Chapter 16 - Solution Manual

C inventory valued at cost and deferred income each

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c. Inventory valued at cost and deferred income each represent accounts measured in past exchanges and must be translated at historical rates. d. Long-term debt is translated at the current rate.
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342 Case 16-6 a. For a derivative designated as a hedge of the exposure to changes in the fair value of a recognized asset or liability or a firm commitment (referred to as a fair value hedge), the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item. The effect of that accounting is to adjust the basis of the hedged item by the amount of the gain or loss on the hedging derivative to the extent that the gain or loss offsets the loss or gain experienced on the hedged item. b. A derivative instrument that is designated as hedging changes in the fair value of an unrecognized firm commitment qualifies for the accounting treatment of a fair value hedge if all of the specified criteria for hedge accounting under SFAS No. 133 are met. A derivative instrument that is designated as hedging the changes in the fair value of an available-for-sale security also qualifies for the accounting treatment of a fair value hedge if all of the same specified criteria are met. c. Derivative instruments designated as hedging the foreign currency exposure to the variability in the functional-currency-equivalent cash flows associated with either a forecasted foreign- currency-denominated transaction (a forecasted export sale to an unaffiliated entity with the price to be denominated in a foreign currency) or a forecasted intercompany foreign-currency- denominated transaction (a forecasted sale to a foreign subsidiary) qualify for hedge accounting under the following conditions: i. The company with the foreign currency exposure is a party to the hedging instrument ii.. The hedged transaction is denominated in a currency other than that unit's functional currency iii. All of the qualifying criteria for hedge accounting contained in SFAS No. 133 are Case 16-7 a. The guidelines contained at FASB ASC 830 adopt the functional currency approach to translation. An entity's functional currency is defined as the currency of the primary economic environment in which it operates, which will normally be the environment in which it expends cash. Most frequently the functional currency will be the local currency, and four general procedures are involved in the translation process when the local currency is defined as the functional currency. 1. The financial statements of each individual foreign entity are initially recorded in that entity's functional currency. For example, a Japanese subsidiary would initially prepare its financial statements in terms of yen, as that would be the currency it generally uses to carry out cash transactions.
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