Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity

Stateents
Chapter 12
Multinational Accounting: Issues in Financial Reporting and Translation of
Foreign Entity Statements

Multiple Choice uestions

The !alance in "e#sprint Corp$%s foreign e&change loss account #as '1()((( on *ece!er
+1) 2((,) !efore any necessary year-end ad-ustent relating to the follo#ing:
.1/ "e#sprint had a '10)((( de!it resulting fro the restateent in dollars of the accounts of
its #holly o#ned foreign su!sidiary for the year ended *ece!er +1) 2((,$
.2/ "e#sprint had an account paya!le to an unrelated foreign supplier) paya!le in the
supplier%s local currency unit .1C2/ on 3anuary 10) 2((4$ The 2$S$ dollar5e6ui7alent of the
paya!le #as '0()((( on the *ece!er 1) 2((,) in7oice date and '0+)((( on *ece!er +1)
2((,$

1$ 8ased on the inforation pro7ided) in "e#sprint%s 2((, consolidated incoe stateent)
#hat aount should !e included as foreign e&change loss in coputing net incoe) if the
1C2 is the functional currency and the translation ethod is appropriate9
A$ '2,)(((
8$ '1+)(((
C$ '20)(((
*$ ',)(((

2$ 8ased on the inforation pro7ided) in "e#sprint%s 2((, consolidated incoe stateent)
#hat aount should !e included as foreign e&change loss in coputing net incoe) if the
2$S$ dollar is the functional currency and the reeasureent ethod is appropriate9
A$ '10)(((
8$ '1()(((
C$ '20)(((
*$ '2,)(((

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
+$ Infinity Corporation ac6uired ,( percent of the coon stoc: of an Egyptian copany on
3anuary 1) 2((,$ The good#ill associated #ith this ac6uisition #as '1,)+0($ E&change rates at
7arious dates during 2((, follo#:


;ood#ill suffered an ipairent of 2( percent during the year$ If the functional currency is
the Egyptian <ound) ho# uch good#ill ipairent loss should !e reported on Infinity%s
consolidated stateent of incoe for 2((,9
A$ '+)=>(
8$ '+)>((
C$ '+)=,(
*$ '+)=4(

?$ Infinity Corporation ac6uired ,( percent of the coon stoc: of an Egyptian copany on
3anuary 1) 2((,$ The good#ill associated #ith this ac6uisition #as '1,)+0($ E&change rates at
7arious dates during 2((, follo#:


;ood#ill suffered an ipairent of 2( percent during the year$ If the functional currency is
the 2$S$ dollar) ho# uch good#ill ipairent loss should !e reported on Infinity%s
consolidated stateent of incoe for 2((,9
A$ '+)=,(
8$ '+)=>(
C$ '+)=4(
*$ '+)>((

12-2
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
0$ Sion Copany has t#o foreign su!sidiaries$ @ne is located in France) the other in
England$ Sion has deterined the 2$S$ dollar is the functional currency for the French
su!sidiary) #hile the 8ritish pound is the functional currency for the English su!sidiary$ 8oth
su!sidiaries aintain their !oo:s and records in their respecti7e local currencies$ Ahat
ethods #ill Sion use to con7ert each of the su!sidiary%s financial stateents into 2$S$
dollars9

A$ @ption A
8$ @ption 8
C$ @ption C
*$ @ption *

Michigan-!ased 1eo Corporation ac6uired 1(( percent of the coon stoc: of a 8ritish
copany on 3anuary 1) 2((,) for '1)1(()((($ The 8ritish su!sidiary%s net assets aounted to
0(()((( pounds on the date of ac6uisition$ @n 3anuary 1) 2((,) the !oo: 7alues of its
identifia!le assets and lia!ilities appro&iated their fair 7alues$ As a result of an analysis of
functional currency indicators) 1eo deterined that the 8ritish pound #as the functional
currency$ @n *ece!er +1) 2((,) the 8ritish su!sidiary%s ad-usted trial !alance) translated
into 2$S$ dollars) contained '1>)((( ore de!its than credits$ The 8ritish su!sidiary reported
incoe of ++)((( pounds for 2((, and paid a cash di7idend of ,)((( pounds on @cto!er 20)
2((,$ Included on the 8ritish su!sidiary%s incoe stateent #as depreciation e&pense of
+)0(( pounds$ 1eo uses the !asic e6uity ethod of accounting for its in7estent in the 8ritish
su!sidiary and deterined that good#ill in the first year had an ipairent loss of 20 percent
of its initial aount$ E&change rates at 7arious dates during 2((, follo#:


12-+
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
=$ 8ased on the preceding inforation) #hat aount should 1eo record as Bincoe fro
su!sidiaryB !ased on the 8ritish su!sidiary%s reported net incoe9
A$ '>2)4+(
8$ '02)0((
C$ '>2)=((
*$ '=4)+((

>$ 8ased on the preceding inforation) the receipt of the di7idend #ill result in a credit to the
in7estent account for:
A$ '1=),((
8$ '1>)=,(
C$ '1,)(((
*$ '1>)=((

,$ 8ased on the preceding inforation) on 1eo%s consolidated !alance sheet at *ece!er +1)
2((,) #hat aount should !e reported for the good#ill ac6uired on 3anuary 1) 2((,9
A$ '+=),?0
8$ '+4)2,=
C$ '+=)4(0
*$ '+=)=(>

4$ 8ased on the preceding inforation) in the stoc:holders% e6uity section of 1eo%s
consolidated !alance sheet at *ece!er +1) 2((,) 1eo should report the translation
ad-ustent as a coponent of other coprehensi7e incoe of:
A$ '14)??(
8$ '1>)(((
C$ '1,)>,=
*$ '14)+,(

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
1($ Ahich of the follo#ing defines a foreign-!ased entity that uses a functional currency
different fro the local currency9

I$ A 2$S$ su!sidiary in 8ritain aintains its accounting records in pounds sterling) #ith the
a-ority of its transactions denoinated in pounds sterling$
II$ A 2$S$ su!sidiary in <eru conducts 7irtually all of its !usiness in 1atin Aerica) and uses
the 2$S$ dollar as its a-or currency$
A$ I$
8$ II$
C$ 8oth I and II$
*$ "either I nor II$

11$ Ahen the local currency of the foreign su!sidiary is the functional currency) a foreign
su!sidiary%s in7entory carried at cost #ould !e con7erted to 2$S$ dollars !y:
A$ translation using historical e&change rates$
8$ reeasureent using historical e&change rates$
C$ reeasureent using the current e&change rate$
*$ translation using the current e&change rate$

12$ Ahen the local currency of the foreign su!sidiary is the functional currency) a foreign
su!sidiary%s incoe stateent accounts #ould !e con7erted to 2$S$ dollars !y:
A$ translation using historical e&change rates$
8$ reeasureent using current e&change rates at the tie of stateent preparation$
C$ translation using a7erage e&change rate for the period$
*$ reeasureent using the current e&change rate at the tie of stateent preparation$

12-0
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
1+$ If the restateent ethod for a foreign su!sidiary in7ol7es reeasuring fro the local
currency into the functional currency) then translating fro functional currency to 2$S$
dollars) the functional currency of the su!sidiary is:

I$ 2$S$ dollar$
II$ 1ocal currency unit$
III$ A third country%s currency$
A$ I
8$ III
C$ II
*$ Either I or II

1?$ If the 2$S$ dollar is the currency in #hich the foreign affiliate%s !oo:s and records are
aintained) and the 2$S$ dollar is also the functional currency)
A$ the translation ethod should !e used for restateent$
8$ the reeasureent ethod should !e used for restateent$
C$ either translation or reeasureent could !e used for restateent$
*$ no restateent is re6uired$

10$ All of the follo#ing stoc:holders% e6uity accounts of a foreign su!sidiary are translated at
historical e&change rates e&cept:
A$ retained earnings$
8$ coon stoc:$
C$ additional paid-in capital$
*$ preferred stoc:$

1=$ *i7idends of a foreign su!sidiary are translated at:
A$ the a7erage e&change rate for the year$
8$ the e&change rate on the date of declaration$
C$ the current e&change rate on the date of preparation of the financial stateent$
*$ the e&change rate on the record date$

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
1>$ If the functional currency is the local currency of a foreign su!sidiary) #hat e&change
rates should !e used to translate the ites !elo#) assuing the foreign su!sidiary is in a
country #hich has not e&perienced hyperinflation o7er three years9

A$ @ption A
8$ @ption 8
C$ @ption C
*$ @ption *

1,$ If the functional currency is the local currency of a foreign su!sidiary) #hat e&change
rates should !e used to translate the ites !elo#) assuing the foreign su!sidiary is in a
country #hich has not e&perienced hyperinflation o7er three years9

A$ @ption A
8$ @ption 8
C$ @ption C
*$ @ption *

12->
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
14$ Ahich co!ination of accounts and e&change rates is correct for the translation of a
foreign entity%s financial stateents fro the functional currency to 2$S$ dollars9

A$ @ption A
8$ @ption 8
C$ @ption C
*$ @ption *

2($ Ahich co!ination of accounts and e&change rates is correct for the reeasureent of a
foreign entity%s financial stateents fro its local currency to 2$S$ dollars9

A$ @ption A
8$ @ption 8
C$ @ption C
*$ @ption *

12-,
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
21$ The assets listed !elo# of a foreign su!sidiary ha7e !een con7erted to 2$S$ dollars at !oth
current and historical e&change rates$ Assuing that the local currency of the foreign
su!sidiary is the functional currency) #hat total aount should appear for these assets on the
2$S$ copany%s consolidated !alance sheet9


A$ '=+=)(((
8$ '=?,)(((
C$ '>(,)(((
*$ '4=()(((

22$ The gain or loss on the effecti7e portion of a 2$S$ parent copany%s hedge of a net
in7estent in a foreign entity should !e treated as:
A$ an ad-ustent to the retained earnings account in the stoc:holders% e6uity section of its
!alance sheet$
8$ other coprehensi7e incoe$
C$ a translation gain or loss in the coputation of net incoe for the reporting period$
*$ an ad-ustent to a 7aluation account in the asset section of its !alance sheet$

12-4
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
2+$ *o7er Copany o#ns 4(C of the capital stoc: of a foreign su!sidiary located in Italy$
*o7er%s accountant has -ust translated the accounts of the foreign su!sidiary and deterined
that a de!it translation ad-ustent of ',()((( e&ists$ If *o7er uses the e6uity ethod for its
in7estent) #hat entry should *o7er record in order to recogniDe the translation ad-ustent9

A$ @ption A
8$ @ption 8
C$ @ption C
*$ @ption *

2?$ For each of the ites listed !elo#) state #hether they increase or decrease the !alance in
cuulati7e translation ad-ustents .assuing a credit !alance at the !eginning of the year/
#hen the foreign currency strengthened relati7e to the 2$S$ dollar during the year$

A$ @ption A
8$ @ption 8
C$ @ption C
*$ @ption *

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
20$ "ichols Copany o#ns 4(C of the capital stoc: of a foreign su!sidiary located in Ireland$
As a result of translating the su!sidiary%s accounts) a de!it of '1=()((( #as needed in the
translation ad-ustents account so that the foreign su!sidiary%s de!its and credits #ere e6ual
in 2$S$ dollars$ Eo# should "ichols report its translation ad-ustents on its consolidated
financial stateents9
A$ As a '1??)((( increase in the stoc:holders% e6uity section of the !alance sheet$
8$ As a '1??)((( reduction in consolidated coprehensi7e net incoe$
C$ As a '1=()((( de!it in stoc:holders% e6uity section of the !alance sheet$
*$ As a '1=()((( reduction in consolidated coprehensi7e net incoe$

2=$ 2nder the teporal ethod) #hich of the follo#ing is usually used to translate onetary
aounts to the functional currency9

I$ The current e&change rate
II The historical e&change rate
III$ A7erage e&change rate
A$ I
8$ III
C$ II
*$ Either I or II

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
Mercury Copany is a su!sidiary of "eptune Copany and is located in FalparaGso) Chile)
#here the currency is the Chilean <eso$ *ata on Mercury%s in7entory and purchases are as
follo#s:

The !eginning in7entory #as ac6uired during the fourth 6uarter of 2((>) and the ending
in7entory #as ac6uired during the fourth 6uarter of 2((,$ <urchases #ere ade e7enly o7er
the year$ E&change rates #ere as follo#s:


2>$ Refer the inforation pro7ided a!o7e$ Assuing the 2$S$ dollar is the functional
currency) #hat is the aount of Mercury%s cost of goods sold reeasured in 2$S$ dollars9
A$ '1)=,(
8$ '1)>12
C$ '1)>((
*$ '1)=42

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
2,$ 8ased on the preceding inforation) the translation of cost of goods sold for 2((,)
assuing that the Spanish peseta is the functional currency is:
A$ '1)>(($
8$ '1)>=($
C$ '1)=,($
*$ '1)=42$

24$ The 8ritish su!sidiary of a 2$S$ copany reported cost of goods sold of >0)((( pounds
.sterling/ for the current year ended *ece!er +1$ The !eginning in7entory #as 1()(((
pounds) and the ending in7entory #as 10)((( pounds$ Spot rates for 7arious dates are as
follo#s:


Assuing the dollar is the functional currency of the 8ritish su!sidiary) the reeasured
aount of cost of goods sold that should appear in the consolidated incoe stateent is:
A$ '1(,)>0($
8$ '112)0(($
C$ '11?)20($
*$ '120)>(($

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
+($ The 8ritish su!sidiary of a 2$S$ copany reported cost of goods sold of >0)((( pounds
.sterling/ for the current year ended *ece!er +1$ The !eginning in7entory #as 1()(((
pounds) and the ending in7entory #as 10)((( pounds$ Spot rates for 7arious dates are as
follo#s:

Assuing the pound is the functional currency of the 8ritish su!sidiary) the translated aount
of cost of goods sold that should appear in the consolidated incoe stateent is:
A$ '1(,)>0($
8$ '112)0(($
C$ '11?)+(($
*$ '120)>(($

Elan) a 2$S$ corporation) copleted the *ece!er +1) 2((,) foreign currency translation of
its >( percent o#ned S#iss su!sidiary%s trial !alance using the current rate ethod$ The
translation resulted in a de!it ad-ustent of '20)((($ The su!sidiary had reported net incoe
of ,(()((( S#iss francs for 2((, and paid di7idends of 0()((( S#iss francs on Septe!er 1)
2((,$ The translation rates for the year #ere:

The 3anuary 1 !alance of the In7estent in the S#iss su!sidiary account #as '1)=(()((($
Elan ac6uired its interest in the S#iss su!sidiary at !oo: 7alue #ith no differential or
good#ill recorded at ac6uisition$

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
+1$ Elan%s In7estent in S#iss su!sidiary account at *ece!er +1) 2((,) is:
A$ '1),,1)(0($
8$ '1)41=)(0($
C$ '1)42+)40($
*$ '2)(01)0(($

+2$ Elan%s consolidated #or:paper eliinations related to the foreign currency translation
ad-ustent #ill include #hich entry9

A$ @ption A
8$ @ption 8
C$ @ption C
*$ @ption *

++$ Seattle) Inc$ o#ns an ,( percent interest in a <ortuguese su!sidiary$ For 2((,) Seattle
reported incoe fro operations of '2$( illion$ The <ortuguese copany%s incoe fro
operations) after foreign currency translation) #as '1$1 illion$ The foreign currency
translation ad-ustent #as '12()((( .credit/$ Consolidated net incoe and consolidated
coprehensi7e incoe for the year are:

A$ @ption A
8$ @ption 8
C$ @ption C
*$ @ption *

12-10
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
@n 3anuary 2) 2((,) 3ohnson Copany ac6uired a 1((C interest in the capital stoc: of <erth
Copany for '+)1(()((($ Any e&cess cost o7er !oo: 7alue is attri!uta!le to a patent #ith a
1(-year reaining life$ At the date of ac6uisition) <erth%s !alance sheet contained the
follo#ing inforation:

<erth%s incoe stateent for 2((, is as follo#s:

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
The !alance sheet of <erth at *ece!er +1) 2((,) is as follo#s:

<erth declared and paid a di7idend of 2()((( FC2 on @cto!er 1) 2((,$ Spot rates at 7arious
dates for 2((, follo#:

Assue <erth%s re7enues) purchases) operating e&penses) depreciation e&pense) and incoe
ta&es #ere incurred e7enly throughout 2((,$

12-1>
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
+?$ Refer to the a!o7e inforation$ Assuing the local currency of the country in #hich <erth
Copany is located is the functional currency) #hat are the translated aounts for the ites
!elo# in 2$S$ dollars9

A$ @ption A
8$ @ption 8
C$ @ption C
*$ @ption *

+0$ Refer to the a!o7e inforation$ Assuing <erth%s local currency is the functional
currency) #hat is the aount of translation ad-ustents that result fro translating <erth%s trial
!alance into 2$S$ dollars at *ece!er +1) 2((,9
A$ '+4=)0(( de!it
8$ '2,0)((( credit
C$ '?(0)((( credit
*$ '?11)((( credit

+=$ Refer to the a!o7e inforation$ Assuing <erth%s local currency is the functional
currency) #hat is the aount of patent aortiDation for 2((, that results fro 3ohnson%s
ac6uisition of <erth%s stoc: on 3anuary 2) 2((,$ Round your ans#er to the nearest dollar$
A$ '11)0((
8$ '11),,?
C$ '>)==>
*$ '4)+4?

12-1,
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
+>$ Refer to the a!o7e inforation$ Assuing <erth%s local currency is the functional
currency) #hat is the aount of translation ad-ustent that appears on 3ohnson%s consolidated
financial stateents at *ece!er +1) 2((,9
A$ '?14)1,? credit
8$ '?1=),,? credit
C$ '?(0),,? de!it
*$ '+4,)0(( credit

+,$ Refer to the a!o7e inforation$ Assuing <erth%s local currency is the functional
currency) #hat is the !alance in 3ohnson%s in7estent in foreign su!sidiary account at
*ece!er +1) 2((,) assuing use of the e6uity ethod9
A$ '+)21=)0((
8$ '+)0=()(((
C$ '+)0=,)+((
*$ '+)0>>)=4?

+4$ Refer to the a!o7e inforation$ Assuing the 2$S$ dollar is the functional currency) #hat
is 3ohnson%s reeasureent gain .loss/ for 2((,9 .Assue the ending in7entory #as ac6uired
on *ece!er +1) 2((,$/
A$ '+1)((( gain
8$ '+=)0(( loss
C$ '22)((( gain
*$ '+2)((( gain

?($ Refer to the a!o7e inforation$ Assuing the 2$S$ dollar is the functional currency) #hat
is the aount of <erth%s cost of goods sold reeasured in 2$S$ dollars9
A$ ',11)0((
8$ ',?+)0((
C$ ',,?)0((
*$ '>44)0((

12-14
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
?1$ Refer to the a!o7e inforation$ Assuing the 2$S$ dollar is the functional currency) #hat
is the aount of patent aortiDation for 2((, that results fro 3ohnson%s ac6uisition of <erth%s
stoc: on 3anuary 2) 2((,9
A$ '11),,?
8$ '11)>>(
C$ '12)00(
*$ '11)0((

?2$ Refer to the a!o7e inforation$ Assuing the 2$S$ dollar is the functional currency) #hat
is <erth%s net incoe for 2((, in 2$S$ dollars .include the reeasureent gain or loss in
<erth%s net incoe/9
A$ '2+,)(((
8$ '22,)(((
C$ '214)0((
*$ '2(2)(((

?+$ Refer to the a!o7e inforation$ Assuing the 2$S$ dollar is the functional currency) #hat
is the !alance in 3ohnson%s in7estent in foreign su!sidiary account at *ece!er +1) 2((,
.assuing the use of the e6uity ethod/9
A$ '+)+(+)?((
8$ '+)24?)0((
C$ '+)+2+)?((
*$ '+)+1?)0((

12-2(
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
@n 3anuary 1) 2((,) Transport Corporation ac6uired >0 percent interest in Steaship
Copany for '+(()((($ Steaship is a "or#egian copany$ The local currency is the
"or#egian :roner ."Hr/$ The ac6uisition resulted in an e&cess of cost-o7er-!oo: 7alue of
'20)((( due solely to a patent ha7ing a reaining life of 0 years$ Transport uses the e6uity
ethod to account for its in7estent$ Steaship%s *ece!er +1) 2((,) trial !alance has !een
translated into 2$S$ dollars) re6uiring a translation ad-ustent de!it of ',)((($ Steaship%s net
incoe translated into 2$S$ dollars is '+0)((($ It declared and paid an "Hr 2()((( di7idend
on 3une 1) 2((,$ Rele7ant e&change rates are as follo#s:

Assue the :roner is the functional currency$

??$ 8ased on the preceding inforation) in the -ournal entry to record the receipt of di7idend
fro Steaship)
A$ In7estent in Steaship Copany #ill !e credited for '+)?0($
8$ Cash #ill !e de!ited for '+)+(($
C$ In7estent in Steaship Copany #ill !e credited for '?)((($
*$ Cash #ill !e de!ited for '+)=(($

?0$ 8ased on the preceding inforation) in the -ournal entry to record parent%s share of
su!sidiary%s translation ad-ustent:
A$ @ther Coprehensi7e Incoe I Translation Ad-ustent #ill !e de!ited for ',)((($
8$ @ther Coprehensi7e Incoe I Translation Ad-ustent #ill !e credited for '=)((($
C$ In7estent in Steaship Copany #ill !e credited for '=)((($
*$ In7estent in Steaship Copany #ill !e de!ited for ',)((($

12-21
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
?=$ 8ased on the preceding inforation) #hat aount of translation ad-ustent is re6uired for
increase in differential9
A$ '+)(((
8$ '0)0((
C$ '?)0((
*$ '0)(((

?>$ 8ased on the preceding inforation) in the -ournal entry to record the aortiDation of the
patent for 2((, on the parent%s !oo:s) In7estent in Steaship Copany #ill !e de!ited for:
A$ '0)(((
8$ '0)0((
C$ '?)0((
*$ '+)(((

@n Septe!er +() 2((,) Ailfred Copany sold in7entory to 3ac:son Corporation) its
Canadian su!sidiary$ The goods cost Ailfred '+()((( and #ere sold to 3ac:son for '?()((()
paya!le in Canadian dollars$ The goods are still on hand at the end of the year on *ece!er
+1$ The Canadian dollar .C'/ is the functional currency of the Canadian su!sidiary$ The
e&change rates follo#:


?,$ 8ased on the preceding inforation) at #hat dollar aount is the ending in7entory sho#n
in the trial !alance of the consolidated #or:paper9
A$ '?0)(((
8$ '0()(((
C$ '?()(((
*$ '+0)(((

12-22
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
?4$ 8ased on the preceding inforation) #hat aount of unrealiDed intercopany gross profit
is eliinated in preparing the consolidated financial stateents for the year9
A$ '(
8$ '0)(((
C$ '1()(((
*$ '10)(((

0($ 8ased on the preceding inforation) at #hat aount is the in7entory sho#n on the
consolidated !alance sheet for the year9
A$ '?0)(((
8$ '+()(((
C$ '?()(((
*$ '+0)(((


Essay uestions

01$ 8riefly e&plain the follo#ing ters associated #ith accounting for foreign entities:

a/ Functional Currency
!/ Translation
c/ Reeasureent




12-2+
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
02$ @n 3anuary 1) 2((,) <ace Copany ac6uired all of the outstanding stoc: of Spin <1C) a
8ritish Copany) for '+0()((($ Spin%s net assets on the date of ac6uisition #ere 20()(((
pounds .J/$ @n 3anuary 1) 2((,) the !oo: and fair 7alues of the Spin%s identifia!le assets and
lia!ilities appro&iated their fair 7alues e&cept for property) plant) and e6uipent and
tradear:s$ The fair 7alue of Spin%s property) plant) and e6uipent e&ceeded its !oo: 7alue
!y '20)((($ The reaining useful life of Spin%s e6uipent at 3anuary 1) 2((,) #as 1( years$
The reainder of the differential #as attri!uta!le to a tradear: ha7ing an estiated useful
life of 0 years$ Spin%s trial !alance on *ece!er +1) 2((,) in pounds) follo#s:


Additional Inforation
1 Spin uses the FIF@ ethod for its in7entory$ The !eginning in7entory #as ac6uired on
*ece!er +1) 2((>) and ending in7entory #as ac6uired on *ece!er 2=) 2((,$ <urchases of
J+(()((( #ere ade e7enly throughout 2((,$
2 Spin ac6uired all of its property) plant) and e6uipent on March 1) 2((=) and uses straight-
line depreciation$
+ Spin%s sales #ere ade e7enly throughout 2((,) and its operating e&penses #ere incurred
e7enly throughout 2((,$
? The di7idends #ere declared and paid on "o7e!er 1) 2((,$
0 <ace%s incoe fro its o#n operations #as '10()((( for 2((,) and its total stoc:holders%
e6uity on 3anuary 1) 2((,) #as '1)((()((($ <ace declared '0()((( of di7idends during 2((,$
= E&change rates #ere as follo#s:
12-2?
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents

Re6uired:
1/ <repare a schedule translating the trial !alance fro 8ritish pounds into 2$S$ dollars$
Assue the pound is the functional currency$
2/ Assue that <ace uses the !asic e6uity ethod$ Record all -ournal entries that relate to its
in7estent in the 8ritish su!sidiary during 2((,$ <ro7ide the necessary docuentation and
support for the aounts in the -ournal entries) including a schedule of the translation
ad-ustent related to the differential$
2/ <repare a schedule that deterines <ace%s consolidated coprehensi7e incoe for 2((,$
?/ Copute <ace%s total consolidated stoc:holders% e6uity at *ece!er +1) 2((,$




0+$ 2se the inforation gi7en in 6uestion 02 to prepare a schedule pro7iding a proof of the
translation ad-ustent$




12-20
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
0?$ Refer to the inforation in 6uestion 02$ Assue the 2$S$ dollar is the functional currency)
not the pound$
Re6uired:
1/ <repare a schedule reeasuring the trial !alance fro 8ritish pound into 2$S$ dollars$
2/ Assue that <ace uses the !asic e6uity ethod$ Record all -ournal entries that relate to its
in7estent in the 8ritish su!sidiary during 2((,$ <ro7ide the necessary docuentation and
support for the aounts in the -ournal entries$
+/ <repare a schedule that deterines <ace%s consolidated net incoe for 2((,$
?/ Copute <ace%s total consolidated stoc:holders% e6uity at *ece!er +1) 2((,$




00$ Refer to the inforation in 6uestion 02$ Assue the 2$S$ dollar is the functional currency)
not the pound$ <repare a schedule pro7iding a proof of the reeasureent gain or loss$
Assue that the 8ritish su!sidiary had the follo#ing onetary assets and lia!ilities at 3anuary
1) 2((,:






12-2=
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
0=$ <arisian Co$ is a French copany located in <aris$ Kan:ee Corp$) located in "e# Kor:
City) ac6uires <arisian Co$ <arisian has the Euro as its local currency and the S#iss Franc as
its functional currency$ Kan:ee has the 2$S$ dollar as its local currency and the 2$S$ dollar as
its functional currency$

Re6uired:
a/ The year-end consolidated financial stateents #ill !e prepared in #hich currency9
!/ E&plain #hich ethod is appropriate to use to use at year-end: Translation or
Reeasureent9




Chapter 12 Multinational Accounting: Issues in Financial Reporting and
Translation of Foreign Entity Stateents Ans#er Hey

Multiple Choice uestions

The !alance in "e#sprint Corp$%s foreign e&change loss account #as '1()((( on *ece!er
+1) 2((,) !efore any necessary year-end ad-ustent relating to the follo#ing:
.1/ "e#sprint had a '10)((( de!it resulting fro the restateent in dollars of the accounts of
its #holly o#ned foreign su!sidiary for the year ended *ece!er +1) 2((,$
.2/ "e#sprint had an account paya!le to an unrelated foreign supplier) paya!le in the
supplier%s local currency unit .1C2/ on 3anuary 10) 2((4$ The 2$S$ dollar5e6ui7alent of the
paya!le #as '0()((( on the *ece!er 1) 2((,) in7oice date and '0+)((( on *ece!er +1)
2((,$

12-2>
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
1$ 8ased on the inforation pro7ided) in "e#sprint%s 2((, consolidated incoe stateent)
#hat aount should !e included as foreign e&change loss in coputing net incoe) if the
1C2 is the functional currency and the translation ethod is appropriate9
A$ '2,)(((
!" '1+)(((
C$ '20)(((
*$ ',)(((

AACSB: Analytic
AICPA: Measurement

2$ 8ased on the inforation pro7ided) in "e#sprint%s 2((, consolidated incoe stateent)
#hat aount should !e included as foreign e&change loss in coputing net incoe) if the
2$S$ dollar is the functional currency and the reeasureent ethod is appropriate9
A$ '10)(((
8$ '1()(((
C$ '20)(((
#" '2,)(((

AACSB: Analytic
AICPA: Measurement

12-2,
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
+$ Infinity Corporation ac6uired ,( percent of the coon stoc: of an Egyptian copany on
3anuary 1) 2((,$ The good#ill associated #ith this ac6uisition #as '1,)+0($ E&change rates at
7arious dates during 2((, follo#:


;ood#ill suffered an ipairent of 2( percent during the year$ If the functional currency is
the Egyptian <ound) ho# uch good#ill ipairent loss should !e reported on Infinity%s
consolidated stateent of incoe for 2((,9
A$ '+)=>(
8$ '+)>((
C" '+)=,(
*$ '+)=4(

AACSB: Analytic
AICPA: Measurement

?$ Infinity Corporation ac6uired ,( percent of the coon stoc: of an Egyptian copany on
3anuary 1) 2((,$ The good#ill associated #ith this ac6uisition #as '1,)+0($ E&change rates at
7arious dates during 2((, follo#:


;ood#ill suffered an ipairent of 2( percent during the year$ If the functional currency is
the 2$S$ dollar) ho# uch good#ill ipairent loss should !e reported on Infinity%s
consolidated stateent of incoe for 2((,9
A$ '+)=,(
!" '+)=>(
C$ '+)=4(
*$ '+)>((

AACSB: Analytic
AICPA: Measurement

12-24
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
0$ Sion Copany has t#o foreign su!sidiaries$ @ne is located in France) the other in
England$ Sion has deterined the 2$S$ dollar is the functional currency for the French
su!sidiary) #hile the 8ritish pound is the functional currency for the English su!sidiary$ 8oth
su!sidiaries aintain their !oo:s and records in their respecti7e local currencies$ Ahat
ethods #ill Sion use to con7ert each of the su!sidiary%s financial stateents into 2$S$
dollars9

A$ @ption A
8$ @ption 8
C$ @ption C
#" @ption *

AACSB: Reflective Thinking
AICPA: Decision Making

12-+(
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
Michigan-!ased 1eo Corporation ac6uired 1(( percent of the coon stoc: of a 8ritish
copany on 3anuary 1) 2((,) for '1)1(()((($ The 8ritish su!sidiary%s net assets aounted to
0(()((( pounds on the date of ac6uisition$ @n 3anuary 1) 2((,) the !oo: 7alues of its
identifia!le assets and lia!ilities appro&iated their fair 7alues$ As a result of an analysis of
functional currency indicators) 1eo deterined that the 8ritish pound #as the functional
currency$ @n *ece!er +1) 2((,) the 8ritish su!sidiary%s ad-usted trial !alance) translated
into 2$S$ dollars) contained '1>)((( ore de!its than credits$ The 8ritish su!sidiary reported
incoe of ++)((( pounds for 2((, and paid a cash di7idend of ,)((( pounds on @cto!er 20)
2((,$ Included on the 8ritish su!sidiary%s incoe stateent #as depreciation e&pense of
+)0(( pounds$ 1eo uses the !asic e6uity ethod of accounting for its in7estent in the 8ritish
su!sidiary and deterined that good#ill in the first year had an ipairent loss of 20 percent
of its initial aount$ E&change rates at 7arious dates during 2((, follo#:


=$ 8ased on the preceding inforation) #hat aount should 1eo record as Bincoe fro
su!sidiaryB !ased on the 8ritish su!sidiary%s reported net incoe9
A" '>2)4+(
8$ '02)0((
C$ '>2)=((
*$ '=4)+((

AACSB: Analytic
AICPA: Measurement

12-+1
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
>$ 8ased on the preceding inforation) the receipt of the di7idend #ill result in a credit to the
in7estent account for:
A$ '1=),((
8$ '1>)=,(
C" '1,)(((
*$ '1>)=((

AACSB: Analytic
AICPA: Measurement

,$ 8ased on the preceding inforation) on 1eo%s consolidated !alance sheet at *ece!er +1)
2((,) #hat aount should !e reported for the good#ill ac6uired on 3anuary 1) 2((,9
A$ '+=),?0
!" '+4)2,=
C$ '+=)4(0
*$ '+=)=(>

AACSB: Analytic
AICPA: Measurement

4$ 8ased on the preceding inforation) in the stoc:holders% e6uity section of 1eo%s
consolidated !alance sheet at *ece!er +1) 2((,) 1eo should report the translation
ad-ustent as a coponent of other coprehensi7e incoe of:
A" '14)??(
8$ '1>)(((
C$ '1,)>,=
*$ '14)+,(

AACSB: Analytic
AICPA: Measurement

12-+2
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
1($ Ahich of the follo#ing defines a foreign-!ased entity that uses a functional currency
different fro the local currency9

I$ A 2$S$ su!sidiary in 8ritain aintains its accounting records in pounds sterling) #ith the
a-ority of its transactions denoinated in pounds sterling$
II$ A 2$S$ su!sidiary in <eru conducts 7irtually all of its !usiness in 1atin Aerica) and uses
the 2$S$ dollar as its a-or currency$
A$ I$
!" II$
C$ 8oth I and II$
*$ "either I nor II$

AACSB: Reflective Thinking
AICPA: Gloal

11$ Ahen the local currency of the foreign su!sidiary is the functional currency) a foreign
su!sidiary%s in7entory carried at cost #ould !e con7erted to 2$S$ dollars !y:
A$ translation using historical e&change rates$
8$ reeasureent using historical e&change rates$
C$ reeasureent using the current e&change rate$
#" translation using the current e&change rate$

AACSB: Reflective Thinking
AICPA: Decision Making

12$ Ahen the local currency of the foreign su!sidiary is the functional currency) a foreign
su!sidiary%s incoe stateent accounts #ould !e con7erted to 2$S$ dollars !y:
A$ translation using historical e&change rates$
8$ reeasureent using current e&change rates at the tie of stateent preparation$
C" translation using a7erage e&change rate for the period$
*$ reeasureent using the current e&change rate at the tie of stateent preparation$

AACSB: Reflective Thinking
AICPA: Decision Making

12-++
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
1+$ If the restateent ethod for a foreign su!sidiary in7ol7es reeasuring fro the local
currency into the functional currency) then translating fro functional currency to 2$S$
dollars) the functional currency of the su!sidiary is:

I$ 2$S$ dollar$
II$ 1ocal currency unit$
III$ A third country%s currency$
A$ I
!" III
C$ II
*$ Either I or II

AACSB: Reflective Thinking
AICPA: Decision Making

1?$ If the 2$S$ dollar is the currency in #hich the foreign affiliate%s !oo:s and records are
aintained) and the 2$S$ dollar is also the functional currency)
A$ the translation ethod should !e used for restateent$
8$ the reeasureent ethod should !e used for restateent$
C$ either translation or reeasureent could !e used for restateent$
#" no restateent is re6uired$

AACSB: Reflective Thinking
AICPA: Decision Making

10$ All of the follo#ing stoc:holders% e6uity accounts of a foreign su!sidiary are translated at
historical e&change rates e&cept:
A" retained earnings$
8$ coon stoc:$
C$ additional paid-in capital$
*$ preferred stoc:$

AACSB: Reflective Thinking
AICPA: Decision Making

12-+?
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
1=$ *i7idends of a foreign su!sidiary are translated at:
A$ the a7erage e&change rate for the year$
!" the e&change rate on the date of declaration$
C$ the current e&change rate on the date of preparation of the financial stateent$
*$ the e&change rate on the record date$

AACSB: Reflective Thinking
AICPA: Decision Making

1>$ If the functional currency is the local currency of a foreign su!sidiary) #hat e&change
rates should !e used to translate the ites !elo#) assuing the foreign su!sidiary is in a
country #hich has not e&perienced hyperinflation o7er three years9

A" @ption A
8$ @ption 8
C$ @ption C
*$ @ption *

AACSB: Reflective Thinking
AICPA: Decision Making

12-+0
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
1,$ If the functional currency is the local currency of a foreign su!sidiary) #hat e&change
rates should !e used to translate the ites !elo#) assuing the foreign su!sidiary is in a
country #hich has not e&perienced hyperinflation o7er three years9

A$ @ption A
!" @ption 8
C$ @ption C
*$ @ption *

AACSB: Reflective Thinking
AICPA: Decision Making

14$ Ahich co!ination of accounts and e&change rates is correct for the translation of a
foreign entity%s financial stateents fro the functional currency to 2$S$ dollars9

A$ @ption A
!" @ption 8
C$ @ption C
*$ @ption *

AACSB: Reflective Thinking
AICPA: Decision Making

12-+=
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
2($ Ahich co!ination of accounts and e&change rates is correct for the reeasureent of a
foreign entity%s financial stateents fro its local currency to 2$S$ dollars9

A$ @ption A
8$ @ption 8
C" @ption C
*$ @ption *

AACSB: Reflective Thinking
AICPA: Decision Making

21$ The assets listed !elo# of a foreign su!sidiary ha7e !een con7erted to 2$S$ dollars at !oth
current and historical e&change rates$ Assuing that the local currency of the foreign
su!sidiary is the functional currency) #hat total aount should appear for these assets on the
2$S$ copany%s consolidated !alance sheet9


A" '=+=)(((
8$ '=?,)(((
C$ '>(,)(((
*$ '4=()(((

AACSB: Analytic
AICPA: Measurement

12-+>
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
22$ The gain or loss on the effecti7e portion of a 2$S$ parent copany%s hedge of a net
in7estent in a foreign entity should !e treated as:
A$ an ad-ustent to the retained earnings account in the stoc:holders% e6uity section of its
!alance sheet$
!" other coprehensi7e incoe$
C$ a translation gain or loss in the coputation of net incoe for the reporting period$
*$ an ad-ustent to a 7aluation account in the asset section of its !alance sheet$

AACSB: Reflective Thinking
AICPA: Decision Making

2+$ *o7er Copany o#ns 4(C of the capital stoc: of a foreign su!sidiary located in Italy$
*o7er%s accountant has -ust translated the accounts of the foreign su!sidiary and deterined
that a de!it translation ad-ustent of ',()((( e&ists$ If *o7er uses the e6uity ethod for its
in7estent) #hat entry should *o7er record in order to recogniDe the translation ad-ustent9

A$ @ption A
8$ @ption 8
C" @ption C
*$ @ption *

AACSB: Analytic
AICPA: Measurement

12-+,
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
2?$ For each of the ites listed !elo#) state #hether they increase or decrease the !alance in
cuulati7e translation ad-ustents .assuing a credit !alance at the !eginning of the year/
#hen the foreign currency strengthened relati7e to the 2$S$ dollar during the year$

A$ @ption A
!" @ption 8
C$ @ption C
*$ @ption *

AACSB: Reflective Thinking
AICPA: Decision Making

20$ "ichols Copany o#ns 4(C of the capital stoc: of a foreign su!sidiary located in Ireland$
As a result of translating the su!sidiary%s accounts) a de!it of '1=()((( #as needed in the
translation ad-ustents account so that the foreign su!sidiary%s de!its and credits #ere e6ual
in 2$S$ dollars$ Eo# should "ichols report its translation ad-ustents on its consolidated
financial stateents9
A$ As a '1??)((( increase in the stoc:holders% e6uity section of the !alance sheet$
!" As a '1??)((( reduction in consolidated coprehensi7e net incoe$
C$ As a '1=()((( de!it in stoc:holders% e6uity section of the !alance sheet$
*$ As a '1=()((( reduction in consolidated coprehensi7e net incoe$

AACSB: Analytic
AICPA: Decision Making

12-+4
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
2=$ 2nder the teporal ethod) #hich of the follo#ing is usually used to translate onetary
aounts to the functional currency9

I$ The current e&change rate
II The historical e&change rate
III$ A7erage e&change rate
A" I
8$ III
C$ II
*$ Either I or II

AACSB: Reflective Thinking
AICPA: Decision Making

Mercury Copany is a su!sidiary of "eptune Copany and is located in FalparaGso) Chile)
#here the currency is the Chilean <eso$ *ata on Mercury%s in7entory and purchases are as
follo#s:

The !eginning in7entory #as ac6uired during the fourth 6uarter of 2((>) and the ending
in7entory #as ac6uired during the fourth 6uarter of 2((,$ <urchases #ere ade e7enly o7er
the year$ E&change rates #ere as follo#s:


12-?(
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
2>$ Refer the inforation pro7ided a!o7e$ Assuing the 2$S$ dollar is the functional
currency) #hat is the aount of Mercury%s cost of goods sold reeasured in 2$S$ dollars9
A$ '1)=,(
8$ '1)>12
C$ '1)>((
#" '1)=42

AACSB: Analytic
AICPA: Measurement

2,$ 8ased on the preceding inforation) the translation of cost of goods sold for 2((,)
assuing that the Spanish peseta is the functional currency is:
A$ '1)>(($
!" '1)>=($
C$ '1)=,($
*$ '1)=42$

AACSB: Analytic
AICPA: Measurement

12-?1
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
24$ The 8ritish su!sidiary of a 2$S$ copany reported cost of goods sold of >0)((( pounds
.sterling/ for the current year ended *ece!er +1$ The !eginning in7entory #as 1()(((
pounds) and the ending in7entory #as 10)((( pounds$ Spot rates for 7arious dates are as
follo#s:


Assuing the dollar is the functional currency of the 8ritish su!sidiary) the reeasured
aount of cost of goods sold that should appear in the consolidated incoe stateent is:
A$ '1(,)>0($
8$ '112)0(($
C" '11?)20($
*$ '120)>(($

AACSB: Analytic
AICPA: Measurement

+($ The 8ritish su!sidiary of a 2$S$ copany reported cost of goods sold of >0)((( pounds
.sterling/ for the current year ended *ece!er +1$ The !eginning in7entory #as 1()(((
pounds) and the ending in7entory #as 10)((( pounds$ Spot rates for 7arious dates are as
follo#s:

Assuing the pound is the functional currency of the 8ritish su!sidiary) the translated aount
of cost of goods sold that should appear in the consolidated incoe stateent is:
A$ '1(,)>0($
!" '112)0(($
C$ '11?)+(($
*$ '120)>(($

AACSB: Analytic
AICPA: Measurement

12-?2
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
Elan) a 2$S$ corporation) copleted the *ece!er +1) 2((,) foreign currency translation of
its >( percent o#ned S#iss su!sidiary%s trial !alance using the current rate ethod$ The
translation resulted in a de!it ad-ustent of '20)((($ The su!sidiary had reported net incoe
of ,(()((( S#iss francs for 2((, and paid di7idends of 0()((( S#iss francs on Septe!er 1)
2((,$ The translation rates for the year #ere:

The 3anuary 1 !alance of the In7estent in the S#iss su!sidiary account #as '1)=(()((($
Elan ac6uired its interest in the S#iss su!sidiary at !oo: 7alue #ith no differential or
good#ill recorded at ac6uisition$

+1$ Elan%s In7estent in S#iss su!sidiary account at *ece!er +1) 2((,) is:
A" '1),,1)(0($
8$ '1)41=)(0($
C$ '1)42+)40($
*$ '2)(01)0(($

AACSB: Analytic
AICPA: Measurement

12-?+
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
+2$ Elan%s consolidated #or:paper eliinations related to the foreign currency translation
ad-ustent #ill include #hich entry9

A$ @ption A
8$ @ption 8
C$ @ption C
#" @ption *

AACSB: Analytic
AICPA: Decision Making

++$ Seattle) Inc$ o#ns an ,( percent interest in a <ortuguese su!sidiary$ For 2((,) Seattle
reported incoe fro operations of '2$( illion$ The <ortuguese copany%s incoe fro
operations) after foreign currency translation) #as '1$1 illion$ The foreign currency
translation ad-ustent #as '12()((( .credit/$ Consolidated net incoe and consolidated
coprehensi7e incoe for the year are:

A$ @ption A
8$ @ption 8
C$ @ption C
#" @ption *

AACSB: Analytic
AICPA: Re!orting

12-??
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
@n 3anuary 2) 2((,) 3ohnson Copany ac6uired a 1((C interest in the capital stoc: of <erth
Copany for '+)1(()((($ Any e&cess cost o7er !oo: 7alue is attri!uta!le to a patent #ith a
1(-year reaining life$ At the date of ac6uisition) <erth%s !alance sheet contained the
follo#ing inforation:

<erth%s incoe stateent for 2((, is as follo#s:

12-?0
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
The !alance sheet of <erth at *ece!er +1) 2((,) is as follo#s:

<erth declared and paid a di7idend of 2()((( FC2 on @cto!er 1) 2((,$ Spot rates at 7arious
dates for 2((, follo#:

Assue <erth%s re7enues) purchases) operating e&penses) depreciation e&pense) and incoe
ta&es #ere incurred e7enly throughout 2((,$

12-?=
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
+?$ Refer to the a!o7e inforation$ Assuing the local currency of the country in #hich <erth
Copany is located is the functional currency) #hat are the translated aounts for the ites
!elo# in 2$S$ dollars9

A$ @ption A
8$ @ption 8
C" @ption C
*$ @ption *

AACSB: Analytic
AICPA: Re!orting

+0$ Refer to the a!o7e inforation$ Assuing <erth%s local currency is the functional
currency) #hat is the aount of translation ad-ustents that result fro translating <erth%s trial
!alance into 2$S$ dollars at *ece!er +1) 2((,9
A$ '+4=)0(( de!it
8$ '2,0)((( credit
C" '?(0)((( credit
*$ '?11)((( credit

AACSB: Analytic
AICPA: Decision Making

+=$ Refer to the a!o7e inforation$ Assuing <erth%s local currency is the functional
currency) #hat is the aount of patent aortiDation for 2((, that results fro 3ohnson%s
ac6uisition of <erth%s stoc: on 3anuary 2) 2((,$ Round your ans#er to the nearest dollar$
A$ '11)0((
!" '11),,?
C$ '>)==>
*$ '4)+4?

AACSB: Analytic
AICPA: Measurement

12-?>
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
+>$ Refer to the a!o7e inforation$ Assuing <erth%s local currency is the functional
currency) #hat is the aount of translation ad-ustent that appears on 3ohnson%s consolidated
financial stateents at *ece!er +1) 2((,9
A" '?14)1,? credit
8$ '?1=),,? credit
C$ '?(0),,? de!it
*$ '+4,)0(( credit

AACSB: Analytic
AICPA: Decision Making

+,$ Refer to the a!o7e inforation$ Assuing <erth%s local currency is the functional
currency) #hat is the !alance in 3ohnson%s in7estent in foreign su!sidiary account at
*ece!er +1) 2((,) assuing use of the e6uity ethod9
A$ '+)21=)0((
8$ '+)0=()(((
C" '+)0=,)+((
*$ '+)0>>)=4?

AACSB: Analytic
AICPA: Measurement

+4$ Refer to the a!o7e inforation$ Assuing the 2$S$ dollar is the functional currency) #hat
is 3ohnson%s reeasureent gain .loss/ for 2((,9 .Assue the ending in7entory #as ac6uired
on *ece!er +1) 2((,$/
A$ '+1)((( gain
8$ '+=)0(( loss
C$ '22)((( gain
#" '+2)((( gain

AACSB: Analytic
AICPA: Measurement

12-?,
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
?($ Refer to the a!o7e inforation$ Assuing the 2$S$ dollar is the functional currency) #hat
is the aount of <erth%s cost of goods sold reeasured in 2$S$ dollars9
A" ',11)0((
8$ ',?+)0((
C$ ',,?)0((
*$ '>44)0((

AACSB: Analytic
AICPA: Measurement

?1$ Refer to the a!o7e inforation$ Assuing the 2$S$ dollar is the functional currency) #hat
is the aount of patent aortiDation for 2((, that results fro 3ohnson%s ac6uisition of <erth%s
stoc: on 3anuary 2) 2((,9
A$ '11),,?
8$ '11)>>(
C$ '12)00(
#" '11)0((

AACSB: Analytic
AICPA: Measurement

?2$ Refer to the a!o7e inforation$ Assuing the 2$S$ dollar is the functional currency) #hat
is <erth%s net incoe for 2((, in 2$S$ dollars .include the reeasureent gain or loss in
<erth%s net incoe/9
A" '2+,)(((
8$ '22,)(((
C$ '214)0((
*$ '2(2)(((

AACSB: Analytic
AICPA: Re!orting

12-?4
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
?+$ Refer to the a!o7e inforation$ Assuing the 2$S$ dollar is the functional currency) #hat
is the !alance in 3ohnson%s in7estent in foreign su!sidiary account at *ece!er +1) 2((,
.assuing the use of the e6uity ethod/9
A$ '+)+(+)?((
!" '+)24?)0((
C$ '+)+2+)?((
*$ '+)+1?)0((

AACSB: Analytic
AICPA: Re!orting

@n 3anuary 1) 2((,) Transport Corporation ac6uired >0 percent interest in Steaship
Copany for '+(()((($ Steaship is a "or#egian copany$ The local currency is the
"or#egian :roner ."Hr/$ The ac6uisition resulted in an e&cess of cost-o7er-!oo: 7alue of
'20)((( due solely to a patent ha7ing a reaining life of 0 years$ Transport uses the e6uity
ethod to account for its in7estent$ Steaship%s *ece!er +1) 2((,) trial !alance has !een
translated into 2$S$ dollars) re6uiring a translation ad-ustent de!it of ',)((($ Steaship%s net
incoe translated into 2$S$ dollars is '+0)((($ It declared and paid an "Hr 2()((( di7idend
on 3une 1) 2((,$ Rele7ant e&change rates are as follo#s:

Assue the :roner is the functional currency$

12-0(
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
??$ 8ased on the preceding inforation) in the -ournal entry to record the receipt of di7idend
fro Steaship)
A" In7estent in Steaship Copany #ill !e credited for '+)?0($
8$ Cash #ill !e de!ited for '+)+(($
C$ In7estent in Steaship Copany #ill !e credited for '?)((($
*$ Cash #ill !e de!ited for '+)=(($

AACSB: Analytic
AICPA: Measurement

?0$ 8ased on the preceding inforation) in the -ournal entry to record parent%s share of
su!sidiary%s translation ad-ustent:
A$ @ther Coprehensi7e Incoe I Translation Ad-ustent #ill !e de!ited for ',)((($
8$ @ther Coprehensi7e Incoe I Translation Ad-ustent #ill !e credited for '=)((($
C" In7estent in Steaship Copany #ill !e credited for '=)((($
*$ In7estent in Steaship Copany #ill !e de!ited for ',)((($

AACSB: Analytic
AICPA: Measurement

?=$ 8ased on the preceding inforation) #hat aount of translation ad-ustent is re6uired for
increase in differential9
A$ '+)(((
8$ '0)0((
C" '?)0((
*$ '0)(((

AACSB: Analytic
AICPA: Measurement

12-01
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
?>$ 8ased on the preceding inforation) in the -ournal entry to record the aortiDation of the
patent for 2((, on the parent%s !oo:s) In7estent in Steaship Copany #ill !e de!ited for:
A$ '0)(((
!" '0)0((
C$ '?)0((
*$ '+)(((

AACSB: Analytic
AICPA: Measurement

@n Septe!er +() 2((,) Ailfred Copany sold in7entory to 3ac:son Corporation) its
Canadian su!sidiary$ The goods cost Ailfred '+()((( and #ere sold to 3ac:son for '?()((()
paya!le in Canadian dollars$ The goods are still on hand at the end of the year on *ece!er
+1$ The Canadian dollar .C'/ is the functional currency of the Canadian su!sidiary$ The
e&change rates follo#:


?,$ 8ased on the preceding inforation) at #hat dollar aount is the ending in7entory sho#n
in the trial !alance of the consolidated #or:paper9
A" '?0)(((
8$ '0()(((
C$ '?()(((
*$ '+0)(((

AACSB: Analytic
AICPA: Measurement

12-02
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
?4$ 8ased on the preceding inforation) #hat aount of unrealiDed intercopany gross profit
is eliinated in preparing the consolidated financial stateents for the year9
A$ '(
8$ '0)(((
C" '1()(((
*$ '10)(((

AACSB: Analytic
AICPA: Measurement

0($ 8ased on the preceding inforation) at #hat aount is the in7entory sho#n on the
consolidated !alance sheet for the year9
A$ '?0)(((
8$ '+()(((
C$ '?()(((
#" '+0)(((

AACSB: Analytic
AICPA: Measurement


Essay uestions

12-0+
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
01$ 8riefly e&plain the follo#ing ters associated #ith accounting for foreign entities:

a/ Functional Currency
!/ Translation
c/ Reeasureent
a/ Functional currency is the currency of the priary econoic en7ironent in #hich the
entity operatesL norally that is the currency of the en7ironent in #hich an entity priarily
generates and recei7es cash$ The functional currency is used to differentiate !et#een t#o
types of foreign operations) those that are self-contained and integrated into a local
en7ironent) and those that are an e&tension of the parent and integrated #ith the parent$
!/ Translation is the ost coon ethod used and is applied #hen the local currency is the
foreign entity%s functional currency$ To translate the financial stateents) the copany #ill
use the current rate) #hich is the e&change rate on the !alance sheet date) to con7ert the local
currency !alance sheet account !alances into 2$S$ dollars$ Any translation ad-ustent that
occurs is a coponent of coprehensi7e incoe$ 8ecause re7enues and e&penses are
assued to occur uniforly o7er the period) re7enues and e&penses on the incoe stateent
are translated using the a7erage rate for the reporting period$
c/ Reeasureent is the restateent of the foreign entity%s financial stateents fro the local
currency that the entity used into the foreign entity%s functional currency$ Reeasureent is
re6uired only #hen the functional currency is different fro the currency used to aintain the
!oo:s and records of the foreign entity$ Monetary assets and lia!ilities are translated at the
current rate$ "on-onetary assets and lia!ilities) including in7entories) are translated at their
historical rates$ The incoe stateent ites other than cost of goods sold is translated at
a7erage rates$ Any resulting ad-ustent is ta:en into current period incoe$

AACSB: Communication
AICPA: Gloal

12-0?
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
02$ @n 3anuary 1) 2((,) <ace Copany ac6uired all of the outstanding stoc: of Spin <1C) a
8ritish Copany) for '+0()((($ Spin%s net assets on the date of ac6uisition #ere 20()(((
pounds .J/$ @n 3anuary 1) 2((,) the !oo: and fair 7alues of the Spin%s identifia!le assets and
lia!ilities appro&iated their fair 7alues e&cept for property) plant) and e6uipent and
tradear:s$ The fair 7alue of Spin%s property) plant) and e6uipent e&ceeded its !oo: 7alue
!y '20)((($ The reaining useful life of Spin%s e6uipent at 3anuary 1) 2((,) #as 1( years$
The reainder of the differential #as attri!uta!le to a tradear: ha7ing an estiated useful
life of 0 years$ Spin%s trial !alance on *ece!er +1) 2((,) in pounds) follo#s:


Additional Inforation
1 Spin uses the FIF@ ethod for its in7entory$ The !eginning in7entory #as ac6uired on
*ece!er +1) 2((>) and ending in7entory #as ac6uired on *ece!er 2=) 2((,$ <urchases of
J+(()((( #ere ade e7enly throughout 2((,$
2 Spin ac6uired all of its property) plant) and e6uipent on March 1) 2((=) and uses straight-
line depreciation$
+ Spin%s sales #ere ade e7enly throughout 2((,) and its operating e&penses #ere incurred
e7enly throughout 2((,$
? The di7idends #ere declared and paid on "o7e!er 1) 2((,$
0 <ace%s incoe fro its o#n operations #as '10()((( for 2((,) and its total stoc:holders%
e6uity on 3anuary 1) 2((,) #as '1)((()((($ <ace declared '0()((( of di7idends during 2((,$
= E&change rates #ere as follo#s:
12-00
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents

Re6uired:
1/ <repare a schedule translating the trial !alance fro 8ritish pounds into 2$S$ dollars$
Assue the pound is the functional currency$
2/ Assue that <ace uses the !asic e6uity ethod$ Record all -ournal entries that relate to its
in7estent in the 8ritish su!sidiary during 2((,$ <ro7ide the necessary docuentation and
support for the aounts in the -ournal entries) including a schedule of the translation
ad-ustent related to the differential$
2/ <repare a schedule that deterines <ace%s consolidated coprehensi7e incoe for 2((,$
?/ Copute <ace%s total consolidated stoc:holders% e6uity at *ece!er +1) 2((,$
12-0=
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents


12-0>
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents


12-0,
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents

12-04
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents



AACSB: Analytic
AICPA: Measurement

12-=(
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
0+$ 2se the inforation gi7en in 6uestion 02 to prepare a schedule pro7iding a proof of the
translation ad-ustent$


AACSB: Analytic
AICPA: Measurement

12-=1
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
0?$ Refer to the inforation in 6uestion 02$ Assue the 2$S$ dollar is the functional currency)
not the pound$
Re6uired:
1/ <repare a schedule reeasuring the trial !alance fro 8ritish pound into 2$S$ dollars$
2/ Assue that <ace uses the !asic e6uity ethod$ Record all -ournal entries that relate to its
in7estent in the 8ritish su!sidiary during 2((,$ <ro7ide the necessary docuentation and
support for the aounts in the -ournal entries$
+/ <repare a schedule that deterines <ace%s consolidated net incoe for 2((,$
?/ Copute <ace%s total consolidated stoc:holders% e6uity at *ece!er +1) 2((,$
12-=2
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents


2/ 3ournal entries for 2((,:
12-=+
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents




12-=?
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents




AACSB: Analytic
AICPA: Measurement

12-=0
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
00$ Refer to the inforation in 6uestion 02$ Assue the 2$S$ dollar is the functional currency)
not the pound$ <repare a schedule pro7iding a proof of the reeasureent gain or loss$
Assue that the 8ritish su!sidiary had the follo#ing onetary assets and lia!ilities at 3anuary
1) 2((,:




AACSB: Analytic
AICPA: Measurement

12-==
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Stateents
0=$ <arisian Co$ is a French copany located in <aris$ Kan:ee Corp$) located in "e# Kor:
City) ac6uires <arisian Co$ <arisian has the Euro as its local currency and the S#iss Franc as
its functional currency$ Kan:ee has the 2$S$ dollar as its local currency and the 2$S$ dollar as
its functional currency$

Re6uired:
a/ The year-end consolidated financial stateents #ill !e prepared in #hich currency9
!/ E&plain #hich ethod is appropriate to use to use at year-end: Translation or
Reeasureent9
a/ The consolidated financial stateents #ill !e reported in Kan:ee%s functional currency - the
2$S$ dollar$
!/ <arisian%s financial stateents #ill need to !e reeasured first fro the Euro to the S#iss
Franc$ Then the financial stateents% 7alued in the S#iss Franc #ill !e translated to the 2$S$
dollar$

AACSB: Communication
AICPA: Critical Thinking

12-=>