答案和详解如下：

Q23. On APJ's 2005 balance sheet, the level of retained earnings in U.S. dollars would be:

A)   $200.

B)   $300.

C)   $240.

Correct answer is C)

Since there is no mention of dividends being paid, the retained earnings will equal net income (RE = NI − Div). The items in the income statement are translated at the average exchange rate under SFAS 52. The average rate is (2 + 3) / 2 = 2.5 Australian dollars = $1.

Income Statement (in $)

Q24. On APJ's 2005 balance sheet, the foreign currency translation adjustment in U.S. dollars would be:

A)   −$220.

B)   −$160.

C)   −$280.

Correct answer is B)

Since the Australian dollar is both the local and the functional currency, use the current rate method. 

When using the current rate method, all assets and liabilities are translated at the current rate, so the net exposure is assets minus liabilities, or total shareholder’s equity.

The currency translation adjustment (CTA) is calculated as the sum of the flow effect and holding effect.

Flow effect (in $) = change in exposure (in LC) × (ending rate − average rate)

Holding gain/loss effect (in $) = beginning exposure (in LC) × (ending rate − beginning rate)

Going back to our data in the example:

Beginning exposure = 720

Ending exposure = (720 + 600) = 1320

Change in exposure = (1320 − 720) = 600

Flow effect (in $) = 600 × [(1 / 3) − (1 / 2.5)] = −$40

Holding gain/loss effect (in $) = 720 × [(1 / 3) − (1 / 2)] = −$120

Translation gain/loss (in $) = flow effect + holding gain/loss effect = −$40 + (−$120) = −$160

Q25. Which one of the following is a condition under which the temporal method should be used to account for foreign currency

    translations?

A)   APJ would have to be a mere operational extension of Dell's main operations.

B)   The Australian dollar is chosen as the functional currency.

C)   The cumulative Australian inflation rate over the last three years would have to be less than 100%.

Correct answer is A)

The conditions necessary for implementation of the temporal method are:

1.         APJ would have to be a mere operational extension of Dell's main operations. If the operations of the subsidiary are well integrated with the parent’s then the parent’s currency (in this case, the U.S. dollar) would be the functional currency.

2.         The cumulative Australian inflation rate over the last 3 years would have to exceed 100%. (Hyperinflation)

Q26. Which one of the following statements correctly describes the effect on Dell's financial statements if the U.S. dollar had been

     chosen as the functional currency?

A)   The current rate method would apply.

B)   The translation adjustment would appear as a line item on Dell's balance sheet.

C)   The translation adjustment would appear as a line item on Dell's income statement.

Correct answer is C)         

If the U.S. dollar had been chosen as the functional currency, then the provisions of the temporal method would apply. Under the temporal method, the translation adjustment would appear as a line item on Dell's income statement and not as an element of equity. Hence, earnings may become more volatile as a result.

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