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Edmonton Oilfield Supply has made an equipment sale in Venezuela in the amount of VEF 15,000,000. On the day of the sale, the exchange rate is 1.7519 VEF per 1 Canadian dollar. 90 days later, when the Venezuelan firm pays for the equipment, the exchange rate is 1.6326. As a result of the change in the exchange rate, Edmonton will recognize a:
A)
loss of $1,789,500.
B)
gain of $1,096,104.
C)
gain of $625,666.



On the day of the sale, Edmonton will record an account receivable of 15m/1.7519 = $8,562,133. When the payment is received and converted to CAD, the realized amount will be 15m/1.6326 = $9,187,799. As a result of the appreciating VEF, Edmonton will realize a gain of $9,187,799 − 8,562,133 = CAD 625,666.

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A German company owns a foreign subsidiary in the U.S. If the results below are reported in Euros, after translation what is the effect of the change in the exchange rate on revenues? Round to the nearest dollar and/or percent.

Year

Sales

$ per 1 Euro

Exchange Rate

2001

$10,000

0.9

2002

$10,000

0.8

A)
The company shows a 12.5% growth in revenues in 2002.
B)
The company shows a 0.1% decline in revenues in 2002.
C)
There is no change is revenue growth between 2001 and 2002.



While sales were flat in terms of local currency, after translation the reported revenue increased 12.5%. 10,000/0.9 = 11,111; 10,000/0.8 = 12,500; 12,500/11,111 = 12.5% increase due to exchange rate effects.

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A U.S. firm owns a foreign subsidiary in France. In 2002, sales were EUR 1,000,000 and the USD/EUR exchange rate was 1.0620. In 2003, sales were EUR 1,100,000 and the exchange rate was 1.1417. What is the impact of the change in the value of the USD on the parent company’s translated sales?
A)
Sales will decrease by 7.5%.
B)
Sales will increase by 18.25%.
C)
Sales will increase by 7.5%.



The increase in sales due to the appreciating EUR is measured as 7.5% [= (1.1417 / 1.0620) − 1]. Sales for the subsidiary rose 10% [= (1,100,000 / 1,000,000) – 1] in the local currency (EUR). After translation the parent firm will report sales of USD 1,062,000 (= EUR 1,000,000 × 1.0620) for 2002 and USD 1,255,870 (= EUR 1,100,000 × 1.1417) for 2003.
Growth measured from the parent’s perspective suggests sales rose 18.25% [= (1,255,870 / 1,062,000) − 1], but this includes the growth rate in sales measured in the local currency and the rate of appreciation in the foreign currency, or (1.10 × 1.075) − 1 = 0.1825. The question only asks for the impact of the change in the value of the USD.

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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.

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Giant Company is a U.S. Company with a subsidiary, Grande, Inc., that operates in Mexico. Giant Company uses either the temporal or the current rate method of foreign currency translation for its subsidiaries.
  • Grande, Inc., began operations January 1, 2001.

  • Common Stock and Fixed Assets were acquired January 1, 2000.

  • Inventory is accounted for under the last in, first out (LIFO) cost flow assumption, with a slow rate of turnover.

  • The beginning U.S. dollar value of Giant's retained earnings was $2,600,000.
  • The inventory in the January 1, 2001, Balance Sheet was acquired on January 1, 2001.

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 (A/R)

20,000,000

35,000,000

Inventory

15,000,000

15,000,000

Fixed Assets (net)

90,000,000

60,000,000




Accounts Payable (A/P)

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 (COGS)

(45,000,000)

Depreciation

(10,000,000)

Net Income

5,000,000


Assume that Giant Company considers the Mexican peso to be the local currency and the functional currency of Grande, Inc.Giant Company should use the following method to reflect the results of Grande, Inc., in its financial statements:
A)
the current rate method followed by the temporal method.
B)
the current rate method.
C)
the temporal method.



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 current rate method is used when the local currency and functional currency are the same.


The Net Income of Grande, Inc., expressed in U.S. dollars for the year ended December 31, 2001, is:
A)
$500,000.
B)
$550,000.
C)
$250,000.



Using the current rate method, the income statement is translated using the average rate for all income statement accounts: Sales − COGS − Depreciation = Net Income. (60,000,000 × $0.11) − (45,000,000 × $0.11) − (10,000,000) × $0.11) = $550,000.

What is the change in exposure for Grande, Inc., for the year ended December 31, 2001?
A)
+$5,000,000 pesos.
B)
+$85,000,000 pesos.
C)
+$35,000,000 pesos.



Exposure under the current rate method is simply equity.
Beginning exposure = 80,000,000 pesos
Ending exposure = 85,000,000 pesos
Change in exposure = 85,000,000 pesos − 80,000,000 pesos = +5,000,000 pesos


The translation gain or loss from the activities of Grande, Inc., should be reported in:
A)
the statement of cash flows.
B)
the income statement.
C)
the equity accounts.



Under the current rate method, translation gains or losses are accumulated on the balance sheet in the equity section.

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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 current rate method into U.S. dollars; and GIC Bahamas’ data should be translated under the current rate method into U.S. dollars.
B)
The financial data for all three subsidiaries should be remeasured under the temporal method.
C)
GIC Europe’s data should be translated under the current rate method; GIC China’s data should be remeasured under the temporal method into Hong Kong dollars, and then translated under the current rate method into U.S. dollars; and GIC Bahamas’ data should be remeasured under the temporal method into U.S. dollars.



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.

GIC Europe’s data should be translated under the current rate method; GIC China’s data should be remeasured under the temporal method into Hong Kong dollars, and then translated under the current rate method into U.S. dollars; and GIC Bahamas’ data should be remeasured under the temporal method into U.S. dollars.

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An important distinction between the temporal method and the current rate method is that:
A)
monetary assets and liabilities are remeasured (temporal method) at historical rates but translated (current rate method) at current rates.
B)
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).
C)
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.



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.

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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

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Which of the following general statements is CORRECT with respect to the temporal method? Monetary assets are:
A)
translated at the average rate.
B)
translated at the current rate.
C)
not translated.



As a general rule in using the temporal method, monetary assets are translated using the current rate.

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Which of the following statements is least accurate regarding accounting for foreign currency translations? The:
A)
temporal method uses the historical exchange rate to translate non-monetary assets and liabilities into the currency of the country of the parent company.
B)
current rate method applies the average exchange rate to all income statement accounts.
C)
current rate method applies the current exchange rate to all balance sheet accounts.



The current rate method applies the current exchange rate to all balance sheet accounts except for common stock, which is translated at a historical rate.

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