The following information should be used for questions 1,2 , and 3 . Select the best answers under each of two alternative assumptions:

(a) the LCU is the functional currency and the translation method is appropriate; and \((b)\) the U.S. dollar is the functional currency and the remeasurement method is appropriate.

1. Refer to the above requirements. Gate Inc. had a credit adjustment of \(\$ 30,000\) for the year ended December \(31,20 \times 2\), from restating its foreign subsidiary's accounts from their local currency units into U.S. dollars. Additionally, Gate had a receivable from a foreign customer payable in the customer's local currency. On December 31, 20X1, this receivable for 200,000 local currency units (LCU) was correctly included in Gate's balance sheet at \(\$ 110,000\). When the receivable was collected on February 15, 20X2, the U.S. dollar equivalent was \(\$ 120,000\). In Gate's \(20 \times 2\) consolidated statement of income, how much should be reported as foreign exchange gain in computing net income?

a. \(\$ 0\).

b. \(\$ 10,000\).

c. \(\$ 30,000\).

d. \(\$ 40,000\).

2. Refer to the above requirements. Bar Corporation had a realized foreign exchange loss of \(\$ 13,000\) for the year ended December 31, 20X2, and must also determine whether the following items will require year-end adjustment:
(1) Bar had a \(\$ 7.000\) credit resulting from the restatement in dollars of the accounts of its wholly owned foreign subsidiary for the year ended December 31, 20X2.
(2) Bar had an account payable to an unrelated foreign supplier payable in the supplier's local currency. The U.S. dollar equivalent of the payable was \(\$ 60,000\) on the October 31, 20X2, invoice date, and it was \(\$ 64,000\) on December 31, 20X2. The invoice is payable on January \(30,20 \times 3\).
What is the amount of the net foreign exchange loss in computing net income that should be reported in Bar's 20X2 consolidated statement of income?

a. \(\$ 6.000\)

b. \(\$ 10,000\).

c. \(\$ 13.000\).

d. \(\$ 17,000\).
3. Refer to the above requirements. The balance in Simpson Corp.'s foreign exchange loss account was \(\$ 15.000\) on December 31, 20X2, before any necessary year-end adjustment relating to the following:
(1) Simpson had a \(\$ 20,000\) debit resulting from the restatement in dollars of the accounts of its wholly owned foreign subsidiary for the year ended December 31, 20X2.
(2) Simpson had an account payable to an unrelated foreign supplier, payable in the supplier's local currency on January 27, 20X3. The U.S. dollar equivalent of the payable was \(\$ 100,000\) on the November \(28,20 \mathrm{X} 2\), invoice date, and it was \(\$ 106,000\) on December 31, 20X2.
In Simpson's 20X2 consolidated income statement, what amount should be included as foreign exchange loss in computing net income?

a. \(\$ 41,000\)

b. \(\$ 35,000\).

c. \(\$ 21,000\).

d. \(\$ 15,000\)
4. When remeasuring foreign currency financial statements into the functional currency, which of the following items would be remeasured using an historical exchange rate?

a. Inventories carried at cost.

b. Trading securities carried at market values.

c. Bonds payable.

d. Accrued liabilities.
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 would be the appropriate exchange rate for translating:

6. The functional currency of Dahl Inc.'s subsidiary is the French franc. Dahl borrowed French francs as a partial hedge of its investment in the subsidiary. In preparing consolidated financial statements. Dahl's debit balance of its translation adjustment exceeded its exchange gain on the borrowing. How should the translation adjustment and the exchange gain be reported in Dahl's consolidated financial statements?

a. The translation adjustment should be netted against the exchange gain, and the excess translation adjustment should be reported in the stockholders' equity section of the balance sheet.

b. The translation adjustment should be netted against the exchange gain, and the excess translation adjustment should be reported in the statement of income in computing net income.

c. The translation adjustment is reported as a component of other comprehensive income and then accumulated in the stockholders' equity section of the balance sheet, and the exchange gain should be reported in the statement of income in computing net income.

d. The translation adjustment should be reported in the statement of income, and the exchange gain should be reported separately in the stockholders' equity section of the balance sheet.

Transcribed Image Text:

Sales to Customers Wages Expense a. No No b. Yes Yes C. No Yes d. Yes No