rgonzalez

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A U.S. company has a subsidiary based in Malaysia, which has the following income statement for 2006 and balance sheets for 2005 and 2006 (in million Ringgit).

Sales	1,000
Cost of goods sold	600
Depreciation	80
Operating expenses	120
Earnings before taxes	200
Taxes	60
Net income	140
Dividends	20

	2005	2006
Cash	50	60
Accounts receivables	100	110
Inventories	100	110
Other current assets	100	110
Gross PP&E	700	800
Less accumulated depreciation	70	150
Net PP&E	630	650
Other fixed assets	20	40
Total assets	1,000	1,080
Account payable	70	80
Current portion of LTD	100	100
Notes payable	100	150
Other current liabilities	30	30
Long-term debt	300	200
Common stock	100	100
Paid in capital	50	50
Retained earnings	250	370

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

January 1, 2005	$0.37
April 1, 2005	$0.38
December 31, 2005	$0.40
June 30, 2006	$0.47
December 31, 2006	$0.50
Average for 2005	$0.39
Average for 2006	$0.45

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 2006. Inventory is measured using the FIFO method. It can be assumed that all of the ending inventory was acquired in June when the last major purchase was made. The operations of the subsidiary are independent from the operations of the U.S. parent. Inflation over the past three years has averaged 15% per year.

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.

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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.

Because the operations are independent from the parent, the current rate method will be used. Cost of goods sold should be accounted for at the average rate for the past year. The amount of cost of goods sold is 0.45 × 600,000,000 = $270,000,000. (Study Session 6, LOS 24.d)

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The value of December 31, 2006, gross property, plant, and equipment reported in USD is:

A) $400,000,000.

B) $304,000,000.

C) $313,000,000.

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Because the operations are independent from the parent, the current rate method will be used. Fixed assets should be accounted for at the current rate. The value is 0.5 × 800,000,000 = $400,000,000. (Study Session 6, LOS 24.d)

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The amount of 2006 depreciation expense in USD is:

A) $30,400,000.

B) $40,000,000.

C) $36,000,000.

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Because the operations are independent from the parent, the current rate method will be used. Depreciation should be accounted for at the average rate for the past year. The amount of depreciation is 0.45 × 80,000,000 = $36,000,000. (Study Session 6, LOS 24.d)

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The value of December 31, 2006, inventory reported in USD is:

A) $49,500,000.

B) $51,700,000.

C) $55,000,000.

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Because the operations are independent from the parent, the current rate method will be used. Inventory should be accounted for at the current rate. The value is 0.50 × 110,000,000 = $55,000,000. (Study Session 6, LOS 24.d)

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The 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) $171,000,000.

B) $225,000,000.

C) $202,500,000.

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Because the operations are independent from the parent, the current rate 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. (Study Session 6, LOS 24.d)

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The combined value of the common stock and paid in capital on December 31, 2006, reported in USD is:

A) $55,500,000.

B) $63,000,000.

C) $75,000,000.

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Because the operations are independent from the parent, the current rate 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. (Study Session 6, LOS 24.d)

rgonzalez

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?

A) $2,600.

B) $2,020.

C) $1,950.

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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

rgonzalez

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?

A) 140.

B) 100.

C) 150.

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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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Jameson would like to look at some of Kasamatsu's figures in U.S. dollars. What would be the appropriate exchange rate (yen/$) to use in translating Kasamatsu's liabilities into U.S. dollars?

A) 150.

B) 140.

C) 100.

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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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Jameson would like to look at some of Kasamatsu's figures in U.S. dollars. What would be the appropriate exchange rate (yen/$) to use in translating Kasamatsu's capital stock into U.S. dollars?

A) 100.

B) 130.

C) 150.

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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.

rgonzalez

Which of the following subsidiary ratios will be affected by the translation adjustment under the current rate method?

A) Gross margin.

B) Return on equity.

C) Net profit margin.

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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.

rgonzalez

Which of the following statements concerning the translation of a subsidiary’s financial statement and the subsidiary’s ratios is least accurate?

A) The subsidiary's ratios in the local currency will differ from ratios calculated after translation.

B) Ratios calculated under the current rate method will not differ from those calculated under the temporal method.

C) The statement of cash flows is not affected by the choice of translation.

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Ratios calculated under the current rate method will differ from those calculated under the temporal method.

rgonzalez

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:

A) $1,923.

B) $2,133.

C) $2,178.

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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.

rgonzalez

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:

A) $1,845 and $2,361.

B) $1,771 and $2,361.

C) $1,845 and $2,401.

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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.

rgonzalez

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:

A) $5,902 and $3,001.

B) $6,150 and $3,075.

C) $5,902 and $3,075.

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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.

rgonzalez

Geocorp is a global corporation with operations in North America, Asia, and Europe. Its primary business is marketing industrial machinery for the construction industry. Geocorp has regional headquarters located in New York, Tokyo, and Paris. All North American and U.S operations report to its regional and world headquarters located in New York, while all Asian operations report to Tokyo, and all European operations report to Paris.
The following information is relevant to Geocorp’s subsidiaries:

• Geocorp has a Canadian subsidiary that reports its results in Canadian dollars (CAD). The CAD is the functional currency.
• All domestic U.S. operations report their results in U.S. dollars (USD).
• All world-wide operations are reported in USD.
• Geocorp’s Asian operations report their results in Japanese yen (JPY). The JPY is the functional currency.
• Geocorp has a Chinese subsidiary that reports its results in Chinese yuan renminbi (CNY). The USD is the functional currency.
• Geocorp’s European headquarters (in Paris) operations report their results in euros (EUR). The EUR is the functional currency.
• Geocorp has a British subsidiary that reports its results in British pounds (GBP). The USD is the functional currency.

The following table is a summary of selected financial results from Geocorp’s foreign operations:

All values are in millions	CAD	JPY	CNY	GBP	EUR
Revenues	50	5,000	250	150	700
Cost of goods sold (COGS)	20	2,700	110	100	480
Gross profit	30	2,300	140	50	220
Selling, general & administrative (SGA) expenses	18	1,000	52	29	200
EBIT	12	1,300	88	21	10
Cash	35	4,200	130	102	400
Accounts receivable	12	1,400	55	45	170
Inventory	20	3,900	135	123	300
Fixed assets	62	7,680	188	370	450
Accounts payable	27	3,300	76	68	350
Long-term debt	70	8,450	290	320	550
Common stock	10	2,000	150	50	350

The following exchange rates apply (USD per foreign currency unit):

Currency	Historical Rate	Average Rate	December 31, 2002
CAD	USD 0.7013	USD 0.6803	USD 0.6592
JPY	USD 0.0094	USD 0.0088	USD 0.0082
CNY	USD 0.1010	USD 0.1109	USD 0.1208
EUR	USD 0.9801	USD 1.0318	USD 1.0834
GBP	USD 1.4803	USD 1.5506	USD 1.6209

With respect to the Canadian subsidiary, what method should be used to value its revenues, what is the appropriate exchange rate, and what is the translated value (in USD)?

A) Temporal method, average rate, USD 34.0 million.

B) Current method, current rate, USD 33.0 million.

C) Current method, average rate, USD 34.0 million.

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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.

Self-contained, independent subsidiaries reporting their results in the local currency that is also the functional currency use the current method. Revenues under the current method are translated using the average rate. Hence, 50 × 0.6803 = USD 34.0 million. (Study Session 6, LOS 24.d)

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With respect to the Japanese subsidiary, what method should be used to value its accounts receivable, what is the appropriate exchange rate, and what is the translated value (in USD)?

A) Temporal method, current rate, USD 11.5 million.

B) Current method, current rate, USD 11.5 million.

C) Current method, average rate, USD 12.3 million.

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Self-contained, independent subsidiaries reporting their results in the local currency that is also the functional currency use the current method. Assets under the current method are translated using the current rate. Hence, 1400 × 0.0082 = USD 11.5 million. (Study Session 6, LOS 24.d)

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With respect to the European HQ subsidiary, what method should be used to value its SG&A expenses, what is the appropriate exchange rate, and what is the translated value (USD)?

A) Temporal method, average rate, USD 206.4 million.

B) Current method, average rate, USD 206.4 million.

C) Current method, current rate, USD 216.7 million.

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Self-contained, independent subsidiaries reporting their results in the local currency that is also the functional currency use the current method. Expenses under the current method are translated using the average rate. Hence, 200 × 1.0318 = USD 206.4 million. (Study Session 6, LOS 24.d)

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With respect to the British subsidiary, what method should be used to value its fixed assets, what is the appropriate exchange rate, and what is the translated value (USD)?

A) Current method, current rate, USD 599.7 million.

B) Temporal method, historical rate, USD 547.7 million.

C) Current method, historical rate, USD 547.7 million.

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Self-contained, independent subsidiaries reporting their results in the local currency that is NOT the functional currency use the temporal method. Fixed assets under the temporal method are translated using the historical rate. Hence, 370 × 1.4803 = USD 547.7 million. (Study Session 6, LOS 24.d)

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With respect to the Chinese subsidiary, what method should be used to value its long term debt, what is the appropriate exchange rate, and what is the translated value (in USD)?

A) Temporal method, historical rate, USD 29.3 million.

B) Temporal method, current rate, USD 35.0 million.

C) Current method, current rate, USD 35.0 million.

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Self-contained, independent subsidiaries reporting their results in the local currency that is NOT the functional currency use the temporal method. Long-term debt under the temporal method is considered a monetary liability and is translated using the current rate. Hence, 290 × 0.1208 = USD 35.0 million. (Study Session 6, LOS 24.d)

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Which of the following statements is most accurate with respect to accounting for inventory and cost of goods sold (COGS) using last-in first out (LIFO) under the temporal method?

A) Inventory is translated at historical rates, and COGS is translated at the current rate.

B) Inventory is translated at the current rate while COGS is translated at historical rates.

C) Inventory is translated at historical rates, and COGS is translated at historical rates.

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If using LIFO, units sold during the year are the ones purchased during the year. Under the temporal method, COGS and inventory would be translated at historical rates. (Study Session 6, LOS 24.c)

rgonzalez

Which example least accurately describes pure balance sheet and income statement ratios?

A) All pure balance sheet ratios are affected by the all-current translation method.

B) The current ratio is a pure balance sheet ratio.

C) When multiplying both the numerator and denominator by the current exchange rate, the current rate is cancelled.

All pure balance sheet ratios are unaffected by the all-current translation method.