Which of the following measures is unaffected by the choice between translation under the current rate method and remeasurement under the temporal method?
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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.
Giant Company is a U.S. firm that produces parts for nuclear reactors. Giant Company has a subsidiary, Grande, Inc., that operates in Mexico and is responsible for designing and manufacturing connection fittings that are vital for the proper operation of its parent company’s reactors.
Exchange Rates were:
January 1, 2000
$0.14/M peso
January 1, 2001
$0.12/M peso
June 30, 2001
$0.11/M peso (this is the 2001 average rate)
December 31, 2001
$0.10/M peso
Grande, Inc.
Balance Sheet (in M Pesos)
Jan. 1, 2001
Dec. 31, 2001
Cash
5,000,000
20,000,000
Accounts Receivable
20,000,000
35,000,000
Inventory
15,000,000
15,000,000
Fixed Assets (net)
70,000,000
60,000,000
Accounts Payable
10,000,000
10,000,000
Long Term Debt
40,000,000
35,000,000
Common Stock
80,000,000
80,000,000
Retained Earnings
5,000,000
2001 Income Statement
(in M Pesos)
Sales
60,000,000
Cost of Goods Sold
(45,000,000)
Depreciation
(10,000,000)
Net Income
5,000,000
Giant Company should use the following method to reflect the results of Grande, Inc., in its financial statements:
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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.
The temporal method is used when the functional currency is the parent’s currency. (Study Session 6, LOS 25.c)
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Both the beginning and ending inventory under LIFO cost flow assumptions are translated at the $0.12 rate as of the date the original inventory was acquired, January 1, 2001. Because beginning and ending inventories expressed in Mexican pesos are equal, the purchases for the year will equal the Cost of Goods Sold, which is remeasured at the average cost of acquiring the goods during the year: $0.11. (45,000,000 × $0.11) = $4,950,000. The average rate is the best estimate of the historical rate because the inventory that was sold was purchased evenly through the year. (Study Session 6, LOS 25.c)
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Under the current rate method, translation gains and losses are reported in equity in the CTA account. This method is typically used when the subsidiary is relatively independent of the parent. Revenues and expenses are translated at the average rate. (Study Session 6, LOS 25.c)
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Under the temporal method, translation gains and losses are included in the income statement. (Study Session 6, LOS 25.d)
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Under the temporal method, revenues are translated at the average rate during the reporting period. 60,000,000 × 0.11 = $6,600,000 (Study Session 6, LOS 25.d)
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Since the functional currency is the reporting currency, the temporal method must be used. Since it is taking fewer dollars to buy a peso, the peso is depreciating.
The quick ratio is a liquidity ratio that does not include inventory. The quick ratio is calculated as [(cash + accounts receivable) / accounts payable]. Since monetary assets and liabilities are translated at the current rate, the quick ratio will be unchanged. (Study Session 6, LOS 25.d)
Dell Air Lines has recently acquired Australian Puddle Jumpers, Inc. (APJ), a small airline located in Sydney . The Australian dollar has been chosen by Dell as the functional currency for APJ. The Balance Sheet of APJ is given below as of
Assets
Liabilities and Equity
Cash
$100
Accounts Payable (A/P)
$90
Accounts Receivable (A/R)
120
Common Stock
360
Maintenance Supplies
90
Fixed Assets
140
Total Assets
$450
Total Liabilities & Equity
$450
APJ's income statement for the year ending
Sales
3,500
Total Costs
2,900
Net Income
600
The Australian dollar has steadily depreciated against the U.S. dollar. At
The Dec. 31, 2002 Balance Sheet for APJ is given in Australian dollars as follows:
Assets
Liabilities and Equity
Cash
441
A/P
210
A/R
330
Common Stock
720
Supplies
291
Retained Earnings
600
Fixed Assets
468
Total Assets
1,530
Total Liabilities & Equity
1,530
On APJ's 2002 income statement, the level of sales in U.S. dollars would be:
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. Income Statement (in $) Sales (3,500 / 2.75) $1,272 Costs (2,900 / 2.75) $1,055
Since we are using the current rate method, the items in the income statement are translated at the average exchange rate. The average rate is (2.5 + 3) / 2 = 2.75 Australian dollars = $1. Income Statement (in $) Sales (3,500 / 2.75) $1,272 Costs (2,900 / 2.75) $1,055
Since we are using the current rate method, in the balance sheet all accounts are translated at the current exchange rate, except for the common stock account, which is translated at the historical rate.
$1,272.
$1,985.
$1,167.
Since the Australian dollar is the functional currency, use the current rate method. The items in the income statement are translated at the average exchange rate. The average rate is (2.5 + 3) / 2 = 2.75 Australian dollars = $1.
Net Income
$217
On APJ's 2002 income statement, the level of net income in U.S. dollars would be:
$242.
$217.
$200.
Net Income
$217
On APJ's 2002 balance sheet, the level of accounts receivable is U.S. dollars would be:
$330.
$132.
$110.
A/R (330 / 3) = 110
Dell Air Lines has recently acquired Australian Puddle Jumpers, Inc., a small airline located in Sydney. The Australian dollar has been chosen by Dell as the functional currency for APJ. The Balance Sheet of APJ is given below as of Dec. 31, 2004 in Australian dollars.
Assets
Liabilities and Equity
Cash
200
A/P
180
A/R
240
Common Stock
720
Maintenance Supplies
180
Fixed Assets
280
Total Assets
900
Total Liab & Equity
900
APJ's income statement for the year ending Dec. 31, 2005 is expressed in Australian dollars as:
Sales
3,500
Total Costs
2,900
Net Income
600
The Australian dollar has steadily depreciated against the U.S. dollar. At Dec. 31, 2004, the exchange rate was 2 Australian dollars = $1 but at Dec. 31, 2005, the exchange rate had deteriorated to 3 Australian dollars = $1.
The Dec. 31, 2005 Balance Sheet for APJ is given in Australian dollars as follows:
Assets
Liabilities and Equity
Cash
441
A/P
210
A/R
330
Common Stock
720
Supplies
291
Retained Earnings
600
Fixed Assets
468
Total Assets
1,530
Total Liab. & Equity
1,530
On APJ's 2005 income statement, the level of net income in U.S. dollars would be:
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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 Australian dollar is both the local and the functional currency, use the current rate method. The items in the income statement are translated at the average exchange rate. The average rate is (2 + 3) / 2 = 2.5 Australian dollars = $1. (Study Session 6, LOS 25.d)
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Since the Australian dollar is the local and the functional currency, use the current rate method. In the balance sheet, all accounts are translated at the current exchange rate, except for the common stock account, which is translated at the historical rate. Common Stock (720 / 2) = 360 (Study Session 6, LOS 25.d)
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Since there is no mention of dividends being paid, the retained earnings will equal net income (RE = NI ? Div). The items in the income statement are translated at the average exchange rate under SFAS 52. The average rate is (2 + 3) / 2 = 2.5 Australian dollars = $1.
Income Statement (in $) (Study Session 6, LOS 25.d)
Sales (3,500 / 2.5)
$1,400
Costs (2,900 / 2.5)
$1,160
Net Income
$240
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Since the Australian dollar is both the local and the functional currency, use the current rate method. When using the current rate method, all assets and liabilities are translated at the current rate. Total assets = 1530/3 = 510 and accounts payable = 210/3 = 70. The common stock is translated at the historical rate on the date of purchase = 720/2 = 360. Beginning retained earnings = 0, so ending retained earnings = translated net income = 240. The cumulative translation adjustment is the plug figure that makes the balance sheet balance = 510 ? 70 ? 360 ? 240 = -160. (Study Session 6, LOS 25.d)
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The conditions necessary for implementation of the temporal method are: (Study Session 6, LOS 25.c)
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If the U.S. dollar had been chosen as the functional currency, then the provisions of the temporal method would apply. Under the temporal method, the translation adjustment would appear as a line item on Dell's income statement and not as an element of equity. Hence, earnings may become more volatile as a result. (Study Session 6, LOS 25.c)
The Precision Screen Printers (PSP) Company has a foreign subsidiary, the Acer Tool & Die Company, located in the country of Rolivia. The currency of Rolivia is the Chad. The balance sheet and income statement of Acer Tool & Die Company for the year-ended December 31, 2005, is shown below. The balance sheet has been restated using the U.S. dollar as the functional currency.
Acer Tool & Die Company Balance Sheet
As of December 31, 2005Chad
(millions)
Exchange Rate
(Chad/US$)
U.S. $
(millions)
Cash 20 0.25 $80 Accounts receivable 30 0.25 120 Inventory 100 0.3125 320 Fixed assets (net) 500 0.3333 1,500 Total assets 650 $2,020 Accounts payable 50 0.25 $200 Capital stock 380 0.3333 1,140 Retained earnings 220 -- 680 Total liabilities and equity 650 $2,020
Acer Tool & Die Company Income Statement
For year ending December 31, 2005
(Amounts in millions of Chad)Revenues 1,000 Cost of sales 700 Depreciation expense 50 Selling expense 30 Translation gain (or loss) Net income 220
Acer has determined that the exchange rate exposure at the beginning of 2005 is ?260 Chad.
The exchange rate at the beginning of 2005 was 0.3333 Chad/US$. The exchange rate at the end of 2005 was 0.25 Chad/US$. The average rate for 2005 is 0.3125 Chad/US$. Beginning inventory is 90 Chad. Acer Tool & Die uses FIFO inventory valuation and depreciates fixed assets using the straight-line method. Assume that retained earnings at year end 2004 were zero, the historical exchange rate for depreciation is 0.333, and no dividends were paid during 2005.
What is Acer Tool & Die's cost of sales in U.S. dollars using the temporal method?
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Purchases = COGS ? Beginning inventory + ending inventory = 710 Chad
Chad Conversion US$ Beginning inventory 90 0.3333 $270 Purchases 710 0.3125 2,272 Ending inventory 100 0.3125 320 COGS 700 $2,222
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Remeasured income statement under temporal method: Revenues = 1000/0.3125 = 3200 COGS = 2222 (from previous question) Depreciation = 50/0.3333 = 150 Selling expense = 30/0.3125 = 96 Income before remeasurement gain = 3200 ? 2222 ? 150 ? 96 = 732 Net income = 680 (= retained earnings at year end 2005 ? retained earnings at year end 2004) Remeasurement gain/loss = 680 ? 732 = -52
Wasson Brothers (WB) is a large U.S. based conglomerate with many subsidiaries in both the U.S. and abroad. One of WB's wholly-owned foreign subsidiaries, Kasamatsu Industries, is based in Japan and manufactures a hugely successful line of trading cards, toys, and other related products. All of Kasamatsu's operations and sales take place in Japan, and the corresponding transactions are denominated in Japanese yen. Additionally, Kasamatsu's books and records are all maintained in yen. WB reports its earnings in U.S. dollars. The history of the exchange rate between the dollar and the yen over the last two years is presented in the following table. Figures are presented in /$.
Yen/Dollar Exchange Rate
December 31, 2002 150 December 31, 2001 130 2002 Average 140 2001 Average 120 Exchange rate on date that 2002 dividends were paid to Wasson Brothers 145 Exchange rate on date of stock issue and acquisition of fixed assets. 100
If Jameson wishes to convert any of the figures on Kasamatsu's Income Statement from yen to dollars, she should use which of the following exchange rates (/$)?
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Ideally, all of the components on the income statement would be translated at the exchange rate that was in effect on the day that the transactions took place. For example, all sales that occurred on March 15, 2002, would be translated at the exchange rate that prevailed on that date. Likewise, if a large portion of inventory was purchased on October 27, 2002, then the appropriate portion of cost of goods sold would be calculated using the exchange rate from October 27, 2002. This however, is not especially practical, especially for a very large company with many transactions. The common practice is to use the average exchange rate for the accounting year, in this case 140 JPY/USD.
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Because an asset is, in effect, being transferred from the balance sheet of the subsidiary to that of the parent (in this case the asset is cash in the form of a dividend) on a known date, it is appropriate to use the exchange rate that prevails on the dividend date.
Wasson Brothers (WB) is a large U.S. based conglomerate with many subsidiaries in both the U.S. and abroad. One of WB's wholly-owned foreign subsidiaries, Kasamatsu Industries, is based in Japan and manufactures a hugely successful line of trading cards, toys, and other related products. All of Kasamatsu's operations and sales take place in Japan, and the corresponding transactions are denominated in Japanese yen. Additionally, Kasamatsu's books and records are all maintained in yen. WB reports its earnings in U.S. dollars. The history of the exchange rate between the dollar and the yen over the last two years is presented in the following table. Figures are presented in yen/$.
Yen/Dollar Exchange Rate
December 31, 2002 150 December 31, 2001 130 2002 Average 140 2001 Average 120 Exchange rate on date that 2002 dividends were paid to Wasson Brothers 145 Exchange rate on date of stock issue and acquisition of fixed assets. 100
Shelly Jameson is an analyst with Henderson-Wells, an investment banking firm in New York, and is the chief analyst covering WB. She believes that the enormous success of the trading cards has contributed greatly to WB's bottom line. However, she believes that this effect may be misstated in the company's financial statements because of the recent volatility in exchange rates. Many analysts at other major investment banking firms have been raising their ratings on WB because of the recent earnings growth. Jameson, however, wants to be absolutely certain that these results are accurate and fully attributable to Kasamatsu's hot new product and not a result of an exchange rate fluctuation. The following are the financial statements of Kasamatsu, stated in thousands of yen.
Financial Statements for Year Ending December 31, 2002
(in thousands on yen)
Statement of Income and Retained Earnings
Sales 700,000 Expenses Cost of Goods Sold (COGS) 280,000 Depreciation 126,000 SG&A 77,000 Total Expenses 483,000 Earnings Before Taxes (EBT) 217,000 Income Tax Expense 98,000 Net Income 119,000 Retained Earnings: December 31, 2001 250,000 369,000 Dividends 58,000 Retained Earnings: December 31, 2002 * 311,000 * Retained earnings on 12/31/2002 were US $2million
Balance Sheet
Assets Cash and receivables 60,000 Inventory 180,000 Land 200,000 Fixed assets 346,000 Total assets 786,000 Liabilities and stockholder's equity Liabilities 300,000 Capital stock 175,000 Retained earnings 311,000 Total liabilities and stockholder's equity 786,000
Jameson has finally completed translating all the necessary figures into dollars and now wants to compute how much WB's reported sales in dollars will change due to Kasamatsu's sales. Which of the following is closest to Jameson's answer (in thousands of dollars)?
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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. 700,000 140 WB will report $5,000 of sales as a result of Kasamatsu's operations. Both remaining answers use incorrect exchange rates.
Because sales is an income statement item, the 2002 average exchange rate of 140, JPY/USD must be used to calculate sales in the reporting currency. Kasamatsu's sales were JPY 700,000. The calculation is:
= 5,000
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Total selling expenses include cost of goods sold, depreciation, and SG&A. Kasamatsu reported a total of JP 483,000. Since these are all income statement items they must all be translated at the average 2002 exchange rate of 140 JP/US$. Therefore, the calculation is: 483,000 140 Both remaining answers use incorrect exchange rates.
= 3,450
The Herlitzka Company, a U.S. multinational firm, has a 100% 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 total value of net monetary assets is equal to:
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Monetary assets and liabilities include cash, A/R, A/P and Long-term debt. Hence, net monetary assets is equal to 3,000 ? (2,000 + 5,000) = -4,000 SF.
Dell Air Lines has recently acquired Australian Puddle Jumpers, Inc., a small airline located in Sydney. The Australian dollar has been chosen by Dell as the functional currency for APJ. The Balance Sheet of APJ is given below as of
Assets
Liabilities and Equity
Cash
$200
A/P
$180
A/R
240
Common Stock
720
Maintenance Supplies
180
Fixed Assets
280
Total Assets
$900
Total Liab & Equity
$900
APJ's income statement for the year ending
Sales
3,500
Total Costs
2,900
Net Income
600
The Australian dollar has steadily depreciated against the U.S. dollar. At
The Dec. 31, 2005 Balance Sheet for APJ is given in Australian dollars as follows:
Assets
Liabilities and Equity
Cash
441
A/P
210
A/R
330
Common Stock
720
Supplies
291
Retained Earnings
600
Fixed Assets
468
Total Assets
1,530
Total Liab. & Equity
1,530
On APJ's 2005 income statement, the level of sales in U.S. dollars would be:
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Since the Australian $ is both the local and the functional currency, use the current rate method. The items in the income statement are translated at the average exchange rate. The average rate is (2 + 3) / 2 = 2.5 Australian dollars = $1.
Income Statement (in $)
Sales (3,500 / 2.5)
$1,400
Costs (2,900 / 2.5)
$1,160
Net Income
$240
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Since the Australian $ is both the local and the functional currency, use the current rate method.
In the balance sheet, all accounts are translated at the current exchange rate, except for the common stock account, which is translated at the historical rate. A/R (330 / 3) = 110
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Since the Australian $ is both the local and the functional currency, use the current rate method. In the balance sheet, all accounts are translated at the current exchange rate, except for the common stock account, which is translated at the historical rate.
Fixed Assets (468 / 3) = 156
Wasson Brothers (WB) is a large U.S. based conglomerate with many subsidiaries in both the U.S. and abroad. One of WB's wholly-owned foreign subsidiaries, Kasamatsu Industries, is based in Japan and manufactures a hugely successful line of trading cards, toys, and other related products. All of Kasamatsu's operations and sales take place in Japan, and the corresponding transactions are denominated in Japanese yen. Additionally, Kasamatsu's books and records are all maintained in yen. WB reports its earnings in U.S. dollars. The history of the exchange rate between the dollar and the yen over the last two years is presented in the following table. Figures are presented in yen/$.
Yen/Dollar Exchange Rate
December 31, 2002 150 December 31, 2001 130 2002 Average 140 2001 Average 120 Exchange rate on date that 2002 dividends were paid to Wasson Brothers 145 Exchange rate on date of stock issue and acquisition of fixed assets. 100
Jameson would like to look at some of Kasamatsu's figures in U.S. dollars. However, she must use the appropriate rate to convert the numbers from yen into dollars. What is the appropriate exchange rate (yen/$) to use in converting Kasamatsu's assets?
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Because the current method of currency translation is being used all assets and liabilities are translated using the exchange rate in effect on the balance sheet date. In this particular case, the exchange rate prevailing on December 31, 2002, is the appropriate rate.
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Under the current method, assets and liabilities are translated at the exchange rate prevailing on the balance sheet date.
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Because WB issued stock and acquired Kasamatsu and their capital stock, they must carry that capital stock on their balance sheet at historical cost, which will be the basis for calculating depreciation expense. Therefore, even though this is a balance sheet item, the exchange rate that prevailed on the date of the acquisition of the capital stock must be used to translate into the reporting currency. Using the exchange rate that was effective on the balance sheet date would be improper, as this would cause the "historical" cost of the capital stock to fluctuate.
The Precision Screen Printers (PSP) Company has a foreign subsidiary, the Acer Tool & Die Company, located in the country of Rolivia. The currency of Rolivia is the Chad. The balance sheet and income statement of Acer Tool & Die Company for the year-ended December 31, 2002, is shown below. The balance sheet has been restated using the U.S. dollar as the functional currency.
Acer Tool & Die Company Balance Sheet
As of December 31, 2002
Chad
(millions)
Exchange Rate
(Chad/US$)
U.S. $
(millions)
Cash 20 0.25 $80 Accounts receivable 30 0.25 120 Inventory 100 0.3125 320 Fixed assets (net) 500 0.3333 1,500 Total assets 650 $2,020 Accounts payable 50 0.25 $200 Capital stock 380 0.3333 1,140 Retained earnings 220 -- 680 Total liabilities and equity 650 $2,020
Acer Tool & Die Company Income Statement
For year ending December 31, 2002
(Amounts in millions of Chad)
Revenues 1,000 Cost of sales 700 Depreciation expense 50 Selling expense 30 Net income 220
The exchange rate at the beginning of 2002 was 0.3333 Chad/US$. The exchange rate at the end of 2002 was 0.25 Chad/US$. The average rate for 2002 is 0.3125 Chad/US$. Beginning inventory is 90 Chad. Acer Tool & Die uses FIFO inventory valuation and depreciates fixed assets using the straight-line method.
Using the current rate method for the Acer Tool & Die Company, what is the value of total assets after translation?
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With the current rate method, all balance sheet items except for common stock are translated at the current rate. Total assets = 650 / 0.25 = $2,600.
The Schuldes Company had the following reported assets in euros at historical cost for the period ending December 31, 2005.
Cash 134 Accounts receivable 270 Inventory 404 Net fixed assets 1347 Total assets 2155
The exchange rate per was $0.8734 on January 1, 2005 and $0.9896 on December 31, 2005. The average exchange rate for the year 2005 was $0.8925. The total assets of Schuldes using the current rate method are:
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With the current rate method all balance sheet items except common stock use the current exchange rate to translate the functional currency into the reporting currency.
2155 × $0.9896 = $2,133.
Which of the following statements concerning the translation of a subsidiary’s financial statement and the subsidiary’s ratios is least accurate?
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Ratios calculated under the current rate method will differ from those calculated under the temporal method.
Which of the following subsidiary ratios will be affected by the translation adjustment under the current rate method?
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The translation adjustment will affect the book value of equity and therefore the return on equity ratio. The other ratios are pure ratios (both component of the ratio come from the income statement) and are not affected by translation.
Which example least accurately describes pure balance sheet and income statement ratios?
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All pure balance sheet ratios are unaffected by the all-current translation method.
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:
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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.
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:
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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.
The U.S. dollar has been appreciating relative to the local currency over the past year. Using current-rate method to translate a foreign subsidiary's financial statements to U.S. dollars will most likely have which of the following effects on the long-term debt to equity ratio (LTD/E) relative to what the ratio would have been without the effects of translation?
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Under the current rate method, both LTD and equity are translated at the current rate of exchange. Hence, since the same rate is applied in both the numerator and denominator, the ratio will not change.
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