Test bank with answers for advanced accounting 3e by jeter chapter 13

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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?

a.
b.
c.
d.

Notes Payable
Yes
Yes
No
No

Equipment
Yes
No
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

a.
b.
c.
d.
13.

Wages expense
Yes
Yes
No
No

Sales to customers
Yes
No
No
Yes

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:

December 31, 2011
Average for year ended December 31, 2011
January 1, 2009

Dollar equivalent
of 1 LCU
$0.50
0.55
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.
b.
c.
d.

$687,500
$625,000
$550,000
$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:

Cash and Receivables
Supplies
Property, Plant, and Equipment
Accounts Payable
Long-term Notes Payable
Common Stock
Retained Earnings
Dividends-Declared & Paid on Dec 31
Revenues
Operating Expenses
Totals

2011
January 1
December 31
24,000
26,000
1,000
500
52,500
49,000
(11,500)
(5,500)
(19,000)
(11,000)
(30,000)
(30,000)
(17,000)
(17,000)
---3,000
---(30,000)
---15,000
-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
650,000

Sales
Cost of Goods Sold
Beginning Inventory
Purchases
Goods Available For Sale
Less: Ending Inventory
Cost of Goods Sold
Depreciation
Selling and Admin. Expenses
Income Taxes
Net Income

310,000
265,000
575,000
285,000
290,000
79,000
155,000
32,000

556,000

94,000

Sewart Corporation
Partial Balance Sheet
Current Assets
Cash
Accts. Rec.
Inventories

155,000
171,000
285,000
611,000

Current Liabilities
Notes Payable
Accts. Payable
Other Current Liab.
Long-term Liab.
(issued July 1, 2009)

78,000
165,000
51,000
294,000
250,000

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
Jan. 1, 2011
June 30, 2011
Dec. 31, 2011
Average for 2011

$1.79
1.75
1.74
1.71
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:
U.S. Dollar
Local currency

Account
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.

Bonds Payable (issued 01/01/08)
Office Supplies
Dividends Declared
Common Stock
Additional Paid-In Capital
Inventory Carried at Cost

Short-term Notes Payable
Accumulated Depreciation
Cash
Marketable Securities (carried
at market)
Cost of Goods Sold
Sales
Accounts Receivable
Depreciation Expense
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
Cash
15,000
Accounts receivable
45,000
Plant and equipment (net) (purchased 6/30/08)
75,000
Land (purchased 6/30/08)
45,000
Total
180,000

Dec. 31
33,000
49,500
67,500
45,000
195,000

Accounts payable
Long-term notes payable (issued 6/30/08)
Common stock (issued 6/30/08)

Retained earnings
Total

18,000
27,000
90,000
60,000
195,000

13,500
31,500
90,000
45,000
180,000

Income Statement
Revenues
Operating expenses including depreciation
of 7,500 francs
Net income
Beginning retained earnings
Dividends declared and paid
Ending retained earnings

180,000
135,000
45,000
45,000
90,000
30,000

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
December 31, 2011
Average for 2011
December 10, 2011, dividend payment date
June 30, 2008
13-4

0.8600
0.8830
0.8715
0.8810
0.8316

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
July 1, 2011
December 31, 2011
2011 average rate

1 pound = 1.81
1 pound = 1.86
1 pound = 1.83
1 pound = 1.82

The subsidiary’s adjusted trial balance is presented below for the year ended December 31, 2011.
Debits
Cash
Accounts receivable
Inventory
Land
Building
Depreciation expense
Cost of goods sold
Other expenses
Total debits

In Pounds
200,000
60,000
80,000
100,000
300,000
3,750
213,750
90,000
1,047,500

Credits

Accumulated depreciation
Accounts payable
Accrued liabilities
Common stock
Retained earnings
Sales revenue
Total credits

3,750
84,000
16,750
500,000
- 0 443,000
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
Net Property, Plant, and Equipment
Totals

30,000
60,000
90,000

84,000
56,000
140,000

Accounts and Notes Payable
Common Stock
Retained Earnings
Totals

45,000
30,000
15,000
90,000

50,000
30,000
60,000
140,000

SWISS MANAGEMENT CONSULTANTS

Consolidated Income and Retained Earnings Statement
For the Year Ended December 31, 2011
Revenues
Operating Expenses including depreciation of 5,000 francs
Net income
Dividends Declared and Paid
Increase in Retained Earnings

112,000
45,000
67,000
22,000
45,000

Direct exchange rates for Swiss franc are:

January 1, 2011
December 31, 2011
Average for 2011
Dividend declaration and payment date

U.S. Dollars per Franc
$0.9987
0.9321
0.9654
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.

2.
3.
4.
5.
6.
7.

d
c
c
d
c
b
a

8.
9.
10.
11.
12.
13.
14.

d
a
c
c
a
a
b

15.
16.
17.
18.
19.
20.

b
c
c
a
b
c

Problems
13-1

A.
Exposed net asset position – 1/1
Adjustment for changes in net
asset position during the year
Add: Revenues
Less: Operating expenses
Dividends
Net asset position translated using
rate in effect at date of transactions
Exposed net asset position – 12/31
Translation adjustment – loss

Francs
47,000

30,000
(15,000)
(3,000)
------59,000

B.
Exposed net monetary liability position – 1/1
Adjustments for changes in net
monetary position during the year
Add: increase in cash and
receivables – revenues
Less: decrease in monetary assets
or increase in monetary liabilities
Operating expenses
Dividends paid
Net monetary asset position
translated using rate in effect
at date of transactions
Exposed net monetary asset position – 12/31
Translation loss

Francs
(6,500)

Translation
Rate
0.22

0.19
0.19
0.18

0.18

Translation
Rate
0.22

$
10,340

5,700
(2,850)
(540)
-----12,650
10,620
2,030

$
(1,430)

30,000

0.19

(11,000)
(3,000)

0.19
0.18

(2,090)
(540)

9,500

0.18

1,640
1,710
70



5,700


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Chapter 13 The Translation of Financial Statements of Foreign Affiliates 13-13
13-2

A.
Beginning Net Monetary Liab. Pos.
+Sales
- Purchases
- Selling & Admin. Expenses
- Income Taxes
- Equipment Purchased
- Dividends Paid
Net Monetary Liab. Pos. Trans.
- Ending Net Monetary Liab. Pos.
Translation Gain
B.
1. Beginning Inventory
Purchases
Goods Available
Ending Inventory
Cost of Goods Sold

3. 2009 equipment:
2011 equipment:

1.
2.
3.

4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.

U.S.
Dollar
C
H
H
H
H
H
C
H
C
C
H
A
C
H
A

(176,000) × 1.71 =

310,000 × $1.77 =
265,000 × 1.73 =
575,000
285,000 × 1.73 =
290,000

2. Depr. on 2009 equipment:
Depr. on 2011 equipment:
2011 Depreciation Expense

13-3

(180,000) × $1.75 =
650,000 × 1.73 =
(265,000) × 1.73 =
(155,000) × 1.73 =
(32,000) × 1.73 =
(38,000) × 1.74 =
(156,000) × 1.74 =

$(315,000)
1,124,500
(458,450)
(268,150)
(55,360)
(66,120)
(271,440)

$(310,020)
(300,960)
$ 9,060

$548,700
458,450
1,007,150
493,050
$514,100

66,000 × $1.79 =
6,000 × 1.74 =

$118,140
10,440
$128,580

340,000 × $1.79 =
38,000 × 1.74 =

$608,600
66,120
$674,720

Local
Currency
C
C
H
H

H
C
C
C
C
C
A
A
C
A
A




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13-14 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition
13-4

Temporal method
Translation
Rate

Francs

U.S.
$

Balance Sheet
Cash
Accounts Receivable
Plant and Equipment (net)
Land
Total

33,000
49,500
67,500
45,000
195,000

0.8830
0.8830
0.8600
0.8600

29,139
43,709

58,050
38,700
169,598

Accounts Payable
Notes Payable
Common Stock
Retained Earnings
Total

18,000
27,000
90,000
60,000
195,000

0.8830
0.8830
0.8600
Bal. Amt.

15,894
23,841
77,400
52,463
169,598

Income Statement
Revenues
Operating Expenses

Depreciation Expense
Translation Gain (loss)
Net Income
Retained Earnings – 1/1
Dividends Declared
Retained Earnings – 12/31

180,000
(127,500)
(7,500)
45,000
45,000
90,000
(30,000)
60,000

0.8715
0.8715
0.8600

0.8600
0.8810

13-5
Francs
Exposed net monetary asset position –
1/1 (60,000 - 45,000)
Add: Increases in net monetary assets –
Revenues
Less: Decreases in net monetary assets –

Operating expenses
Dividends
Net monetary position translated using
the rate in effect at date of transaction
Exposed net monetary asset position –
12/31
Translation gain (loss)

156,870
(111,116)
(6,450)
889
40,193
38,700
78,893
(26,430)
52,463
Translation
Rate

U.S.
$

15,000

0.8600

12,900

180,000

0.8715

156,870

(127,500)
(30,000)

0.8715
0.8810

(111,116)
(26,430)
32,224

37,500

0.8830



33,113
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
Accounts receivable
Inventory
Land
Building
Depreciation expense
Cost of goods sold
Other expenses
Total debits

200,000 × 1.83 =$366,000
60,000 × 1.83 = 109,800
80,000 × 1.83 = 146,400
100,000 × 1.83 = 183,000
300,000 × 1.83 = 549,000
3,750 × 1.82 = 6,825

213,750 × 1.82 = 389,025
90,000 × 1.82 = 163,800
$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
Expenses:
Cost of goods sold
Depreciation expense

Other expenses
Net income
Beginning retained earnings, Jan. 1, 2011
Ending retained earnings, Dec. 31, 2011

$806,260
(389,025)
(6,825)
(163,800)
$246,610
- 0 $ 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
Accounts receivable
Inventory
Land
Building-net
Total Assets

$366,000
109,800
146,400
183,000
542,137
$1,347,337

Equities:
Accounts payable
Accrued liabilities
Common stock
Retained earnings
Other comprehensive income-translation adj.
Total liabilities and equity

$153,720
30,653
905,000

246,610
11,354
$1,347,337

13-7
A.
Subsidiary Corporation
Translated Workpapers
Debits
Cash
Accounts receivable
Inventory (average cost method)
Land
Building
Depreciation expense
Cost of goods sold
Other expenses
Total debits
Credits
Accumulated depreciation
Accounts payable
Accrued liabilities
Common stock
Retained earnings
Sales revenue
Total credits
Cumulative translation
remeasurement gain-credit balance

200,000 × 1.83

60,000 × 1.83
80,000 × 1.82
100,000 × 1.86
300,000 × 1.86
3,750 × 1.86
213,750 × 1.82
90,000 × 1.82

=
=
=
=
=
=
=
=

$366,000
109,800
145,600
186,000
558,000
6,975
389,025
163,800
$1,925,200

3,750 × 1.86
84,000 × 1.83
16,750 × 1.83

500,000 × 1.81

=
=
=
=

$ 6,975
153,720
30,653
905,000
- 0 806,260
$1,902,608

443,000 × 1.82 =



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
Expenses:
Cost of goods sold
Depreciation expense
Other expenses
Translation remeasurement gain
Net income
Beginning retained earnings, Jan. 1, 2011
Ending retained earnings, Dec. 31, 2011

$806,260
(389,025)
(6,975)
(163,800)
22,592
269,052
- 0 -.
$ 269,052

C.

Subsidiary Corporation
Translated Balance Sheet
December 31, 2011
Assets:
Cash
Accounts receivable
Inventory
Land
Building-net
Total Assets

$366,000
109,800
145,600
186,000
551,025
$1,358,425

Equities:
Accounts payable
Accrued liabilities
Common stock
Retained earnings
Total liabilities and equity

153,720
30,653
905,000
269,052
$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
Francs

Consolidated Income and Retained Earnings Statement
Revenues
Operating Expenses
Net Income
Retained Earnings – 1/1
Dividends

Retained Earnings – 12/31
Balance Sheet
Cash and Receivables
Net Property, Plant and Equipment
Total
Accounts and Notes Payable
Common Stock
Retained Earnings
Cumulative Translation Adjustment (debit)
Total
Part B

Translation
Rate

$

112,000
(45,000)
67,000
15,000
82,000
(22,000)
60,000

$0.9654
0.9654

84,000
56,000

140,000

0.9321
0.9321

78,296
52,198
130,494

50,000
30,000
60,000
140,000
--140,000

0.9321
0.9987

46,605
29,961
58,081
134,647
(4,153)
130,494

Swiss
Francs
45,000

Exposed net asset position – 1/1

Adjustment for changes in the net asset position during the year:
Net income
67,000
Dividends
(22,000)
Net asset position translated using rate in effect at date of
transactions
---Exposed net asset position – 12/31
90,000
Cumulative translation adjustment (debit)

0.9987
0.9810

Balancing amt.

Translation
Rate
$0.9987

108,125
43,443
64,682
14,981
79,663
(21,582)
58,081

$
44,942

0.9654
0.9810

64,682
(21,582)

0.9321

88,042
83,889
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: /> /> />