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Multiple
Choice Questions
1. In
accounting, the term translation refers to
A) the
calculation of gains or losses from hedging transactions.
B) the
calculation of exchange rate gains or losses on individual transactions in
foreign currencies.
C) the
procedure required to identify a company’s functional currency.
D) the
calculation of gains or losses from all transactions for the year.
E) a
procedure to prepare a foreign subsidiary’s financial statements for
consolidation.
2. What
is a company’s functional currency?
A) the
currency of the primary economic environment in which it operates
B) the
currency of the country where it has its headquarters
C) the
currency in which it prepares its financial statements
D) the
reporting currency of its parent for a subsidiary
E) the
currency it chooses to designate as such
3. According
to SFAS 52, which method is usually required for translating a foreign
subsidiary’s financial statements into the parent’s reporting currency?
A) the
temporal method
B) the
current rate method
C) the
current/noncurrent method
D) the
monetary/nonmonetary method
E) the
noncurrent rate method
4. In
translating a foreign subsidiary’s financial statements, which exchange rate
does the current method require being used for the subsidiary’s assets and
liabilities?
A) the
exchange rate in effect when each asset or liability was acquired
B) the
average exchange rate for the current year
C) a
calculated exchange rate based on market value
D) the
exchange rate in effect as of the balance sheet date
E) the
exchange rate in effect at the start of the current year
5. The
translation adjustment from translating a foreign subsidiary’s financial
statements should be shown as
A) an
asset or liability (depending on the balance) on the consolidated balance
sheet.
B) a
revenue or expense (depending on the balance) on the consolidated income
statement.
C) a
component of stockholders’ equity on the consolidated balance sheet.
D) a
component of cash flows from financing activities on the consolidated statement
of cash flows.
E) an
element of the notes which accompany the consolidated financial statements.
Use
the following to answer questions 6-7:
Westmore,
Ltd. is a British subsidiary of a U.S. company.
Westmore’s functional currency is the pound sterling. The following exchange rates were in effect
during 2004:
Jan. 1
$1 = £.625
June 30
$1 = £.610
Dec. 31
$1 = £.620
Weighted
average rate for the year
$1 = £.630
6. Westmore
reported sales of £1,500,000 during 2004.
What amount would have been included for this subsidiary in calculating consolidated
sales?
A) $2,380,952
B) $2,400,000
C) $2,429,150
D) $2,419,355
E) $2,425,876
7. On
December 31, Westmore had accounts receivable of £280,000. What amount would have been included for this
subsidiary in calculating consolidated accounts receivable?
A) $444,444
B) $451,613
C) $142,600
D) $176,400
E) $452,830
8. Gunther
Co. established a subsidiary in Mexico on January 1, 2004. The subsidiary engaged in the following
transactions during 2004:
Jan. 1
Sold common
stock to Gunther for 5,000,000 pesos.
Purchased inventory throughout the year, 8,000,000 pesos (¼ remained
at year-end).
Sales
throughout the year totaled 12,000,000 pesos.
31
Purchased
equipment for 1,000,000 pesos.
Gunther
concluded that the subsidiaryâs functional currency was the
dollar. Exchange rates for 2004 were:
Jan. 1
1 peso = $.20
31
1 peso = $.19
Dec. 31
1 peso = $.16
Weighted
average rate for the year
1 peso = $.18
What amount of foreign
exchange gain or loss would have been recognized on Gunther’s consolidated
income statement for 2004?
A) $200,400
loss
B) $ 90,000 loss
C) $226,000
loss
D) $235,600
loss
E) $250,000
loss
Use
the following to answer questions 9-10:
Darron
Co. was formed on January 1, 2004 as a wholly owned foreign subsidiary of a
U.S. corporation. Darron’s functional
currency was the stickle (§). The
following transactions and events occurred during 2004:
Jan. 1
Darron issued
common stock for §1,000,000.
June 30
Darron paid
dividends of §20,000.
Dec. 31
Darron reported
net income of §80,000 for the year.
Exchange rates
for 2004 were:
Jan. 1
$1 = §.48
June 30
$1 = §.46
Dec. 31
$1 = §.42
Weighted
average rate for the year
$1 = §.44
9. What
exchange rate should have been used in translating Darron’s revenues and
expenses for 2004?
A) $1
= §.48
B) $1
= §.44
C) $1
= §.46
D) $1
= §.42
E) $1
= §.45
10. What
was the amount of the translation adjustment for 2004?
A) $293,479
increase in relative value of net assets
B) $302,137
increase in relative value of net assets
C) $300,160
increase in relative value of net assets
D) $187,418
increase in relative value of net assets
E) $270,800
increase in relative value of net assets
11. Which
of the following translation methods was originally mandated by SFAS No. 8?
A) Current/Noncurrent
Method
B) Monetary/Nonmonetary
Method
C) Current
Rate Method
D) Temporal
Method
E) Indirect
Method
12. Which
accounts are remeasured using current exchange rates?
A) all
revenues and expenses
B) all
assets and liabilities
C) all
monetary assets and liabilities
D) all
current assets and liabilities
E) all
noncurrent assets and liabilities
13. For
a foreign subsidiary that uses the US dollar as its functional currency, what
translation method is required?
A) Current/Noncurrent
Method
B) Monetary/Nonmonetary
Method
C) Current
Rate Method
D) Temporal
Method
E) Indirect
Method
Use
the following to answer questions 14-15:
Dilty Corp. owned a subsidiary in France. Dilty concluded that the subsidiary’s functional
currency was the U.S. dollar.
14. Which
one of the following statements would justify this conclusion?
A) Most
of the subsidiary’s sales and purchases were with companies in the U.S.
B) Dilty’s
functional currency is the dollar and Dilty is the parent.
C) Dilty’s
other subsidiaries all had the dollar as their functional currency.
D) Generally
accepted accounting principles require that the subsidiary’s functional
currency must be the dollar if consolidated financial statements are to be
prepared.
E) Dilty
is located in the U.S.
15. What
must Dilty do to ready the subsidiary’s financial statements for consolidation?
A) first
translate them, then remeasure them
B) first
remeasure them, then translate them
C) state
all of the subsidiary’s accounts in U.S. dollars using the exchange rate in
effect at the balance sheet date
D) translate
them
E) remeasure
them
