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The Herlitzka Company, a U.S. multinational firm, has a 100 percent stake in a Swiss subsidiary. The U.S. dollar (USD) has been determined to be the functional currency. All the common stock of the subsidiary was issued at the beginning of the year and the subsidiary uses the weighted-average inventory cost-flow assumption. In addition, the value of the SF is as follows:
Beginning of year $0.5902
Average throughout the year $0.6002
End of year $0.6150

The SF-based balance sheet and income statement data for the Swiss subsidiary are as follows:
Accounts receivable = 3,000
Inventory= 4,000
Fixed assets= 12,000
Accounts payable= 2,000
Long-term debt= 5,000
Common stock= 10,000
Retained earnings= 2,000
Net income= 2,000

The remeasured value of accounts receivable and inventory respectively are closest to:
A)
$1,845 and $2,361.
B)
$1,771 and $2,361.
C)
$1,845 and $2,401.



The basis for using the current rate method is when Functional Currency is NOT the same as Parent's Presentation (reporting) Currency. The basis for using the temporal method is when Functional Currency = Parent's Presentation Currency.

Since the USD is the functional currency, use the temporal method. Under the temporal method, inventory is remeasured using the historical rate. However, our best guess of the historical rate under the weighted average inventory cost-flow assumption is the average rate through the period. Hence, A/R = $0.615 × 3,000 = $1,845 and Inventory = $0.6002 × 4,000 = $2,401.

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The Herlitzka Company, a U.S. multinational firm, has a 100% stake in a Swiss subsidiary. The Swiss franc (SF) has been determined to be the functional currency. All the common stock of the subsidiary was issued at the beginning of the year and the subsidiary uses the FIFO inventory cost-flow assumption. In addition, the value of the SF is as follows:

Beginning of year$0.5902
Average throughout the year$0.6002
End of year$0.6150


The SF-based balance sheet and income statement data for the Swiss subsidiary are as follows:

Accounts receivable= 3,000
Inventory= 4,000
Fixed assets= 12,000
Accounts payable= 2,000
Long-term debt= 5,000
Common stock= 10,000
Retained earnings= 2,000
Net income= 2,000


The translated value of common stock and long-term debt respectively are:
A)
$5,902 and $3,001.
B)
$6,150 and $3,075.
C)
$5,902 and $3,075.



The basis for using the current rate method is when Functional Currency is NOT the same as Parent's Presentation (reporting) Currency. The basis for using the temporal method is when Functional Currency = Parent's Presentation Currency.

Since the SF is the functional currency, use the current rate method. Common stock is translated at the historical rate which is the rate that applied when the transaction was made or $0.5902 and long-term debt is translated at the current rate of $0.615. 10,000 × 0.5902 = $5,902 for common stock and 5000 × 0.6150 = $3,075 for long term debt.

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Geocorp is a global corporation with operations in North America, Asia, and Europe. Its primary business is marketing industrial machinery for the construction industry. Geocorp has regional headquarters located in New York, Tokyo, and Paris. All North American and U.S operations report to its regional and world headquarters located in New York, while all Asian operations report to Tokyo, and all European operations report to Paris.
The following information is relevant to Geocorp’s subsidiaries:
  • Geocorp has a Canadian subsidiary that reports its results in Canadian dollars (CAD). The CAD is the functional currency.
  • All domestic U.S. operations report their results in U.S. dollars (USD).
  • All world-wide operations are reported in USD.
  • Geocorp’s Asian operations report their results in Japanese yen (JPY). The JPY is the functional currency.
  • Geocorp has a Chinese subsidiary that reports its results in Chinese yuan renminbi (CNY). The USD is the functional currency.
  • Geocorp’s European headquarters (in Paris) operations report their results in euros (EUR). The EUR is the functional currency.
  • Geocorp has a British subsidiary that reports its results in British pounds (GBP). The USD is the functional currency.

The following table is a summary of selected financial results from Geocorp’s foreign operations:

All values are in millions

CAD

JPY

CNY

GBP

EUR


Revenues

50

5,000


250

150

700

Cost of goods sold (COGS)

20

2,700


110

100

480

Gross profit

30

2,300


140

50

220

Selling, general & administrative (SGA) expenses

18

1,000


52

29

200

EBIT

12

1,300


88

21

10

Cash

35

4,200


130

102

400

Accounts receivable

12

1,400


55

45

170

Inventory

20

3,900


135

123

300

Fixed assets

62

7,680


188

370

450

Accounts payable

27

3,300


76

68

350

Long-term debt

70

8,450


290

320

550

Common stock

10

2,000


150

50

350

The following exchange rates apply (USD per foreign currency unit):

Currency

Historical Rate

Average Rate

December 31, 2002


CAD

USD 0.7013

USD 0.6803

USD 0.6592


JPY

USD 0.0094

USD 0.0088

USD 0.0082


CNY

USD 0.1010

USD 0.1109

USD 0.1208


EUR

USD 0.9801

USD 1.0318

USD 1.0834


GBP

USD 1.4803

USD 1.5506

USD 1.6209


With respect to the Canadian subsidiary, what method should be used to value its revenues, what is the appropriate exchange rate, and what is the translated value (in USD)?
A)
Temporal method, average rate, USD 34.0 million.
B)
Current method, current rate, USD 33.0 million.
C)
Current method, average rate, USD 34.0 million.



The basis for using the current rate method is when Functional Currency is NOT the same as Parent's Presentation (reporting) Currency. The basis for using the temporal method is when Functional Currency = Parent's Presentation Currency.

Self-contained, independent subsidiaries reporting their results in the local currency that is also the functional currency use the current method. Revenues under the current method are translated using the average rate. Hence, 50 × 0.6803 = USD 34.0 million. (Study Session 6, LOS 24.d)

With respect to the Japanese subsidiary, what method should be used to value its accounts receivable, what is the appropriate exchange rate, and what is the translated value (in USD)?
A)
Temporal method, current rate, USD 11.5 million.
B)
Current method, current rate, USD 11.5 million.
C)
Current method, average rate, USD 12.3 million.



Self-contained, independent subsidiaries reporting their results in the local currency that is also the functional currency use the current method. Assets under the current method are translated using the current rate. Hence, 1400 × 0.0082 = USD 11.5 million. (Study Session 6, LOS 24.d)

With respect to the European HQ subsidiary, what method should be used to value its SG&A expenses, what is the appropriate exchange rate, and what is the translated value (USD)?
A)
Temporal method, average rate, USD 206.4 million.
B)
Current method, average rate, USD 206.4 million.
C)
Current method, current rate, USD 216.7 million.



Self-contained, independent subsidiaries reporting their results in the local currency that is also the functional currency use the current method. Expenses under the current method are translated using the average rate. Hence, 200 × 1.0318 = USD 206.4 million. (Study Session 6, LOS 24.d)

With respect to the British subsidiary, what method should be used to value its fixed assets, what is the appropriate exchange rate, and what is the translated value (USD)?
A)
Current method, current rate, USD 599.7 million.
B)
Temporal method, historical rate, USD 547.7 million.
C)
Current method, historical rate, USD 547.7 million.



Self-contained, independent subsidiaries reporting their results in the local currency that is NOT the functional currency use the temporal method. Fixed assets under the temporal method are translated using the historical rate. Hence, 370 × 1.4803 = USD 547.7 million. (Study Session 6, LOS 24.d)

With respect to the Chinese subsidiary, what method should be used to value its long term debt, what is the appropriate exchange rate, and what is the translated value (in USD)?
A)
Temporal method, historical rate, USD 29.3 million.
B)
Temporal method, current rate, USD 35.0 million.
C)
Current method, current rate, USD 35.0 million.



Self-contained, independent subsidiaries reporting their results in the local currency that is NOT the functional currency use the temporal method. Long-term debt under the temporal method is considered a monetary liability and is translated using the current rate. Hence, 290 × 0.1208 = USD 35.0 million. (Study Session 6, LOS 24.d)

Which of the following statements is most accurate with respect to accounting for inventory and cost of goods sold (COGS) using last-in first out (LIFO) under the temporal method?
A)
Inventory is translated at historical rates, and COGS is translated at the current rate.
B)
Inventory is translated at the current rate while COGS is translated at historical rates.
C)
Inventory is translated at historical rates, and COGS is translated at historical rates.



If using LIFO, units sold during the year are the ones purchased during the year. Under the temporal method, COGS and inventory would be translated at historical rates. (Study Session 6, LOS 24.c)

TOP

Which example least accurately describes pure balance sheet and income statement ratios?
A)
All pure balance sheet ratios are affected by the all-current translation method.
B)
The current ratio is a pure balance sheet ratio.
C)
When multiplying both the numerator and denominator by the current exchange rate, the current rate is cancelled.


All pure balance sheet ratios are unaffected by the all-current translation method.

TOP

Assume that Scud Co. is a Swiss subsidiary of the U.S. firm Patriot, Inc. On December 31, 2001 the $/SF exchange rate was 0.77. (Each Swiss Franc buys 77 cents). One year later the Swiss Franc had appreciated to 0.85 $/SF. Scud Co. pays no dividends. The average exchange rate for the year was 0.80 $/SF. Scud pays no taxes. Assume that inventory is accounted for using the last in, first out (LIFO) inventory assumption and was bought and sold evenly throughout the year.
Scud Co. Int'l
Balance Sheet (in SF thousands)

Dec. 31, 2001

Dec. 31, 2002
Cash & accounts receivables (A/R)400600
Inventory500500
Net Fixed Assets

700

600

Total Assets1,6001,700

Accounts payable (A/P)

100

200
Long-term debt200100
Common Stock1,3001,300
Retained Earnings

0

100

Total Liabilities1,6001,700

Income Statement (in SF thousands)
December 31, 2002

In SF

Sales7,000
Cost of Goods Sold (COGS)(6,800)
Depreciation(100)
Translation Gain/Loss--
Net Income100

Assume that the functional currency is the U.S. dollar when answering the following questions.The level of long-term debt on the 2002 balance sheet would be:
A)
$77.
B)
$85.
C)
$80.



The basis for using the current rate method is when Functional Currency is NOT the same as Parent's Presentation (reporting) Currency. The basis for using the temporal method is when Functional Currency = Parent's Presentation Currency.
Since the U.S. dollar is the functional currency and the reporting currency, the temporal method should be used to remeasure the Swiss Franc into U.S. dollars. With the temporal method monetary assets like cash and monetary liabilities are remeasured at the current exchange rate. Long term debt is considered a monetary asset, thus use the current rate: 100SF × 0.85$/SF = $85.


Depreciation would be:
A)
$77.
B)
$85.
C)
$80.



The temporal method uses the historical rate to remeasure depreciation: 100SF × 0.77$/SF = $77.

The level of common stock on the 2002 balance sheet would be:
A)
$1,105.
B)
$1,001.
C)
$1,040.



Common stock uses the historical rate for both the temporal method and the current rate method: 1300SF × 0.77$/SF = $1001.

TOP

Which of the following measures is unaffected by the choice between translation under the current rate method and remeasurement under the temporal method?
A)
Cost of goods sold.
B)
Tax expense.
C)
Equity.



Taxes are converted at the same rate (average rate) under both methods. Equity under the temporal method is a mixed rate whereas under the current rate method it is at the current rate.  COGS under the temporal method is at the historical rate and under the current rate method it is at the average rate.

TOP

Which of the following ratios is unaffected by the choice between the current rate method and the temporal method?
A)
Accounts receivable turnover.
B)
Net profit margin.
C)
Debt/Assets.



Both accounts receivable and sales are converted at the same rate so the ratio is the same under each method.

TOP

Fronttalk Company is a U.S. multinational firm with a 100% stake in a foreign subsidiary. The foreign subsidiary's local currency has depreciated against the U.S. dollar over the latest financial statement reporting period. In addition, the subsidiary accounts for inventories using the last in, first out (LIFO) inventory cost-flow assumption and all purchases were made toward the end of the year. The gross profit margin as computed under the temporal method would most likely be:
A)
higher than the same ratio computed under the current rate method.
B)
equal to the same ratio computed under the current rate method.
C)
lower than the same ratio computed under the current rate method.



The foreign company uses LIFO so new purchases are flowing to cost of goods sold (COGS) and most purchases occurred toward the end of the year, so the current rate of exchange is our best guess for the COGS account. Since the local currency is depreciating, it is taking more foreign currency units to buy a dollar in the more recent periods and as a result, COGS as measured in U.S. dollars is lower and the gross profit margin is higher under the temporal method.

TOP

Under U.S. GAAP, the temporal method is preferred to the current rate method in hyperinflationary economies because the temporal method:
A)
is easier to perform under hyperinflation.
B)
results in non-monetary asset values that are a better proxy for the economic values of those assets.
C)
provides better conversions of subsidiary revenues.



The temporal method results in non-monetary asset values that are a better proxy for the economic values of those assets than those obtained under the current rate method. Both methods convert revenues and SG&A at the average rate so there could be no clear preference when considering these measures.

TOP

In a hyperinflationary economy, translation under the current rate method will most likely result in relatively:
A)
high balance sheet values for long term assets.
B)
low balance sheet values for long term liabilities.
C)
high translation gains.



In a hyperinflationary economy, translation under the current rate method will most likely result in relatively low balance sheet values for assets and liabilities. Translation losses will also occur.

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