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Exam 11: Translation of Foreign Financial Statements

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Question 1

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The translation (remeasurement) adjustment reported in a translation when the functional currency is not the foreign currency is included

A) as a separate component of other comprehensive income
B) in the current liability section of the balance sheet as deferred revenue
C) in the calculation of net income
D) none of the above

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C

Question 2

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Complete the following table:

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A U.S. firm purchased 100% of a foreign firm on January 1, 20X1, when the foreign firm had the following equity accounts: $\begin{array}{lrl}\text { Common stock } & 150,000 & \mathrm{FC} \\\text { Paid-in excess of par value } & 50,000& \mathrm{FC} \\\text { Retained earnings } & 200,000 & \mathrm{FC} \\& \underline{400,000} & \mathrm{FC}\end{array}$ The U.S. firm paid 420,000 FCs for the foreign firm. The payment in excess of book value is traceable to undervalued land owned by the foreign firm. The foreign firm had a net income of 25,000 FCs during 20X1. Assume that the following exchange rates are relevant: Required: Prepare all the journal entries to record and update the investment account of the U.S. firm and the necessary eliminating and adjusting entries for the 20X1 consolidated statement. Assume that the U.S. firm used the simple equity method.

Abercrombe Co., a U.S. firm, formed a German company in 20X4 by purchasing the common stock of the newly formed Dolce Inc. The functional currency of Dolce is the euro. During their first three years, Dolce experienced the following activity in retained earnings: The following exchange rates could be relevant: Required: What is the translated December 31, 20X6, balance of the retained earnings for Dolce?

In most cases, which of the following is NOT a component of translated retained earnings?

Consider the consolidation process for a foreign subsidiary: When the excess of cost over book value is attributable to identifiable assets, those assets are adjusted in the "distribution" elimination entry by an amount that is calculated as

In which of the following circumstances surrounding a Mexican subsidiary of an U.S. parent is the peso most likely to be considered the functional currency?

List the two primary objectives of translating foreign financial statements according to the FASB #52, which emphasizes the concept of the functional currency.

The reconciliation of the annual translation adjustment usually includes all of the following, EXCEPT

Which of the following suggests that the foreign entity's functional currency is the parent's currency?

If the functional currency is determined to not be the foreign entity's local currency, translation is done using

Exchange gains and losses resulting from translating (not remeasuring) foreign currency financial statements into U.S. dollars should be included as a(an)

In the functional or current method of translation from functional currency to reporting currency, what are the steps required and rates to be used.

Scenario 11-1 Rhante is a German company wholly owned by a U.S. firm. Its inventory is valued at the lower of cost or market, with cost being measured by the average cost method. Purchases of inventory occur evenly throughout the period. In 2005 Rhante's ending inventory was 50,000 euros at cost and 48,000 euros at market. Assume the following exchange rates: -Refer to Scenario 11-1. Determine the translated value of Rhante's inventory to be included in the consolidated balance sheet for the U.S. parent given Rhante's functional currency is the euro.

When the functional currency is the foreign entity's currency:

Kerry Manufacturing Company is a German subsidiary of a U.S. company. Kerry records its operations and prepares financial statements in euros. However, its functional currency is the British pound. Kerry was organized and acquired by the U.S. company on June 1, 20X4. The cumulative translation adjustment as of December 31, 20X6, was $79,860. The value of the subsidiary's retained earnings expressed in British pounds and U.S. dollars as of December 31, 20X7, was 365,000 pounds and $618,000, respectively. On March 1, 20X7, Kerry declared a dividend of 120,000 euros. The trial balance of Kerry in euros as of December 31, 20X7, is as follows: The marketable securities were acquired on November 1, 20X6, and the prepaid insurance was acquired on December 1, 20X7. The cost of goods sold and the ending inventory are calculated by the weighted-average method. The underlying costs have been incurred uniformly throughout the year. On June 1, 20X4, 60% of the depreciable assets existed, and the balance was acquired on March 1, 20X6. The depreciable assets are amortized over a 10-year period by the straight-line method. Of the total depreciation expense, 80% is traceable to the cost of goods sold and the balance is in general expenses. On November 1, 20X6, Kerry received a customer prepayment valued at 3,000,000 euros. On February 1, 20X7, 2,040,000 euros of the prepayment was earned. The balance remains unearned as of December 31, 20X7. Relevant exchange rates are as follows: $\begin{array}{rr}&\text { Pounds/Euro } & \$ / \text { Pound } \\\text { June } 1,20 \mathrm{X} 4 & 0.310 & \$ 1.600 \\\text { March } 1,20 \mathrm{X} 6 & 0.300 & \$ 1.640 \\\text { November } 1,20 \mathrm{X} 6 & 0.305 & \$ 1.650 \\\text { December } 31,20 \mathrm{X} 6 & 0.310 & \$ 1.680 \\\text { February } 1,20 \mathrm{X} 7 & 0.302 & \$ 1.670 \\\text { March } 1,20 \mathrm{X} 7 & 0.300 & \$ 1.660 \\\text { December } 1,20 \mathrm{X} 7 & 0.290 & \$ 1.640 \\\text { December } 31,20 \mathrm{X} 7 & 0.288 & \$ 1.640 \\\text { 20X7 average } & 0.297 & \$ 1.660\end{array}$ Required: Prepare a remeasured and translated trial balance of the Kerry Manufacturing Company as of December 31, 20X7. Provide supporting schedules.

Renta USA, Inc. formed a foreign subsidiary on January 1, 20X3; the subsidiary issued 15,000 of its no-par 10FC stock to Renta. The subsidiary's books are kept in their functional currency. Income earned in 20X3 and 20X4 totaled 100,000 FC and 120,000 FC, respectively. Dividends of 40,000 FC have been paid on December 31 of each year. In addition, 1,000 shares of common stock (no par) were issued on July 1, 20X4 for 20 FC each. Exchange rates relating this foreign currency to U.S. dollars are as follows: Required: Calculate the owners' equity of the subsidiary on December 31, 20X4.

On January 1, 20X8, Cayane Inc. purchased 90% of an German firm, Brosch Manufacturing when Brosch's equity consisted of the following: Cayane paid 810,000 euros for its 90% interest in Brosch. The excess over book value was attributed to a building with a 20-year useful life. Brosch reported net income for 20X8 of 150,000 euros. The year-end cumulative translation adjustment is $10,000 credit. Relevant exchange rates are as follows: Required: Prepare all the journal entries related to Cayane's investment in Brosch and all the necessary eliminating and adjusting entries for consolidation of Brosch, assuming the use of the simple equity method.

Discuss the factors that may be considered in determining if a Mexican subsidiary of a U.S. firm has the peso or the dollar as its functional currency. The subsidiary only manufactures component parts that are shipped to the U.S. firm's final production plant in Detroit.

The functional currency approach adopted by FASB 52 requires: