% of the outstanding common stock of S Company which is a foreign company.  The acquisition was accounted for using the purchase method.  In preparing consolidated statements, the paid-in capital of S Company should be converted at the

a.exchange rate effective when S Company was organized.

b.exchange rate effective on the date of purchase of the stock of S Company by P Company.

c.average exchange rate for the period S Company stock has been upheld by P Company.

d.current exchange rate.

16.In preparing consolidated financial statements of a U.S. parent company and a foreign subsidiary, the foreign subsidiary’s functional currency is the currency:

  1.     of the country the parent is located.
  2.    of the country the subsidiary is located.
  3.     in which the subsidiary primarily generates and spends cash.
  4.    in which the subsidiary maintains its accounting records.

17.Gains from remeasuring a foreign subsidiary’s financial statements from the local currency, which is not the functional currency, into the parent company’s currency should be reported as a(n):

  1.     other comprehensive income item.
  2.    extraordinary item (net of tax).
  3.     part of continuing operations.
  4.    deferred credit.

18.Assuming no significant inflation, gains resulting from the process of translating a foreign entity’s financial statements from the functional currency to U.S. dollars should be included as a(n):

  1.     other comprehensive income item.
  2.    extraordinary item (net of tax).
  3.     part of continuing operations.
  4.    deferred credit.

19.A foreign subsidiary’s functional currency is its local currency and inflation of over 100 percent has been experienced over a three-year period.  For consolidation purposes, SFAS No. 52 requires the use of:

  1. the current rate method only.
  2. the temporal method only
  3. both the current rate and temporal methods.
  4. neither the current rate or the temporal method.

20.The objective of remeasurement is to:

  1.     produce the same results as if the books were maintained in the currency of the foreign entity’s

largest customer.

  1.    produce the same results as if the books were maintained solely in the local currency.
  2.     produce the same results as if the books were maintained solely in the functional currency.
  3.    none of the above.

21.How does a corporation handle a foreign subsidiary?

  1. Leave it on the consolidated financial statements as an investment
  2. Consolidate its statements with the parent’s
  3. Include it as a special equity account
  4. Add the assets and liabilities, but not the revenue or expenses

22.The functional currency concept is

  1. to provide information that is compatible with economic reality
  2. to reflect in the consolidated statements the results of the affiliates’ transactions
  3. that the financial statements should reflect the shift in exchange rates
  4. all of the above

23.What is the basic premise of the temporal method?

  1. The accounts should all be translated at the same exchange rate
  2. The accounts should be translated at the exchange rate that most closely fits their economic substance
  3. The accounts should all be translated at the historic rate
  4. The accounts should all be translated at the current rate

24.How does the current method translate capital assets?

  1. At the current rate
  2. At the historical rate on the date of acquisition
  3. At the average exchange rate for the current year
  4. At the historical rate on the date the asset was purchased by the subsidiary

25.How would a parent company which owned a Canadian subsidiary which had branches in Mexico handle statements of the Mexican branch?

  1. Translate
  2. Restate
  3. Restate then translate
  4. Translate then restate

 

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