What is meant by a company s functional currency?A It is the currency in the country where its financial statements are distributed.B It is the currency of its primary cash flows.C It is the currency used in all foreign transactions.D It is the currency of any country in which the company does 10 percent or more of its transactions.The correct answer was B.A company’s functional currency is the one primarily used in its cash flows. When a company operates in more than one currency, it should look at the currency in which it makes most of its sales, obtains most of its financing, pays most of its employees, and buys most of its materials to determine the functional currency.2 of 7Question 2A US company has ownership of a subsidiary located in Japan. Currently, the US company is preparing consolidated financial statements. Which of the following statements is true?A The accounts of the Japanese company must be translated into USdollars if both the parent and the subsidiary have the same functional currency.B The accounts of the Japanese company must be translated into US dollars if the subsidiary has a different functional currency from the parent.C The accounts of the Japanese company must be translated into US dollars regardless of the identity of the functional currencies.D The accounts of the Japanese company must be translated into USdollars but only if the US company holds 100 percent interest in the subsidiary.Ooops! answer to question 2 is incorrect...The correct answer was B.Translation is a preliminary step in the consolidation of a foreign subsidiary and its parent company but only if the two have different functional currencies. Remeasurement of any balances denominated in a foreign currency is appropriate if the parent and the subsidiary both utilize the same functional currency.3 of 7Question 3A US company is in the process of consolidating a subsidiary operating in Japan. Because the two companies have different functional currencies, the Japanese account balances are being translated into US dollars. Some accounts are translated at historical rates whereas others are translated at current rates as of the balance sheet date. Which of the following is true about the subsidiary’s accounts?A Inventory is translated at the current rate whereas accounts receivable is translated at historical rates.B Inventory is translated at historical rates whereas accounts receivable is translated at the current rate.C Inventory is translated at the current rate and accounts receivable is also translated at the current rate.D Inventory is translated at historical rates and accounts receivable is also translated at historical rates.Ooops! answer to question 3 is incorrect...The correct answer was C.In a translation, all assets and liabilities are reported at the current exchange rate as of the balance sheet date. All other accounts are reported at their appropriate historical rates.4 of 7Question 4A US company is in the process of consolidating a subsidiary operating in Japan. Because the two companies have different functional currencies, the Japanese account balances are being translated into US dollars. Inventory is acquired by the Japanese subsidiary for 300,000 yen when the exchange rate was one US dollar for 100 Japanese yen. At the end of the year, the exchange rate is now one US dollar for 125 Japanese yen. Which of the following statements is true?A A $600 translation loss is reported within net income.B A $600 translation gain is reported within net income.C A $600 translation loss is reported within accumulated other comprehensive income in stockholders’ equity.D A $600 translation gain is reported within accumulated other comprehensive income in stockholders’ equity.The correct answer was C.1.In a translation, all assets and liabilities are reported as currentexchange rates. When acquired, the inventory had a translated value of $3,000 (300,000 yen times an exchange rate of 1/100). At the end of the year, the inventory has a translated value of $2,400 (300,000 yen times an exchange rate of 1/125). Because the $600 loss resulted from a translation rather than from a remeasurement, it is reported in the accumulated other comprehensive income section of the company’s stockholders’ equity section on its balance sheet.5 of 7Question 5A US company receives an account receivable denominated in a foreign currency on November 17, Year One with an exchange value of $15,000. Because of a favorable change in exchange rates, it has a value of $19,000 as of December 31, Year One. The money is actually collected on January 6, Year Two with a value of $18,000. In addition, the company owns a foreign subsidiary and an $8,000 translation adjustment gain results from the Year One consolidation process. Assuming that there was no beginning of year balance, what amount should be reported by the company as Accumulated Other Comprehensive Income on its December 31, Year One, balance sheet?A $4,000B $8,000C $11,000The correct answer was B.The translation adjustment created by the consolidation of the foreign subsidiary is reported within Accumulated Other Comprehensive Income on the company’s balance sheet (within stockholders’ equity). The changes in the value of the receivable are reported as a remeasurement so that any gains and losses are reported within net income and not in Accumulated Other Comprehensive Income.6 of 7Question 6The Roanoke Corporation had a total accumulated other comprehensive income reported in the stockholders equity section of its December 31, Year One balance sheet of $75,000. By the end of Year Two, this figure had climbed to $89,000. Which of the following is not a possible reason for this change?A A translation adjustment resulted from the consolidation of asubsidiary in another country with a different functional currency than Roanoke.B A gain in the value of investments classified by Roanoke as available for sale.C A gain resulted from the sale of treasury shares that Roanoke had acquired several years ago.D Roanoke amended a pension agreement with its employees which reduced future benefits.The correct answer was C.When gains and losses are incurred in connection with the sale of treasury stock shares, they are reported as increases and decreases in additional paid-in capital. A gain has no impact on accumulated other comprehensive income. A translation adjustment, gains and losses on changes in value of available for sale securities, and prior service costs resulting amendments to defined benefit pension plans all directly impact accumulated other comprehensive income.7 of 7Question 7Ace Company buys inventory on December 18, Year One for 20,000 vilsecks, a foreign currency. On that day, one vilseck is worth $.24. At the end of Year One, the inventory is still held and the debt is not yet paid. On that date, one vilseck is worth $.25. Ace might be a foreign subsidiary that is being consolidated with a US parent company so that translation is appropriate. Ace might be a US company making a purchase from a foreign supplier so that a remeasurement is appropriate. What gain or loss is reported in each case at the end of Year One?A If this is a translation, there is a $200 gain. If this is a remeasurement, there is a $200 loss.B If this is a translation, there is no gain or loss. If this is a remeasurement, there is a $200 loss.C If this is a translation, there is no gain or loss. If this is a remeasurement, there is no gain or loss.D If this is a translation, there is a $200 gain. If this is a remeasurement, there is a $200 gain.The correct answer was B.In the translation of a foreign subsidiary, all assets and liabilities are adjusted at year-end to the new exchange rate. Therefore, both balances at December 18 are equal to 20,000 times $.24 or $4,800. At December 31, both are translated at 20,000 times $.25 or $5,000. The $200 gain in the reported value of the inventory is offset by the $200 loss in the reported amount of the payable. In contrast, in the remeasurement of an individual transaction, only monetary assets and liabilities (cash, payables, receivables, and accounts reported at fair value) are adjusted to new exchange rates. Again, both balances at December 18 are equal to 20,000 times $.24 or $4,800. However, at December 31, only the payable is adjusted to 20,000 times $.25 or $5,000. The increase in the liability creates a $200 loss. The inventory remains at $4,800 for reporting purposes.。
