F6/M5 Foreign Currency Accounting

Question 1

Historical exchange rate (Use for Equity Accounts)

Answer 1

Rate in effect at the issuance of stock

Question 2

Weighted average rate (Income statement accounts)

Answer 2

Income Statement accounts

Question 3

Functional currency

Answer 3

Currency of the primary economic environment

1. Use that country’s currency
2. Self contained (Do their own banking)
3. Not hyper inflationary (100% in 3 years)

Question 4

Foreign Currency Translation Method

Answer 4

Functional currency –> Reporting currency

Subs entire financial statements

Sub must have Financial statements already in Functional Currency

Question 5

Foreign Currency Remeasurement Method

Answer 5

Foreign Currency -> Functional currency

Monetary Items (Fixed):

• A/R
• Cash
• Allowances
• Payables
• Accrued expenses

Non monetary Items (Nonfixed)

• common stock
• PP&E
• Inventory
• Investment in Sub
• Intangible assets

Question 6

Remeasurement method steps

Answer 6

1. Balance Sheet (first conversion)
   - Monetary items = Current Rate = Fixed
   - Non monetary items = Historical Rate =
   Fluctuate
2. Income Statement (second conversion)
   - Non B/S items = Weighted avg. rate
   - B/S items = Historical rate
3. Remeasurement G/L (I/S)
   - Adjust R/E to make B/S balance

Question 7

Translation method (PU[F]ER)
 - Foreign Currency Translation adjustment

Answer 7

1. Income Statement ( first conversion )
   - All items = weighted avg
   - Transfer Net Income to Retained Earnings
2. Balance Sheet (second conversion)
   - Assets = current year rate
   - Liabilities = current year
   - Common stock / apic = Historical
   - RE = roll forward
3. Translation gain or loss (OCI)
   - Plug translation adjustment directly to OCI (equity)
   - Not income item

Question 8

JE to record gain on Translation adjustment

Answer 8

Dr: Cumulative Translation Adjustment
Cr: OCI

Question 9

Individual Foreign transactions (Foreign exchange contracts)

Answer 9

Changes to current exchange rate is adjusted to net income as a gain or loss