7.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/dollars. Yen / Dollar Exchange Rate | December 31, 2005 | 150 | December 31, 2004 | 130 | | 2005 Average | 140 | 2004 Average | 120 | | Exchange rate on date that 2005 dividends were paid to Wasson Brothers | 145 | Exchange rate on date of stock issue and acquisition of fixed assets. | 100 |
Ashley 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, 2005 (in thousands on yen) | Statement of Income and Retained Earnings | | Sales | 700,000 | | Expenses |
| | COGS | 280,000 | | Depreciation | 126,000 | | SG & A | 77,000 | |
| Total Expenses | 483,000 | | EBT | 217,000 | Income Tax Expense | 98,000 | Net Income | 119,000 | Retained Earnings: December 31, 2004 | 250,000 |
| 369,000 | Dividends | 58,000 | Retained Earnings: December 31, 2005 * | 311,000 | | * Retained earnings on 12/31/2005 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 |
Before Jameson can perform any financial statement analysis she needs to determine which method WB uses to translate Kasamatsu's earnings into U.S. dollars. Which of the following is the CORRECT method and reasoning? A) Current method because the functional currency is the yen. B) Current method because the local currency is the U.S. dollar. C) Temporal method because Kasamatsu operates in a highly inflationary environment. D) Temporal method because the local currency differs from the functional currency. The correct answer was A) According to SFAS 52 the current method must be used to translate the yen financial statements into U.S. dollars, the reporting currency. Had Kasamatsu been operating in a highly inflationary environment or had the local and functional currency not been the same, then WB would be required to use the temporal method also known as remeasurement. 8.Jameson must also determine how the fluctuation in the yen vs. the dollar has affected Kasamatsu's earnings in the reporting currency. Which of the following best describes the effect of changes in the yen/dollar rate has had on earnings in the reporting currency? Earnings have: A) decreased because the yen is depreciating vs. the US$. B) increased because the yen is appreciating vs. the US$. C) increased because the yen is depreciating vs. the US$. D) decreased because the yen is appreciating vs. the US$. The correct answer was A) Examination of the history of the exchange rate shows that both the year-end and average exchange rates are lower in 2005 than in 2004 (lower in that the yen has weakened vs. the dollar). Therefore, Kasamatsu has to earn more yen than it did in the previous year for WB to be able to report the same dollar amount of net income. This means that the true economic performance of Kasamatsu is understated when viewed as a component of WB's net income. 9.Global International Corp. (GIC) has three subsidiaries; GIC Europe whose local currency is the euro and whose functional currency is the euro, GIC China whose local currency is the yuan and whose functional currency is the Hong Kong dollar, and GIC Bahamas whose local currency is the Bahamian dollar and whose functional currency is the U.S. dollar. GIC’s reporting currency is the U.S. dollar. Which conversion methods should be used by GIC for each of its subsidiaries? A) GIC Europe’s data should be remeasured under the temporal method; GIC China’s data should be remeasured under the temporal method into Hong Kong dollars, and then translated under the all current method into U.S. dollars; and GIC Bahamas’ data should be translated under the all-current method into U.S. dollars. B) The financial data for all three subsidiaries should be translated under the all-current method. C) GIC Europe’s data should be translated under the all-current method; GIC China’s data should be remeasured under the temporal method into Hong Kong dollars, and then translated under the all current method into U.S. dollars; and GIC Bahamas’ data should be remeasured under the temporal method into U.S. dollars. D) The financial data for all three subsidiaries should be remeasured under the temporal method. The correct answer was C) GIC Europe’s data should be translated under the all-current method; GIC China’s data should be remeasured under the temporal method into Hong Kong dollars, and then translated under the all current method into U.S. dollars; and GIC Bahamas’ data should be remeasured under the temporal method into U.S. dollars. 10.An important distinction between remeasurement under the temporal method and translation under the all-current method is that: A) depreciation and cost of goods sold (COGS) are a function of the current rate under translation (all-current method), but a function of the average rate under remeasurement (temporal method). B) translation (all-current method) results in an adjustment to the equity account on the balance sheet, remeasurement (temporal method) results in a gain or loss appearing on the income statement. C) monetary assets and liabilities are remeasured (temporal method) at historical rates but translated (all-current method) at current rates. D) common equity is remeasured (temporal method) at historical rates but translated (all-current method) at current rates. The correct answer was B) Translation results in an adjustment to the equity account on the balance sheet, remeasurement results in a gain or loss appearing on the income statement. Depreciation and COGS are a function of the average rate under translation (all-current method), but a function of the historical rate under remeasurement (temporal method). Monetary assets and liabilities are remeasured and translated at current rates. Common equity is remeasured (temporal method) and translated (all-current method) at historical rates. 11.Which of the following statements regarding foreign currency translation under SFAS 52 are FALSE? Under the: A) temporal method, sales are remeasured using the average rate. B) temporal method, selling, general, and administrative expenses are remeasured using the average rate. C) temporal method, COGS and depreciation are remeasured using the historical rate. D) current rate method, the foreign currency translation gain or loss appears on the parent firm's income statement. The correct answer was D) Under the current rate method, the foreign currency translation gain or loss appears on the parent firm's balance sheet in the equity accounts. 12.The Deter Company operates a subsidiary in the UK, and the functional currency is the British pound. The subsidiary’s 2001 income statement shows 500 of net income and a 50 dividend that was paid on December 31, when the exchange rate was $1.50 per pound. The current exchange rate is $1.65 per pound, and the average rate is $1.58 per pound. What is the change in retained earnings for the period in U.S. dollars under the provisions of SFAS 52? A) $715. B) $725. C) $746. D) $750. The correct answer was A) Since the functional currency is the local currency, use the current rate method. The net income is translated at the average rate, and dividends are translated at the rate that applied when they were paid. Hence: 1.58 (500) - 1.50(50) = 715. | 
发表于 2008-5-12 14:57
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