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.

---

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

---

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.

---

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)

---

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.

---

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)

---

The amount of 2006 depreciation expense in USD is:

A) $30,400,000.

B) $40,000,000.

C) $36,000,000.

---

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)

---

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

A) $49,500,000.

B) $51,700,000.

C) $55,000,000.

---

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)

---

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.

---

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)

---

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.

---

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

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/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

If Jameson wishes to convert any of the figures on Kasamatsu's Income Statement from yen to dollars, she should use which of the following exchange rates (/$)?

A) 140.

B) 150.

C) 130.

---

Ideally, all of the components on the income statement would be translated at the exchange rate that was in effect on the day that the transactions took place. For example, all sales that occurred on March 15, 2002, would be translated at the exchange rate that prevailed on that date. Likewise, if a large portion of inventory was purchased on October 27, 2002, then the appropriate portion of cost of goods sold would be calculated using the exchange rate from October 27, 2002. This however, is not especially practical, especially for a very large company with many transactions. The common practice is to use the average exchange rate for the accounting year, in this case 140 JPY/USD.

---

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

A) 150.

B) 145.

C) 140.

---

Because an asset is, in effect, being transferred from the balance sheet of the subsidiary to that of the parent (in this case the asset is cash in the form of a dividend) on a known date, it is appropriate to use the exchange rate that prevails on the dividend date.

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

Shelly 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, 2002 (in thousands on yen)
Statement of Income and Retained Earnings
Sales			700,000
Expenses
	Cost of Goods Sold (COGS)		280,000
	Depreciation		126,000
	SG&A		77,000
		Total Expenses	483,000
Earnings Before Taxes (EBT)			217,000
Income Tax Expense			98,000
Net Income			119,000
Retained Earnings: December 31, 2001			250,000
			369,000
Dividends			58,000
Retained Earnings: December 31, 2002 *			311,000
* Retained earnings on 12/31/2002 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

Jameson has finally completed translating all the necessary figures into dollars and now wants to compute how much WB's reported sales in dollars will change due to Kasamatsu's sales. Which of the following is closest to Jameson's answer (in thousands of dollars)?

A) $4,828.

B) $5,000.

C) $4,667.

---

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 sales is an income statement item, the 2002 average exchange rate of 140, JPY/USD must be used to calculate sales in the reporting currency. Kasamatsu's sales were JPY 700,000. The calculation is:

700,000 140

= 5,000

WB will report $5,000 of sales as a result of Kasamatsu's operations. Both remaining answers use incorrect exchange rates.

---

What will Jameson find to be the U.S. dollar impact of Kasamatsu's total selling expenses on WB's financial statements (in thousands of dollars)?

A) $3,220.

B) $3,450.

C) $4,150.

---

Total selling expenses include cost of goods sold, depreciation, and SG&A. Kasamatsu reported a total of JP 483,000. Since these are all income statement items they must all be translated at the average 2002 exchange rate of 140 JP/US$. Therefore, the calculation is:

483,000 140

= 3,450

Both remaining answers use incorrect exchange rates.

rgonzalez

The Herlitzka Company, a U.S. multinational firm, has a 100% 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 total value of net monetary assets is equal to:

A) 12,000 SF.

B) -4,000 SF.

C) 3,000 SF.

---

Monetary assets and liabilities include cash, A/R, A/P and Long-term debt. Hence, net monetary assets is equal to 3,000 − (2,000 + 5,000) = -4,000 SF.

rgonzalez

Dell Air Lines has recently acquired Australian Puddle Jumpers, Inc., a small airline located in Sydney. The Australian dollar has been chosen by Dell as the functional currency for APJ. The Balance Sheet of APJ is given below as of Dec. 31, 2004 in Australian dollars.

Assets			Liabilities and Equity
Cash	$200		A/P	$180
A/R	240		Common Stock	720
Maintenance Supplies	180
Fixed Assets	280
Total Assets	$900		Total Liab & Equity	$900

APJ's income statement for the year ending Dec. 31, 2005 is expressed in Australian dollars as:

Sales	3,500
Total Costs	2,900
Net Income	600

The Australian dollar has steadily depreciated against the U.S. dollar. At Dec. 31, 2004, the exchange rate was 2 Australian dollars = $1 but at Dec. 31, 2005, the exchange rate had deteriorated to 3 Australian dollars = $1.
The Dec. 31, 2005 Balance Sheet for APJ is given in Australian dollars as follows:

Assets			Liabilities and Equity
Cash	441		A/P	210
A/R	330		Common Stock	720
Supplies	291		Retained Earnings	600
Fixed Assets	468
Total Assets	1,530		Total Liab. & Equity	1,530

On APJ's 2005 income statement, the level of sales in U.S. dollars would be:

A) $1,750.

B) $1,167.

C) $1,400.

---

Since the Australian $ is both the local and the functional currency, use the current rate method. The items in the income statement are translated at the average exchange rate. The average rate is (2 + 3) / 2 = 2.5 Australian dollars = $1.

Income Statement (in $)

Sales (3,500 / 2.5)	$1,400
Costs (2,900 / 2.5)	$1,160
Net Income	$240

---

On APJ's 2005 balance sheet, the level of accounts receivable is U.S. dollars would be:

A) $110.

B) $165.

C) $132.

---

Since the Australian $ is both the local and the functional currency, use the current rate method.
In the balance sheet, all accounts are translated at the current exchange rate, except for the common stock account, which is translated at the historical rate.
A/R (330 / 3) = 110

---

On APJ's 2005 balance sheet, the level of fixed assets in U.S. dollars would be:

A) $156.

B) $234.

C) $187.

---

Since the Australian $ is both the local and the functional currency, use the current rate method. In the balance sheet, all accounts are translated at the current exchange rate, except for the common stock account, which is translated at the historical rate.

Fixed Assets (468 / 3) = 156

rgonzalez

Giant Company is a U.S. firm that produces parts for nuclear reactors. Giant Company has a subsidiary, Grande, Inc., that operates in Mexico and is responsible for designing and manufacturing connection fittings that are vital for the proper operation of its parent company’s reactors.

• Giant Company considers the U.S. dollar to be the functional currency of Grande, Inc.
• 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, and was purchased evenly through the year.
• 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	20,000,000	35,000,000
Inventory	15,000,000	15,000,000
Fixed Assets (net)	70,000,000	60,000,000
Accounts Payable	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	(45,000,000)
Depreciation	(10,000,000)
Net Income	5,000,000

Giant Company should use the following method to reflect the results of Grande, Inc., in its financial statements:

A) the temporal method.

B) the temporal method followed by the current rate method.

C) the current rate 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 temporal method is used when the functional currency is the parent’s currency. (Study Session 6, LOS 24.c)

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The Cost of Goods Sold for Grande, Inc., for the year ended December 31, 2001, expressed in U.S. dollars is:

A) $5,400,000.

B) $5,250,000.

C) $4,950,000.

---

Both the beginning and ending inventory under LIFO cost flow assumptions are translated at the $0.12 rate as of the date the original inventory was acquired, January 1, 2001. Because beginning and ending inventories expressed in Mexican pesos are equal, the purchases for the year will equal the Cost of Goods Sold, which is remeasured at the average cost of acquiring the goods during the year: $0.11. (45,000,000 × $0.11) = $4,950,000. The average rate is the best estimate of the historical rate because the inventory that was sold was purchased evenly through the year. (Study Session 6, LOS 24.c)

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Which of the following statements regarding the current rate method are most correct?

A) This method is not typically used when the subsidiary is relatively independent of the parent.

B) Revenues and expenses are translated at the historic rate.

C) Under this method, translation gains and losses are reported in equity in the CTA account.

---

Under the current rate method, translation gains and losses are reported in equity in the CTA account. This method is typically used when the subsidiary is relatively independent of the parent. Revenues and expenses are translated at the average rate.
(Study Session 6, LOS 24.c)

---

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 statement of shareholder’s equity.

---

Under the temporal method, translation gains and losses are included in the income statement. (Study Session 6, LOS 24.d)

---

Revenues for 2001 translated into U.S. dollars amount to:

A) $6,600,000.

B) $6,000,000.

C) $7,800,000.

---

Under the temporal method, revenues are translated at the average rate during the reporting period.
60,000,000 × 0.11 = $6,600,000
(Study Session 6, LOS 24.d)

---

As a result of making the appropriate currency adjustments to the financial statements, Grande Inc.’s December 31, 2001 quick ratio will be:

A) higher.

B) unchanged.

C) lower.

---

Since the functional currency is the reporting currency, the temporal method must be used. Since it is taking fewer dollars to buy a peso, the peso is depreciating.

The quick ratio is a liquidity ratio that does not include inventory. The quick ratio is calculated as [(cash + accounts receivable) / accounts payable]. Since monetary assets and liabilities are translated at the current rate, the quick ratio will be unchanged. (Study Session 6, LOS 24.d)

rgonzalez

Dell Air Lines has recently acquired Australian Puddle Jumpers, Inc. (APJ), a small airline located in Sydney . The Australian dollar has been chosen by Dell as the functional currency for APJ. The Balance Sheet of APJ is given below as of Dec. 31, 2001 in U.S. dollars.

Assets			Liabilities and Equity
Cash	$100		Accounts Payable (A/P)	$90
Accounts Receivable (A/R)	120		Common Stock	360
Maintenance Supplies	90
Fixed Assets	140
Total Assets	$450		Total Liabilities & Equity	$450

APJ's income statement for the year ending Dec. 31, 2002 is expressed in Australian dollars as:

Sales	3,500
Total Costs	2,900
Net Income	600

The Australian dollar has steadily depreciated against the U.S. dollar. At Dec. 31, 2001, the exchange rate was 2.5 Australian dollars = $1 but at Dec. 31, 2002, the exchange rate had deteriorated to 3 Australian dollars = $1.
The Dec. 31, 2002 Balance Sheet for APJ is given in Australian dollars as follows:

Assets			Liabilities and Equity
Cash	441		A/P	210
A/R	330		Common Stock	720
Supplies	291		Retained Earnings	600
Fixed Assets	468
Total Assets	1,530		Total Liabilities & Equity	1,530

On APJ's 2002 income statement, the level of sales in U.S. dollars would be:</FONT

A) $1,272.</FONT

B) $1,985.</FONT

C) $1,167.</FONT

---

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 Australian dollar is the functional currency, use the current rate method. The items in the income statement are translated at the average exchange rate. The average rate is (2.5 + 3) / 2 = 2.75 Australian dollars = $1.

Income Statement (in $)

Sales (3,500 / 2.75)	$1,272
Costs (2,900 / 2.75)	$1,055
Net Income	$217

---

On APJ's 2002 income statement, the level of net income in U.S. dollars would be:

A) $242.

B) $200.

C) $217.

---

Since we are using the current rate method, the items in the income statement are translated at the average exchange rate. The average rate is (2.5 + 3) / 2 = 2.75 Australian dollars = $1.

Income Statement (in $)

Sales (3,500 / 2.75)	$1,272
Costs (2,900 / 2.75)	$1,055
Net Income	$217

---

On APJ's 2002 balance sheet, the level of accounts receivable is U.S. dollars would be:

A) $330.

B) $110.

C) $132.

---

Since we are using the current rate method, in the balance sheet all accounts are translated at the current exchange rate, except for the common stock account, which is translated at the historical rate.

A/R (330 / 3) = 110

rgonzalez

Dell Air Lines has recently acquired Australian Puddle Jumpers, Inc., a small airline located in Sydney. The Australian dollar has been chosen by Dell as the functional currency for APJ. The Balance Sheet of APJ is given below as of Dec. 31, 2004 in Australian dollars.

Assets			Liabilities and Equity
Cash	200		A/P	180
A/R	240		Common Stock	720
Maintenance Supplies	180
Fixed Assets	280
Total Assets	900		Total Liab & Equity	900

APJ's income statement for the year ending Dec. 31, 2005 is expressed in Australian dollars as:

Sales	3,500
Total Costs	2,900
Net Income	600

The Australian dollar has steadily depreciated against the U.S. dollar. At Dec. 31, 2004, the exchange rate was 2 Australian dollars = $1 but at Dec. 31, 2005, the exchange rate had deteriorated to 3 Australian dollars = $1.
The Dec. 31, 2005 Balance Sheet for APJ is given in Australian dollars as follows:

Assets			Liabilities and Equity
Cash	441		A/P	210
A/R	330		Common Stock	720
Supplies	291		Retained Earnings	600
Fixed Assets	468
Total Assets	1,530		Total Liab. & Equity	1,530

On APJ's 2005 income statement, the level of net income in U.S. dollars would be:

A) $300.

B) $200.

C) $240.

---

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 Australian dollar is both the local and the functional currency, use the current rate method. The items in the income statement are translated at the average exchange rate. The average rate is (2 + 3) / 2 = 2.5 Australian dollars = $1. (Study Session 6, LOS 24.d)

---

On APJ's 2005 balance sheet, the level of common stock (not including retained earnings) in U.S. dollars would be:

A) $288.

B) $240.

C) $360.

---

Since the Australian dollar is the local and the functional currency, use the current rate method.
In the balance sheet, all accounts are translated at the current exchange rate, except for the common stock account, which is translated at the historical rate.
Common Stock (720 / 2) = 360
(Study Session 6, LOS 24.d)

---

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

A) $200.

B) $240.

C) $300.

---

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 $)

Sales (3,500 / 2.5)	$1,400
Costs (2,900 / 2.5)	$1,160
Net Income	$240

(Study Session 6, LOS 24.d)

---

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

A) −$220.

B) −$280.

C) −$160.

---

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. Total assets = 1530/3 = 510 and accounts payable = 210/3 = 70. The common stock is translated at the historical rate on the date of purchase = 720/2 = 360. Beginning retained earnings = 0, so ending retained earnings = translated net income = 240. The cumulative translation adjustment is the plug figure that makes the balance sheet balance = 510 − 70 − 360 − 240 = -160. (Study Session 6, LOS 24.d)

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

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

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

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

---

The conditions necessary for implementation of the temporal method are:

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

(Study Session 6, LOS 24.c)

---

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 income statement.

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

---

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. (Study Session 6, LOS 24.c)

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, 2005, 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, 2005
	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, 2005 (Amounts in millions of Chad)
Revenues	1,000
Cost of sales	700
Depreciation expense	50
Selling expense	30
Translation gain (or loss)
Net income	220

Acer has determined that the exchange rate exposure at the beginning of 2005 is −260 Chad.
The exchange rate at the beginning of 2005 was 0.3333 Chad/US$. The exchange rate at the end of 2005 was 0.25 Chad/US$. The average rate for 2005 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. Assume that retained earnings at year end 2004 were zero, the historical exchange rate for depreciation is 0.333, and no dividends were paid during 2005.What is Acer Tool & Die's cost of sales in U.S. dollars using the temporal method?

A) $2,222.

B) $2,242.

C) $2,240.

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Purchases = COGS − Beginning inventory + ending inventory = 710 Chad

	Chad	Conversion	US$
Beginning inventory	90	0.3333	$270
Purchases	710	0.3125	2,272
Ending inventory	100	0.3125	320
COGS	700		$2,222

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What is the remeasurement gain or loss for the period using the temporal method?

A) $50 gain.

B) $52 loss.

C) $32 loss.

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Remeasured income statement under temporal method:
Revenues = 1000/0.3125 = 3200
COGS = 2222 (from previous question)
Depreciation = 50/0.3333 = 150
Selling expense = 30/0.3125 = 96
Income before remeasurement gain = 3200 − 2222 − 150 − 96 = 732
Net income = 680 (= retained earnings at year end 2005 − retained earnings at year end 2004)
Remeasurement gain/loss = 680 − 732 = -52