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Chapter 10 End of the Chapter Solutions

Chapter 10 End of the Chapter Solutions - Chapter 10...

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Chapter 10 - Management of Translation Exposure 10-1 CHAPTER 10 MANAGEMENT OF TRANSLATION EXPOSURE SUGGESTED ANSWERS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. Explain the difference in the translation process between the monetary/nonmonetary method and the temporal method. Answer: Under the monetary/nonmonetary method, all monetary balance sheet accounts of a foreign subsidiary are translated at the current exchange rate. Other balance sheet accounts are translated at the historical rate exchange rate in effect when the account was first recorded. Under the temporal method, monetary accounts are translated at the current exchange rate. Other balance sheet accounts are also translated at the current rate, if they are carried on the books at current value. If they are carried at historical value, they are translated at the rate in effect on the date the item was put on the books. Since fixed assets and inventory are usually carried at historical costs, the temporal method and the monetary/nonmonetary method will typically provide the same translation. 2. How are translation gains and losses handled differently according to the current rate method in comparison to the other three methods, that is, the current/noncurrent method, the monetary/nonmonetary method, and the temporal method? Answer: Under the current rate method, translation gains and losses are handled only as an adjustment to net worth through an equity account named the “cumulative translation adjustment” account. Nothing passes through the income statement. The other three translation methods pass foreign exchange gains or losses through the income statement before they enter on to the balance sheet through the accumulated retained earnings account.
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Chapter 10 - Management of Translation Exposure 10-2 3. Identify some instances under FASB 52 when a foreign entity’s function al currency would be the same as the parent firm’s currency. Answer: Three examples under FASB 52, where the foreign entity’s functional currency will be the same as the parent firm’s currency, are: i) the foreign entity’s cash flows directly affect the parent’s cash flows and are readily available for remittance to the parent firm; ii) the sales prices for the foreign entity’s products are responsive on a short -term basis to exchange rate changes, where sales prices are determined through worldwide competition; and, iii) the sales market is primarily located in the parent’s country or sales contracts are denominated in the parent’s currency. 4. Describe the remeasurement and translation process under FASB 52 of a wholly owned affiliate that keeps its books in the local currency of the country in which it operates, which is different than its functional currency.
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