Chapter 10 Exam 3
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1. In accounting, the term translation refers to
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A) The calculation of gains or losses from hedging transactions.
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B) The calculation of exchange rate gains or losses on individual transactions in foreign currencies.
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C) The procedure required to identify a company's functional currency.
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D) The calculation of gains or losses from all transactions for the year.
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E) A procedure to prepare a foreign subsidiary's financial statements for consolidation.
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Chapter 10 Exam 3 assesses knowledge on the translation of foreign subsidiary financial statements, functional currencies, and the application of the current rate method under U. S. GAAP. It is crucial for understanding international accounting practices.
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- 2.
2. What is a company's functional currency?
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A) The currency of the primary economic environment in which it operates.
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B) The currency of the country where it has its headquarters.
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C) The currency in which it prepares its financial statements.
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D) The reporting currency of its parent for a subsidiary.
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E) The currency it chooses to designate as such.
Correct Answer
A. A) The currency of the primary economic environment in which it operates.Explanation
A company's functional currency refers to the currency of the primary economic environment in which it operates. This means that the functional currency is the currency that is most relevant and widely used in the company's day-to-day operations and transactions. It is the currency that the company primarily uses to generate and spend its revenue, and it is also the currency in which the company's financial performance is evaluated. The functional currency may not necessarily be the same as the currency of the country where the company has its headquarters or the currency in which it prepares its financial statements.Rate this question:
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- 3.
3. According to U.S. GAAP, when the local currency is the functional currency, which method is usually required for translating a foreign subsidiary's financial statements into the parent's reporting currency?
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A) The temporal method.
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B) The current rate method.
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C) The current/noncurrent method.
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D) The monetary/nonmonetary method.
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E) The noncurrent rate method.
Correct Answer
A. B) The current rate method.Explanation
According to U.S. GAAP, when the local currency is the functional currency, the current rate method is usually required for translating a foreign subsidiary's financial statements into the parent's reporting currency. This method uses the current exchange rate to translate all assets and liabilities at the current rate, while using historical rates for the income statement items. This method is used to reflect the current economic conditions and exchange rates accurately.Rate this question:
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- 4.
4. In translating a foreign subsidiary's financial statements, which exchange rate does the current method require for the subsidiary's assets and liabilities?
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A) The exchange rate in effect when each asset or liability was acquired.
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B) The average exchange rate for the current year.
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C) A calculated exchange rate based on market value.
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D) The exchange rate in effect as of the balance sheet date.
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E) The exchange rate in effect at the start of the current year.
Correct Answer
A. D) The exchange rate in effect as of the balance sheet date.Explanation
The current method of translating a foreign subsidiary's financial statements requires the exchange rate in effect as of the balance sheet date for the subsidiary's assets and liabilities. This is because the current method aims to reflect the financial position of the subsidiary at a specific point in time, which is the balance sheet date. Using the exchange rate at this date ensures that the assets and liabilities are translated accurately and reflect their fair value at that particular moment.Rate this question:
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- 5.
5- 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 2018: Westmore reported sales of £1,500,000 during 2018. What amount (rounded) would have been included for this subsidiary in calculating consolidated sales?
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A) $2,415,000.
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B) $2,400,000.
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C) $2,385,000.
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D) $ 943,396.
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E) $ 931,677.
Correct Answer
A. C) $2,385,000.Explanation
Feedback: Current rate method: £1,500,000 × $1.59 (Avg Rate) = $2,385,000Rate this question:
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- 6.
6- Darron Co. was formed on January 1, 2018 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 2018: What exchange rate should have been used in translating Darron's revenues and expenses for 2018?
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A) $1 = §.48.
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B) $1 = §.44.
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C) $1 = §.46.
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D) $1 = §.42.
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E) $1 = §.45.
Correct Answer
A. B) $1 = §.44.Explanation
Current rate method: Average Rate for Revenues & Expenses [$1 = §.44]Rate this question:
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- 7.
7. Sinkal Co. was formed on January 1, 2018 as a wholly owned foreign subsidiary of a U.S. corporation. Sinkal's functional currency was the stickle (§). The following transactions and events occurred during 2018: What was the amount of the translation adjustment for 2018?
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A) $52,000 decrease in relative value of net assets.
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B) $60,400 decrease in relative value of net assets.
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C) $60,400 increase in relative value of net assets.
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D) $440,000 decrease in relative value of net assets.
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E) $26,000 increase in relative value of net assets.
Correct Answer
A. B) $60,400 decrease in relative value of net assets.Explanation
Feedback: [§1,000,000 × [$.48 - $.42] $.06 = $60,000] + [§20,000 × [$.48 - $.46] $.02] = $400 = $60,400 increase in Relative Asset ValueRate this question:
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- 8.
8. Under the current rate method, which accounts are translated using current exchange rates?
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A) All revenues and expenses.
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B) All assets and liabilities.
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C) Cash, receivables, and most liabilities.
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D) All current assets and deferred income.
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E) All stockholders’ equity.
Correct Answer
A. B) All assets and liabilities.Explanation
Under the current rate method, all assets and liabilities are translated using current exchange rates. This method is used to translate financial statements of foreign subsidiaries into the reporting currency of the parent company. By using current exchange rates, the values of assets and liabilities are adjusted to reflect the current exchange rates, providing a more accurate representation of the financial position of the subsidiary.Rate this question:
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- 9.
9. Under the temporal method, which accounts are remeasured using current exchange rates?
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A) All revenues and expenses.
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B) All assets and liabilities.
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C) Cash, receivables, and most liabilities.
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D) All current assets and deferred income.
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E) All stockholders’ equity.
Correct Answer
A. C) Cash, receivables, and most liabilities.Explanation
Under the temporal method, cash, receivables, and most liabilities are remeasured using current exchange rates. This is because these accounts are considered to have a short-term nature and their values can be easily affected by changes in exchange rates. By remeasuring these accounts using current exchange rates, the financial statements can reflect the most accurate and up-to-date values of these items. Other accounts such as revenues, expenses, assets, deferred income, and stockholders' equity may be translated at historical exchange rates or using specific rules depending on the circumstances.Rate this question:
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- 10.
10. For a foreign subsidiary that uses the U.S. dollar as its functional currency, what method is required to ready the financial statements for consolidation?
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A) Current/Noncurrent Method.
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B) Monetary/Nonmonetary Method.
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C) Current Rate Method.
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D) Temporal Method.
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E) Indirect Method.
Correct Answer
A. D) Temporal Method.Explanation
The correct answer is D) Temporal Method. The temporal method is required to ready the financial statements for consolidation for a foreign subsidiary that uses the U.S. dollar as its functional currency. This method is used to translate the subsidiary's financial statements into the reporting currency (U.S. dollar) and is based on the underlying nature of the assets and liabilities. It distinguishes between monetary items (cash, receivables, payables) and non-monetary items (inventory, fixed assets) and uses different exchange rates for translation.Rate this question:
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- 11.
11. Which one of the following statements would justify this conclusion?
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A) Most of the subsidiary's sales and purchases were with companies in the U.S.
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B) Dilty's functional currency is the dollar and Dilty is the parent.
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C) Dilty's other subsidiaries all had the dollar as their functional currency.
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D) Generally accepted accounting principles require that the subsidiary's functional currency must be the dollar if consolidated financial statements are to be prepared.
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E) Dilty is located in the U.S.
Correct Answer
A. A) Most of the subsidiary's sales and purchases were with companies in the U.S.Explanation
The conclusion is likely related to the functional currency of the subsidiary. Option A justifies the conclusion by stating that most of the subsidiary's sales and purchases were with companies in the U.S. This suggests that the subsidiary's operations are primarily conducted in U.S. dollars, which would support the conclusion that the functional currency is the dollar.Rate this question:
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- 12.
13. A net liability balance sheet exposure exists and the foreign currency depreciates. Which of the following statements is true?
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A) There is no translation adjustment.
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B) There is a transaction loss.
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C) There is a transaction gain.
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D) There is a negative translation adjustment.
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E) There is a positive translation adjustment.
Correct Answer
A. E) There is a positive translation adjustment.Explanation
When a net liability balance sheet exposure exists and the foreign currency depreciates, there will be a positive translation adjustment. This is because the value of the liabilities in the foreign currency will increase when translated into the reporting currency, resulting in a gain.Rate this question:
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- 13.
14. Which method of translating a foreign subsidiary's financial statements is correct if it is assumed that the parent’s net investment is exposed to foreign exchange risk?
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A) Historical rate method.
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B) Working capital method.
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C) Current rate method.
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D) Remeasurement.
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E) Temporal method.
Correct Answer
A. C) Current rate method.Explanation
The current rate method is the correct method of translating a foreign subsidiary's financial statements if it is assumed that the parent's net investment is exposed to foreign exchange risk. This method uses the current exchange rate to translate the subsidiary's financial statements into the parent's reporting currency. By using the current exchange rate, any changes in the value of the subsidiary's assets and liabilities due to foreign exchange fluctuations are reflected in the parent's financial statements, allowing for a more accurate representation of the parent's net investment.Rate this question:
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- 14.
15. Which method is used for remeasuring a foreign subsidiary's financial statements?
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A) Historical rate method.
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B) Working capital method.
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C) Current rate method.
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D) Translation.
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E) Temporal method.
Correct Answer
A. E) Temporal method.Explanation
The temporal method is used for remeasuring a foreign subsidiary's financial statements. This method involves translating monetary assets and liabilities at the current exchange rate and non-monetary assets and liabilities at historical rates. It is used when the functional currency of the subsidiary is different from the reporting currency of the parent company. The temporal method helps to reflect the economic reality of the subsidiary's financial position and performance in the reporting currency.Rate this question:
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- 15.
16. Under the temporal method, inventory at net realizable value would be remeasured for the balance sheet at what rate?
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A) Beginning of the year rate.
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B) Average rate.
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C) Current rate.
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D) Historical rate.
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E) Composite amount.
Correct Answer
A. C) Current rate.Explanation
Under the temporal method, inventory at net realizable value is remeasured for the balance sheet at the current rate. This means that the inventory is valued at its current value in the foreign currency, taking into account any changes in the exchange rate since the inventory was acquired. This ensures that the balance sheet reflects the most up-to-date value of the inventory in the reporting currency.Rate this question:
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- 16.
17. Under the temporal method, common stock would be remeasured at what rate?
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A) Beginning of the year rate.
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B) Average rate.
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C) Current rate.
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D) Historical rate.
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E) Composite amount.
Correct Answer
A. D) Historical rate.Explanation
Under the temporal method, common stock would be remeasured at the historical rate. The temporal method is a method of translating foreign currency financial statements into the reporting currency of a company. It uses historical exchange rates to remeasure certain balance sheet items, such as common stock, at the rate in effect at the time of the transaction. This is because the historical rate reflects the actual exchange rate at the time the common stock was issued or acquired, providing a more accurate representation of the value of the common stock in the reporting currency.Rate this question:
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- 17.
18. Under the current rate method, retained earnings would be translated at what rate?
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A) Beginning of the year rate.
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B) Average rate.
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C) Current rate.
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D) Historical rate.
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E) Composite amount.
Correct Answer
A. E) Composite amount. -
- 18.
19. Under the current rate method, depreciation expense would be translated at what rate?
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A) Beginning of the year rate.
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B) Average rate.
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C) Current rate.
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D) Historical rate.
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E) Composite amount.
Correct Answer
A. B) Average rate.Explanation
Under the current rate method, depreciation expense would be translated at the average rate. This means that the expense would be translated using the average exchange rate for the period in which the depreciation expense occurred. This method is used to ensure that the translated financial statements reflect the average exchange rate fluctuations during the period, rather than just the rate at the beginning or end of the period.Rate this question:
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- 19.
20. A highly inflationary economy is defined as
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A) Cumulative 5-year inflation in excess of 100%.
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B) Cumulative 3-year inflation in excess of 100%.
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C) Cumulative 5-year inflation in excess of 90%.
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D) Cumulative 3-year inflation in excess of 90%.
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E) Any country designated as a company operating in a third-world economy.
Correct Answer
A. B) Cumulative 3-year inflation in excess of 100%.Explanation
A highly inflationary economy is defined as having a cumulative 3-year inflation rate in excess of 100%. This means that over a period of three years, the overall increase in prices has exceeded 100%. This indicates a rapid and significant increase in the cost of goods and services, which can have negative impacts on the economy and the purchasing power of individuals.Rate this question:
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- 20.
21. When preparing a consolidated statement of cash flows, which of the following statements is false?
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A) All operating activity items are translated at an average exchange rate for the period.
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B) A change in accounts receivable is translated using the current rate.
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C) A change in long-term debt is translated using the historical rate at the date of the change.
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D) Dividends paid are translated using the historical rate at the date of the payment.
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E) All items follow translation rates used for the balance sheet and the income statement.
Correct Answer
A. B) A change in accounts receivable is translated using the current rate.Explanation
In a consolidated statement of cash flows, a change in accounts receivable is not translated using the current rate. Instead, it is translated using the exchange rate at the date of the transaction. The current rate is used for translating items in the income statement and the balance sheet, but not for changes in accounts receivable.Rate this question:
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- 21.
22- Esposito is an Italian subsidiary of a U.S. company. Esposito’s ending inventory is valued at the average cost for the last quarter of the year. The following account balances are available for Esposito for 2018: Compute the cost of goods sold for 2018 in U.S. dollars using the temporal method.
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A) $376,650.
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B) $387,750.
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C) $388,800.
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D) $400,950.
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E) $409,050.
Correct Answer
A. B) $387,750.Explanation
Feedback: Begin Inventory (€20,000 × $.93 = $18,600) + Purchases (€400,000 × $.96 = $384,000) – End Inventory (€15,000 × $.99 = $14,850) = COGS $387,750Rate this question:
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- 22.
23- A foreign subsidiary uses the first-in first-out inventory method. The following inventory balances are given at December 31, 2018 in local currency units (LCU): Compute the December 31, 2018, inventory balance using the lower of cost or net realizable value method under the temporal method.
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A) $321,000.
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B) $457,600.
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C) $596,400.
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D) $454,400.
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E) $419,000.
Correct Answer
A. B) $457,600.Explanation
Feedback: Inventory at Historical Cost 320,000 LCU × $1.43 = $457,600. Inventory at Net Realizable Value 420,000 LCU × $1.42 = $596,400. Report at the lower of the two dollar amounts = $457,600.Rate this question:
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- 23.
24- Perez Company, a Mexican subsidiary of a U.S. company, sold equipment costing 200,000 pesos with accumulated depreciation of 75,000 pesos for 140,000 pesos on March 1, 2018. The equipment was purchased on January 1, 2017. Relevant exchange rates for the peso are as follows: The financial statements for Perez are translated by its U.S. parent. What amount of gain or loss would be reported in its translated income statement?
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A) $1,530.
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B) $1,575.
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C) $1,590.
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D) $1,090.
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E) $1,650.
Correct Answer
A. C) $1,590.Explanation
Feedback: [Sales Price 140,000p × $.106 = $14,840] – [BV at Historical Cost 200,000p – Acc. Deprec. 75,000p = 125,000p × $.106 = $13,250] = $1,590 GainRate this question:
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- 24.
25- Certain balance sheet accounts of a foreign subsidiary of Parker Company at December 31, 2018, have been restated into U.S. dollars as follows: Assuming the functional currency of the subsidiary is the U.S. dollar, what total should be included in Parker's consolidated balance sheet at December 31, 2018, for the above items?
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A) $407,500.
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B) $418,000.
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C) $396,000.
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D) $403,500.
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E) $398,500.
Correct Answer
A. A) $407,500.Explanation
Feedback: If the Dollar is the Functional Currency, Current Rates Used for All Items except PP&E at their Historical Values ($47,500 + $95,000 + $76,000 + $54,000 + $135,000) = $407,500Rate this question:
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- 25.
26- Certain balance sheet accounts of a foreign subsidiary of Parker Company at December 31, 2018, have been restated into U.S. dollars as follows: Assuming the functional currency of the subsidiary is the local currency, what total should be included in Parker's consolidated balance sheet at December 31, 2018, for the above items?
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A) $407,500.
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B) $418,000.
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C) $396,000.
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D) $403,500.
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E) $398,500.
Correct Answer
A. B) $418,000.Explanation
Feedback: If LC is the Functional Currency, Current Rates Used for All Items = $418,000Rate this question:
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- 26.
27- Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2017. Selected account balances are available for the year ended December 31, 2018, and are stated in Euro, the local currency. Assume the functional currency is the Euro; compute the U.S. income statement amount for sales for 2018.
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A) $364,000.
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B) $372,000.
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C) $380,000.
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D) $360,000.
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E) $404,000.
Correct Answer
A. C) $380,000.Explanation
Feedback: €400,000 × $.95 = $380,000Rate this question:
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- 27.
12. A net asset balance sheet exposure exists and the foreign currency depreciates. Which of the following statements is true?
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A) There is no translation adjustment.
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B) There is a transaction loss.
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C) There is a transaction gain.
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D) There is a negative translation adjustment.
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E) There is a positive translation adjustment.
Correct Answer
A. D) There is a negative translation adjustment.Explanation
When a net asset balance sheet exposure exists and the foreign currency depreciates, it means that the value of the foreign currency has decreased compared to the domestic currency. This results in a negative translation adjustment because the value of the net assets denominated in the foreign currency will decrease when translated back into the domestic currency.Rate this question:
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