The united states rather than distinguishing a

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Intermediate Accounting: Reporting and Analysis
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Chapter 18 / Exercise 18-23
Intermediate Accounting: Reporting and Analysis
Jones/Wahlen
Expert Verified
The United States, rather than distinguishing a foreign subsidiary as either integrated or self-sustaining, requires that the functional currency of the subsidiary be determined. Management must evaluate the nature and purpose of each of its individual foreign subsidiaries to determine the appropriate functional currency for each. If a foreign subsidiary of a U.S.-based company is determined to have the U.S. dollar as its functional currency, it is essentially an extension of the parent company (equivalent to the integrated foreign entity designation used by most countries). If, however, the functional currency of the foreign subsidiary is determined to be different from the U.S. dollar, the subsidiary is
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Intermediate Accounting: Reporting and Analysis
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Chapter 18 / Exercise 18-23
Intermediate Accounting: Reporting and Analysis
Jones/Wahlen
Expert Verified
considered a separate entity from the parent (equivalent to the self- sustaining entity designation). Translation Methods Two basic methods for translation are employed worldwide: the current rate method and the temporal method . Regardless of which method is employed, a translation method must not only designate at what exchange rate individual balance sheet and income statement items are remeasured, but also designate where any imbalance is to be recorded, either in current income or in an equity reserve account in the balance sheet. Current Rate Method The current rate method is the most prevalent in the world today. Under this method, all financial statement line items are translated at the “current” exchange rate with few exceptions. Assets and liabilities. All assets and liabilities are translated at the current rate of exchange; that is, at the rate of exchange in effect on the balance sheet date. Income statement items. All items, including depreciation and cost of goods sold, are translated at either the actual exchange rate on the dates the various revenues, expenses, gains, and losses were incurred or at an appropriately weighted average exchange rate for the period. Distributions. Dividends paid are translated at the exchange rate in effect on the date of payment. Equity items. Common stock and paid-in capital accounts are translated at historical rates. Year-end retained earnings consist of the original year-beginning retained earnings plus or minus any income or loss for the year. Gains or losses caused by translation adjustments are not included in the calculation of consolidated net income. Rather, translation gains or losses are reported separately and accumulated in a separate equity reserve account (on the consolidated balance sheet) with a title such as “cumulative translation adjustment” (CTA), but it depends on the country. If a foreign subsidiary is later sold or liquidated, translation gains or losses of past years accumulated in the CTA account are reported as one component of the total gain or loss on sale or
liquidation. The total gain or loss is reported as part of the net income or loss for the period in which the sale or liquidation occurs.

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