Section 3E Foreign Currency Transactions

Question 1

• On September 1, 20X1, Cano & Co., a U.S. corporation, sold merchandise to a foreign firm for 250,000 francs. Terms of the sale require payment in francs on February 1, 20X2. On September 1, 20X1, the spot exchange rate was $.20 per franc.
• At December 31, 20X1, Cano’s year-end, the spot rate was $.19, but the rate increased to $.22 by February 1, 20X2, when payment was received.

How much should Cano report as foreign exchange gain or loss in its 20X2 income statement?

$2,500 loss

$0

$5,000 gain

$7,500 gain

Answer 1

$7,500 gain

Choice “C” is correct. Foreign exchange gains and losses are recorded at year end on uncompleted contracts. The gain for Year 2 is the exchange rate change from 12/31/Year 1 to 2/1/Year 2: ($.22 - $.19) or $.03 x $250,000$7,500

Question 2

For other than forward contracts, the following should apply to all foreign currency transactions of an enterprise and its investees:

a. At the date the ___is recognized, each asset, liability, revenue, expense, gain, or loss arising from the transaction should be measured and recorded in the functional currency of the recording entity by use of the exchange rate in effect at that date.
b. At each ___date, recorded balances that are denominated in a currency other than the functional currency of the recording entity should be adjusted to reflect the current exchange rate as of the ____date.

Answer 2

transaction

balance sheet , balance sheet

Question 3

___ and ___arising from foreign currency transactions (transactions denominated in a currency other than the functional currency) arise when monetary assets and liabilities (such as the account receivable in this question) are denominated in a currency other than the functional currency and the exchange rate between the currencies changes.

Answer 3

Gains and losses

Question 4

When remeasuring foreign currency financial statements into the functional currency, which of the following items would be remeasured using historical exchange rates?

Marketable equity securities reported at market values

Bonds payable

Inventories carried at cost

Accrued liabilities

Answer 4

Inventories carried at cost

.

FASB ASC 830-10-45-18 provides guidance for the remeasurement (i.e., translation) of the books of record into the functional currency. Specifically, a listing of accounts to be remeasured using historical exchange rates is provided and inventories carried at cost appears in that listing.

Note: Remeasurement using historical rates is the exception to the general guidance of using the current exchange rate for all assets and liabilities. Only those items on this listing are remeasured using historical rates.

Question 5

Which of the following statements regarding foreign exchange gains and losses is correct?

An exchange gain occurs when the exchange rate increases between the date a receivable is recorded and the date of cash receipt.

An exchange gain occurs when the exchange rate increases between the date a payable is recorded and the date of cash payment.

An exchange loss occurs when the exchange rate increases between the date a receivable is recorded and the date of the cash receipt.

An exchange loss occurs when the exchange rate decreases between the date a payable is recorded and the date of the cash payment.

Answer 5

An exchange gain occurs when the exchange rate increases between the date a receivable is recorded and the date of cash receipt.

• Receivables denominated in a foreign currency entitle a company to a fixed number of units of the foreign currency.
• The U.S. dollar balance of the receivable is measured initially using the exchange rate in effect when the receivable is established.
• If the exchange rate is higher when the fixed number of units of the foreign currency is received (i.e., cash is received), the dollars received will exceed the balance of the receivable in dollars, and a gain will have occurred.

Question 6

Foreign currency transactions may produce ___ or ___that are fixed in terms of the amount of foreign currency that will be received or paid.

A change in exchange rates between the functional currency and the currency in which a transaction is denominated increases or decreases the expected amount of functional currency cash flows on settlement of the transaction T/F.

The increase or decrease in expected functional currency cash flows is a foreign currency transaction __ or __that should generally be included in determining net income for the period in which the exchange rate changes.

Answer 6

receivables or payables

True

gain or loss

Question 7

As the exchange rate increases, the ___incurs an exchange loss because a greater number of U.S. dollars is required to satisfy the payable denominated in units of a foreign currency. Conversely, the debtor experiences an exchange gain when the exchange rate ___.

Answer 7

debtor

declines

Question 8

When remeasuring foreign currency financial statements into the functional currency, which of the following items would be remeasured using historical exchange rates?

Debt securities classified as available-for-sale

Long-term notes payable

Equipment used in operations, carried at cost

Accounts receivable

Answer 8

Equipment used in operations, carried at cost

• FASB ASC 830-10-45-18 provides guidance for the remeasurement (i.e., translation) of the books of record into the functional currency.
• Specifically, a listing of accounts to be remeasured using historical exchange rates is provided and tangible, fixed assets carried at cost appear in that listing.
• In general, monetary items are remeasured using current rates and nonmonetary items are remeasured using historical rates. For example, plant assets and the related depreciation expense would be translated at historical rates.

Question 9

Answer 9

$41,000

Question 10

A foreign subsidiary of a U.S. parent company should measure its assets, liabilities and operations using the:

U.S. dollar.

best available spot rate.

subsidiary’s local currency.

subsidiary’s functional currency.

Answer 10

subsidiary’s functional currency.

The FASB requires that an asset, liability, revenue, expense, gain, or loss arising from a transaction should be measured and recorded in the functional currency of the recording entity by use of the exchange rate in effect on the transaction date.

Functional currency is determined by the primary economic environment in which the entity operates and is often determined by the parent company.

Question 11

Answer 11

$1,000 loss

FASB ASC 830-20 (Foreign Currency Transactions) provides that a gain or loss on a forward contract is computed by multiplying the foreign currency amount of the forward contract by the difference between the spot rate at the balance sheet date and the spot rate at the date of inception of the forward contract.

Troy’s reported foreign exchange loss:

= 25,000 Australian dollars × ($0.74 – $0.78) per Australian dollar
= $1,000 loss

Forward contract = specified price on a specified date

Question 12

Answer 12

$1,000

Foreign currency amount at 09/01/X1 ($.74 x 50,000) $37,000
Less: Foreign currency amount at 09/30/X1 ($.72 x 50,000) 36,000
Foreign exchange loss $ 1,000

Note: On September 1, 20X1, the 60-day forward rate is used while the rate used on September 30, 20X1, is the 30-day rate. Since the forward contract (the derivative) is for purposes of speculation, any associated exchange gain or loss must be included in net income.

Question 13

Any exchange gains or losses associated with the forward contract or with the accounts payable denominated in a foreign currency must be recognized in the period in which the___ and be ___in the determination of net income.

Answer 13

exchange rate changes, included

Question 14

• On September 22, 20X1, Yumi Corp. purchased merchandise from an unaffiliated foreign company for 10,000 units of the foreign company’s local currency.
• On that date, the spot rate was $.55. Yumi paid the bill in full on March 20, 20X2, when the spot rate was $.65.

The spot rate was $.70 on December 31, 20X1. What amount should Yumi report as a foreign currency transaction loss in its income statement for the year ended December 31, 20X1?

$1,500

$1,000

$500

$0

Answer 14

$1,500

A foreign currency transaction loss occurred because it cost more to purchase the units of foreign currency on December 31 ($.70) than it cost when the transaction originated on September 22 ($.55).

The amount of loss would be computed as follows:
Transaction loss = Number of units x Change in rate
= 10,000 x ($.70 - $.55)
= 10,000 x $.15
= $1,500

Question 15

Gordon, Ltd., a 100%-owned British subsidiary of a U.S. parent company, reports its financial statements in local currency, the British pound. A local newspaper published the following U.S. exchange rates to the British pound at year-end:

Current rate $1.50
Historical rate (acquisition) 1.70
Average rate 1.55
Inventory (FIFO) 1.60

Which currency rate should Gordon use to convert its income statement to U.S. dollars at year-end?

$1.60

$1.50

$1.55

$1.70

Answer 15

$1.55

Under FASB ASC 830-30-45-3, all elements of financial statements should be translated by using a current exchange rate. For revenues and expenses, an appropriately weighted-average exchange rate for the period may be used to translate those amounts.

Question 16

Malay Corporation is a 100%-owned subsidiary of a U.S. parent company. Malay is located in Singapore and reports its financial statements in local currency, the Singapore dollar. The following exchange rates were available at the time U.S. parent company was preparing consolidated financial statements:

Current rate $0.79
Historical rate (acquisition) 0.90
Weighted-average rate 0.85
Beginning of current year 0.88

Malay reported revenue of 4,570,000 Singapore dollars for the current period. When converting Malay’s revenue account to U.S. dollars at year-end, how much should be reported in U.S. dollars?

$3,610,300

$4,113,000

$4,021,600

$3,884,500

Answer 16

$3,884,500

• Under FASB ASC 830-30-45-3, all elements of financial statements should be translated by using a current exchange rate.
• For revenues and expenses, an appropriately weighted-average exchange rate for the period may be used to translate those amounts.
• In this case, the weighted-average exchange rate of 0.85 times the revenue in Singapore dollars equals the revenue in U.S. dollars (0.85 × 4,570,000 Singapore dollars = $3,884,500).

Question 17

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:

both the foreign currency and the U.S. dollar.

the foreign currency.

the U.S. dollar.

neither the foreign currency nor the U.S. dollar.

Answer 17

the U.S. dollar.

The objective of translation or remeasurement is to report the subsidiary’s income statement results in the U.S. parent’s currency—which is the U.S. dollar.

Question 18

The need for translation of foreign currency financial statements arises, for example, when a U.S. corporation has a subsidiary or equity-method investee located in a foreign country. The discussion in this section focuses on the case of a U.S. parent corporation and its foreign subsidiary. It is assumed that the parent company’s functional currency (as well as its reporting currency) is the ___. The translation issue then revolves around translating the foreign subsidiary’s financial statements into the reporting currency of the parent for purposes of preparing consolidated financial statements.

Answer 18

U.S. dollar

Question 19

On October 1, 20X1, Mild Co., a U.S. company, purchased machinery from Grund, a German company, with payment due on April 1, 20X2. If Mild’s 20X1 operating income included no foreign exchange transaction gain or loss, then the transaction could have:

caused a foreign currency gain to be reported as a contra account against machinery.

been denominated in U.S. dollars.

been denominated in the foreign currency.

caused a foreign currency translation gain to be reported as a separate component of stockholders’ equity.

Answer 19

been denominated in U.S. dollars.

A foreign currency translation gain or loss (which is reported as a separate component of stockholders’ equity) results from the process of translating financial statements from the entity’s functional currency into the reporting currency (clearly not the case here), not from a specific foreign exchange transaction such as the purchase of machinery.

It would seem very unlikely that exchange rates between U.S. and German currencies would remain constant for the three months, October to December 31, 20X1. Therefore, it is reasonable to assume that the transaction was denominated in U.S. dollars.

Question 20

• The functional currency of Nash, Inc.’s, subsidiary is the euro. Nash borrowed euros as a partial hedge of its investment in the subsidiary.
• In preparing consolidated financial statements, Nash’s translation loss on its investment in the subsidiary exceeded its exchange gain on the borrowing.

How should the effects of the loss and gain be reported in Nash’s consolidated financial statements?

1. The translation loss less the exchange gain is reported in other comprehensive income.
2. The translation loss is reported in net income and the exchange gain is reported in other comprehensive income.
3. The translation loss is reported in other comprehensive income and the exchange gain is reported in net income
4. The translation loss less the exchange gain is reported in net income.

Answer 20

The translation loss less the exchange gain is reported in other comprehensive income.

Both of the items involved, the translation loss on the investment in the subsidiary and the partial hedge through the borrowing of euros, are items that will be reported in other comprehensive income.

Since one is a gain and the other is a loss, the net effect of both is reported in other comprehensive income

Question 21

An entity may have foreign currency risk exposure from its investments in foreign operations. An entity is allowed to hedge this foreign currency risk by using a ___instrument or a foreign currency denominated ___financial instrument (such as a foreign currency denominated debt).

the effects of changes in exchange rates are recognized in ___income and closed to the cumulative ___account (a specific component of the accumulated other comprehensive income balance sheet account).

Answer 21

derivative

nonderivative

other comprehensive , translation adjustment

Question 22

Answer 22

$9,000

FASB ASC 830-20 (Foreign Currency Transactions) provides that a gain or loss on a forward contract is computed by multiplying the foreign currency amount of the forward contract by the difference between the spot rate at the balance sheet date and the spot rate at the date of inception of the forward contract.
Hunt’s reported foreign exchange gain
= 300,000 British pounds x ($1.65 - $1.62) per British pound
= $9,000

Question 23

• Park Co.’s wholly owned subsidiary, Schnell Corp., maintains its accounting records in German marks. Because all of Schnell’s branch offices are in Switzerland, its functional currency is the Swiss franc. (Park’s functional currency is also the Swiss franc.)
• Remeasurement of Schnell’s 20X1 financial statements resulted in a $7,600 gain, and translation of its financial statements resulted in an $8,100 gain.

What amount should Park report as a foreign exchange gain in its income statement for the year ended December 31, 20X1?

$15,700

$8,100

$0

$7,600

Answer 23

$7,600

FASB ASC 830-10-45-17 provides that remeasurement for transactions denominated in a currency other than the functional currency will give rise to a “foreign currency transaction gain or loss that generally shall be included in determining net income for the period in which the exchange rate changes.”

FASB ASC 830-30-45-12 states, “Translation adjustments shall not be included in determining net income but shall be reported separately and accumulated in comprehensive income.”

Based on this, Park should include the $7,600 remeasurement gain in its income statement, but not the translation gain.

Question 24

First, the financial statements of the subsidiary must be stated in terms of U.S. GAAP if they are not already so stated. t/f

Logically, one would assume that the foreign subsidiary’s books and records are maintained in its local currency. , the currency in which the subsidiary’s books and records are maintained will be referred to as the “___” currency. Further, it is assumed that the subsidiary’s local currency is the ___. t/f

If the subsidiary’s functional currency is the same as its recording currency, __is not necessary

On the other hand, if the subsidiary’s functional currency is the U.S. dollar, step 1 (remeasurement) is necessary (i.e., the accounts first would have to be remeasured from the recording currency (zags) into the functional currency (U.S. dollars)). In this case, step 2 (___) would not be necessary

Answer 24

true

recording, zag

remeasurement

translation

Question 25

The particular significance of which currency is the subsidiary’s functional currency is that exchange gains and losses resulting from ___must enter into the determination of net income, whereas exchange gains and losses resulting from ___do not

Answer 25

remeasurement , translation

Question 26

Assuming the subsidiary’s financial statements are already stated in terms of U.S. GAAP, the overall translation process can be summarized as a two-step process.

Step 1: If necessary, ___the subsidiary’s financial statements from its recording currency into its functional currency.

Step 2: If necessary, ____the subsidiary’s financial statements from its functional currency into the reporting currency of the parent.

Answer 26

remeasure

translate

Question 27

A company from the United Kingdom uses British pounds in its normal operations, reports in the European Union in euros, and reports in the United States in U.S. dollars. The company is owned by a private equity firm in Japan. What is the company’s functional currency?

The U.S. dollar

The Japanese yen

The euro

The British pound

Answer 27

The British pound

Functional currency is the currency of the primary economic environment in which the entity operates (i.e., the environment in which the entity generates and expends cash), which would be British pounds for this example.

Question 28

The following definitions are important in understanding accounting for foreign operations:

a. __rate: The amount of one currency that can be exchanged for another at a particular point in time
b. ___rate: The exchange rate existing at the current date
c. __rate: A specified exchange rate between currencies at some specified future date
d. ___contract: A contract to buy or sell currency at a forward rate
e. ___currency: The currency of the primary economic environment in which the entity operates (i.e., the environment in which the entity generates and expends cash)

Answer 28

exchange

spot

forward

forward exchange

functional

Question 29

• On October 15, 20X7, Felis Limited, a U.S. corporation, sold merchandise to a Belgian firm for 130,000 euros. Terms of the sale require payment in euros on February 16, 20X8. On October 15, 20X7, the spot exchange rate was $1.17 per euro.
• At December 31, 20X7, Felis’ year-end, the spot rate was $1.15, but the rate increased to $1.21 by February 16, 20X8, when payment was received.

How much should Felis report as foreign exchange gain or loss in its 20X8 income statement?

$2,600 loss

$2,600 gain

$7,800 loss

$7,800 gain

Answer 29

$7,800 gain

These changes increase or decrease expected functional currency cash flows and shall be included in determining net income for the period in which the exchange rate changes (i.e., the receivable is revalued at the spot rate at year-end and again when the payment is received).

Thus, Felis would revalue the receivable at $1.15/euro and report a $2,600 (€130,000 × ($1.17 – $1.15)) foreign transaction loss at December 31, 20X7. Then, in its 20X8 income statement, Felis again revalues the receivable (from $1.15 to $1.21) and reports a $7,800 gain (€130,000 × ($1.21 – $1.15)).

Question 30

Which of the following is not reported in the income statement?

Foreign currency transaction gains

All of the answer choices are reported in the income statement.

Foreign currency remeasurement gains

Foreign currency translation gains

Answer 30

Foreign currency translation gains

Foreign currency remeasurement gains and losses are reported in the income statement, as are foreign currency transaction gains and losses. Foreign currency translation gains and losses are reported in other comprehensive income.

Question 31

Which of following characterizes the concept of a company’s functional currency?

The currency in which an entity expends cash

The currency is that of the primary economic environment in which the entity operates.

The currency in which an entity generates cash

All of the answer choices characterize an entity’s functional currency.

Answer 31

All of the answer choices characterize an entity’s functional currency.

The functional currency of an entity is the currency used in its primary economic environment and in which the entity generates and expends cash.

Question 32

A company’s foreign subsidiary operation maintains its financial statements in the local currency. The foreign operation’s capital accounts would be translated to the functional currency of the reporting entity using which of the following rates?

Current exchange rate at the balance sheet date

Functional exchange rate

Weighted-average exchange rate

Historical exchange rate

Answer 32

Historical exchange rate

When translating the capital accounts of a subsidiary, the historical exchange rate is used for the capital stock account and additional paid-in capital. This date cannot be earlier than the date the parent acquired the investment in the subsidiary.

Question 33

On December 15, a U.S. company bought inventory from a European supplier. Payment is required in euros in 30 days. What exchange rate should be used to value the payable for this transaction at year-end?

Exchange rate at year-end

Exchange rate at purchase date

Exchange rate at settlement date

Weighted-average exchange rate for the year

Answer 33

Exchange rate at year-end

• Foreign currency transactions are transactions denominated in a currency other than the entity’s functional currency. In this case, the functional currency is the U.S. dollar and the foreign currency is the euro.
• At the date the transaction is recognized, each asset, liability, revenue, expense, gain, or loss arising from the transaction should be measured and recorded in the functional currency of the recording entity by using the exchange rate in effect at that date.
• At each balance sheet date, recorded balances that are denominated in a currency other than the functional currency of the recording entity should be adjusted to reflect the current exchange rate as of the balance sheet date.

Question 34

Fogg Co., a U.S. company, contracted to purchase foreign goods. Payment in foreign currency was due one month after the goods were received at Fogg’s warehouse. Between the receipt of goods and the time of payment, the exchange rates changed in Fogg’s favor. The resulting gain should be included in Fogg’s financial statements as:

a component of other comprehensive income.

a deferred credit.

a component of income from continuing operations.

a separate component of stockholders’ equity.

Answer 34

a component of income from continuing operations.

• Fogg should include the gain as a component of income from continuing operations according to the provisions of FASB ASC 830-20-35-1:
• “A change in exchange rates between the functional currency and the currency in which a transaction is denominated increases or decreases the expected amount of functional currency cash flows upon settlement of the transaction.
• That increase or decrease in expected functional currency cash flows is a foreign currency transaction gain or loss that generally shall be included in determining net income for the period in which the exchange rate changes.”

Question 35

Answer 35

$1,350 gain

Question 36

In preparing consolidated financial statements of a U.S. parent company with a foreign subsidiary, the foreign subsidiary’s functional currency is the currency:

of the country in which the subsidiary is located.

in which the subsidiary maintains its accounting records.

of the country in which the parent is located.

of the environment in which the subsidiary primarily generates and expends cash.

Answer 36

of the environment in which the subsidiary primarily generates and expends cash

FASB ASC 830-10-45-2 states that the functional currency is the currency of the primary economic environment in which the entity operates or the currency in which most of the subsidiary’s transactions are denominated.

Question 37

A U.S. company purchased inventory on account at a cost of 1,000 foreign currency units (FCU) from a non-U.S. company on November 15, to be paid on December 15. The FCU is valued at $0.85 on November 15 and at $0.90 on December 15. The journal entry to record payment on December 15 should include which of the following?

Debit exchange gains and losses and credit accounts payable for $50.

Debit inventory and credit cash for $850.

Debit accounts payable and credit cash for $850.

Debit accounts payable and credit exchange gains and losses for $50.

Answer 37

Debit exchange gains and losses and credit accounts payable for $50.

• Exchange gains and losses resulting from remeasurement (rather than translation) must enter into the determination of net income.
• It will now cost the U.S. company an additional $0.05 for each FCU, or a total of $50 ($0.05 × 1,000 FCU).
• The difference is recognized in net income as an exchange loss, and accounts payable is remeasured from $850 ($0.85 × 1,000 FCU) to $900 ($0.90 × 1,000 FCU).

Question 38

Which of the following statements is correct regarding remeasurement and translation gains and losses?

1. Both remeasurement and translation gains and losses are reported in other comprehensive income.
2. Remeasurement gains and losses are reported in the income statement in the period they occur and translation gains and losses are reported in other comprehensive income.
3. Both remeasurement and translation gains and losses are reported in the income statement in the period they occur.
4. Remeasurement gain and losses are reported in other comprehensive income and translation gains and losses are reported in the income statement in the period they occur.

Answer 38

Remeasurement gains and losses are reported in the income statement in the period they occur and translation gains and losses are reported in other comprehensive income.

FASB ASC 830-10-45-17 provides that remeasurement for transactions denominated in a currency other than the functional currency will give rise to a “foreign currency transaction gain or loss that generally shall be included in determining net income for the period in which the exchange rate changes.”

FASB ASC 830-30-45-12 states, “Translation adjustments shall not be included in determining net income but shall be reported separately and accumulated in comprehensive income.”

Question 39

Packet Corp. is in the process of preparing its financial statements for the year ended December 31, 20X1. How would a gain on remeasuring a foreign subsidiary’s financial statements from the local currency into the functional currency that occurred during 20X1 be classified in these financial statements?

Other comprehensive income

Income from continuing operations, with no separate disclosure

Income from continuing operations, with separate disclosure (either on the face of statement or in the notes)

None of the answer choices are correct.

Answer 39

Income from continuing operations, with separate disclosure (either on the face of statement or in the notes)

FASB ASC 830-30-45-17 provides: “It is also necessary to recognize currently in income all exchange gains and losses from remeasurement of monetary assets and liabilities.”

FASB ASC 830-30-45-18 states: “An analysis of the changes…shall be provided in a separate financial statement, in notes to the financial statements, or as a part of a statement of changes in equity.”

Question 40

Answer 40

$475,000

FASB ASC 830-30-45-3 requires that the financial statements of a foreign subsidiary be translated to U.S. dollars. The exchange rate used for translation of assets is the current exchange rate. The translation using current rates is $475,000.

Question 41

Ball Corp. had the following foreign currency transactions during the current year:

• Goods purchased from a foreign supplier on January 20 for the U.S. dollar equivalent of $90,000. The invoice was paid on March 20, at the U.S. dollar equivalent of $96,000.
• On July 1, Ball borrowed the U.S. dollar equivalent of $500,000 evidenced by a note that was payable in the lender’s local currency on July 1, in two years. On December 31, the U.S. dollar equivalents of the principal amount and accrued interest were $520,000 and $26,000, respectively. Interest on the note is 10% per annum.

In Ball’s year-end income statement, what amount should be included as foreign exchange loss?

$0

$6,000

$21,000

$27,000

Answer 41

$27,000

Question 42

Answer 42

$106,400

The receivable should initially be recorded at the spot rate on the date of the transaction (1,900,000 pesos × $0.056 = $106,400). When Rafia receives payment on March 3, the 1,900,000 pesos will equal $95,000 (1,900,000 × $0.05) in U.S. dollars, not the $106,400 U.S. dollars for which the accounts receivable was originally recorded.

The journal entry on March 3 is:

Cash 95,000
Foreign currency transaction loss 11,400
Accounts receivable 106,400

Question 43

Toigo Co. purchased merchandise from a vendor in England on November 20 for 500,000 British pounds. Payment was due in British pounds on January 20. The spot rates to purchase 1 pound were as follows:
November 20 $1.25
December 31 1.20
January 20 1.17

How should the foreign currency transaction gain be reported on Toigo’s financial statements at December 31?

A gain of $40,000 in the income statement

A gain of $40,000 as a separate component of stockholders’ equity

A gain of $25,000 in the income statement

A gain of $25,000 as a separate component of stockholders’ equity

Answer 43

A gain of $25,000 in the income statement

Question 44

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 all of the following financial statement items except:

patents.

rental expense.

legal expense.

sales returns and allowances.

Answer 44

patents.

• FASB ASC 830-10-55-10 expresses a preference for using the current exchange rate in effect when revenues, expenses, gains, or losses occur.
• However, “because translation at the exchange rates at the dates the numerous revenues, expenses, gains, and losses are recognized is generally impractical, an appropriately weighted-average exchange rate for the period may be used to translate those elements.”
• Items such as intangible assets are translated using the historical exchange rate at the date of acquisition.

Thus, sales returns and allowances, legal expense, and rental expense may be translated using a weighted-average exchange rate.

Question 45

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:

both sales to customers and wages expense.

wages expense.

neither sales to customers nor wages expense.

sales to customers.

Answer 45

both sales to customers and wages expense

1. FASB ASC 830-10-55-10 expresses a preference for using the current exchange rate in effect when revenues, expenses, gains, or losses occur.
2. However, “because translation at the exchange rates at the dates the numerous revenues, expenses, gains, and losses are recognized is generally impractical, an appropriately weighted-average exchange rate for the period may be used to translate those elements.”

Thus, both sales and wages expense may be translated using a weighted-average exchange rate.

Question 46

Which of the following should be reported as a stockholders’ equity contra account?

Organization costs

Discount on convertible bonds that are common stock equivalents

Premium on convertible bonds that are common stock equivalents

Cumulative foreign exchange translation loss

Answer 46

Cumulative foreign exchange translation loss

• FASB ASC 830-30-45-12 requires that foreign currency translation adjustments “not be included in determining net income but shall be reported separately and accumulated in a separate component of equity.”
• If these cumulative adjustments netted out to a loss, this loss would effectively be reported as a stockholders’ equity contra account.

Discounts or premiums on convertible bonds are reported as contra accounts to the bond liability. Organization costs are an amortizable asset.

Question 47

Answer 47

$197,600

The receivable should initially be recorded at the spot rate on the date of the transaction.

200,000 euros × $0.988 = $197,600

Question 48

1. On October 1 of the current year, a U.S. company sold merchandise on account to a British company for 2,000 pounds (exchange rate: 1 pound = $1.43).
2. At the company’s December 31 fiscal year-end, the exchange rate was 1 pound = $1.45.
3. The exchange rate was 1 pound = $1.50 on collection in January of the subsequent year.

What amount would the company recognize as a gain (loss) from foreign currency translation when the receivable is collected?

$100

$(140)

$140

$0

Answer 48

$100

The company would recognize a $100 gain:
January (2,000 pounds x $1.50) $3,000
December (2,000 pounds x $1.45) 2,900
Gain $ 100

Question 49

1. On December 10 of the current year, a U.S. company sold merchandise on account to a Brazilian company for 84,000 Brazilian real (exchange rate: 1 real = $0.27).
2. At the company’s December 31 fiscal year-end, the exchange rate was 1 real = $0.26.
3. The exchange rate was 1 real = $0.24 on collection in early February of the subsequent year.

What amount would the company recognize as a gain or loss from this foreign currency transaction when the receivable is collected?

$840 loss

$1,680 loss

$1,680 gain

$840 gain

Answer 49

$1,680 loss

The company would recognize a $1,680 loss between December 31 and collection in February (note that the account would have been adjusted at December 31 to $21,840 from its original balance of $22,680):

February (84,000 real × $0.24) $20,160
December (84,000 real × $0.26) 21,840
Loss ($1,680)

Question 50

Answer 50

$400

Speculative contracts do not quality as hedges and are still controlled by FASB ASC 830-20-35-1. For these derivatives, the change in fair value is recognized immediately in net income.