Chapter 16 - Solution Manual

An example of such a transaction would be the

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An example of such a transaction would be the purchase of goods for sale by a German subsidiary of a U.S company (measuring the transaction in German marks) from a British company payable (denominated) in pounds sterling. A transaction may also be measured and denominated in the same foreign (with respect to a parent company) currency. An example of this type of transaction would be a British subsidiary of a U.S. company purchasing an asset from another British company. In this example the British subsidiary would measure the transaction in pounds sterling and would subsequently satisfy the debt in pounds sterling. In the first example, a change in the exchange rate between the date of the purchase of the goods and the settlement of the debt would cause the debt to be paid at an amount different from the original balance measured in U.S. dollars at the date of the transaction. This difference arises because a fixed amount of pounds sterling must be paid in order to settle the debt regardless of the cost to obtain the pounds sterling. In the second example, the subsidiary measures its transactions in the currency in which the debt is denominated, and so a subsequent change in the exchange rate of pounds sterling to U.S. dollars would have no effect on the amount of debt owed. Case 16-5 The temporal method generally translates assets and liabilities expressed in foreign currency in a manner that retains the accounting principles used to measure them in foreign statements and is characterized by the following: a. Cash or amounts receivable or payable that are denominated in a local foreign currency are to be translated using current rates. All other assets and liabilities that are not classified as above are to be translated in a manner that retains their original measurement bases. The historical rate is to be used for accounts that are carried at prices in past exchanges, and the current rate is to be used in translating accounts that are priced in current or future exchanges. The balances in long- term accounts receivable and long-term accounts payable represent amounts receivable or payable denominated in local foreign currency and as such must be translated at the current rate of exchange. b. Revenues and expense accounts are to be translated at the average exchange rate in effect during the period being reported upon. However, revenue and expense balances related to assets and liabilities translated at historical rates are translated at the rate in existence at the time the asset or liability was attained. Examples of revenue and expense accounts to be translated at historical rates are depreciation, amortization, inventory changes in cost of goods sold, and recognition of deferred income.
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