Reading 26- LOS b ～ Q1－6

1．Which of the following statements describing the choice of the functional currency is FALSE? The functional currency should be the same as the parent’s reporting currency if the subsidiary is:

A)   highly integrated with the parent where the local currency, prices, and some costs are controlled or restricted.

B)   operating in high-inflation environment.

C)   mostly independent from the parent.

D)   highly integrated with the parent where the local currency, prices, and some costs are not controlled or restricted.

The correct answer was C)

The preferred functional currency for subsidiaries that are mostly independent of the parent is the local currency. For highly integrated subsidiaries (regardless of local conditions), or for subsidiaries operating in high-inflation environments, the parent’s reporting currency should be used as the functional currency.

2．The local currency is best characterized as:

A)   the preferred functional currency for subsidiaries that are highly integrated with the parent.

B)   translated into the functional currency under the all-current method.

C)   the preferred functional currency for subsidiaries operating in high-inflation environments.

D)   the currency of the country in which the foreign subsidiary is located.

The correct answer was D)

The local currency is best described as the currency of the country in which the foreign subsidiary is located. If a subsidiary is highly integrated with its parent or operating in a high-inflation environment, the functional currency is the parent’s currency. Local currencies are remeasured under the temporal method.

3．Which of the following statements regarding the functional currency is FALSE? The functional currency:

A)   is the currency of the primary economic environment in which the foreign subsidiary generates and expends cash.

B)   is remeasured into the reporting currency under the temporal method.

C)   is determined by management.

D)   may be the currency in which the subsidiary conducts operations or some other currency.

The correct answer was B)

The local currency is remeasured into the functional currency under the temporal method. The functional currency is translated into the reporting currency using the all-current method.

4．Which of the following is NOT correct concerning the functional currency?

A)   The functional currency is the primary currency of the entity's economic environment.

B)   Translation is the conversion of the functional currency into the reporting currency.

C)   Remeasurement is the conversion of the functional currency into the reporting currency.

D)   Remeasurement is the translation of local currency transactions into the functional currency.

The correct answer was C)

Translation is the conversion of the functional currency into the reporting currency. Remeasurement is the translation of local currency transactions into the functional currency.

5．In January, when 200 yen purchased one dollar, a Japanese subsidiary of a U.S. company borrowed $3,000,000 from a bank, payable in December with 3 percent interest. When the loan and interest (a total of $3,090,000) was paid, a dollar was worth 210 yen. The functional currency of the subsidiary is yen. The average rate during the year was 205 yen per dollar. The Japanese subsidiary will report:

A)   No gain or loss.

B)   A currency loss of 30,900,000 yen.

C)   A currency loss of 15,450,000 yen.

D)   A currency loss of 30,000,000 yen.

The correct answer was B)

Even though the subsidiary is owned by a U.S. company, the transaction represents a foreign currency loss. The amount of the loss is 3,090,000 × (210 − 200) = 30,900,000.

6.Remeasurement can be described as the following. The translation of:

A)   functional currency transactions into the local currency.

B)   local currency transactions into the functional currency.

C)   local currency transactions into the reporting currency.

D)   the functional currency of a subsidiary into a reporting currency.

The correct answer was B)

Remeasurement is the translation of local currency transactions into the functional currency.