B. Woods Chapter 13 - Chapter 13 FOREIGN CURRENCY FINANCIAL...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
203 Chapter 13 FOREIGN CURRENCY FINANCIAL STATEMENTS Answers to Questions 1 No. Translation of revenue and expense accounts at average exchange rates is an exception because average rates are merely an approximation of the exchange rates in effect at the transaction dates. In addition, paid-in capital accounts are translated at historical rates and dividends are translated at the exchange rates in effect at the time of payment. In contrast to translation, remeasurement into the currency of the reporting entity requires conversion of most nonmonetary items at historical rates and intercompany balances at reciprocal amounts. 2 A change in the functional currency of a subsidiary that results from restructuring manufacturing and distribution lines is not an accounting change because the change is necessitated by transactions and events different in substance from those previously occurring. [ FASB Statement No. 52 , paragraph 45] 3 A highly inflationary economy under Statement 52 is one that has cumulative inflation of approximately 100 percent or more over a three-year period. Judgment must be exercised in applying this rule to avoid changing functional currencies frequently due to minor differences in the inflation rate. 4 In accounting for a 60 percent owned foreign investee that operates in a highly inflationary economy, the financial statements of the foreign entity are remeasured using a U.S. dollar functional currency. Subsequently, the investor records its income from the investee based on the remeasured financial statements. 5 The functional currency of a foreign subsidiary does not affect the original recording of the business combination. This is because all assets, liabilities, and equities of the foreign subsidiary are converted into U.S. dollars at the current exchange rate in effect on the date of consummation of the business combination. 6 Special care must be exercised in applying the lower-of-cost-or-market rule to inventories in remeasured statements because remeasured amounts are affected both by changes in exchange rates and changes in replacement costs. Write-downs to market may be appropriate for both foreign currency statements and translated statements, foreign currency statements but not translated statements, or translated statements but not foreign currency statements.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
204 Foreign Currency Financial Statements 7 The amount of retained earnings is a combination of numerous revenue, expense, and dividend translations and there is no single exchange rate applicable to its balance. Therefore, the dollar amount of retained earnings is included in the year-end trial balance at its beginning-of-the-period translated amount. Retained earnings at year end is equal to beginning retained earnings, plus net income in U.S. dollars, less dividends in U.S. dollars. 8
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/04/2012 for the course ACCT 111 taught by Professor Bemo during the Spring '12 term at Nanyang Technological University.

Page1 / 47

B. Woods Chapter 13 - Chapter 13 FOREIGN CURRENCY FINANCIAL...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online