CH 13

Package Title: Test Bank Questions
Course Title: Advanced Accounting, 6e

Chapter Number: 13
Question Type: 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) Notes Payable, Yes; Equipment, Yes

b) Notes Payable, Yes; Equipment, No
c) Notes Payable, No; Equipment, No
d) Notes Payable, No; Equipment, Yes
Answer: d
Question Title: Test Bank (Multiple Choice) Question 01

Difficulty: Easy
Learning Objective: 4 Compare the two methods used to convert the financial statements of a foreign entity
into U.S. dollars.
Section Reference: 13.4
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.
Answer: c

Difficulty: Easy
into U.S. dollars.
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.
Answer: c
Difficulty: Easy
Learning Objective: 5 Distinguish between the circumstances under which each of the two methods is
appropriate under current GAAP.
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
Answer: d

Difficulty: Medium
into U.S. dollars.
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.
Answer: c

Difficulty: Medium
into U.S. dollars.
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.
Answer: b

Difficulty: Easy
into U.S. dollars.
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.
Answer: a

Difficulty: Medium
Learning Objective: 9 Understand the concept of comprehensive income in the context of foreign currency
translation.
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.
Answer: d

Difficulty: Easy
into U.S. dollars.
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.
Answer: a

Difficulty: Easy
Learning Objective: 8 Translate the statements of a foreign entity when the functional currency is the U.S.
dollar.
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.
Answer: c

Difficulty: Easy
dollar.
11) The following balance sheet accounts of a foreign subsidiary at December 31, 2017, 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, 2017, 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
Answer: c

Difficulty: Hard
dollar.
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) Wages expense, Yes; Sales to customers, Yes

b) Wages expense, Yes; Sales to customers, No
c) Wages expense, No; Sales to customers, No
d) Wages expense, No; Sales to customers, Yes
Answer: a

Difficulty: Easy
Learning Objective: 7 Translate the statements of a foreign entity when the functional currency is the local
currency.
13) A wholly owned subsidiary of a U.S. parent company has certain expense accounts for the year ended
December 31, 2017, stated in local currency units (LCU) as follows:
LCU
Depreciation of equipment (related assets were purchased January 1, 2015) 375,000
Provision for doubtful accounts 250,000
Rent 625,000
The exchange rates at various dates are as follows:
Dollar equivalent LCU

December 31, 2017 $0.50
Average for year ended December 31, 2017 0.55
January 1, 2015 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) $687,500
b) $625,000
c) $550,000
d) $500,000
Answer: a

Difficulty: Easy
currency.
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.
Answer: b

Difficulty: Easy
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.
Answer: b

Difficulty: Medium
currency., 8 Translate the statements of a foreign entity when the functional currency is the U.S. dollar.
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.
Answer: c

Difficulty: Easy
Learning Objective: 3 Identify the functional currency of a foreign entity.
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.
Answer: c

Difficulty: Medium
translation.
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.
Answer: a

Difficulty: Easy
translation.
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.
Answer: b

Difficulty: Medium
Learning Objective: 6 Explain the factors involved in translating the statements of a foreign entity operating
in a highly inflationary economy.
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 these.
Answer: c

Difficulty: Easy
Question Type: Essay
21) 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.
Answer: 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.
Question Title: Test Bank (Essay) Question 21

Difficulty: Medium
into U.S. dollars.
Section Reference:
22) 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.
Answer: 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.
Question Title: Test Bank (Essay) Question 22

Difficulty: Hard
into U.S. dollars., 5 Distinguish between the circumstances under which each of the two methods is
appropriate under current GAAP., 6 Explain the factors involved in translating the statements of a foreign
entity operating in a highly inflationary economy.
Section Reference: 13.4, 13.5, 13.6
23) Dakota, Inc. owns a company that operates in France. Account balances in francs for the subsidiary are
shown below:
2017
January 1 December 31
Cash and Receivables 24,000 26,000
Supplies 1,000 500
Property, Plant, and Equipment 52,500 49,000
Accounts Payable (11,500) (5,500)
Long-term Notes Payable (19,000) (11,000)
Common Stock (30,000) (30,000)
Retained Earnings (17,000) (17,000)
Dividends-Declared & Paid on Dec 31 ---- 3,000
Revenues ---- (30,000)
Operating Expenses ---- 15,000
Totals -0- -0-
Exchange rates for 2017 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.
Answer:
A. Translation
Francs Rate $
Exposed net asset position – 1/1 47,000 0.22 10,340
Adjustment for changes in net
asset position during the year
Add: Revenues 30,000 0.19 5,700
Less: Operating expenses (15,000) 0.19 (2,850)
Dividends (3,000) 0.18 (540)
Net asset position translated using ------- ------
rate in effect at date of transactions 12,650
Translation adjustment – loss 2,030
B. Translation
Francs Rate $
Exposed net monetary liability position – 1/1 (6,500) 0.22 (1,430)
Adjustments for changes in net
monetary position during the year
Add: increase in cash and
receivables – revenues 30,000 0.19 5,700
Less: decrease in monetary assets
or increase in monetary liabilities
Operating expenses (11,000) 0.19 (2,090)
Dividends paid (3,000) 0.18 (540)
Net monetary asset position
translated using rate in effect
at date of transactions 1,640
Exposed net monetary asset position – 12/31 9,500 0.18 1,710
Translation loss 70
Question Title: Test Bank (Problem) Question 13-1

Difficulty: Medium
Section Reference: 13.6, 13.7
24) Stiff Sails Corporation, a U.S. company, operates a 100%-owned British subsidiary, SeaBeWe
Corporation. The U.S. dollar is the functional currency of the subsidiary. Financial statements for the
subsidiary for the fiscal year-end December 31, 2017, are as follows:
SeaBeWe Corporation
Income Statement
Pounds
Sales 650,000
Cost of Goods Sold
Beginning Inventory 310,000
Purchases 265,000
Goods Available For Sale 575,000
Less: Ending Inventory 285,000
Cost of Goods Sold 290,000
Depreciation 79,000
Selling and Admin. Expenses 155,000
Income Taxes 32,000 556,000
Net Income 94,000
SeaBeWe Corporation
Partial Balance Sheet
Current Assets Current Liabilities

Cash 155,000 Notes Payable 78,000
Accts. Rec. 171,000 Accts. Payable 165,000
Inventories 285,000 Other Current Liab. 51,000
611,000 294,000
Long-term Liab. 250,000
(issued July 1, 2015)
Other Information:
1. Equipment costing 340,000 pounds was acquired July 1, 2015, and 38,000 was acquired June 30, 2017.
Depreciation for the period was as follows:
Equipment – 2015 acquisitions 66,000
– 2017 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, 2015 $1.79

Jan. 1, 2017 1.75
June 30, 2017 1.74
Dec. 31, 2017 1.71
Average for 2017 1.73
Required:
A. Prepare a schedule to determine the translation gain or loss for 2016, assuming the net monetary
liability position on January 1, 2017, was 180,000 pounds.
B. Compute the dollar amount that each of the following would be reported at in the 2017 financial
statements:
1. Cost of Goods Sold.
2. Depreciation Expense.
3. Equipment.
Answer:
A.
Beginning Net Monetary Liab. Pos. (180,000) × $1.75 = $(315,000)
+Sales 650,000 × 1.73 = 1,124,500
- Purchases (265,000) × 1.73 = (458,450)
- Selling & Admin. Expenses (155,000) × 1.73 = (268,150)
- Income Taxes (32,000) × 1.73 = (55,360)
- Equipment Purchased (38,000) × 1.74 = (66,120)
- Dividends Paid (156,000) × 1.74 = (271,440)
Net Monetary Liab. Pos. Trans. $(310,020)
- Ending Net Monetary Liab. Pos. (176,000) × 1.71 = (300,960)
Translation Gain $ 9,060
B.
1. Beginning Inventory 310,000 × $1.77 = $548,700
Purchases 265,000 × 1.73 = 458,450
Goods Available 575,000 1,007,150
Ending Inventory 285,000 × 1.73 = 493,050
Cost of Goods Sold 290,000 $514,100
2. Depr. on 2015 equipment: 66,000 × $1.79 = $118,140

Depr. on 2017 equipment: 6,000 × 1.74 = 10,440
2017 Depreciation Expense $128,580
3. 2015 equipment: 340,000 × $1.79 = $608,600

2017 equipment: 38,000 × 1.74 = 66,120
$674,720

Difficulty: Hard
dollar.
25) 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:
Account U.S. Dollar Local currency
1. Bonds Payable (issued 01/01/11) ___________ ______________

2. Office Supplies ___________ ______________
3. Dividends Declared ___________ ______________
4. Common Stock ___________ ______________
5. Additional Paid-In Capital ___________ ______________
6. Inventory Carried at Cost ___________ ______________
7. Short-term Notes Payable ___________ ______________
8. Accumulated Depreciation ___________ ______________
9. Cash ___________ ______________
10. Marketable Securities (carried
at market) ___________ ______________
11. Cost of Goods Sold ___________ ______________
12. Sales ___________ ______________
13. Accounts Receivable ___________ ______________
14. Depreciation Expense ___________ ______________
15. Income Tax Expense ___________ ______________
Answer:
U.S. Local
Dollar Currency
1. C C
2. H C
3. H H
4. H H
5. H H
6. H C
7. C C
8. H C
9. C C
10. C C
11. H A
12. A A
13. C C
14. H A
15. A A

Difficulty: Easy
26) Use the information below to (a) translate the year-end financial statements of Perfect Company, the
foreign subsidiary, using the temporal method, and (b) prepare a schedule to compute the translation gain or
loss for Perfect Company. Round numbers to the nearest dollar.
On January 2, 2017, Design Inc., a U.S. parent company, purchased a 100% interest in Perfect Company, a
subdivision located in Switzerland. The purchase method of accounting was used to account for the
acquisition. The 2017 financial statements for Perfect Company, the subsidiary, in Swiss francs were as
follows:
Comparative Balance Sheets

Jan. 2 Dec. 31
Cash 15,000 33,000
Accounts receivable 45,000 49,500
Plant and equipment (net) (purchased 6/30/11) 75,000 67,500
Land (purchased 6/30/11) 45,000 45,000
Total 180,000 195,000
Accounts payable 13,500 18,000

Long-term notes payable (issued 6/30/11) 31,500 27,000
Common stock (issued 6/30/11) 90,000 90,000
Retained earnings 45,000 60,000
Total 180,000 195,000
Income Statement
Revenues 180,000
Operating expenses including depreciation
of 7,500 francs 135,000
Net income 45,000
Beginning retained earnings 45,000
90,000
Dividends declared and paid 30,000
Ending retained earnings 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, 2017 0.8600
December 31, 2017 0.8830
December 10, 2017, dividend payment date 0.8810
June 30, 2014 0.8316
Answer:
Temporal method
Translation U.S.
Francs Rate $
Balance Sheet
Cash 33,000 0.8830 29,139
Accounts Receivable 49,500 0.8830 43,709
Plant and Equipment (net) 67,500 0.8600 58,050
Land 45,000 0.8600 38,700
Total 195,000 169,598
Accounts Payable 18,000 0.8830 15,894

Notes Payable 27,000 0.8830 23,841
Common Stock 90,000 0.8600 77,400
Retained Earnings 60,000 Bal. Amt. 52,463
Total 195,000 169,598
Income Statement
Revenues 180,000 0.8715 156,870
Operating Expenses (127,500) 0.8715 (111,116)
Depreciation Expense (7,500) 0.8600 (6,450)
Translation Gain (loss) 889
Net Income 45,000 40,193
Retained Earnings – 1/1 45,000 0.8600 38,700
90,000 78,893
Dividends Declared (30,000) 0.8810 (26,430)
Retained Earnings – 12/31 60,000 52,463
Translation U.S.
Francs Rate $
Exposed net monetary asset position –
1/1 (60,000 - 45,000) 15,000 0.8600 12,900
Add: Increases in net monetary assets –
Revenues 180,000 0.8715 156,870
Less: Decreases in net monetary assets –
Operating expenses (127,500) 0.8715 (111,116)
Dividends (30,000) 0.8810 (26,430)
Net monetary position translated using
the rate in effect at date of transaction 32,224
Exposed net monetary asset position –
12/31 37,500 0.8830 33,113
Translation gain (loss) 889

Difficulty: Hard
dollar.
27) Pike Corporation, a U.S. Company, formed a subsidiary with a new company in London on January 1,
2017, 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, 2017. 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, 2017 1 pound = 1.81

July 1, 2017 1 pound = 1.86
December 31, 2017 1 pound = 1.83
2017 average rate 1 pound = 1.82
The subsidiary’s adjusted trial balance is presented below for the year ended December 31, 2017.
Debits In Pounds
Cash 200,000
Accounts receivable 60,000
Inventory 80,000
Land 100,000
Building 300,000
Depreciation expense 3,750
Cost of goods sold 213,750
Other expenses 90,000
Total debits 1,047,500
Credits
Accumulated depreciation 3,750
Accounts payable 84,000
Accrued liabilities 16,750
Common stock 500,000
Retained earnings - 0 -
Sales revenue 443,000
Total credits 1,047,500
Required: Using the current rate method prepare the subsidiary’s:

A. Translated workpapers (round to the nearest dollar)
B. Translated income statement
C. Translated balance sheet
Answer:
A.
Subsidiary Corporation
Translated Workpapers
Debits
Cash 200,000 × 1.83 =$366,000
Accounts receivable 60,000 × 1.83 = 109,800
Inventory 80,000 × 1.83 = 146,400
Land 100,000 × 1.83 = 183,000
Building 300,000 × 1.83 = 549,000
Depreciation expense 3,750 × 1.82 = 6,825
Cost of goods sold 213,750 × 1.82 = 389,025
Other expenses 90,000 × 1.82 = 163,800
Total debits $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
Sales revenue 443,000 × 1.82 = 806,260
Cumulative Translation Adjustment-Credit balance 11,354
$1,913,850
B.
Translated Income Statement
For the Year Ended December 31, 2017
Sales revenue $806,260

Expenses:
Cost of goods sold (389,025)
Depreciation expense (6,825)
Other expenses (163,800)
Net income $246,610
Beginning retained earnings, Jan. 1, 2017 - 0 -
Ending retained earnings, Dec. 31, 2017 $ 246,610
C.
Translated Balance Sheet
December 31, 2017
Assets:
Cash $366,000
Inventory 146,400
Land 183,000
Building-net 542,137
Total Assets $1,347,337
Equities:
Accounts payable $153,720
Retained earnings 246,610
Other comprehensive income-translation adj. 11,354
Total liabilities and equity $1,347,337

Difficulty: Hard
dollar.
28) Pike Corporation, a U.S. Company, formed a subsidiary with a new company in London on January 1,
2017, 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, 2017. 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, 2017 1 pound = 1.81

July 1, 2017 1 pound = 1.86
December 31, 2017 1 pound = 1.83
2017 average rate 1 pound = 1.82
The subsidiary’s adjusted trial balance is presented below for the year ended December 31, 2017.
Debits In Pounds
Cash 200,000
Inventory 80,000
Land 100,000
Building 300,000
Depreciation expense 3,750
Cost of goods sold 213,750
Other expenses 90,000
Total debits 1,047,500
Credits
Accumulated depreciation 3,750
Sales revenue 443,000
Required: Using the temporal method prepare the subsidiary’s:

A. Translated workpapers (round to the nearest dollar)
B. Translated income statement
C. Translated balance sheet
Answer:
A.
Translated Workpapers
Debits
Cash 200,000 × 1.83 = $366,000
Accounts receivable 60,000 × 1.83 = 109,800
Inventory (average cost method) 80,000 × 1.82 = 145,600
Land 100,000 × 1.86 = 186,000
Building 300,000 × 1.86 = 558,000
Depreciation expense 3,750 × 1.86 = 6,975
Cost of goods sold 213,750 × 1.82 = 389,025
Other expenses 90,000 × 1.82 = 163,800
Total debits $1,925,200
Credits
Accumulated depreciation 3,750 × 1.86 = $ 6,975
Accounts payable 84,000 × 1.83 = 153,720
Accrued liabilities 16,750 × 1.83 = 30,653
Common stock 500,000 × 1.81 = 905,000
Sales revenue 443,000 × 1.82 = 806,260
Total credits $1,902,608
Cumulative translation
remeasurement gain-credit balance 22,592
$1,925,200
B.
Translated Income Statement
Sales revenue $806,260

Expenses:
Cost of goods sold (389,025)
Depreciation expense (6,975)
Other expenses (163,800)
Translation remeasurement gain 22,592
Net income 269,052
Beginning retained earnings, Jan. 1, 2017 - 0 -.
Ending retained earnings, Dec. 31, 2017 $ 269,052
C.
Translated Balance Sheet
December 31, 2017
Assets:
Cash $366,000
Inventory 145,600
Land 186,000
Building-net 551,025
Total Assets $1,358,425
Equities:
Retained earnings 269,052
Total liabilities and equity $1,358,425

Difficulty: Hard
dollar.
29) On January 1, 2017, Roswell Systems, a U.S.-based company, purchased a controlling interest in Bern
Management Consultants located in Bern, Switzerland. The acquisition was treated as a purchase
transaction. The 2017 financial statements stated in Swiss francs are given below.
BERN MANAGEMENT CONSULTANTS

Comparative Balance Sheets
January 1 and December 31, 2017
Jan. 1 Dec. 31
Cash and Receivables 30,000 84,000

Net Property, Plant, and Equipment 60,000 56,000
Totals 90,000 140,000
Accounts and Notes Payable 45,000 50,000
Common Stock 30,000 30,000
Retained Earnings 15,000 60,000
Totals 90,000 140,000
BERN MANAGEMENT CONSULTANTS

Consolidated Income and Retained Earnings Statement
Revenues 112,000
Operating Expenses including depreciation of 5,000 francs 45,000
Net income 67,000
Dividends Declared and Paid 22,000
Increase in Retained Earnings 45,000
Direct exchange rates for Swiss franc are:
U.S. Dollars per Franc

January 1, 2017 $0.9987
December 31, 2017 0.9321
Dividend declaration and payment date 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.
Answer:
Part A Swiss Translation
Francs Rate $
Consolidated Income and Retained Earnings Statement
Revenues 112,000 $0.9654 108,125
Operating Expenses (45,000) 0.9654 43,443
Net Income 67,000 64,682
Retained Earnings – 1/1 15,000 0.9987 14,981
82,000 79,663
Dividends (22,000) 0.9810 (21,582)
Retained Earnings – 12/31 60,000 58,081
Balance Sheet
Cash and Receivables 84,000 0.9321 78,296
Net Property, Plant and Equipment 56,000 0.9321 52,198
Total 140,000 130,494
Accounts and Notes Payable 50,000 0.9321 46,605

Common Stock 30,000 0.9987 29,961
Retained Earnings 60,000 58,081
140,000 134,647
Cumulative Translation Adjustment (debit) --- Balancing amt. (4,153)
Total 140,000 130,494
Part B Swiss Translation

Francs Rate $
Exposed net asset position – 1/1 45,000 $0.9987 44,942
Adjustment for changes in the net asset position during the year:
Net income 67,000 0.9654 64,682
Dividends (22,000) 0.9810 (21,582)
Net asset position translated using rate in effect at date of
transactions ---- 88,042
Cumulative translation adjustment (debit) 4,153

Difficulty: Hard
dollar., 10 Identify the disclosure requirements for firms with foreign entities.
Section Reference: 13.7, 13.8

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Package Title: Test Bank Questions

Course Title: Advanced Accounting, 6e

Question Type: Multiple Choice

a) Notes Payable, Yes; Equipment, Yes

Question Title: Test Bank (Multiple Choice) Question 01

a) beginning of the current year.

Question Title: Test Bank (Multiple Choice) Question 02

a) cost of goods sold

Question Title: Test Bank (Multiple Choice) Question 04

a) the current rate method only.

Question Title: Test Bank (Multiple Choice) Question 05

a) Marketable securities carried at cost.

Question Title: Test Bank (Multiple Choice) Question 06

Question Title: Test Bank (Multiple Choice) Question 07

a) smooth out large translation gains and losses.

Question Title: Test Bank (Multiple Choice) Question 08

a) historical rate in effect when the land was purchased.

Question Title: Test Bank (Multiple Choice) Question 09

a) current exchange rate.

Question Title: Test Bank (Multiple Choice) Question 10

Question Title: Test Bank (Multiple Choice) Question 11

a) Wages expense, Yes; Sales to customers, Yes

Question Title: Test Bank (Multiple Choice) Question 12

The exchange rates at various dates are as follows:

Dollar equivalent LCU

Question Title: Test Bank (Multiple Choice) Question 13

Question Title: Test Bank (Multiple Choice) Question 14

a) exchange rate effective when S Company was organized.

Question Title: Test Bank (Multiple Choice) Question 15

a) of the country the parent is located.

Question Title: Test Bank (Multiple Choice) Question 16

a) other comprehensive income item.

Question Title: Test Bank (Multiple Choice) Question 17

a) other comprehensive income item.

Question Title: Test Bank (Multiple Choice) Question 18

a) the current rate method only.

Question Title: Test Bank (Multiple Choice) Question 19

Question Title: Test Bank (Multiple Choice) Question 20

Question Title: Test Bank (Essay) Question 21

Question Title: Test Bank (Essay) Question 22

Exchange rates for 2017 were as follows:

Question Title: Test Bank (Problem) Question 13-1

Current Assets Current Liabilities

3. Dividends were paid by the subsidiary on June 30 amounting to 156,000 pounds.

5. Exchange rates for the pound on various dates were:

July 1, 2015 $1.79

2. Depr. on 2015 equipment: 66,000 × $1.79 = $118,140

3. 2015 equipment: 340,000 × $1.79 = $608,600

Question Title: Test Bank (Problem) Question 13-2

H – Historical exchange rate

Exchange rate if the

1. Bonds Payable (issued 01/01/11) ___________ ______________

Question Title: Test Bank (Problem) Question 13-3

Comparative Balance Sheets

Accounts payable 13,500 18,000

Exchange rates for the franc at various dates are:

Accounts Payable 18,000 0.8830 15,894

Question Title: Test Bank (Problem) Question 13-4

January 1, 2017 1 pound = 1.81

Required: Using the current rate method prepare the subsidiary’s:

Sales revenue $806,260

Question Title: Test Bank (Problem) Question 13-5

1. Bonds Payable (issued 01/01/11) _ ____