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Unformatted text preview: CHAPTER 13 Note: The letter A or B indicated for a question, exercise, or problem means that the question, exercise, or problem relates to a chapter appendix. ANSWERS TO QUESTIONS 1. (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. 2. 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 parents cash flow; .b The short-term responsiveness of the sales price to changes in the exchange rate; .c The sales market for the firms 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 entitys operations to generate amounts of that currency sufficient to service the debt; .f The volume of transactions between the foreign entity and its parent. 3. Local currency, current rate 4. U.S. dollar, temporal 5. The temporal method is used when a foreign subsidiary operates in a highly inflationary economy. 6. Remeasurement is the process of translating the accounts of a foreign entity into its functional currency when they are stated in another currency. 7. All assets and liabilities are translated using the current rate at the balance sheet date when the current rate method of translation is used. 8. 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 periods 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. 9. 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. 13- 1 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. 11. The translation adjustment is reported as a separate component of stockholders equity when the current rate method is used to translate the accounts....
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- Spring '08