Multiple Choice Question

1. What is a subsidiary’s functional currency?

a. The parent’s reporting currency.

b. The currency in which transactions are denominated.

c. The currency in which the entity primarily generates and expends cash.

d. Always the currency of the country in which the company has its headquarters.

2. In comparing the translation and the remeasurement process, which of the following is true?

a. The reported balance of inventory is normally the same under both methods.

b. The reported balance of equipment is normally the same under both methods.

c. The reported balance of sales is normally the same under both methods.

d. The reported balance of depreciation expense is normally the same under both methods.

3. Which of the following statements is true for the translation process (as opposed to remeasurement)?

a. A translation adjustment can affect consolidated net income.

b. Equipment is translated at the historical exchange rate in effect at the date of its purchase.

c. A translation adjustment is created by the change in the relative value of a subsidiary’s net assets caused by exchange rate fluctuations.

d. A translation adjustment is created by the change in the relative value of a subsidiary’s monetary assets and monetary liabilities caused by exchange rate fluctuations.

4. A subsidiary of Byner Corporation has one asset (inventory) and no liabilities. The functional currency for this subsidiary is the peso. The inventory was acquired for 100,000 pesos when the exchange rate was $0.16 = 1 peso. Consolidated statements are to be produced, and the current exchange rate is $0.19 = 1 peso. Which of the following statements is true for the consolidated financial statements?

a. A remeasurement gain must be reported.

b. A positive translation adjustment must be reported.

c. A negative translation adjustment must be reported.

d. A remeasurement loss must be reported.

5. At what rates should the following balance sheet accounts in foreign statements be translated (rather than remeasured) into U.S. dollars?

                                  Accumulated

                 Depreciation—Equipment                   Equipment

a.                                   Current                                 Current

b.                                  Current                                  Average for year

c.                                 Historical                                 Current

d.                                 Historical                                 Historical

Problems 6 and 7 are based on the following information.

Certain balance sheet accounts of a foreign subsidiary of Rose Company have been stated in U.S. dollars as follows:

6. This subsidiary’s functional currency is a foreign currency. What total should Rose’s balance sheet include for the preceding items?

a. $430,000.

b. $435,000.

c. $440,000.

d. $450,000.

7. This subsidiary’s functional currency is the U.S. dollar. What total should Rose’s balance sheet include for the preceding items?

a. $430,000.

b. $435,000.

c. $440,000.

d. $450,000.

Problems 8 and 9 are based on the following information.

A subsidiary of Salisbury, Inc., is located in a foreign country whose functional currency is the schweikart (SWK). The subsidiary acquires inventory on credit on November 1, 2010, for SWK 100,000 that is sold on January 17, 2011, for SWK 130,000. The subsidiary pays for the inventory on January 31, 2011. Currency exchange rates for 1 SWK are as follows:

November 1, 2010 . . . . . . . . . . . . . . . . . . .  $0.16 = 1 SWK

December 31, 2010 . . . . . . . . . . . . . . . . . . . . 0.17 = 1

January 17, 2011 . . . . . . . . . . . . . . . . . . . . . . 0.18 = 1

January 31, 2011 . . . . . . . . . . . . . . . . . . . . . . 0.19 = 1

Average for 2011 . . . . . . . . . . . . . . . . . . . . .. 0.20 = 1

8. What amount does Salisbury’s consolidated balance sheet report for this inventory at December 31, 2010?

a. $16,000.

b. $17,000.

c. $18,000.

d. $19,000.

9. What amount does Salisbury’s consolidated income statement report for cost of goods sold for the year ending December 31, 2011?

a. $16,000.

b. $17,000.

c. $18,000.

d. $19,000.

10. Assume that the peso is the subsidiary’s functional currency. What balances does a consolidated balance sheet report as of December 31, 2011?

a. Marketable equity securities = $16,000 and Inventory = $16,000.

b. Marketable equity securities = $17,000 and Inventory = $17,000.

c. Marketable equity securities = $19,000 and Inventory = $16,000.

d. Marketable equity securities = $19,000 and Inventory = $19,000.

Transcribed Image Text:

Stated at Current Rates Historical Rates Accounts receivable, current Accounts receivable, long term Prepaid insurance Goodwill $200,000 100,000 50,000 80,000 $220,000 110,000 55,000 85,000 $470,000 $430,000