Chapter 2 Foreign Currency Accounting

Question 1

What is Functional Currency?

Answer 1

The functional currency of an entity generally depnds upon the environment in which the entity generates and expends cash.

Question 2

How are gains and losses resulting from foreign exchange transactions recorded

Answer 2

They are included as a component of “income from continuing operations”. In the period in which they occur.

Question 3

How are cumulative foreign exchange translation losses reported?

Answer 3

They are reported in stockholders equity as a contra account. A cumulative foreign exchange translation loss would be a debit to accumulated other comprehensive income, therefore a contra to shareholders equity.

Question 4

A balance arising from the translation or remeasurement of a subsidiary’s foreign currency financial statements is reported in the consolidated income statement when the subsidiary’s functional currency is the?

Answer 4

Foreign currency - NO

Reporting currency - YES

Question 5

What rate should be used to translate all assets and all liabilities from the functional currency to the reporting currency

Answer 5

Current rate

Question 6

What rate is used for to transfer income statement accounts?

Answer 6

Average rate

Question 7

What rate is used when translating common stock and additional paid in capital?

Answer 7

Historical exchange rate

Question 8

How is a transaction recorded when its denominated in a foreign currency?

Answer 8

Using the spot rate