Ch13_Test Bank Jeter Advanced Accounting 3rd Edition

Chapter 13

Translation of Financial Statements of Foreign Affiliates

Multiple Choice

1. When translating foreign currency financial statements for a company whose functional currency is

the U.S. dollar, which of the following accounts is translated using historical exchange rates?

Notes Payable Equipment

a. Yes Yes

b. Yes No

c. No No

d. No Yes

2. Under the temporal method, monetary assets and liabilities are translated by using the exchange rate

existing at the:

a. beginning of the current year.

b. date the transaction occurred.

c. balance sheet date.

d. None of these.

3. The process of translating the accounts of a foreign entity into its functional currency when they are

stated in another currency is called:

a. verification.

b. translation.

c. remeasurement.

d. None of these.

4. Which of the following would be restated using the average exchange rate under the temporal

method?

a. cost of goods sold

b. depreciation expense

c. amortization expense

d. None of these

5. Paid-in capital accounts are translated using the historical exchange rate under:

a. the current rate method only.

b. the temporal method only.

c. both the current rate and temporal methods.

d. neither the current rate nor temporal methods.

6. Which of the following would be restated using the current exchange rate under the temporal

method?

a. Marketable securities carried at cost.

b. Inventory carried at market.

c. Common stock.

d. None of these.

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Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd

Edition

13-2

7. The translation adjustment that results from translating the financial statements of a foreign

subsidiary using the current rate method should be:

a. included as a separate item in the stockholders' equity section of the balance sheet.

b. included in the determination of net income for the period it occurs.

c. deferred and amortized over a period not to exceed forty years.

d. deferred until a subsequent year when a loss occurs and offset against that loss.

8. Average exchange rates are used to translate certain items from foreign financial statements into

U.S. dollars. Such averages are used in order to:

a. smooth out large translation gains and losses.

b. eliminate temporary fluctuation in exchange rates that may be reversed in the next fiscal period.

c. avoid using different exchange rates for some revenue and expense accounts.

d. approximate the exchange rate in effect when the items were recognized.

9. When the functional currency is identified as the U.S. dollar, land purchased by a foreign subsidiary

after the controlling interest was acquired by the parent company should be translated using the:

a. historical rate in effect when the land was purchased.

b. current rate in effect at the balance sheet date.

c. forward rate.

d. average exchange rate for the current period.

10. The appropriate exchange rate for translating a plant asset in the balance sheet of a foreign

subsidiary in which the functional currency is the U.S. dollar is the:

a. current exchange rate.

b. average exchange rate for the current year.

c. historical exchange rate in effect when the plant asset was acquired or the date of acquisition,

whichever is later.

d. forward rate.

11. The following balance sheet accounts of a foreign subsidiary at December 31, 2011, have been

translated into U.S. dollars as follows:

Translated at

Current Rates Historical Rates

Accounts receivable, current $ 600,000 $ 660,000

Accounts receivable, long-term 300,000 324,000

Inventories carried at market 180,000 198,000

Goodwill 190,000 220,000

$1,270,000 $1,402,000

What total should be included in the translated balance sheet at December 31, 2011, for the above

items? Assume the U.S. dollar is the functional currency.

a. $1,270,000

b. $1,288,000

c. $1,300,000

d. $1,354,000




Chapter 13 The Translation of Financial Statements of Foreign Affiliates 13-3

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 expense Sales to customers

a. Yes Yes

b. Yes No

c. No No

d. No Yes

13. A wholly owned subsidiary of a U.S. parent company has certain expense accounts for the year

ended December 31, 2011, stated in local currency units (LCU) as follows:

LCU

Depreciation of equipment (related assets

were purchased January 1, 2009) 375,000

Provision for doubtful accounts 250,000

Rent 625,000

The exchange rates at various dates are as follows:

Dollar equivalent

of 1 LCU

December 31, 2011 $0.50

Average for year ended December 31, 2011 0.55

January 1, 2009 0.40

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. $687,500

b. $625,000

c. $550,000

d. $500,000

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.





Edition

13-4

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:

a. of the country the parent is located.

b. of the country the subsidiary is located.

c. in which the subsidiary primarily generates and spends cash.

d. 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):

a. other comprehensive income item.

b. extraordinary item (net of tax).

c. part of continuing operations.

d. 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):

a. other comprehensive income item.

b. extraordinary item (net of tax).

c. part of continuing operations.

d. 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:

a. the current rate method only.

b. the temporal method only

c. both the current rate and temporal methods.

d. neither the current rate or the temporal method.

20. The objective of remeasurement is to:

a. produce the same results as if the books were maintained in the currency of the foreign

entity’s largest customer.

b. produce the same results as if the books were maintained solely in the local currency.

c. produce the same results as if the books were maintained solely in the functional currency.

d. None of the above.





Problems

13-1 Ramsey, Inc. owns a company that operates in France. Account balances in francs for the subsidiary

are shown below:

2011

January 1 December 31

Cash and Receivables 24,000 26,000

Supplies 1,000 500

Property, Plant, and Equipment 52,500 49,000

Accounts Payable (11,500) (5,500)

Long-term Notes Payable (19,000) (11,000)

Common Stock (30,000) (30,000)

Retained Earnings (17,000) (17,000)

Dividends-Declared & Paid on Dec 31 ---- 3,000

Revenues ---- (30,000)

Operating Expenses ---- 15,000

Totals -0- -0

Exchange rates for 2011 were as follows:

January 1 $0.22

Average for the year 0.19

December 31 0.18

Revenues were earned and operating expenses, except for depreciation and supplies used, were

incurred evenly throughout the year. No purchases of supplies or plant assets were made during the

year.

Required:

A. Prepare a schedule to compute the translation adjustment for the year, assuming the subsidiary's

functional currency is the franc.

B. Prepare a schedule to compute the translation gain or loss, assuming the subsidiary's functional

currency is the U.S. dollar.





Edition

13-6

13-2 Sloop Sails Corporation, a U.S. company, operates a 100%-owned British subsidiary, Sewart

Corporation. The U.S. dollar is the functional currency of the subsidiary. Financial statements for

the subsidiary for the fiscal year-end December 31, 2011, are as follows:

Sewart Corporation

Income Statement

Pounds

Sales 650,000

Cost of Goods Sold

Beginning Inventory 310,000

Purchases 265,000

Goods Available For Sale 575,000

Less: Ending Inventory 285,000

Cost of Goods Sold 290,000

Depreciation 79,000

Selling and Admin. Expenses 155,000

Income Taxes 32,000 556,000

Net Income 94,000

Sewart Corporation

Partial Balance Sheet

Current Assets Current Liabilities

Cash 155,000 Notes Payable 78,000

Accts. Rec. 171,000 Accts. Payable 165,000

Inventories 285,000 Other Current Liab. 51,000

611,000 294,000

Long-term Liab. 250,000

(issued July 1, 2009)

Other Information:

1. Equipment costing 340,000 pounds was acquired July 1, 2009, and 38,000 was acquired June

30, 2011. Depreciation for the period was as follows:

Equipment – 2009 acquisitions 66,000

– 2011 acquisitions 6,000

2. The beginning inventory was acquired when the exchange rate was $1.77. The inventory is

valued on a FIFO basis. Purchases and the ending inventory were acquired evenly throughout

the period.

3. Dividends were paid by the subsidiary on June 30 amounting to 156,000 pounds.

4. Sales were made and all expenses were incurred uniformly throughout the year.

5. Exchange rates for the pound on various dates were:

July 1, 2009 $1.79

Jan. 1, 2011 1.75

June 30, 2011 1.74

Dec. 31, 2011 1.71

Average for 2011 1.73





13-2 (Continued)

Required:

A. Prepare a schedule to determine the translation gain or loss for 2010, assuming the net monetary

liability position on January 1, 2011, was 180,000 pounds.

B. Compute the dollar amount that each of the following would be reported at in the 2011 financial

statements:

1. Cost of Goods Sold.

2. Depreciation Expense.

3. Equipment.

13-3 Accounts are listed below for a foreign subsidiary that maintains its books in its local currency. The

equity interest in the subsidiary was acquired in a purchase transaction. In the space provided,

indicate the exchange rate that would be used to translate the accounts into dollars assuming the

functional currency was identified (a) as the U.S. dollar and (b) as the foreign entity's local currency.

Use the following letters to identify the exchange rate:

H – Historical exchange rate

C – Current exchange rate

A – Average exchange rate for the current period

Exchange rate if the

functional currency is:

Account U.S. Dollar Local currency

1. Bonds Payable (issued 01/01/08) ___________ ______________

2. Office Supplies ___________ ______________

3. Dividends Declared ___________ ______________

4. Common Stock ___________ ______________

5. Additional Paid-In Capital ___________ ______________

6. Inventory Carried at Cost ___________ ______________

7. Short-term Notes Payable ___________ ______________

8. Accumulated Depreciation ___________ ______________

9. Cash ___________ ______________

10. Marketable Securities (carried

at market) ___________ ______________

11. Cost of Goods Sold ___________ ______________

12. Sales ___________ ______________

13. Accounts Receivable ___________ ______________

14. Depreciation Expense ___________ ______________

15. Income Tax Expense ___________ ______________





Edition

13-8

Use the following information to answer Problems 13-4 and 13-5.

On January 2, 2011, Promo Inc., a U.S. parent company, purchased a 100% interest in Spot

Company, a subdivision located in Switzerland. The purchase method of accounting was used to

account for the acquisition. The 2011 financial statements for Spot Company, the subsidiary, in

Swiss francs were as follows:

Comparative Balance Sheets

Jan. 2 Dec. 31

Cash 15,000 33,000

Accounts receivable 45,000 49,500

Plant and equipment (net) (purchased 6/30/08) 75,000 67,500

Land (purchased 6/30/08) 45,000 45,000

Total 180,000 195,000

Accounts payable 13,500 18,000

Long-term notes payable (issued 6/30/08) 31,500 27,000

Common stock (issued 6/30/08) 90,000 90,000

Retained earnings 45,000 60,000

Total 180,000 195,000

Income Statement

Revenues 180,000

Operating expenses including depreciation

of 7,500 francs 135,000

Net income 45,000

Beginning retained earnings 45,000

90,000

Dividends declared and paid 30,000

Ending retained earnings 60,000

Sales were earned and operating expenses were incurred evenly during the year.

Exchange rates for the franc at various dates are:

January 2, 2011 0.8600

December 31, 2011 0.8830


December 10, 2011, dividend payment date 0.8810

June 30, 2008 0.8316

13-4 Use the above information to answer the following question:

Required:

Translate the year-end financial statements of Spot Company, the foreign subsidiary, using the temporal

method. Round numbers to the nearest dollar.

13-5 Use the above information to answer the following question:

Required:

Prepare a schedule to compute the translation gain or loss for Spot Company, assuming the temporal method

of translation. Round numbers to the nearest dollar.





13-6 Bass Corporation, a U.S. Company, formed a subsidiary with a new company in London on January

1, 2011, by investing 500,000 British pounds in exchange for all of the subsidiary’s common stock.

The subsidiary purchased land for 100,000 pounds and a building for 300,000 pounds on July 1,

2011. The building is being depreciated over a 40-year life by the straight-line method. The

inventory is valued on an average cost basis. The British pound is the subsidiary’s functional

currency and its reporting currency and has not experienced any abnormal inflation. Exchange rates

for the pound on various dates were:

January 1, 2011 1 pound = 1.81

July 1, 2011 1 pound = 1.86

December 31, 2011 1 pound = 1.83

2011 average rate 1 pound = 1.82

The subsidiary’s adjusted trial balance is presented below for the year ended December 31, 2011.

Debits In Pounds

Cash 200,000

Accounts receivable 60,000

Inventory 80,000

Land 100,000

Building 300,000

Depreciation expense 3,750

Cost of goods sold 213,750

Other expenses 90,000

Total debits 1,047,500

Credits

Accumulated depreciation 3,750

Accounts payable 84,000

Accrued liabilities 16,750

Common stock 500,000

Retained earnings - 0 -

Sales revenue 443,000

Total credits 1,047,500

Required: Prepare the subsidiary’s:

A. Translated workpapers (round to the nearest dollar)

B. Translated income statement

C. Translated balance sheet

13-7 Using the information provided in Problem 13-6, use the temporal method instead of the current rate

method.

Required: Prepare the subsidiary’s:

A. Translated workpapers (round to the nearest dollar)

B. Translated income statement

C. Translated balance sheet





Edition

13-10

13-8

On January 1, 2011, Roswell Systems, a U.S.-based company, purchased a controlling interest in Swiss

Management Consultants located in Zurich, Switzerland. The acquisition was treated as a purchase

transaction. The 2011 financial statements stated in Swiss francs are given below.

SWISS MANAGEMENT CONSULTANTS

Comparative Balance Sheets

January 1 and December 31, 2011

Jan. 1 Dec. 31

Cash and Receivables 30,000 84,000

Net Property, Plant, and Equipment 60,000 56,000

Totals 90,000 140,000

Accounts and Notes Payable 45,000 50,000

Common Stock 30,000 30,000

Retained Earnings 15,000 60,000

Totals 90,000 140,000

SWISS MANAGEMENT CONSULTANTS

Consolidated Income and Retained Earnings Statement

For the Year Ended December 31, 2011

Revenues 112,000

Operating Expenses including depreciation of 5,000 francs 45,000

Net income 67,000

Dividends Declared and Paid 22,000

Increase in Retained Earnings 45,000

Direct exchange rates for Swiss franc are:

U.S. Dollars per Franc

January 1, 2011 $0.9987

December 31, 2011 0.9321


Dividend declaration and payment date 0.9810

Required:

A. Translate the year-end balance sheet and income statement of the foreign subsidiary using the current

rate method of translation.

B. Prepare a schedule to verify the translation adjustment.

Short Answer

1. To accomplish the objectives of translation, two translation methods are used depending on the

functional currency of the foreign entity. Describe the two translation methods.

2. The translation process can be done using either the current rate method or the temporal method.

Explain under what circumstances each of the methods is appropriate.





Short Answer Questions from the Textbook

1. What requirements must be satisfied if a foreign subsidiary is to be consolidated?

2. What is meant by an entity’s functional currency and what are the economic indicators identified by

the FASB to provide guidance in selecting the functional currency?

3. The __________is the functional currency of a foreign subsidiary with operations that are relatively

self-contained and integrated within the country in which it is located. In such cases, the__________

method of translation would be used to translate the accounts into dollars.

4. The __________is the functional currency of a foreign subsidiary that is a direct and integral

component or extension of a U.S. parent company. In such cases, the __________method of

translation is used to translate (remeasure) the accounts into dollars.

5. Which method of translation is used to convert the financial statements when a foreign subsidiary

operates in a highly inflationary economy?

6. Define remeasurement.

7. Under the current rate method, how are assets and liabilities that are stated in a foreign currency

translated?

8. Under the current rate method, describe how the various balance sheet accounts are translated

(including the equity accounts) and how this translation affects the computation of various ratios

(such as debt to equity or the current ratio). In particular, discuss whether or not the ratios will

change when computed in local currencies and compared to their calculations (after translation)

using the parent’s currency.

9. What is the objective of the temporal method of translation?

10. Assuming that the temporal method is used, how are revenue and expense items in foreign currency

financial statements converted?

11. A translation adjustment results from the process of translating financial statements of a foreign

subsidiary from its functional currency into dollars. Where is the translation adjustment reported in

the financial statements if the current rate method is used to translate the accounts?

Business Ethics Question from the Textbook

The Shady Tree Company is preparing to announce their quarterly earnings numbers. The company

expectsto beat the analysts’ forecast of earnings by at least5cents a share. In anticipation of the increase

instockvalue and before the release of the earnings numbers, the company issued stock options to the top

executives in the firm, with the option price equal to today’s market price.

1. This type of executive stock option is often re-ferred to as “spring-loading.” Do you think this

practice should be allowed? Does it provide in-formation about the integrity of the firm or is this

just good business practice?

2. Do you think this practice violates the insider trading rules?





Edition

13-12

ANSWER KEY

Multiple Choice

1. d

2. c

3. c

4. d

5. c

6. b

7. a

8. d

9. a

10. c

11. c

12. a

13. a

14. b

15. b

16. c

17. c

18. a

19. b

20. c

Problems

13-1 A. Translation

Francs Rate $

Exposed net asset position – 1/1 47,000 0.22 10,340

Adjustment for changes in net

asset position during the year

Add: Revenues 30,000 0.19 5,700

Less: Operating expenses (15,000) 0.19 (2,850)

Dividends (3,000) 0.18 (540)

Net asset position translated using ------- ------

rate in effect at date of transactions 12,650


Translation adjustment – loss 2,030

B. Translation

Francs Rate $

Exposed net monetary liability position – 1/1 (6,500) 0.22 (1,430)

Adjustments for changes in net

monetary position during the year

Add: increase in cash and

receivables – revenues 30,000 0.19 5,700

Less: decrease in monetary assets

or increase in monetary liabilities

Operating expenses (11,000) 0.19 (2,090)

Dividends paid (3,000) 0.18 (540)

Net monetary asset position

translated using rate in effect

at date of transactions 1,640

Exposed net monetary asset position – 12/31 9,500 0.18 1,710

Translation loss 70





13-2 A.

Beginning Net Monetary Liab. Pos. (180,000) × $1.75 = $(315,000)

+Sales 650,000 × 1.73 = 1,124,500

- Purchases (265,000) × 1.73 = (458,450)

- Selling & Admin. Expenses (155,000) × 1.73 = (268,150)

- Income Taxes (32,000) × 1.73 = (55,360)

- Equipment Purchased (38,000) × 1.74 = (66,120)

- Dividends Paid (156,000) × 1.74 = (271,440)

Net Monetary Liab. Pos. Trans. $(310,020)

- Ending Net Monetary Liab. Pos. (176,000) × 1.71 = (300,960)

Translation Gain $ 9,060

B.

1. Beginning Inventory 310,000 × $1.77 = $548,700

Purchases 265,000 × 1.73 = 458,450

Goods Available 575,000 1,007,150

Ending Inventory 285,000 × 1.73 = 493,050

Cost of Goods Sold 290,000 $514,100

2. Depr. on 2009 equipment: 66,000 × $1.79 = $118,140

Depr. on 2011 equipment: 6,000 × 1.74 = 10,440

2011 Depreciation Expense $128,580

3. 2009 equipment: 340,000 × $1.79 = $608,600

2011 equipment: 38,000 × 1.74 = 66,120

$674,720

13-3 U.S. Local

Dollar Currency

1. C C

2. H C

3. H H

4. H H

5. H H

6. H C

7. C C

8. H C

9. C C

10. C C

11. H A

12. A A

13. C C

14. H A

15. A A





Edition

13-14

13-4 Temporal method

Translation U.S.

Francs Rate $

Balance Sheet

Cash 33,000 0.8830 29,139

Accounts Receivable 49,500 0.8830 43,709

Plant and Equipment (net) 67,500 0.8600 58,050

Land 45,000 0.8600 38,700

Total 195,000 169,598

Accounts Payable 18,000 0.8830 15,894

Notes Payable 27,000 0.8830 23,841

Common Stock 90,000 0.8600 77,400

Retained Earnings 60,000 Bal. Amt. 52,463

Total 195,000 169,598

Income Statement

Revenues 180,000 0.8715 156,870

Operating Expenses (127,500) 0.8715 (111,116)

Depreciation Expense (7,500) 0.8600 (6,450)

Translation Gain (loss) 889

Net Income 45,000 40,193

Retained Earnings – 1/1 45,000 0.8600 38,700

90,000 78,893

Dividends Declared (30,000) 0.8810 (26,430)

Retained Earnings – 12/31 60,000 52,463

13-5 Translation U.S.

Francs Rate $

Exposed net monetary asset position –

1/1 (60,000 - 45,000) 15,000 0.8600 12,900

Add: Increases in net monetary assets –

Revenues 180,000 0.8715 156,870

Less: Decreases in net monetary assets –

Operating expenses (127,500) 0.8715 (111,116)

Dividends (30,000) 0.8810 (26,430)

Net monetary position translated using

the rate in effect at date of transaction 32,224

Exposed net monetary asset position –

12/31 37,500 0.8830 33,113

Translation gain (loss) 889





13-6

A.

Subsidiary Corporation

Translated Workpapers

Debits

Cash 200,000 × 1.83 =$366,000

Accounts receivable 60,000 × 1.83 = 109,800

Inventory 80,000 × 1.83 = 146,400

Land 100,000 × 1.83 = 183,000

Building 300,000 × 1.83 = 549,000

Depreciation expense 3,750 × 1.82 = 6,825

Cost of goods sold 213,750 × 1.82 = 389,025

Other expenses 90,000 × 1.82 = 163,800

Total debits $1,913,850

Credits

Accumulated depreciation 3,750 × 1.83 = $ 6,863

Accounts payable 84,000 × 1.83 = 153,720

Accrued liabilities 16,750 × 1.83 = 30,653

Common stock 500,000 × 1.81 = 905,000


Sales revenue 443,000 × 1.82 = 806,260

Total credits 1,902,496

Cumulative Translation Adjustment-Credit balance 11,354

$1,913,850

B.


Translated Income Statement


Sales revenue $806,260

Expenses:

Cost of goods sold (389,025)

Depreciation expense (6,825)

Other expenses (163,800)

Net income $246,610

Beginning retained earnings, Jan. 1, 2011 - 0 -

Ending retained earnings, Dec. 31, 2011 $ 246,610





Edition

13-16

C.


Translated Balance Sheet

December 31, 2011

Assets:

Cash $366,000


Inventory 146,400

Land 183,000

Building-net 542,137

Total Assets $1,347,337

Equities:

Accounts payable $153,720



Retained earnings 246,610

Other comprehensive income-translation adj. 11,354

Total liabilities and equity $1,347,337

13-7

A.


Translated Workpapers

Debits

Cash 200,000 × 1.83 = $366,000

Accounts receivable 60,000 × 1.83 = 109,800

Inventory (average cost method) 80,000 × 1.82 = 145,600

Land 100,000 × 1.86 = 186,000

Building 300,000 × 1.86 = 558,000

Depreciation expense 3,750 × 1.86 = 6,975

Cost of goods sold 213,750 × 1.82 = 389,025

Other expenses 90,000 × 1.82 = 163,800

Total debits $1,925,200

Credits

Accumulated depreciation 3,750 × 1.86 = $ 6,975

Accounts payable 84,000 × 1.83 = 153,720

Accrued liabilities 16,750 × 1.83 = 30,653

Common stock 500,000 × 1.81 = 905,000


Sales revenue 443,000 × 1.82 = 806,260

Total credits $1,902,608

Cumulative translation

remeasurement gain-credit balance 22,592

$1,925,200





B.


Translated Income Statement


Sales revenue $806,260

Expenses:

Cost of goods sold (389,025)

Depreciation expense (6,975)

Other expenses (163,800)

Translation remeasurement gain 22,592

Net income 269,052

Beginning retained earnings, Jan. 1, 2011 - 0 - .

Ending retained earnings, Dec. 31, 2011 $ 269,052

C.


Translated Balance Sheet

December 31, 2011

Assets:

Cash $366,000


Inventory 145,600

Land 186,000

Building-net 551,025

Total Assets $1,358,425

Equities:

Accounts payable 153,720



Retained earnings 269,052

Total liabilities and equity $1,358,425





Edition

13-18

13-8

Part A Swiss Translation

Francs Rate $

Consolidated Income and Retained Earnings Statement

Revenues 112,000 $0.9654 108,125

Operating Expenses (45,000) 0.9654 43,443

Net Income 67,000 64,682

Retained Earnings – 1/1 15,000 0.9987 14,981

82,000 79,663

Dividends (22,000) 0.9810 (21,582)

Retained Earnings – 12/31 60,000 58,081

Balance Sheet

Cash and Receivables 84,000 0.9321 78,296

Net Property, Plant and Equipment 56,000 0.9321 52,198

Total 140,000 130,494

Accounts and Notes Payable 50,000 0.9321 46,605

Common Stock 30,000 0.9987 29,961

Retained Earnings 60,000 58,081

140,000 134,647

Cumulative Translation Adjustment (debit) --- Balancing amt. (4,153)

Total 140,000 130,494

Part B Swiss Translation

Francs Rate $

Exposed net asset position – 1/1 45,000 $0.9987 44,942

Adjustment for changes in the net asset position during the year:

Net income 67,000 0.9654 64,682

Dividends (22,000) 0.9810 (21,582)

Net asset position translated using rate in effect at date of

transactions ---- 88,042


Cumulative translation adjustment (debit) 4,153

Short Answer

1. Under the current rate method, all assets and liabilities are translated using the current exchange rate

on the balance sheet date. Revenue and expense transactions are translated at the exchange rate

existing on the date each underlying transaction occurred.

Under the temporal method, monetary assets and liabilities are translated at the current exchange rate.

Assets and liabilities carried at historical cost are translated at historical exchange rates while those

carried at current values are translated at the current exchange rate. Revenues and expenses except

those related to assets and liabilities translated at historical rates, are translated at exchange rates in

effect on the dates the underlying transaction occurred.





2. The current rate method is appropriate when the functional currency is the local currency. The

temporal method is appropriate when the functional currency is the U.S. dollar or when the foreign

environment is highly inflationary. If the functional currency is the currency of a third country, the

accounts are first remeasured into the functional currency using the temporal method and then

translated into U.S. dollars using the current rate method.

Short Answer Questions in Textbook Solutions

1. (1) The parent company must control more than 50 percent of the voting stock of the subsidiary.

(2) The intent of control should be permanent.

(3) The control should rest with the majority owners.

2. The functional currency of an entity is the currency of the primary economic environment in which the

entity operates. The FASB provided the following six economic indicators:

a. The impact on the parent’s cash flow;

b. The short-term responsiveness of the sales price to changes in the exchange rate;

c. The sales market for the firm’s products;

d. The currency in which labor, materials, and other factor inputs are primarily obtained;

e. The currency in which debt is denominated and the ability of the foreign entity’s operations to

generate amounts of that currency sufficient to service the debt;

f. The volume of transactions between the foreign entity and its parent.

3. Local currency, current rate

4. U.S. dollar, temporal

5. The temporal method is used when a foreign subsidiary operates in a highly inflationary economy.

6. Remeasurement is the process of translating the accounts of a foreign entity into its functional currency

when they are stated in another currency.

7. All assets and liabilities are translated using the current rate at the balance sheet date when the current

rate method of translation is used.

8. Assets and liabilities are translated at the rate in effect at the balance sheet date. Common stock is

translated at the historical rate when the stock was issued. Retained earnings consists of various period’s

net income (translated at the yearly average rates) less dividends converted at the historical rates on the

declaration dates. The cumulative translation adjustment is a balancing amount in equity, which results

in total equity (including the cumulative adjustment) being driven back to the rate in effect at the

balance sheet date. Thus, the ratios will not change from their calculations using the local currency.

9. Application of the temporal method produces translated amounts that reflect transactions as if they had

been measured in dollars originally rather than in the local currency.

10. Revenues and expenses are translated using the exchange rate in effect when they were recognized

during the period except for expenses associated with nonmonetary items which are translated using

historical rates. Because it is impractical to translate numerous transactions, the use of an appropriate

average is permitted.





Edition

13-20

11. The translation adjustment is reported as a separate component of stockholders’ equity when the current

rate method is used to translate the accounts.

Business Ethics Solutions

Business ethics solutions are merely suggestions of points to address. The objective is to raise the students'

awareness of the topics, and to invite discussion. In most cases, there is clear room for disagreement or

conflicting viewpoints.

1. Spring-loading is a contentious issue, and the following points are among those that may be

considered in a discussion or debate of whether it should be allowed or not:

Though granting options is intended to motivate and incentivize the employees to generate more

profits, granting an award that is already known (or strongly suspected) before-the-fact to be in the

money very soon seems counter to this intent.

Companies engaged in spring-loading mislead investors by not disclosing that options are awarded

with foreknowledge of the impending good news.

Spring-loading is legal as long as the compensation committee awarding the options knows the same

information as the recipient, and the company informs shareholders that it does not withhold

granting options when undisclosed, positive company information is pending.

Companies suspected of spring-loading cannot be said to have advantage of prior market reactions

that have not actually taken place, and executives can argue, truthfully, that there is no way to know

for certain how the market will react to impending news.

Option manipulation is generally more likely to occur in circumstances in which the company executives

like CEOs have greater influence on the company’s pay-setting and governance processes, which suggests a

lack of board oversight.

2. Spring-loaded grants might violate insider-trading rules, particularly if managers with

knowledge of the information gives options to themselves, or if executives conceal good news

from directors while urging them to grant options.

Also, see the following links: http://www.cfo.com/article.cfm/7880157/1/c_2984338

http://blog.issproxy.com/files/OptionsBackdating7806.pdf

http://www.aflcio.org/corporatewatch/paywatch/stockoptions.cfm



http://www.cfo.com/article.cfm/7880157/1/c_2984338

http://blog.issproxy.com/files/OptionsBackdating7806.pdf

http://www.aflcio.org/corporatewatch/paywatch/stockoptions.cfm


Ch13_Test Bank Jeter Advanced Accounting 3rd Edition

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Transcript of Ch13_Test Bank Jeter Advanced Accounting 3rd Edition