土豆妮

The U.S. 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 U.S. GAAP?

A) $725.

B) $715.

C) $750.

---

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 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.

---

土豆妮

Which of the following statements regarding foreign currency translation are least accurate? Under the:

A) temporal method, sales are remeasured using the average rate.

B) temporal method, COGS and depreciation are remeasured using the historical rate.

C) current rate method, the foreign currency translation gain or loss appears on the parent firm's income statement.

---

Under the current rate method, the foreign currency translation gain or loss appears on the parent firm's balance sheet in the equity accounts.

土豆妮

An important distinction between the temporal method and the current rate method is that:

A) the current rate method results in an adjustment to the equity account on the balance sheet. The temporal method results in a gain or loss appearing on the income statement.

B) monetary assets and liabilities are remeasured (temporal method) at historical rates but translated (current rate method) at current rates.

C) depreciation and cost of goods sold (COGS) are a function of the current rate under translation (current rate method), but a function of the average rate under remeasurement (temporal method).

---

The current rate method results in an adjustment to the equity account on the balance sheet. The temporal method results in a gain or loss appearing on the income statement. Depreciation and COGS are a function of the average rate under the current rate method, but a function of the historical rate under the temporal method. Monetary assets and liabilities are use the current rates under both methods.