Multiple Choice Questions
1. Assume that the U.S. dollar 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.

2. In the translated financial statements, which method of translation maintains the underlying valuation methods used in the foreign currency financial statements?
a. Current rate method; income statement translated at average exchange rate for the year.
b. Current rate method; income statement translated at exchange rate at the balance sheet date.
c. Temporal method.
d. Monetary/nonmonetary method.

3 .Which of the following items is not remeasured using historical exchange rates under the temporal method?
a. Accumulated depreciation on equipment.
b. Cost of goods sold.
c. Marketable equity securities.
d. Retained earnings.

4. In accordance with U.S. generally accepted accounting principles, which translation combination is appropriate for a foreign operation whose functional currency is the U.S. dollar?
Method Treatment of Translation Adjustment
a. Temporal Other comprehensive income
b. Temporal Gain or loss in net income
c. Current rate Other comprehensive income
d. Current rate Gain or loss in net income

5. 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 is the appropriate exchange rate for translating
Wages Expense Wages Payable
a. Yes Yes
b. Yes No
c. No Yes
d. No No

6. The functional currency of DeZoort, Inc.’s British subsidiary is the British pound. DeZoort borrowed pounds as a partial hedge of its investment in the subsidiary. In preparing consolidated financial statements, DeZoort’s negative translation adjustment on its investment in the subsidiary exceeded its foreign exchange gain on its borrowing. How should DeZoort report the effects of the negative translation adjustment and foreign exchange gain in its consolidated financial statements?
a. Report the translation adjustment in Other Comprehensive Income on the balance sheet and the foreign exchange gain in the income statement.
b. Report the translation adjustment in the income statement and defer the foreign exchange gain in Other Comprehensive Income on the balance sheet.
c. Report the translation adjustment less the foreign exchange gain in Other Comprehensive Income on the balance sheet.
d. Report the translation adjustment less the foreign exchange gain in the income statement.

7. Gains from remeasuring a foreign subsidiary’s financial statements from the local currency, which is not the functional currency, into the parent’s currency should be reported as a(n)
a. Deferred foreign exchange gain.
b. Translation adjustment in Other Comprehensive Income.
c. Extraordinary item, net of income taxes.
d. Part of continuing operations.