Multiple Choice Questions
Which of the following items is normally translated the same way under both the current rate and temporal methods of translation?
a. Inventory
b. Equipment
c. Sales revenue
d. Depreciation expense
2. In translating the financial statements of a foreign subsidiary into the parent's reporting currency under the current rate method, which of the following statements is true?
a. Expenses are translated using a combination of current and historical exchange rates.
b. Intangible assets are translated at the historical exchange rates in effect on the date the assets are purchased.
c. The translation adjustment is a function of the foreign subsidiary's net assets.
d. The translation adjustment is a function of the relative amount of monetary assets and monetary liabilities held by the foreign subsidiary.
3. A foreign subsidiary of Wampoa Ltd. has one asset (inventory) and no liabilities. The subsidiary operates with a significant degree of autonomy from Wampoa and primarily uses the local currency (the won) in carrying out its transactions. Since the date the inventory was acquired, the won has decreased in value in relation to Wampoa's reporting currency. In translating the foreign subsidiary's won financial statements into the parent's reporting currency, which of the following is true?
a. A translation gain must be reported in net income.
b. A positive translation adjustment must be reported in stockholders' equity.
c. A negative translation adjustment must be reported in stockholders' equity.
d. A translation loss must be reported in net income.
4. Which of the following best explains how a translation loss arises when the temporal method of translation is used to translate the foreign currency financial statements of a foreign subsidiary?
a. The foreign subsidiary has more monetary assets than monetary liabilities, and the foreign currency appreciates in value.
b. The foreign subsidiary has more monetary liabilities than monetary assets, and the foreign currency depreciates in value.
c. The foreign subsidiary has more monetary assets than monetary liabilities, and the foreign currency depreciates in value.
d. The foreign subsidiary has more total assets than total liabilities, and the foreign currency appreciates in value.
5. Which method of translation maintains, in the translated financial statements, 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.
6. In accordance with U.S. generally accepted accounting principles (GAAP), which translation combination would be appropriate for a foreign operation whose functional currency is the U.S. dollar?
Method Treatment of Translation Adjustment
a. Temporal Separate component of stockholders' equity
b. Temporal Gain or loss in income statement
c. Current rate Separate component of stockholders' equity
d. Current rate Gain or loss in income statement
7. The functional currency of Garland Inc.'s Japanese subsidiary is the Japanese yen. Garland borrowed Japanese yen as a partial hedge of its investment in the subsidiary. How should the transaction gain on the foreign currency borrowing be reported in Garland's consolidated financial statements?
a. The transaction gain is reported as an adjustment to interest expense in the income statement.
b. The transaction gain is reported as an extraordinary item in the income statement.
c. The transaction gain is offset against the negative translation adjustment related to the Japanese subsidiary in the stockholders' equity section of the balance sheet.
d. The transaction gain is offset against the negative translation adjustment related to the Japanese subsidiary on the income statement.