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Chapter 13
Translation of Financial Statements of Foreign Affiliates
Multiple Choice

1. When translating foreign currency financial statements for a company whose functional currency is
the U.S. dollar, which of the following accounts is translated using historical exchange rates?

Notes Payable Equipment


a. Yes Yes
b. Yes No
c. No No
d. No Yes

2. Under the temporal method, monetary assets and liabilities are translated by using the exchange rate
existing at the:
a. beginning of the current year.
b. date the transaction occurred.
c. balance sheet date.
d. None of these.

3. The process of translating the accounts of a foreign entity into its functional currency when they are
stated in another currency is called:
a. verification.
b. translation.
c. remeasurement.
d. None of these.

4. Which of the following would be restated using the average exchange rate under the temporal
method?
a. cost of goods sold
b. depreciation expense
c. amortization expense
d. None of these

5. Paid-in capital accounts are translated using the historical exchange rate under:
a. the current rate method only.
b. the temporal method only.
c. both the current rate and temporal methods.
d. neither the current rate nor temporal methods.

6. Which of the following would be restated using the current exchange rate under the temporal
method?
a. Marketable securities carried at cost.
b. Inventory carried at market.
c. Common stock.
d. None of these.

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13-2 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition

7. The translation adjustment that results from translating the financial statements of a foreign
subsidiary using the current rate method should be:
a. included as a separate item in the stockholders' equity section of the balance sheet.
b. included in the determination of net income for the period it occurs.
c. deferred and amortized over a period not to exceed forty years.
d. deferred until a subsequent year when a loss occurs and offset against that loss.

8. Average exchange rates are used to translate certain items from foreign financial statements into
U.S. dollars. Such averages are used in order to:
a. smooth out large translation gains and losses.
b. eliminate temporary fluctuation in exchange rates that may be reversed in the next fiscal period.
c. avoid using different exchange rates for some revenue and expense accounts.
d. approximate the exchange rate in effect when the items were recognized.

9. When the functional currency is identified as the U.S. dollar, land purchased by a foreign subsidiary
after the controlling interest was acquired by the parent company should be translated using the:
a. historical rate in effect when the land was purchased.
b. current rate in effect at the balance sheet date.
c. forward rate.
d. average exchange rate for the current period.

10. The appropriate exchange rate for translating a plant asset in the balance sheet of a foreign
subsidiary in which the functional currency is the U.S. dollar is the:
a. current exchange rate.
b. average exchange rate for the current year.
c. historical exchange rate in effect when the plant asset was acquired or the date of acquisition,
whichever is later.
d. forward rate.

11. The following balance sheet accounts of a foreign subsidiary at December 31, 2011, have been
translated into U.S. dollars as follows:
Translated at
Current Rates Historical Rates
Accounts receivable, current $ 600,000 $ 660,000
Accounts receivable, long-term 300,000 324,000
Inventories carried at market 180,000 198,000
Goodwill 190,000 220,000
$1,270,000 $1,402,000

What total should be included in the translated balance sheet at December 31, 2011, for the above
items? Assume the U.S. dollar is the functional currency.
a. $1,270,000
b. $1,288,000
c. $1,300,000
d. $1,354,000

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Chapter 13 The Translation of Financial Statements of Foreign Affiliates 13-3

12. A foreign subsidiary's functional currency is its local currency which has not experienced significant
inflation. The weighted average exchange rate for the current year would be the appropriate
exchange rate for translating

Wages expense Sales to customers


a. Yes Yes
b. Yes No
c. No No
d. No Yes

13. A wholly owned subsidiary of a U.S. parent company has certain expense accounts for the year
ended December 31, 2011, stated in local currency units (LCU) as follows:
LCU
Depreciation of equipment (related assets
were purchased January 1, 2009) 375,000
Provision for doubtful accounts 250,000
Rent 625,000

The exchange rates at various dates are as follows:


Dollar equivalent
of 1 LCU
December 31, 2011 $0.50
Average for year ended December 31, 2011 0.55
January 1, 2009 0.40

Assume that the LCU is the subsidiary's functional currency and that the charges to the expense
accounts occurred approximately evenly during the year. What total dollar amount should be
included in the translated income statement to reflect these expenses?

a. $687,500
b. $625,000
c. $550,000
d. $500,000

14. If the functional currency is determined to be the U.S. dollar and its financial statements are
prepared in the local currency, SFAS 52, requires which of the following procedures to be followed?
a. Translate the financial statements into U.S. dollars using the current rate method.
b. Remeasure the financial statements into U.S. dollars using the temporal method.
c. Translate the financial statements into U.S. dollars using the temporal method.
d. Remeasure the financial statements into U.S. dollars using the current rate method.

15. P Company acquired 90% of the outstanding common stock of S Company which is a foreign
company. The acquisition was accounted for using the purchase method. In preparing consolidated
statements, the paid-in capital of S Company should be converted at the:
a. exchange rate effective when S Company was organized.
b. exchange rate effective on the date of purchase of the stock of S Company by P Company.
c. average exchange rate for the period S Company stock has been upheld by P Company.
d. current exchange rate.

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13-4 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition

16. In preparing consolidated financial statements of a U.S. parent company and a foreign subsidiary,
the foreign subsidiary’s functional currency is the currency:
a. of the country the parent is located.
b. of the country the subsidiary is located.
c. in which the subsidiary primarily generates and spends cash.
d. in which the subsidiary maintains its accounting records.

17. Gains from remeasuring a foreign subsidiary’s financial statements from the local currency, which
is not the functional currency, into the parent company’s currency should be reported as a(n):
a. other comprehensive income item.
b. extraordinary item (net of tax).
c. part of continuing operations.
d. deferred credit.

18. Assuming no significant inflation, gains resulting from the process of translating a foreign entity’s
financial statements from the functional currency to U.S. dollars should be included as a(n):
a. other comprehensive income item.
b. extraordinary item (net of tax).
c. part of continuing operations.
d. deferred credit.

19. A foreign subsidiary’s functional currency is its local currency and inflation of over 100 percent has
been experienced over a three-year period. For consolidation purposes, SFAS No. 52 requires the
use of:
a. the current rate method only.
b. the temporal method only
c. both the current rate and temporal methods.
d. neither the current rate or the temporal method.

20. The objective of remeasurement is to:


a. produce the same results as if the books were maintained in the currency of the foreign
entity’s largest customer.
b. produce the same results as if the books were maintained solely in the local currency.
c. produce the same results as if the books were maintained solely in the functional currency.
d. None of the above.

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Chapter 13 The Translation of Financial Statements of Foreign Affiliates 13-5

Problems

13-1 Ramsey, Inc. owns a company that operates in France. Account balances in francs for the subsidiary
are shown below:

2011
January 1 December 31
Cash and Receivables 24,000 26,000
Supplies 1,000 500
Property, Plant, and Equipment 52,500 49,000
Accounts Payable (11,500) (5,500)
Long-term Notes Payable (19,000) (11,000)
Common Stock (30,000) (30,000)
Retained Earnings (17,000) (17,000)
Dividends-Declared & Paid on Dec 31 ---- 3,000
Revenues ---- (30,000)
Operating Expenses ---- 15,000
Totals -0- -0

Exchange rates for 2011 were as follows:


January 1 $0.22
Average for the year 0.19
December 31 0.18

Revenues were earned and operating expenses, except for depreciation and supplies used, were
incurred evenly throughout the year. No purchases of supplies or plant assets were made during the
year.

Required:
A. Prepare a schedule to compute the translation adjustment for the year, assuming the subsidiary's
functional currency is the franc.

B. Prepare a schedule to compute the translation gain or loss, assuming the subsidiary's functional
currency is the U.S. dollar.

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13-6 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition

13-2 Sloop Sails Corporation, a U.S. company, operates a 100%-owned British subsidiary, Sewart
Corporation. The U.S. dollar is the functional currency of the subsidiary. Financial statements for
the subsidiary for the fiscal year-end December 31, 2011, are as follows:

Sewart Corporation
Income Statement
Pounds
Sales 650,000
Cost of Goods Sold
Beginning Inventory 310,000
Purchases 265,000
Goods Available For Sale 575,000
Less: Ending Inventory 285,000
Cost of Goods Sold 290,000
Depreciation 79,000
Selling and Admin. Expenses 155,000
Income Taxes 32,000 556,000
Net Income 94,000

Sewart Corporation
Partial Balance Sheet

Current Assets Current Liabilities


Cash 155,000 Notes Payable 78,000
Accts. Rec. 171,000 Accts. Payable 165,000
Inventories 285,000 Other Current Liab. 51,000
611,000 294,000
Long-term Liab. 250,000
(issued July 1, 2009)

Other Information:
1. Equipment costing 340,000 pounds was acquired July 1, 2009, and 38,000 was acquired June
30, 2011. Depreciation for the period was as follows:
Equipment – 2009 acquisitions 66,000
– 2011 acquisitions 6,000

2. The beginning inventory was acquired when the exchange rate was $1.77. The inventory is
valued on a FIFO basis. Purchases and the ending inventory were acquired evenly throughout
the period.

3. Dividends were paid by the subsidiary on June 30 amounting to 156,000 pounds.

4. Sales were made and all expenses were incurred uniformly throughout the year.

5. Exchange rates for the pound on various dates were:

July 1, 2009 $1.79


Jan. 1, 2011 1.75
June 30, 2011 1.74
Dec. 31, 2011 1.71
Average for 2011 1.73

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Chapter 13 The Translation of Financial Statements of Foreign Affiliates 13-7

13-2 (Continued)
Required:
A. Prepare a schedule to determine the translation gain or loss for 2010, assuming the net monetary
liability position on January 1, 2011, was 180,000 pounds.

B. Compute the dollar amount that each of the following would be reported at in the 2011 financial
statements:
1. Cost of Goods Sold.
2. Depreciation Expense.
3. Equipment.

13-3 Accounts are listed below for a foreign subsidiary that maintains its books in its local currency. The
equity interest in the subsidiary was acquired in a purchase transaction. In the space provided,
indicate the exchange rate that would be used to translate the accounts into dollars assuming the
functional currency was identified (a) as the U.S. dollar and (b) as the foreign entity's local currency.
Use the following letters to identify the exchange rate:
H – Historical exchange rate
C – Current exchange rate
A – Average exchange rate for the current period

Exchange rate if the


functional currency is:
Account U.S. Dollar Local currency

1. Bonds Payable (issued 01/01/08) ___________ ______________


2. Office Supplies ___________ ______________
3. Dividends Declared ___________ ______________
4. Common Stock ___________ ______________
5. Additional Paid-In Capital ___________ ______________
6. Inventory Carried at Cost ___________ ______________
7. Short-term Notes Payable ___________ ______________
8. Accumulated Depreciation ___________ ______________
9. Cash ___________ ______________
10. Marketable Securities (carried
at market) ___________ ______________
11. Cost of Goods Sold ___________ ______________
12. Sales ___________ ______________
13. Accounts Receivable ___________ ______________
14. Depreciation Expense ___________ ______________
15. Income Tax Expense ___________ ______________

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13-8 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition

Use the following information to answer Problems 13-4 and 13-5.

On January 2, 2011, Promo Inc., a U.S. parent company, purchased a 100% interest in Spot
Company, a subdivision located in Switzerland. The purchase method of accounting was used to
account for the acquisition. The 2011 financial statements for Spot Company, the subsidiary, in
Swiss francs were as follows:

Comparative Balance Sheets


Jan. 2 Dec. 31
Cash 15,000 33,000
Accounts receivable 45,000 49,500
Plant and equipment (net) (purchased 6/30/08) 75,000 67,500
Land (purchased 6/30/08) 45,000 45,000
Total 180,000 195,000

Accounts payable 13,500 18,000


Long-term notes payable (issued 6/30/08) 31,500 27,000
Common stock (issued 6/30/08) 90,000 90,000
Retained earnings 45,000 60,000
Total 180,000 195,000

Income Statement
Revenues 180,000
Operating expenses including depreciation
of 7,500 francs 135,000
Net income 45,000
Beginning retained earnings 45,000
90,000
Dividends declared and paid 30,000
Ending retained earnings 60,000

Sales were earned and operating expenses were incurred evenly during the year.

Exchange rates for the franc at various dates are:


January 2, 2011 0.8600
December 31, 2011 0.8830
Average for 2011 0.8715
December 10, 2011, dividend payment date 0.8810
June 30, 2008 0.8316

13-4 Use the above information to answer the following question:

Required:
Translate the year-end financial statements of Spot Company, the foreign subsidiary, using the temporal
method. Round numbers to the nearest dollar.

13-5 Use the above information to answer the following question:

Required:
Prepare a schedule to compute the translation gain or loss for Spot Company, assuming the temporal method
of translation. Round numbers to the nearest dollar.

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Chapter 13 The Translation of Financial Statements of Foreign Affiliates 13-9

13-6 Bass Corporation, a U.S. Company, formed a subsidiary with a new company in London on January
1, 2011, by investing 500,000 British pounds in exchange for all of the subsidiary’s common stock.
The subsidiary purchased land for 100,000 pounds and a building for 300,000 pounds on July 1,
2011. The building is being depreciated over a 40-year life by the straight-line method. The
inventory is valued on an average cost basis. The British pound is the subsidiary’s functional
currency and its reporting currency and has not experienced any abnormal inflation. Exchange rates
for the pound on various dates were:

January 1, 2011 1 pound = 1.81


July 1, 2011 1 pound = 1.86
December 31, 2011 1 pound = 1.83
2011 average rate 1 pound = 1.82

The subsidiary’s adjusted trial balance is presented below for the year ended December 31, 2011.

Debits In Pounds
Cash 200,000
Accounts receivable 60,000
Inventory 80,000
Land 100,000
Building 300,000
Depreciation expense 3,750
Cost of goods sold 213,750
Other expenses 90,000
Total debits 1,047,500

Credits
Accumulated depreciation 3,750
Accounts payable 84,000
Accrued liabilities 16,750
Common stock 500,000
Retained earnings - 0 -
Sales revenue 443,000
Total credits 1,047,500

Required: Prepare the subsidiary’s:


A. Translated workpapers (round to the nearest dollar)
B. Translated income statement
C. Translated balance sheet

13-7 Using the information provided in Problem 13-6, use the temporal method instead of the current rate
method.

Required: Prepare the subsidiary’s:


A. Translated workpapers (round to the nearest dollar)
B. Translated income statement
C. Translated balance sheet

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13-10 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition

13-8

On January 1, 2011, Roswell Systems, a U.S.-based company, purchased a controlling interest in Swiss
Management Consultants located in Zurich, Switzerland. The acquisition was treated as a purchase
transaction. The 2011 financial statements stated in Swiss francs are given below.

SWISS MANAGEMENT CONSULTANTS


Comparative Balance Sheets
January 1 and December 31, 2011
Jan. 1 Dec. 31

Cash and Receivables 30,000 84,000


Net Property, Plant, and Equipment 60,000 56,000
Totals 90,000 140,000

Accounts and Notes Payable 45,000 50,000


Common Stock 30,000 30,000
Retained Earnings 15,000 60,000
Totals 90,000 140,000

SWISS MANAGEMENT CONSULTANTS


Consolidated Income and Retained Earnings Statement
For the Year Ended December 31, 2011

Revenues 112,000
Operating Expenses including depreciation of 5,000 francs 45,000
Net income 67,000
Dividends Declared and Paid 22,000
Increase in Retained Earnings 45,000

Direct exchange rates for Swiss franc are:

U.S. Dollars per Franc


January 1, 2011 $0.9987
December 31, 2011 0.9321
Average for 2011 0.9654
Dividend declaration and payment date 0.9810

Required:
A. Translate the year-end balance sheet and income statement of the foreign subsidiary using the current
rate method of translation.
B. Prepare a schedule to verify the translation adjustment.

Short Answer
1. To accomplish the objectives of translation, two translation methods are used depending on the
functional currency of the foreign entity. Describe the two translation methods.

2. The translation process can be done using either the current rate method or the temporal method.
Explain under what circumstances each of the methods is appropriate.

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Chapter 13 The Translation of Financial Statements of Foreign Affiliates 13-11

Short Answer Questions from the Textbook

1. What requirements must be satisfied if a foreign subsidiary is to be consolidated?

2. What is meant by an entity’s functional currency and what are the economic indicators identified by
the FASB to provide guidance in selecting the functional currency?

3. The __________is the functional currency of a foreign subsidiary with operations that are relatively
self-contained and integrated within the country in which it is located. In such cases, the__________
method of translation would be used to translate the accounts into dollars.

4. The __________is the functional currency of a foreign subsidiary that is a direct and integral
component or extension of a U.S. parent company. In such cases, the __________method of
translation is used to translate (remeasure) the accounts into dollars.

5. Which method of translation is used to convert the financial statements when a foreign subsidiary
operates in a highly inflationary economy?

6. Define remeasurement.

7. Under the current rate method, how are assets and liabilities that are stated in a foreign currency
translated?

8. Under the current rate method, describe how the various balance sheet accounts are translated
(including the equity accounts) and how this translation affects the computation of various ratios
(such as debt to equity or the current ratio). In particular, discuss whether or not the ratios will
change when computed in local currencies and compared to their calculations (after translation)
using the parent’s currency.

9. What is the objective of the temporal method of translation?

10. Assuming that the temporal method is used, how are revenue and expense items in foreign currency
financial statements converted?

11. A translation adjustment results from the process of translating financial statements of a foreign
subsidiary from its functional currency into dollars. Where is the translation adjustment reported in
the financial statements if the current rate method is used to translate the accounts?

Business Ethics Question from the Textbook

The Shady Tree Company is preparing to announce their quarterly earnings numbers. The company
expectsto beat the analysts’ forecast of earnings by at least5cents a share. In anticipation of the increase
instockvalue and before the release of the earnings numbers, the company issued stock options to the top
executives in the firm, with the option price equal to today’s market price.
1. This type of executive stock option is often re-ferred to as “spring-loading.” Do you think this
practice should be allowed? Does it provide in-formation about the integrity of the firm or is this
just good business practice?
2. Do you think this practice violates the insider trading rules?

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13-12 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition

ANSWER KEY

Multiple Choice

1. d 8. d 15. b
2. c 9. a 16. c
3. c 10. c 17. c
4. d 11. c 18. a
5. c 12. a 19. b
6. b 13. a 20. c
7. a 14. b

Problems

13-1 A. Translation
Francs Rate $
Exposed net asset position – 1/1 47,000 0.22 10,340
Adjustment for changes in net
asset position during the year
Add: Revenues 30,000 0.19 5,700
Less: Operating expenses (15,000) 0.19 (2,850)
Dividends (3,000) 0.18 (540)
Net asset position translated using ------- ------
rate in effect at date of transactions 12,650
Exposed net asset position – 12/31 59,000 0.18 10,620
Translation adjustment – loss 2,030

B. Translation
Francs Rate $
Exposed net monetary liability position – 1/1 (6,500) 0.22 (1,430)
Adjustments for changes in net
monetary position during the year
Add: increase in cash and
receivables – revenues 30,000 0.19 5,700
Less: decrease in monetary assets
or increase in monetary liabilities
Operating expenses (11,000) 0.19 (2,090)
Dividends paid (3,000) 0.18 (540)
Net monetary asset position
translated using rate in effect
at date of transactions 1,640
Exposed net monetary asset position – 12/31 9,500 0.18 1,710
Translation loss 70

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Chapter 13 The Translation of Financial Statements of Foreign Affiliates 13-13

13-2 A.
Beginning Net Monetary Liab. Pos. (180,000) × $1.75 = $(315,000)
+Sales 650,000 × 1.73 = 1,124,500
- Purchases (265,000) × 1.73 = (458,450)
- Selling & Admin. Expenses (155,000) × 1.73 = (268,150)
- Income Taxes (32,000) × 1.73 = (55,360)
- Equipment Purchased (38,000) × 1.74 = (66,120)
- Dividends Paid (156,000) × 1.74 = (271,440)
Net Monetary Liab. Pos. Trans. $(310,020)
- Ending Net Monetary Liab. Pos. (176,000) × 1.71 = (300,960)
Translation Gain $ 9,060

B.
1. Beginning Inventory 310,000 × $1.77 = $548,700
Purchases 265,000 × 1.73 = 458,450
Goods Available 575,000 1,007,150
Ending Inventory 285,000 × 1.73 = 493,050
Cost of Goods Sold 290,000 $514,100

2. Depr. on 2009 equipment: 66,000 × $1.79 = $118,140


Depr. on 2011 equipment: 6,000 × 1.74 = 10,440
2011 Depreciation Expense $128,580

3. 2009 equipment: 340,000 × $1.79 = $608,600


2011 equipment: 38,000 × 1.74 = 66,120
$674,720

13-3 U.S. Local


Dollar Currency
1. C C
2. H C
3. H H
4. H H
5. H H
6. H C
7. C C
8. H C
9. C C
10. C C
11. H A
12. A A
13. C C
14. H A
15. A A

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13-14 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition

13-4 Temporal method


Translation U.S.
Francs Rate $
Balance Sheet
Cash 33,000 0.8830 29,139
Accounts Receivable 49,500 0.8830 43,709
Plant and Equipment (net) 67,500 0.8600 58,050
Land 45,000 0.8600 38,700
Total 195,000 169,598

Accounts Payable 18,000 0.8830 15,894


Notes Payable 27,000 0.8830 23,841
Common Stock 90,000 0.8600 77,400
Retained Earnings 60,000 Bal. Amt. 52,463
Total 195,000 169,598

Income Statement
Revenues 180,000 0.8715 156,870
Operating Expenses (127,500) 0.8715 (111,116)
Depreciation Expense (7,500) 0.8600 (6,450)
Translation Gain (loss) 889
Net Income 45,000 40,193
Retained Earnings – 1/1 45,000 0.8600 38,700
90,000 78,893
Dividends Declared (30,000) 0.8810 (26,430)
Retained Earnings – 12/31 60,000 52,463

13-5 Translation U.S.


Francs Rate $
Exposed net monetary asset position –
1/1 (60,000 - 45,000) 15,000 0.8600 12,900
Add: Increases in net monetary assets –
Revenues 180,000 0.8715 156,870
Less: Decreases in net monetary assets –
Operating expenses (127,500) 0.8715 (111,116)
Dividends (30,000) 0.8810 (26,430)
Net monetary position translated using
the rate in effect at date of transaction 32,224
Exposed net monetary asset position –
12/31 37,500 0.8830 33,113
Translation gain (loss) 889

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Chapter 13 The Translation of Financial Statements of Foreign Affiliates 13-15

13-6

A.
Subsidiary Corporation
Translated Workpapers

Debits
Cash 200,000 × 1.83 =$366,000
Accounts receivable 60,000 × 1.83 = 109,800
Inventory 80,000 × 1.83 = 146,400
Land 100,000 × 1.83 = 183,000
Building 300,000 × 1.83 = 549,000
Depreciation expense 3,750 × 1.82 = 6,825
Cost of goods sold 213,750 × 1.82 = 389,025
Other expenses 90,000 × 1.82 = 163,800
Total debits $1,913,850

Credits
Accumulated depreciation 3,750 × 1.83 = $ 6,863
Accounts payable 84,000 × 1.83 = 153,720
Accrued liabilities 16,750 × 1.83 = 30,653
Common stock 500,000 × 1.81 = 905,000
Retained earnings - 0 -
Sales revenue 443,000 × 1.82 = 806,260
Total credits 1,902,496
Cumulative Translation Adjustment-Credit balance 11,354
$1,913,850

B.
Subsidiary Corporation
Translated Income Statement
For the Year Ended December 31, 2011

Sales revenue $806,260


Expenses:
Cost of goods sold (389,025)
Depreciation expense (6,825)
Other expenses (163,800)
Net income $246,610
Beginning retained earnings, Jan. 1, 2011 - 0 -
Ending retained earnings, Dec. 31, 2011 $ 246,610

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13-16 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition

C.
Subsidiary Corporation
Translated Balance Sheet
December 31, 2011

Assets:
Cash $366,000
Accounts receivable 109,800
Inventory 146,400
Land 183,000
Building-net 542,137
Total Assets $1,347,337

Equities:
Accounts payable $153,720
Accrued liabilities 30,653
Common stock 905,000
Retained earnings 246,610
Other comprehensive income-translation adj. 11,354
Total liabilities and equity $1,347,337

13-7

A.
Subsidiary Corporation
Translated Workpapers

Debits
Cash 200,000 × 1.83 = $366,000
Accounts receivable 60,000 × 1.83 = 109,800
Inventory (average cost method) 80,000 × 1.82 = 145,600
Land 100,000 × 1.86 = 186,000
Building 300,000 × 1.86 = 558,000
Depreciation expense 3,750 × 1.86 = 6,975
Cost of goods sold 213,750 × 1.82 = 389,025
Other expenses 90,000 × 1.82 = 163,800
Total debits $1,925,200

Credits
Accumulated depreciation 3,750 × 1.86 = $ 6,975
Accounts payable 84,000 × 1.83 = 153,720
Accrued liabilities 16,750 × 1.83 = 30,653
Common stock 500,000 × 1.81 = 905,000
Retained earnings - 0 -
Sales revenue 443,000 × 1.82 = 806,260
Total credits $1,902,608
Cumulative translation
remeasurement gain-credit balance 22,592
$1,925,200

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Chapter 13 The Translation of Financial Statements of Foreign Affiliates 13-17

B.
Subsidiary Corporation
Translated Income Statement
For the Year Ended December 31, 2011

Sales revenue $806,260


Expenses:
Cost of goods sold (389,025)
Depreciation expense (6,975)
Other expenses (163,800)
Translation remeasurement gain 22,592
Net income 269,052
Beginning retained earnings, Jan. 1, 2011 - 0 -.
Ending retained earnings, Dec. 31, 2011 $ 269,052

C.
Subsidiary Corporation
Translated Balance Sheet
December 31, 2011

Assets:
Cash $366,000
Accounts receivable 109,800
Inventory 145,600
Land 186,000
Building-net 551,025
Total Assets $1,358,425

Equities:
Accounts payable 153,720
Accrued liabilities 30,653
Common stock 905,000
Retained earnings 269,052
Total liabilities and equity $1,358,425

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13-18 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition

13-8
Part A Swiss Translation
Francs Rate $
Consolidated Income and Retained Earnings Statement
Revenues 112,000 $0.9654 108,125
Operating Expenses (45,000) 0.9654 43,443
Net Income 67,000 64,682
Retained Earnings – 1/1 15,000 0.9987 14,981
82,000 79,663
Dividends (22,000) 0.9810 (21,582)
Retained Earnings – 12/31 60,000 58,081

Balance Sheet
Cash and Receivables 84,000 0.9321 78,296
Net Property, Plant and Equipment 56,000 0.9321 52,198
Total 140,000 130,494

Accounts and Notes Payable 50,000 0.9321 46,605


Common Stock 30,000 0.9987 29,961
Retained Earnings 60,000 58,081
140,000 134,647
Cumulative Translation Adjustment (debit) --- Balancing amt. (4,153)
Total 140,000 130,494

Part B Swiss Translation


Francs Rate $
Exposed net asset position – 1/1 45,000 $0.9987 44,942
Adjustment for changes in the net asset position during the year:
Net income 67,000 0.9654 64,682
Dividends (22,000) 0.9810 (21,582)
Net asset position translated using rate in effect at date of
transactions ---- 88,042
Exposed net asset position – 12/31 90,000 0.9321 83,889
Cumulative translation adjustment (debit) 4,153

Short Answer
1. Under the current rate method, all assets and liabilities are translated using the current exchange rate
on the balance sheet date. Revenue and expense transactions are translated at the exchange rate
existing on the date each underlying transaction occurred.

Under the temporal method, monetary assets and liabilities are translated at the current exchange rate.
Assets and liabilities carried at historical cost are translated at historical exchange rates while those
carried at current values are translated at the current exchange rate. Revenues and expenses except
those related to assets and liabilities translated at historical rates, are translated at exchange rates in
effect on the dates the underlying transaction occurred.

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Chapter 13 The Translation of Financial Statements of Foreign Affiliates 13-19

2. The current rate method is appropriate when the functional currency is the local currency. The
temporal method is appropriate when the functional currency is the U.S. dollar or when the foreign
environment is highly inflationary. If the functional currency is the currency of a third country, the
accounts are first remeasured into the functional currency using the temporal method and then
translated into U.S. dollars using the current rate method.

Short Answer Questions in Textbook Solutions

1. (1) The parent company must control more than 50 percent of the voting stock of the subsidiary.
(2) The intent of control should be permanent.
(3) The control should rest with the majority owners.

2. The functional currency of an entity is the currency of the primary economic environment in which the
entity operates. The FASB provided the following six economic indicators:
a. The impact on the parent’s cash flow;
b. The short-term responsiveness of the sales price to changes in the exchange rate;
c. The sales market for the firm’s products;
d. The currency in which labor, materials, and other factor inputs are primarily obtained;
e. The currency in which debt is denominated and the ability of the foreign entity’s operations to
generate amounts of that currency sufficient to service the debt;
f. The volume of transactions between the foreign entity and its parent.

3. Local currency, current rate

4. U.S. dollar, temporal

5. The temporal method is used when a foreign subsidiary operates in a highly inflationary economy.

6. Remeasurement is the process of translating the accounts of a foreign entity into its functional currency
when they are stated in another currency.

7. All assets and liabilities are translated using the current rate at the balance sheet date when the current
rate method of translation is used.

8. Assets and liabilities are translated at the rate in effect at the balance sheet date. Common stock is
translated at the historical rate when the stock was issued. Retained earnings consists of various period’s
net income (translated at the yearly average rates) less dividends converted at the historical rates on the
declaration dates. The cumulative translation adjustment is a balancing amount in equity, which results
in total equity (including the cumulative adjustment) being driven back to the rate in effect at the
balance sheet date. Thus, the ratios will not change from their calculations using the local currency.

9. Application of the temporal method produces translated amounts that reflect transactions as if they had
been measured in dollars originally rather than in the local currency.

10. Revenues and expenses are translated using the exchange rate in effect when they were recognized
during the period except for expenses associated with nonmonetary items which are translated using
historical rates. Because it is impractical to translate numerous transactions, the use of an appropriate
average is permitted.

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13-20 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition

11. The translation adjustment is reported as a separate component of stockholders’ equity when the current
rate method is used to translate the accounts.

Business Ethics Solutions


Business ethics solutions are merely suggestions of points to address. The objective is to raise the students'
awareness of the topics, and to invite discussion. In most cases, there is clear room for disagreement or
conflicting viewpoints.

1. Spring-loading is a contentious issue, and the following points are among those that may be
considered in a discussion or debate of whether it should be allowed or not:
Though granting options is intended to motivate and incentivize the employees to generate more
profits, granting an award that is already known (or strongly suspected) before-the-fact to be in the
money very soon seems counter to this intent.
Companies engaged in spring-loading mislead investors by not disclosing that options are awarded
with foreknowledge of the impending good news.
Spring-loading is legal as long as the compensation committee awarding the options knows the same
information as the recipient, and the company informs shareholders that it does not withhold
granting options when undisclosed, positive company information is pending.
Companies suspected of spring-loading cannot be said to have advantage of prior market reactions
that have not actually taken place, and executives can argue, truthfully, that there is no way to know
for certain how the market will react to impending news.

Option manipulation is generally more likely to occur in circumstances in which the company executives
like CEOs have greater influence on the company’s pay-setting and governance processes, which suggests a
lack of board oversight.

2. Spring-loaded grants might violate insider-trading rules, particularly if managers with


knowledge of the information gives options to themselves, or if executives conceal good news
from directors while urging them to grant options.

Also, see the following links: http://www.cfo.com/article.cfm/7880157/1/c_2984338


http://blog.issproxy.com/files/OptionsBackdating7806.pdf
http://www.aflcio.org/corporatewatch/paywatch/stockoptions.cfm

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