Test bank with answers for advanced accounting 3e by jeter chapter 13

To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 13 Translation of Financial Statements of Foreign Affiliates Multiple Choice When translating foreign currency financial statements for a company whose functional currency is the U.S dollar, which of the following accounts is translated using historical exchange rates? a b c d Notes Payable Yes Yes No No Equipment Yes No No Yes Under the temporal method, monetary assets and liabilities are translated by using the exchange rate existing at the: a beginning of the current year b date the transaction occurred c balance sheet date d None of these The process of translating the accounts of a foreign entity into its functional currency when they are stated in another currency is called: a verification b translation c remeasurement d None of these Which of the following would be restated using the average exchange rate under the temporal method? a cost of goods sold b depreciation expense c amortization expense d None of these Paid-in capital accounts are translated using the historical exchange rate under: a the current rate method only b the temporal method only c both the current rate and temporal methods d neither the current rate nor temporal methods Which of the following would be restated using the current exchange rate under the temporal method? a Marketable securities carried at cost b Inventory carried at market c Common stock d None of these http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 13-2 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition The translation adjustment that results from translating the financial statements of a foreign subsidiary using the current rate method should be: a included as a separate item in the stockholders' equity section of the balance sheet b included in the determination of net income for the period it occurs c deferred and amortized over a period not to exceed forty years d deferred until a subsequent year when a loss occurs and offset against that loss Average exchange rates are used to translate certain items from foreign financial statements into U.S dollars Such averages are used in order to: a smooth out large translation gains and losses b eliminate temporary fluctuation in exchange rates that may be reversed in the next fiscal period c avoid using different exchange rates for some revenue and expense accounts d approximate the exchange rate in effect when the items were recognized When the functional currency is identified as the U.S dollar, land purchased by a foreign subsidiary after the controlling interest was acquired by the parent company should be translated using the: a historical rate in effect when the land was purchased b current rate in effect at the balance sheet date c forward rate d average exchange rate for the current period 10 The appropriate exchange rate for translating a plant asset in the balance sheet of a foreign subsidiary in which the functional currency is the U.S dollar is the: a current exchange rate b average exchange rate for the current year c historical exchange rate in effect when the plant asset was acquired or the date of acquisition, whichever is later d forward rate 11 The following balance sheet accounts of a foreign subsidiary at December 31, 2011, have been translated into U.S dollars as follows: Translated at Current Rates Historical Rates Accounts receivable, current $ 600,000 $ 660,000 Accounts receivable, long-term 300,000 324,000 Inventories carried at market 180,000 198,000 Goodwill 190,000 220,000 $1,270,000 $1,402,000 What total should be included in the translated balance sheet at December 31, 2011, for the above items? Assume the U.S dollar is the functional currency a $1,270,000 b $1,288,000 c $1,300,000 d $1,354,000 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 13 The Translation of Financial Statements of Foreign Affiliates 13-3 12 A foreign subsidiary's functional currency is its local currency which has not experienced significant inflation The weighted average exchange rate for the current year would be the appropriate exchange rate for translating a b c d 13 Wages expense Yes Yes No No Sales to customers Yes No No Yes A wholly owned subsidiary of a U.S parent company has certain expense accounts for the year ended December 31, 2011, stated in local currency units (LCU) as follows: LCU Depreciation of equipment (related assets were purchased January 1, 2009) 375,000 Provision for doubtful accounts 250,000 Rent 625,000 The exchange rates at various dates are as follows: December 31, 2011 Average for year ended December 31, 2011 January 1, 2009 Dollar equivalent of LCU $0.50 0.55 0.40 Assume that the LCU is the subsidiary's functional currency and that the charges to the expense accounts occurred approximately evenly during the year What total dollar amount should be included in the translated income statement to reflect these expenses? a b c d $687,500 $625,000 $550,000 $500,000 14 If the functional currency is determined to be the U.S dollar and its financial statements are prepared in the local currency, SFAS 52, requires which of the following procedures to be followed? a Translate the financial statements into U.S dollars using the current rate method b Remeasure the financial statements into U.S dollars using the temporal method c Translate the financial statements into U.S dollars using the temporal method d Remeasure the financial statements into U.S dollars using the current rate method 15 P Company acquired 90% of the outstanding common stock of S Company which is a foreign company The acquisition was accounted for using the purchase method In preparing consolidated statements, the paid-in capital of S Company should be converted at the: a exchange rate effective when S Company was organized b exchange rate effective on the date of purchase of the stock of S Company by P Company c average exchange rate for the period S Company stock has been upheld by P Company d current exchange rate http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 13-4 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 16 In preparing consolidated financial statements of a U.S parent company and a foreign subsidiary, the foreign subsidiary’s functional currency is the currency: a of the country the parent is located b of the country the subsidiary is located c in which the subsidiary primarily generates and spends cash d in which the subsidiary maintains its accounting records 17 Gains from remeasuring a foreign subsidiary’s financial statements from the local currency, which is not the functional currency, into the parent company’s currency should be reported as a(n): a other comprehensive income item b extraordinary item (net of tax) c part of continuing operations d deferred credit 18 Assuming no significant inflation, gains resulting from the process of translating a foreign entity’s financial statements from the functional currency to U.S dollars should be included as a(n): a other comprehensive income item b extraordinary item (net of tax) c part of continuing operations d deferred credit 19 A foreign subsidiary’s functional currency is its local currency and inflation of over 100 percent has been experienced over a three-year period For consolidation purposes, SFAS No 52 requires the use of: a the current rate method only b the temporal method only c both the current rate and temporal methods d neither the current rate or the temporal method 20 The objective of remeasurement is to: a produce the same results as if the books were maintained in the currency of the foreign entity’s largest customer b produce the same results as if the books were maintained solely in the local currency c produce the same results as if the books were maintained solely in the functional currency d None of the above http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 13 The Translation of Financial Statements of Foreign Affiliates 13-5 Problems 13-1 Ramsey, Inc owns a company that operates in France Account balances in francs for the subsidiary are shown below: Cash and Receivables Supplies Property, Plant, and Equipment Accounts Payable Long-term Notes Payable Common Stock Retained Earnings Dividends-Declared & Paid on Dec 31 Revenues Operating Expenses Totals 2011 January December 31 24,000 26,000 1,000 500 52,500 49,000 (11,500) (5,500) (19,000) (11,000) (30,000) (30,000) (17,000) (17,000) -3,000 -(30,000) -15,000 -0-0 Exchange rates for 2011 were as follows: January $0.22 Average for the year 0.19 December 31 0.18 Revenues were earned and operating expenses, except for depreciation and supplies used, were incurred evenly throughout the year No purchases of supplies or plant assets were made during the year Required: A Prepare a schedule to compute the translation adjustment for the year, assuming the subsidiary's functional currency is the franc B Prepare a schedule to compute the translation gain or loss, assuming the subsidiary's functional currency is the U.S dollar http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 13-6 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 13-2 Sloop Sails Corporation, a U.S company, operates a 100%-owned British subsidiary, Sewart Corporation The U.S dollar is the functional currency of the subsidiary Financial statements for the subsidiary for the fiscal year-end December 31, 2011, are as follows: Sewart Corporation Income Statement Pounds 650,000 Sales Cost of Goods Sold Beginning Inventory Purchases Goods Available For Sale Less: Ending Inventory Cost of Goods Sold Depreciation Selling and Admin Expenses Income Taxes Net Income 310,000 265,000 575,000 285,000 290,000 79,000 155,000 32,000 556,000 94,000 Sewart Corporation Partial Balance Sheet Current Assets Cash Accts Rec Inventories 155,000 171,000 285,000 611,000 Current Liabilities Notes Payable Accts Payable Other Current Liab Long-term Liab (issued July 1, 2009) 78,000 165,000 51,000 294,000 250,000 Other Information: Equipment costing 340,000 pounds was acquired July 1, 2009, and 38,000 was acquired June 30, 2011 Depreciation for the period was as follows: Equipment – 2009 acquisitions 66,000 – 2011 acquisitions 6,000 The beginning inventory was acquired when the exchange rate was $1.77 The inventory is valued on a FIFO basis Purchases and the ending inventory were acquired evenly throughout the period Dividends were paid by the subsidiary on June 30 amounting to 156,000 pounds Sales were made and all expenses were incurred uniformly throughout the year Exchange rates for the pound on various dates were: July 1, 2009 Jan 1, 2011 June 30, 2011 Dec 31, 2011 Average for 2011 $1.79 1.75 1.74 1.71 1.73 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 13 The Translation of Financial Statements of Foreign Affiliates 13-7 13-2 (Continued) Required: A Prepare a schedule to determine the translation gain or loss for 2010, assuming the net monetary liability position on January 1, 2011, was 180,000 pounds B Compute the dollar amount that each of the following would be reported at in the 2011 financial statements: Cost of Goods Sold Depreciation Expense Equipment 13-3 Accounts are listed below for a foreign subsidiary that maintains its books in its local currency The equity interest in the subsidiary was acquired in a purchase transaction In the space provided, indicate the exchange rate that would be used to translate the accounts into dollars assuming the functional currency was identified (a) as the U.S dollar and (b) as the foreign entity's local currency Use the following letters to identify the exchange rate: H – Historical exchange rate C – Current exchange rate A – Average exchange rate for the current period Exchange rate if the functional currency is: U.S Dollar Local currency Account 10 11 12 13 14 15 Bonds Payable (issued 01/01/08) Office Supplies Dividends Declared Common Stock Additional Paid-In Capital Inventory Carried at Cost Short-term Notes Payable Accumulated Depreciation Cash Marketable Securities (carried at market) Cost of Goods Sold Sales Accounts Receivable Depreciation Expense Income Tax Expense _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 13-8 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition Use the following information to answer Problems 13-4 and 13-5 On January 2, 2011, Promo Inc., a U.S parent company, purchased a 100% interest in Spot Company, a subdivision located in Switzerland The purchase method of accounting was used to account for the acquisition The 2011 financial statements for Spot Company, the subsidiary, in Swiss francs were as follows: Comparative Balance Sheets Jan Cash 15,000 Accounts receivable 45,000 Plant and equipment (net) (purchased 6/30/08) 75,000 Land (purchased 6/30/08) 45,000 Total 180,000 Dec 31 33,000 49,500 67,500 45,000 195,000 Accounts payable Long-term notes payable (issued 6/30/08) Common stock (issued 6/30/08) Retained earnings Total 18,000 27,000 90,000 60,000 195,000 13,500 31,500 90,000 45,000 180,000 Income Statement Revenues Operating expenses including depreciation of 7,500 francs Net income Beginning retained earnings Dividends declared and paid Ending retained earnings 180,000 135,000 45,000 45,000 90,000 30,000 60,000 Sales were earned and operating expenses were incurred evenly during the year Exchange rates for the franc at various dates are: January 2, 2011 December 31, 2011 Average for 2011 December 10, 2011, dividend payment date June 30, 2008 13-4 0.8600 0.8830 0.8715 0.8810 0.8316 Use the above information to answer the following question: Required: Translate the year-end financial statements of Spot Company, the foreign subsidiary, using the temporal method Round numbers to the nearest dollar 13-5 Use the above information to answer the following question: Required: Prepare a schedule to compute the translation gain or loss for Spot Company, assuming the temporal method of translation Round numbers to the nearest dollar http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 13 The Translation of Financial Statements of Foreign Affiliates 13-9 13-6 Bass Corporation, a U.S Company, formed a subsidiary with a new company in London on January 1, 2011, by investing 500,000 British pounds in exchange for all of the subsidiary’s common stock The subsidiary purchased land for 100,000 pounds and a building for 300,000 pounds on July 1, 2011 The building is being depreciated over a 40-year life by the straight-line method The inventory is valued on an average cost basis The British pound is the subsidiary’s functional currency and its reporting currency and has not experienced any abnormal inflation Exchange rates for the pound on various dates were: January 1, 2011 July 1, 2011 December 31, 2011 2011 average rate pound = 1.81 pound = 1.86 pound = 1.83 pound = 1.82 The subsidiary’s adjusted trial balance is presented below for the year ended December 31, 2011 Debits Cash Accounts receivable Inventory Land Building Depreciation expense Cost of goods sold Other expenses Total debits In Pounds 200,000 60,000 80,000 100,000 300,000 3,750 213,750 90,000 1,047,500 Credits Accumulated depreciation Accounts payable Accrued liabilities Common stock Retained earnings Sales revenue Total credits 3,750 84,000 16,750 500,000 - 443,000 1,047,500 Required: Prepare the subsidiary’s: A Translated workpapers (round to the nearest dollar) B Translated income statement C Translated balance sheet 13-7 Using the information provided in Problem 13-6, use the temporal method instead of the current rate method Required: Prepare the subsidiary’s: A Translated workpapers (round to the nearest dollar) B Translated income statement C Translated balance sheet http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 13-10 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 13-8 On January 1, 2011, Roswell Systems, a U.S.-based company, purchased a controlling interest in Swiss Management Consultants located in Zurich, Switzerland The acquisition was treated as a purchase transaction The 2011 financial statements stated in Swiss francs are given below SWISS MANAGEMENT CONSULTANTS Comparative Balance Sheets January and December 31, 2011 Jan Dec 31 Cash and Receivables Net Property, Plant, and Equipment Totals 30,000 60,000 90,000 84,000 56,000 140,000 Accounts and Notes Payable Common Stock Retained Earnings Totals 45,000 30,000 15,000 90,000 50,000 30,000 60,000 140,000 SWISS MANAGEMENT CONSULTANTS Consolidated Income and Retained Earnings Statement For the Year Ended December 31, 2011 Revenues Operating Expenses including depreciation of 5,000 francs Net income Dividends Declared and Paid Increase in Retained Earnings 112,000 45,000 67,000 22,000 45,000 Direct exchange rates for Swiss franc are: January 1, 2011 December 31, 2011 Average for 2011 Dividend declaration and payment date U.S Dollars per Franc $0.9987 0.9321 0.9654 0.9810 Required: A Translate the year-end balance sheet and income statement of the foreign subsidiary using the current rate method of translation B Prepare a schedule to verify the translation adjustment Short Answer To accomplish the objectives of translation, two translation methods are used depending on the functional currency of the foreign entity Describe the two translation methods The translation process can be done using either the current rate method or the temporal method Explain under what circumstances each of the methods is appropriate http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 13 The Translation of Financial Statements of Foreign Affiliates 13-11 Short Answer Questions from the Textbook What requirements must be satisfied if a foreign subsidiary is to be consolidated? What is meant by an entity’s functional currency and what are the economic indicators identified by the FASB to provide guidance in selecting the functional currency? The is the functional currency of a foreign subsidiary with operations that are relatively self-contained and integrated within the country in which it is located In such cases, the method of translation would be used to translate the accounts into dollars The is the functional currency of a foreign subsidiary that is a direct and integral component or extension of a U.S parent company In such cases, the method of translation is used to translate (remeasure) the accounts into dollars Which method of translation is used to convert the financial statements when a foreign subsidiary operates in a highly inflationary economy? Define remeasurement Under the current rate method, how are assets and liabilities that are stated in a foreign currency translated? Under the current rate method, describe how the various balance sheet accounts are translated (including the equity accounts) and how this translation affects the computation of various ratios (such as debt to equity or the current ratio) In particular, discuss whether or not the ratios will change when computed in local currencies and compared to their calculations (after translation) using the parent’s currency What is the objective of the temporal method of translation? 10 Assuming that the temporal method is used, how are revenue and expense items in foreign currency financial statements converted? 11 A translation adjustment results from the process of translating financial statements of a foreign subsidiary from its functional currency into dollars Where is the translation adjustment reported in the financial statements if the current rate method is used to translate the accounts? Business Ethics Question from the Textbook The Shady Tree Company is preparing to announce their quarterly earnings numbers The company expectsto beat the analysts’ forecast of earnings by at least5cents a share In anticipation of the increase instockvalue and before the release of the earnings numbers, the company issued stock options to the top executives in the firm, with the option price equal to today’s market price This type of executive stock option is often re-ferred to as “spring-loading.” Do you think this practice should be allowed? Does it provide in-formation about the integrity of the firm or is this just good business practice? Do you think this practice violates the insider trading rules? http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 13-12 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition ANSWER KEY Multiple Choice d c c d c b a 10 11 12 13 14 d a c c a a b 15 16 17 18 19 20 b c c a b c Problems 13-1 A Exposed net asset position – 1/1 Adjustment for changes in net asset position during the year Add: Revenues Less: Operating expenses Dividends Net asset position translated using rate in effect at date of transactions Exposed net asset position – 12/31 Translation adjustment – loss Francs 47,000 30,000 (15,000) (3,000) 59,000 B Exposed net monetary liability position – 1/1 Adjustments for changes in net monetary position during the year Add: increase in cash and receivables – revenues Less: decrease in monetary assets or increase in monetary liabilities Operating expenses Dividends paid Net monetary asset position translated using rate in effect at date of transactions Exposed net monetary asset position – 12/31 Translation loss Francs (6,500) Translation Rate 0.22 0.19 0.19 0.18 0.18 Translation Rate 0.22 $ 10,340 5,700 (2,850) (540) -12,650 10,620 2,030 $ (1,430) 30,000 0.19 (11,000) (3,000) 0.19 0.18 (2,090) (540) 9,500 0.18 1,640 1,710 70 http://downloadslide.blogspot.com 5,700 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 13 The Translation of Financial Statements of Foreign Affiliates 13-13 13-2 A Beginning Net Monetary Liab Pos +Sales - Purchases - Selling & Admin Expenses - Income Taxes - Equipment Purchased - Dividends Paid Net Monetary Liab Pos Trans - Ending Net Monetary Liab Pos Translation Gain B Beginning Inventory Purchases Goods Available Ending Inventory Cost of Goods Sold 2009 equipment: 2011 equipment: 10 11 12 13 14 15 U.S Dollar C H H H H H C H C C H A C H A (176,000) × 1.71 = 310,000 × $1.77 = 265,000 × 1.73 = 575,000 285,000 × 1.73 = 290,000 Depr on 2009 equipment: Depr on 2011 equipment: 2011 Depreciation Expense 13-3 (180,000) × $1.75 = 650,000 × 1.73 = (265,000) × 1.73 = (155,000) × 1.73 = (32,000) × 1.73 = (38,000) × 1.74 = (156,000) × 1.74 = $(315,000) 1,124,500 (458,450) (268,150) (55,360) (66,120) (271,440) $(310,020) (300,960) $ 9,060 $548,700 458,450 1,007,150 493,050 $514,100 66,000 × $1.79 = 6,000 × 1.74 = $118,140 10,440 $128,580 340,000 × $1.79 = 38,000 × 1.74 = $608,600 66,120 $674,720 Local Currency C C H H H C C C C C A A C A A http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 13-14 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 13-4 Temporal method Translation Rate Francs U.S $ Balance Sheet Cash Accounts Receivable Plant and Equipment (net) Land Total 33,000 49,500 67,500 45,000 195,000 0.8830 0.8830 0.8600 0.8600 29,139 43,709 58,050 38,700 169,598 Accounts Payable Notes Payable Common Stock Retained Earnings Total 18,000 27,000 90,000 60,000 195,000 0.8830 0.8830 0.8600 Bal Amt 15,894 23,841 77,400 52,463 169,598 Income Statement Revenues Operating Expenses Depreciation Expense Translation Gain (loss) Net Income Retained Earnings – 1/1 Dividends Declared Retained Earnings – 12/31 180,000 (127,500) (7,500) 45,000 45,000 90,000 (30,000) 60,000 0.8715 0.8715 0.8600 0.8600 0.8810 13-5 Francs Exposed net monetary asset position – 1/1 (60,000 - 45,000) Add: Increases in net monetary assets – Revenues Less: Decreases in net monetary assets – Operating expenses Dividends Net monetary position translated using the rate in effect at date of transaction Exposed net monetary asset position – 12/31 Translation gain (loss) 156,870 (111,116) (6,450) 889 40,193 38,700 78,893 (26,430) 52,463 Translation Rate U.S $ 15,000 0.8600 12,900 180,000 0.8715 156,870 (127,500) (30,000) 0.8715 0.8810 (111,116) (26,430) 32,224 37,500 0.8830 http://downloadslide.blogspot.com 33,113 889 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 13 The Translation of Financial Statements of Foreign Affiliates 13-15 13-6 A Subsidiary Corporation Translated Workpapers Debits Cash Accounts receivable Inventory Land Building Depreciation expense Cost of goods sold Other expenses Total debits 200,000 × 1.83 =$366,000 60,000 × 1.83 = 109,800 80,000 × 1.83 = 146,400 100,000 × 1.83 = 183,000 300,000 × 1.83 = 549,000 3,750 × 1.82 = 6,825 213,750 × 1.82 = 389,025 90,000 × 1.82 = 163,800 $1,913,850 Credits Accumulated depreciation 3,750 × 1.83 = $ 6,863 Accounts payable 84,000 × 1.83 = 153,720 Accrued liabilities 16,750 × 1.83 = 30,653 Common stock 500,000 × 1.81 = 905,000 Retained earnings - Sales revenue 443,000 × 1.82 = 806,260 Total credits 1,902,496 Cumulative Translation Adjustment-Credit balance 11,354 $1,913,850 B Subsidiary Corporation Translated Income Statement For the Year Ended December 31, 2011 Sales revenue Expenses: Cost of goods sold Depreciation expense Other expenses Net income Beginning retained earnings, Jan 1, 2011 Ending retained earnings, Dec 31, 2011 $806,260 (389,025) (6,825) (163,800) $246,610 - $ 246,610 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 13-16 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition C Subsidiary Corporation Translated Balance Sheet December 31, 2011 Assets: Cash Accounts receivable Inventory Land Building-net Total Assets $366,000 109,800 146,400 183,000 542,137 $1,347,337 Equities: Accounts payable Accrued liabilities Common stock Retained earnings Other comprehensive income-translation adj Total liabilities and equity $153,720 30,653 905,000 246,610 11,354 $1,347,337 13-7 A Subsidiary Corporation Translated Workpapers Debits Cash Accounts receivable Inventory (average cost method) Land Building Depreciation expense Cost of goods sold Other expenses Total debits Credits Accumulated depreciation Accounts payable Accrued liabilities Common stock Retained earnings Sales revenue Total credits Cumulative translation remeasurement gain-credit balance 200,000 × 1.83 60,000 × 1.83 80,000 × 1.82 100,000 × 1.86 300,000 × 1.86 3,750 × 1.86 213,750 × 1.82 90,000 × 1.82 = = = = = = = = $366,000 109,800 145,600 186,000 558,000 6,975 389,025 163,800 $1,925,200 3,750 × 1.86 84,000 × 1.83 16,750 × 1.83 500,000 × 1.81 = = = = $ 6,975 153,720 30,653 905,000 - 806,260 $1,902,608 443,000 × 1.82 = http://downloadslide.blogspot.com 22,592 $1,925,200 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 13 The Translation of Financial Statements of Foreign Affiliates 13-17 B Subsidiary Corporation Translated Income Statement For the Year Ended December 31, 2011 Sales revenue Expenses: Cost of goods sold Depreciation expense Other expenses Translation remeasurement gain Net income Beginning retained earnings, Jan 1, 2011 Ending retained earnings, Dec 31, 2011 $806,260 (389,025) (6,975) (163,800) 22,592 269,052 - - $ 269,052 C Subsidiary Corporation Translated Balance Sheet December 31, 2011 Assets: Cash Accounts receivable Inventory Land Building-net Total Assets $366,000 109,800 145,600 186,000 551,025 $1,358,425 Equities: Accounts payable Accrued liabilities Common stock Retained earnings Total liabilities and equity 153,720 30,653 905,000 269,052 $1,358,425 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 13-18 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 13-8 Part A Swiss Francs Consolidated Income and Retained Earnings Statement Revenues Operating Expenses Net Income Retained Earnings – 1/1 Dividends Retained Earnings – 12/31 Balance Sheet Cash and Receivables Net Property, Plant and Equipment Total Accounts and Notes Payable Common Stock Retained Earnings Cumulative Translation Adjustment (debit) Total Part B Translation Rate $ 112,000 (45,000) 67,000 15,000 82,000 (22,000) 60,000 $0.9654 0.9654 84,000 56,000 140,000 0.9321 0.9321 78,296 52,198 130,494 50,000 30,000 60,000 140,000 140,000 0.9321 0.9987 46,605 29,961 58,081 134,647 (4,153) 130,494 Swiss Francs 45,000 Exposed net asset position – 1/1 Adjustment for changes in the net asset position during the year: Net income 67,000 Dividends (22,000) Net asset position translated using rate in effect at date of transactions -Exposed net asset position – 12/31 90,000 Cumulative translation adjustment (debit) 0.9987 0.9810 Balancing amt Translation Rate $0.9987 108,125 43,443 64,682 14,981 79,663 (21,582) 58,081 $ 44,942 0.9654 0.9810 64,682 (21,582) 0.9321 88,042 83,889 4,153 Short Answer Under the current rate method, all assets and liabilities are translated using the current exchange rate on the balance sheet date Revenue and expense transactions are translated at the exchange rate existing on the date each underlying transaction occurred Under the temporal method, monetary assets and liabilities are translated at the current exchange rate Assets and liabilities carried at historical cost are translated at historical exchange rates while those carried at current values are translated at the current exchange rate Revenues and expenses except those related to assets and liabilities translated at historical rates, are translated at exchange rates in effect on the dates the underlying transaction occurred http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 13 The Translation of Financial Statements of Foreign Affiliates 13-19 The current rate method is appropriate when the functional currency is the local currency The temporal method is appropriate when the functional currency is the U.S dollar or when the foreign environment is highly inflationary If the functional currency is the currency of a third country, the accounts are first remeasured into the functional currency using the temporal method and then translated into U.S dollars using the current rate method Short Answer Questions in Textbook Solutions (1) The parent company must control more than 50 percent of the voting stock of the subsidiary (2) The intent of control should be permanent (3) The control should rest with the majority owners The functional currency of an entity is the currency of the primary economic environment in which the entity operates The FASB provided the following six economic indicators: a The impact on the parent’s cash flow; b The short-term responsiveness of the sales price to changes in the exchange rate; c The sales market for the firm’s products; d The currency in which labor, materials, and other factor inputs are primarily obtained; e The currency in which debt is denominated and the ability of the foreign entity’s operations to generate amounts of that currency sufficient to service the debt; f The volume of transactions between the foreign entity and its parent Local currency, current rate U.S dollar, temporal The temporal method is used when a foreign subsidiary operates in a highly inflationary economy Remeasurement is the process of translating the accounts of a foreign entity into its functional currency when they are stated in another currency All assets and liabilities are translated using the current rate at the balance sheet date when the current rate method of translation is used Assets and liabilities are translated at the rate in effect at the balance sheet date Common stock is translated at the historical rate when the stock was issued Retained earnings consists of various period’s net income (translated at the yearly average rates) less dividends converted at the historical rates on the declaration dates The cumulative translation adjustment is a balancing amount in equity, which results in total equity (including the cumulative adjustment) being driven back to the rate in effect at the balance sheet date Thus, the ratios will not change from their calculations using the local currency Application of the temporal method produces translated amounts that reflect transactions as if they had been measured in dollars originally rather than in the local currency 10 Revenues and expenses are translated using the exchange rate in effect when they were recognized during the period except for expenses associated with nonmonetary items which are translated using historical rates Because it is impractical to translate numerous transactions, the use of an appropriate average is permitted http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 13-20 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 11 The translation adjustment is reported as a separate component of stockholders’ equity when the current rate method is used to translate the accounts Business Ethics Solutions Business ethics solutions are merely suggestions of points to address The objective is to raise the students' awareness of the topics, and to invite discussion In most cases, there is clear room for disagreement or conflicting viewpoints Spring-loading is a contentious issue, and the following points are among those that may be considered in a discussion or debate of whether it should be allowed or not: Though granting options is intended to motivate and incentivize the employees to generate more profits, granting an award that is already known (or strongly suspected) before-the-fact to be in the money very soon seems counter to this intent Companies engaged in spring-loading mislead investors by not disclosing that options are awarded with foreknowledge of the impending good news Spring-loading is legal as long as the compensation committee awarding the options knows the same information as the recipient, and the company informs shareholders that it does not withhold granting options when undisclosed, positive company information is pending Companies suspected of spring-loading cannot be said to have advantage of prior market reactions that have not actually taken place, and executives can argue, truthfully, that there is no way to know for certain how the market will react to impending news Option manipulation is generally more likely to occur in circumstances in which the company executives like CEOs have greater influence on the company’s pay-setting and governance processes, which suggests a lack of board oversight Spring-loaded grants might violate insider-trading rules, particularly if managers with knowledge of the information gives options to themselves, or if executives conceal good news from directors while urging them to grant options Also, see the following links: http://www.cfo.com/article.cfm/7880157/1/c_2984338 http://blog.issproxy.com/files/OptionsBackdating7806.pdf http://www.aflcio.org/corporatewatch/paywatch/stockoptions.cfm http://downloadslide.blogspot.com ... solutionsand andtest testbank, bank, visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 13- 6 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 13- 2 Sloop... solutionsand andtest testbank, bank, visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 13- 10 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 13- 8 On... solutionsand andtest testbank, bank, visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 13- 14 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 13- 4 Temporal