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1Copyright©2012PearsonEducation,Inc.PublishingasPrenticeHallAdvancedAccounting,11e(Beams/Anthony/Bettinghaus/Smith)Chapter14ForeignCurrencyFinancialStatementsMultipleChoiceQuestions1)AU.S.firmhasaBelgiansubsidiarythatusestheBritishpoundasitsfunctionalcurrency.AccordingtoGAAP,theU.S.dollarfromBelgianunit'spointofviewwillbeA)itsonlyforeigncurrency.B)itslocalcurrency.C)itscurrentratemethodcurrency.D)itsreportingcurrency.Answer:DObjective:LO1Difficulty:Easy2)SelveyInc.isawholly-ownedsubsidiaryofParsfieldIncorporated,aU.S.firm.ThecountrywhereSelveyoperatesisdeterminedtohaveahighlyinflationaryeconomyaccordingtoGAAPdefinitions.Therefore,forpurposesofpreparingconsolidatedfinancialstatements,thefunctionalcurrencyisA)itsreportingcurrency.B)itscurrentratemethodcurrency.C)theUSdollar.D)itslocalcurrency.Answer:CExplanation:C)Selveymustusethefunctionalcurrencyofthereportingentity.Objective:LO3Difficulty:Easy3)Allofthefollowingfactorswouldbeusedtodefineaforeignentity'sfunctionalcurrency,exceptA)highvolumeofintercompanytransactions.B)expensesforforeignentityprimarilydrivenbylocalfactors.C)financingforforeignentitydenominatedinlocalcurrency.D)foreignentity'sstatusasalocaltaxhavenfortransferpricingpurposes.Answer:DObjective:LO1Difficulty:Easy4)TheprimarygoalbehindconsolidatingfinancialstatementsofacontrolledsubsidiaryisA)assuringthatthesubsidiaryfinancialstatementsarethesameunderthetemporalmethodorthecurrentratemethod.B)assuringthattheindividualnatureofthesubsidiaryentityisnotlostintheconsolidation.C)representingtheconversionofstatementsatthehistoricalexchangerate.D)representingthecompany'sunderlyingeconomiccondition.Answer:DObjective:LO2Difficulty:Easy2Copyright©2012PearsonEducation,Inc.PublishingasPrenticeHall5)Pelmerhasaforeignsubsidiary,SappCorporationofGermany,whosefunctionalcurrencyistheeuro.Sapp'sbooksaremaintainedineuros.OnDecember31,2011,SapphasanaccountreceivabledenominatedinBritishpounds.Whichoneofthefollowingstatementsistrue?A)BecauseallaccountsofthesubsidiaryaretranslatedintoU.S.dollarsatthecurrentrate,theAccountReceivableisnotadjustedonthesubsidiary'sbooksbeforetranslation.B)TheAccountReceivableisremeasuredintothefunctionalcurrency,thuseliminatingtheneedfortranslation.C)TheAccountReceivableisfirstadjustedtoreflectthecurrentexchangerateineurosandthentranslatedatthecurrentexchangerateintodollars.D)TheAccountReceivableisadjustedtoeurosatthecurrentexchangerate,andanyresultinggainorlossisincludedasatranslationadjustmentinthestockholders'equitysectionofthesubsidiary'sseparatebalancesheet.Answer:CObjective:LO2Difficulty:Moderate6)PaskinCorporation'swholly-ownedCanadiansubsidiaryhasaCanadiandollarfunctionalcurrency.Intranslatingthesubsidiary'saccountbalancesintoU.S.dollarsforreportingpurposes,whichoneofthefollowingaccountswouldbetranslatedathistoricalexchangerates?A)AccountsReceivableB)NotesPayableC)CapitalStockD)RetainedEarningsAnswer:CObjective:LO2Difficulty:Easy7)AforeignentityisasubsidiaryofaU.S.parentcompanyandhasalwaysusedthecurrentratemethodtotranslateitsforeignfinancialstatementsonbehalfofitsparentcompany.Whichoneofthefollowingstatementsisfalse?A)TheU.S.dollaristhefunctionalcurrencyofthiscompany.B)Changesinexchangeratesbetweenthesubsidiary'scountryandtheparent'scountryarenotexpectedtoaffecttheforeignentity'scashflows.C)Translationadjustmentsareshowninstockholders'equityasincreasesordecreasesinothercomprehensiveincome.D)Translationadjustmentsarenotshownontheincomestatement.Answer:AObjective:LO2Difficulty:Easy3Copyright©2012PearsonEducation,Inc.PublishingasPrenticeHall8)AssumethefunctionalcurrencyofaforeignentityistheU.S.dollar,butthebooksarekeptineuros.Theobjectiveofremeasurementofaforeignentity'saccountsistoA)producethesameresultsasiftheforeignentity'sbooksweremaintainedinthecurrencyofthelargestcustomer.B)producethesameresultsasiftheforeignentity'sbooksweremaintainedsolelyinthelocalcurrency.C)producethesameresultsasiftheforeignentity'sbooksweremaintainedsolelyintheU.S.dollar.D)producetheresultsreflectiveoftheforeignentity'seconomicsinthelocalcurrency.Answer:CObjective:LO2Difficulty:Easy9)Whichofthefollowingassetsand/orliabilitiesareconsideredmonetary?A)IntangibleAssetsandPlant,Property,andEquipmentB)BondsPayableandCommonStockC)CashandAccountsPayableD)NotesReceivableandInventoriescarriedatcostAnswer:CObjective:LO2Difficulty:Easy10)WhichofthefollowingstatementsabouttheCurrentRatemethodisfalse?A)Translationinvolvesrestatingthefunctionalcurrencyamountsintothereportingcurrency.B)Allassetsandliabilitiesaretranslatedatthecurrentrate.C)Ifthesubsidiarymaintainstheirbooksintheirfunctionalcurrency,thecurrentratemethodisused.D)Theeffectofexchangeratechangesarereportedontheincomestatementasaforeignexchangegainorloss.Answer:DObjective:LO2Difficulty:Easy11)AccountsrepresentinganallowanceforuncollectibleaccountsareconvertedintoU.S.dollarsatA)historicalrateswhentheU.S.dollaristhefunctionalcurrency.B)currentratesonlywhentheU.S.dollaristhefunctionalcurrency.C)historicalratesregardlessofthefunctionalcurrency.D)currentratesregardle