Multiple-Choice Questions on Translation and Foreign Currency Transactions
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 or (b) the U.S. dollar is the functional currency and the remeasurement method is appropriate.
1. Refer to the preceding requirements. Gate Inc. had a credit adjustment of $30,000 for the year ended December 31, 20X2, 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 20X2 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 preceding 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 $64,000 on December 31, 20X2. The invoice is payable on January 30, 20X3.
What amount of the net foreign exchange loss in computing net income 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 preceding 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, 20X2, invoice date, and $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 a 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
| Sales to Customers | Wages Expense |
a. | No | No |
b. | Yes | Yes |
c. | No | Yes |
d. | Yes | No |
6. The functional currency of Dahl Inc.’s subsidiary is the European euro. Dahl borrowed euros 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.
b. 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.
c. 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
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