1．e temporal method (remeasurement) is preferred to the all-current method (translation) in hyperinflationary economies because remeasurement:

A)   is easier than translation to perform under hyperinflation.

B)   results in non-monetary asset values that are a better proxy for the economic values of those assets (vs. the all-current method).

C)   provides better conversions of subsidiary revenues.

D)   provides better conversions of SG&A expenses.

2．U.S. company has a subsidiary based in Brazil, which has the following income statement for 2006 and ending balance sheets for 2005 and 2006 (in million Real).

The value of the Real at various times over the past two years is as follows:

The common stock and long-term debt were originally issued in January of 2005. The fixed assets and first inventory purchases were made in April of 2005. Additional fixed asset purchases were made in June of 2006. Inventory is measured using the FIFO method. It can be assumed that all ending inventory was acquired in June when the last major purchase was made. The operations of the subsidiary are very intertwined with the operations of the U.S. parent.

The amount of 2006 cost of goods sold in USD is: (Note: if needed, use $0.40 as the rate to convert 2005 ending inventory):

A)   $300,000,000.

B)   $270,000,000.

C)   $262,800,000.

D)   $284,800,000.

3．e value of all financing debt (notes payable, current portion of long-term debt, and long-term debt) on December 31, 2006, reported in USD is:

A)   $225,000,000.

B)   $171,000,000.

C)   $189,000,000.

D)   $202,500,000.

4．e value of December 31, 2006, inventory reported in USD is:

A)   $55,000,000.

B)   $49,500,000.

C)   $44,000,000.

D)   $51,700,000.

5．he value of December 31, 2006, gross property, plant, and equipment (PP&E) reported in USD is:

A)   $304,000,000.

B)   $400,000,000.

C)   $313,000,000.

D)   $345,900,000.

6．flation over the past three years has averaged 40 percent per year. The amount of 2006 depreciation expense in USD is:

A)   $31,300,000.

B)   $30,400,000.

C)   $40,000,000.

D)   $36,000,000.

7．flation over the past three years has averaged 40 percent per year. The combined value of the common stock and paid in capital on December 31, 2006, reported in USD is:

A)   $75,000,000.

B)   $67,500,000.

C)   $57,000,000.

D)   $55,500,000.

8．n a hyperinflationary economy, translation under the all-current method will most likely result in relatively:

A)   low balance sheet values for long term liabilities.

B)   high balance sheet values for long term assets.

C)   high translation gains.

D)   large changes in the common stock account.

9．ich of the following asset or liability values is likely to be the most understated in a hyperinflationary economy if translation occurs under the all-current method?

A)   Accounts receivable.

B)   A plant purchased several years ago.

C)   Accounts payable.

D)   Dividends payable.

10.ch of the following best describes the situation in a hyperinflationary economy? Purchasing power of the foreign currency will:

A)   quickly deteriorate and the foreign currency will be rapidly depreciating against the reporting currency.

B)   quickly deteriorate and the foreign currency will be rapidly appreciating against the reporting currency.

C)   dramatically appreciate and the foreign currency will be rapidly appreciating against the reporting currency.

D)   dramatically appreciate and the foreign currency will be rapidly depreciating against the reporting currency.

11.reality, what best describes the real value of non-monetary assets and liabilities in a hyperinflationary environment?

A)   All non-monetary accounts are re-measured at the current rate.

B)   All non-monetary accounts are re-measured at the average rate.

C)   Typically not affected because their local currency-denominated values decrease to offset the impact of inflation.

D)   Typically not affected because their local currency-denominated values increase to offset the impact of inflation.

12.yperinflationary economy is typically defined as one that has:

A)   cumulative inflation that exceeds 100% over a twelve-year period.

B)   an inflation rate that exceeds 10% per year for three consecutive years.

C)   an inflation rate that exceeds 10% per year for five consecutive years.

D)   cumulative inflation that exceeds 100% over a three-year period.

13. a subsidiary in a hyperinflationary economy, the functional currency should be the:

A)   Local currency.

B)   Subsidiary's operating currency.

C)   Parent's currency.

D)   Any hard currency other than the parent's or subsidiary's.

14.ich translation method should be used under a hyperinflationary economy?

A)   All-current, because dividends are translated at the rate that applied when they were issued.

B)   Monetary/non-monetary, because all monetary accounts are translated at the historical rate.

C)   Temporal, because all non-monetary accounts are re-measured at the historical rate.

D)   Current/non-current, because the current assets and liabilities are translated at the historical rate

1．e temporal method (remeasurement) is preferred to the all-current method (translation) in hyperinflationary economies because remeasurement:

A)   is easier than translation to perform under hyperinflation.

B)   results in non-monetary asset values that are a better proxy for the economic values of those assets (vs. the all-current method).

C)   provides better conversions of subsidiary revenues.

D)   provides better conversions of SG&A expenses.

The correct answer was B)

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

A)   $300,000,000.

B)   $270,000,000.

C)   $262,800,000.

D)   $284,800,000.

The correct answer was C)

Because the operations are well integrated with the parent, the temporal method will be used. Cost of goods sold must be calculated using adjusted inventory figures, which are valued at historical cost, and purchases, which are valued using the average exchange rate. Note: Since no information is given as to what the exchange rate was when the inventory was bought and sold, it is assumed that it was done evenly throughout the year thus the average rate is used.

Purchases in Real = 600,000,000 + 110,000,000 − 100,000,000 = 610,000,000.
Purchases in dollars = 0.45 × 610,000,000 = 274,500,000
Beginning inventory = 0.40 × 100,000,000 = 40,000,000
Ending inventory = 0.47 × 110,000,000 = 51,700,000
Cost of goods sold = 274,500,000 + 40,000,000 − 51,700,000 = 262,800,000

3．e value of all financing debt (notes payable, current portion of long-term debt, and long-term debt) on December 31, 2006, reported in USD is:

A)   $225,000,000.

B)   $171,000,000.

C)   $189,000,000.

D)   $202,500,000.

The correct answer was A)

Because the operations are well integrated with the parent, the temporal, or remeasurement, method will be used. All debt is considered a monetary liability and should be accounted for at the current rate. The value is 0.50 × 450,000,000 = 225,000,000.

4．e value of December 31, 2006, inventory reported in USD is:

A)   $55,000,000.

B)   $49,500,000.

C)   $44,000,000.

D)   $51,700,000.

The correct answer was D)     

Because the operations are well integrated with the parent, the temporal, or remeasurement, method will be used. Inventory should be accounted for at the historical rate—the rate in effect when the inventory was purchased. The value is 0.47 × 110,000,000 = 51,700,000.

5．he value of December 31, 2006, gross property, plant, and equipment (PP&E) reported in USD is:

A)   $304,000,000.

B)   $400,000,000.

C)   $313,000,000.

D)   $345,900,000.

The correct answer was C)

Because the operations are well integrated with the parent, the temporal, or remeasurement, method will be used. Fixed assets should be accounted for at the historical rate—the rate in effect when the assets were purchased. Fixed asset purchases were 700,000,000 in April 2005 and 100,000,000 in June 2006. The value is (0.38 × 700,000,000) + (0.47 × 100,000,000) = 313,000,000.

6．flation over the past three years has averaged 40 percent per year. The amount of 2006 depreciation expense in USD is:

A)   $31,300,000.

B)   $30,400,000.

C)   $40,000,000.

D)   $36,000,000.

The correct answer was A)

Because cumulative inflation of the past three years is higher than 100 percent, the temporal, or remeasurement, method will be used. Depreciation should be accounted for at the historical rate—the rate in effect when the fixed assets were purchased. 70,000,000 of the depreciation is from fixed asset purchases in April 2005 and 10,000,000 is from fixed asset purchases in June 2006. The amount of depreciation is (0.38 × 70,000,000) + (0.47 × 10,000,000) = 31,300,000.

7．flation over the past three years has averaged 40 percent per year. The combined value of the common stock and paid in capital on December 31, 2006, reported in USD is:

A)   $75,000,000.

B)   $67,500,000.

C)   $57,000,000.

D)   $55,500,000.

The correct answer was D)

Because cumulative inflation of the past three years is higher than 100 percent, the temporal, or remeasurement, method will be used. Common stock should be accounted for at the historical rate—the rate in effect when it was issued. The value is 0.37 × 150,000,000 = 55,500,000.

8．n a hyperinflationary economy, translation under the all-current method will most likely result in relatively:

A)   low balance sheet values for long term liabilities.

B)   high balance sheet values for long term assets.

C)   high translation gains.

D)   large changes in the common stock account.

The correct answer was A)

In a hyperinflationary economy, translation under the all-current method will most likely result in relatively low balance sheet values for assets and liabilities. Translation losses will also occur. Common stock is translated at the historical rate.

9．ich of the following asset or liability values is likely to be the most understated in a hyperinflationary economy if translation occurs under the all-current method?

A)   Accounts receivable.

B)   A plant purchased several years ago.

C)   Accounts payable.

D)   Dividends payable.

The correct answer was B)

The accounts receivable, accounts payable, and dividends payable will all have book values that are closer to their market values than a plant purchased many years ago.

10.ch of the following best describes the situation in a hyperinflationary economy? Purchasing power of the foreign currency will:

A)   quickly deteriorate and the foreign currency will be rapidly depreciating against the reporting currency.

B)   quickly deteriorate and the foreign currency will be rapidly appreciating against the reporting currency.

C)   dramatically appreciate and the foreign currency will be rapidly appreciating against the reporting currency.

D)   dramatically appreciate and the foreign currency will be rapidly depreciating against the reporting currency.

The correct answer was A)

Purchasing power and foreign currency will depreciate.

11.reality, what best describes the real value of non-monetary assets and liabilities in a hyperinflationary environment?

A)   All non-monetary accounts are re-measured at the current rate.

B)   All non-monetary accounts are re-measured at the average rate.

C)   Typically not affected because their local currency-denominated values decrease to offset the impact of inflation.

D)   Typically not affected because their local currency-denominated values increase to offset the impact of inflation.

The correct answer was D)

Typically not affected because their local currency-denominated values increase to offset the impact of inflation (for example, real estate values typically rise with inflation).

12.yperinflationary economy is typically defined as one that has:

A)   cumulative inflation that exceeds 100% over a twelve-year period.

B)   an inflation rate that exceeds 10% per year for three consecutive years.

C)   an inflation rate that exceeds 10% per year for five consecutive years.

D)   cumulative inflation that exceeds 100% over a three-year period.

The correct answer was D)

The typical definition is that cumulative inflation exceeds 100% over a three-year period.

13. a subsidiary in a hyperinflationary economy, the functional currency should be the:

A)   Local currency.

B)   Subsidiary's operating currency.

C)   Parent's currency.

D)   Any hard currency other than the parent's or subsidiary's.

The correct answer was C)

The functional currency should be the parent's currency.

14.ich translation method should be used under a hyperinflationary economy?

A)   All-current, because dividends are translated at the rate that applied when they were issued.

B)   Monetary/non-monetary, because all monetary accounts are translated at the historical rate.

C)   Temporal, because all non-monetary accounts are re-measured at the historical rate.

D)   Current/non-current, because the current assets and liabilities are translated at the historical rate

The correct answer was C)

The temporal method is more appropriate because all non-monetary accounts are remeasured at the historical rate.