TBChap 008

Chapter 08
Translation of Foreign Currency Financial Statements
Multiple Choice Questions
1. In accounting, the term translation refers to
A. the calculation of gains or losses from hedging transactions.

B. the calculation of exchange rate gains or losses on individual transactions in
foreign currencies.
C. the procedure required to identify a company's functional currency.
D. the calculation of gains or losses from all transactions for the year.
E. a procedure to prepare a foreign subsidiary's financial statements for
consolidation.
2. What is a company's functional currency?
A. the currency of the primary economic environment in which it operates.

B. the currency of the country where it has its headquarters.
C. the currency in which it prepares its financial statements.
D. the reporting currency of its parent for a subsidiary.
E.
the currency it chooses to designate as such.
3. According to U.S. GAAP for a local currency perspective, which method is usually
required for translating a foreign subsidiary's financial statements into the parent's
reporting currency?
A.
B.
C.
D.
E.
the temporal method.

the current rate method.
the current/noncurrent method.
the monetary/nonmonetary method.
the noncurrent rate method.
8-1
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4. In translating a foreign subsidiary's financial statements, which exchange rate does

the current method require for the subsidiary's assets and liabilities?
A. the exchange rate in effect when each asset or liability was acquired.
B. the average exchange rate for the current year.
C. a calculated exchange rate based on market value.
D. the exchange rate in effect as of the balance sheet date.
E. the exchange rate in effect at the start of the current year.
5. The translation adjustment from translating a foreign subsidiary's financial
statements should be shown as
A. an asset or liability (depending on the balance) in the consolidated balance sheet.

B. a revenue or expense (depending on the balance) in the consolidated income
statement.
C. a component of stockholders' equity in the consolidated balance sheet.
D. a component of cash flows from financing activities in the consolidated statement
of cash flows.
E. an element of the notes which accompany the consolidated financial statements.
6. Westmore Ltd., is a British subsidiary of a U.S. company. Westmore's functional
currency is the pound sterling (). The following exchange rates were in effect during
2013:
Westmore reported sales of 1,500,000 during 2013. What amount (rounded) would
have been included for this subsidiary in calculating consolidated sales?
A.
B.
C.
D.
E.
$2,415,000.
$2,400,000.
$2,385,000.
$943,396.
$931,677.
8-2
7. Westmore Ltd., is a British subsidiary of a U.S. company. Westmore's functional

currency is the pound sterling (). The following exchange rates were in effect during
2013:
On December 31, 2013, Westmore had accounts receivable of 280,000. What

amount (rounded) would have been included for this subsidiary in calculating
consolidated accounts receivable?
A.
B.
C.
D.
E.
$173,913.
$176,100.
$445,200.
$448,000.
$450,800.
8-3
8. Gunther Co. established a subsidiary in Mexico on January 1, 2013. The subsidiary

engaged in the following transactions during 2013:
What amount of foreign exchange gain or loss would have been recognized in
Gunther's consolidated income statement for 2013?
A.
B.
C.
D.
E.
$800,000 gain.
$760,000 gain.
$320,000 loss.
$280,000 loss.
$440,000 loss.
8-4
9. Darron Co. was formed on January 1, 2013 as a wholly owned foreign subsidiary of a
U.S. corporation. Darron's functional currency was the stickle (). The following
transactions and events occurred during 2013:
What exchange rate should have been used in translating Darron's revenues and
expenses for 2013?
A.
B.
C.
D.
E.
$1 = .48.
$1 = .44.
$1 = .46.
$1 = .42.
$1 = .45.
8-5
10. Darron Co. was formed on January 1, 2013 as a wholly owned foreign subsidiary of a
U.S. corporation. Darron's functional currency was the stickle (). The following
What was the amount of the translation adjustment for 2013?
A.
B.
C.
D.
E.
$52,000 decrease in relative value of net assets.

$466,400 increase in relative value of net assets.
8-6
11. Sinkal Co. was formed on January 1, 2013 as a wholly owned foreign subsidiary of a
U.S. corporation. Sinkal's functional currency was the stickle (). The following
A.
B.
C.
D.
E.

12. Which accounts are translated using current exchange rates?
A.
B.
C.
D.
E.
all revenues and expenses.

all assets and liabilities.
cash, receivables, and most liabilities.
all current assets and liabilities.
all noncurrent assets and liabilities.
13. Which accounts are remeasured using current exchange rates?
A.
B.
C.
D.
E.

8-7
14. For a foreign subsidiary that uses the U.S. dollar as its functional currency, what
method is required to ready the financial statements for consolidation?
A.
B.
C.
D.
E.
Current/Noncurrent Method.
Monetary/Nonmonetary Method.
Current Rate Method.
Temporal Method.
Indirect Method.
15. Dilty Corp. owned a subsidiary in France. Dilty concluded that the subsidiary's
functional currency was the U.S. dollar.
Which one of the following statements would justify this conclusion?
A. Most of the subsidiary's sales and purchases were with companies in the U.S.
B. Dilty's functional currency is the dollar and Dilty is the parent.
C. Dilty's other subsidiaries all had the dollar as their functional currency.
D. Generally accepted accounting principles require that the subsidiary's functional
currency must be the dollar if consolidated financial statements are to be
prepared.
E.
Dilty is located in the U.S.
16. Dilty Corp. owned a subsidiary in France. Dilty concluded that the subsidiary's
What must Dilty do to ready the subsidiary's financial statements for consolidation?
A.
first translate them, then remeasure them.
B.
first remeasure them, then translate them.
C. state all of the subsidiary's accounts in U.S. dollars using the exchange rate in
effect at the balance sheet date.
D.
translate them.
E.
remeasure them.
8-8
17. Certain balance sheet accounts of a foreign subsidiary of the Tulip Co. had been
stated in U.S. dollars as follows:
If the subsidiary's local currency is its functional currency, what total amount should
be included in Tulip's balance sheet in U.S. dollars?
A.
B.
C.
D.
E.
$609,000.
$658,000.
$602,000.
$630,000.
$616,000.
8-9
18. Certain balance sheet accounts of a foreign subsidiary of the Tulip Co. had been
If the U.S. dollar is the functional currency of this subsidiary, what total amount
should be included in Tulip's balance sheet in U.S. dollars?
A.
B.
C.
D.
E.
$609,000.
$658,000.
$602,000.
$630,000.
$616,000.
19. A subsidiary of Porter Inc., a U.S. company, was located in a foreign country. The
functional currency of this subsidiary was the Stickle (), the local currency where the
subsidiary is located. The subsidiary acquired inventory on credit on November 1,
2012, for 120,000 that was sold on January 17, 2013 for 156,000. The subsidiary
paid for the inventory on January 31, 2013. Currency exchange rates between the
dollar and the Stickle were as follows:
What amount would have been reported for this inventory in Porter's consolidated
balance sheet at December 31, 2012?
A.
B.
C.
D.
E.
$24,000.
$26,400.
$22,800.
$27,600.
$28,800.
8-10
20. A subsidiary of Porter Inc., a U.S. company, was located in a foreign country. The
functional currency of this subsidiary was the Stickle (), the local currency where the
subsidiary is located. The subsidiary acquired inventory on credit on November 1,
2012, for 120,000 that was sold on January 17, 2013 for 156,000. The subsidiary
paid for the inventory on January 31, 2013. Currency exchange rates between the
dollar and the Stickle were as follows:
What amount would have been reported for cost of goods sold on Porter's
consolidated income statement at December 31, 2013?
A.
B.
C.
D.
E.
$24,000.
$26,400.
$22,800.
$27,600.
$28,800.
21. A U.S. company's foreign subsidiary had the following amounts in stickles () in 2013:
The average exchange rate during 2013 was 1 = $.96. The beginning inventory was
acquired when the exchange rate was 1 = $1.20. The ending inventory was acquired
when the exchange rate was 1 = $.90. The exchange rate at December 31, 2013
was 1 = $.84. Assuming that the foreign country had a highly inflationary economy,
at what amount should the foreign subsidiary's cost of goods sold have been
reflected in the 2013 U.S. dollar income statement?
A.
B.
C.
D.
E.
$11,253,600.
$11,577,600.
$11,649,600.
$11,613,600.
$11,523,600.
8-11
22. A U.S. company's foreign subsidiary had the following amounts in stickles (), the
functional currency, in 2013:
was 1 = $.84. At what amount should the foreign subsidiary's cost of goods sold
have been reflected in the 2013 U.S. dollar income statement?
A.
B.
C.
D.
E.
$11,253,600.
$11,577,600.
$11,520,000.
$11,613,600.
$11,523,600.
23. A U.S. company's foreign subsidiary had the following amounts in stickles (), the
was 1 = $.84. Assuming that the foreign nation for the subsidiary had a highly
inflationary economy, at what amount should that foreign subsidiary's purchases
have been reflected in the 2013 U.S. dollar income statement?
A.
B.
C.
D.
E.
$11,865,600.
$11,577,600.
$11,520,000.
$11,613,600.
$11,523,600.
8-12
24. A historical exchange rate for common stock of a foreign subsidiary is best described
as
A. The rate at date of the acquisition business combination.

B. The rate when the common stock was originally issued for the acquisition
transaction.
C. The average rate from date of acquisition to the date of the balance sheet.
D.
The rate from the prior year's balances.
E.
The January 1 exchange rate.
25. A net asset balance sheet exposure exists and the foreign currency appreciates.
Which of the following statements is true?
A.
B.
C.
D.
E.
There is no translation adjustment.

There is a transaction loss.
There is a transaction gain.
There is a negative translation adjustment.
There is a positive translation adjustment.
26. A net asset balance sheet exposure exists and the foreign currency depreciates.
A.
B.
C.
D.
E.

27. A net liability balance sheet exposure exists and the foreign currency appreciates.
A.
B.
C.
D.
E.

8-13
28. A net liability balance sheet exposure exists and the foreign currency depreciates.
A.
B.
C.
D.
E.

29. Which method of translating a foreign subsidiary's financial statements is correct?
A.
B.
C.
D.
E.
Historical rate method.

Working capital method.
Current rate method.
Remeasurement.
Temporal method.
30. Which method of remeasuring a foreign subsidiary's financial statements is correct?
A.
B.
C.
D.
E.

Translation.
Temporal method.
31. Under the temporal method, inventory at market would be remeasured at what rate?
A.
B.
C.
D.
E.
Beginning of the year rate.

Average rate.
Current rate.
Historical rate.
Composite amount.
32. Under the current rate method, inventory at market would be translated at what
rate?
A.
B.
C.
D.
E.

Average rate.
Current rate.
Historical rate.
Composite amount.
8-14
33. Under the temporal method, common stock would be remeasured at what rate?
A.
B.
C.
D.
E.

Average rate.
Current rate.
Historical rate.
Composite amount.
34. Under the current rate method, common stock would be translated at what rate?
A.
B.
C.
D.
E.

Average rate.
Current rate.
Historical rate.
Composite amount.
35. Under the current rate method, property, plant & equipment would be translated at
what rate?
A.
B.
C.
D.
E.

Average rate.
Current rate.
Historical rate.
Composite amount.
36. Under the temporal method, property, plant & equipment would be remeasured at
what rate?
A.
B.
C.
D.
E.

Average rate.
Current rate.
Historical rate.
Composite amount.
37. Under the current rate method, retained earnings would be translated at what rate?
A.
B.
C.
D.
E.

Average rate.
Current rate.
Historical rate.
Composite amount.
8-15
38. Under the temporal method, retained earnings would be remeasured at what rate?
A.
B.
C.
D.
E.

Average rate.
Current rate.
Historical rate.
Composite amount.
39. Under the current rate method, depreciation expense would be translated at what
rate?
A.
B.
C.
D.
E.

Average rate.
Current rate.
Historical rate.
Composite amount.
40. Under the temporal method, depreciation expense would be remeasured at what
rate?
A.
B.
C.
D.
E.

Average rate.
Current rate.
Historical rate.
Composite amount.
41. Under the temporal method, how would cost of goods sold be remeasured?
A.
B.
C.
D.
E.

Average rate.
Current rate.
A single historical rate.
A combination of historical rates.
42. Under the current rate method, how would cost of goods sold be translated?
A.
B.
C.
D.
E.

Average rate.
Current rate.
Historical rate.
Composite amount.
8-16
43. Where is the disposition of a translation loss reported in the parent company's
financial statements?
A.
Net loss in the income statement.
B. Cumulative translation adjustment as a deferred asset.
C. Cumulative translation adjustment as a deferred liability.
D.
Accumulated other comprehensive income.
E.
Retained earnings.
44. Where is the disposition of a remeasurement gain or loss reported in the parent
company's financial statements?
A.
Net income/loss in the income statement.
B. Cumulative translation adjustment as a deferred asset.
C. Cumulative translation adjustment as a deferred liability.
D.
Other comprehensive income.
E.
Retained earnings.
45. A highly inflationary economy is defined as
A. Cumulative 5-year inflation in excess of 100%.

B. Cumulative 3-year inflation in excess of 100%.
C.
Cumulative 5-year inflation in excess of 90%.
D.
E. Any country designated as a company operating in a third-world economy.
46. If a subsidiary is operating in a highly inflationary economy, how are the financial
statements to be restated?
A.
B.
C.
D.
E.
Historical rate.
Working capital rate.
Translation.
Remeasurement.
Current rate.
8-17
47. When consolidating a foreign subsidiary, which of the following statements is true?
A. Parent reports a cumulative translation adjustment from adjusting its investment

account under the equity method.
B. Parent reports a gain or loss in net income from adjusting its investment account
under the equity method.
C. Subsidiary's cumulative translation adjustment is carried forward to the
consolidated balance sheet.
D. Subsidiary's income/loss is carried forward to the consolidated balance sheet.
E. All foreign currency gains/losses are eliminated in the consolidated income
statement and balance sheet.
48. When preparing a consolidating statement of cash flows, which of the following
statements is false?
A. All operating activity items are translated at an average exchange rate for the
period.
B. A change in accounts receivable is translated using the current rate.
C. A change in long-term debt is translated using the historical rate at the date of the
change.
D. Dividends paid are translated using the historical rate at the date of the payment.
E. All items follow translation rates used for the balance sheet and the income
statement.
49. When preparing a consolidation worksheet for a parent and its foreign subsidiary
accounted for under the equity method, which of the following statements is false?
A. The cumulative translation adjustment included in the Investment in Subsidiary

account is eliminated.
B. The excess of fair value over book value since the date of acquisition is revalued
for the change in exchange rate.
C. The amount of equity income recognized by the parent in the current year is
eliminated.
D. The allocations of excess of fair value over book value at the date of acquisition
are eliminated.
E. The subsidiary's stockholders' equity accounts as of the beginning of the year are
eliminated.
8-18
50. Esposito is an Italian subsidiary of a U.S. company.

Esposito's ending inventory is valued at the average cost for the last quarter of the
year.
The following account balances are available for Esposito for 2013:
Compute the cost of goods sold for 2013 in U.S. dollars using the temporal method.
A.
B.
C.
D.
E.
$376,650.
$387,750.
$388,800.
$400,950.
$409,050.
8-19

year.
Compute the cost of goods sold for 2013 in U.S. dollars using the current rate
method.
A.
B.
C.
D.
E.
$376,550.
$387,750.
$388,800.
$400,950.
$409,050.
8-20

year.
Compute ending inventory for 2013 under the temporal method.
A.
B.
C.
D.
E.
$13,950.
$14,100.
$14,400.
$14,850.
$15,150.
8-21

year.
Compute ending inventory for 2013 under the current rate method.
A.
B.
C.
D.
E.
$13,950.
$14,100.
$14,400.
$14,850.
$15,150.
8-22
54. A foreign subsidiary uses the first-in first-out inventory method. The following
inventory balances are given at December 31, 2013 in local currency units (LCU):
Compute the December 31, 2013, inventory balance using the lower of cost or
market method under the temporal method.
A.
B.
C.
D.
E.
$429,000.
$457,600.
$596,400.
$568,000.
$426,000.
8-23
55. A foreign subsidiary uses the first-in first-out inventory method. The following
Compute the December 31, 2013, inventory balance using the current rate method.
A.
B.
C.
D.
E.
$454,400.
$457,600.
$596,400.
$568,000.
$426,000.
56. Perez Company, a Mexican subsidiary of a U.S. company, sold equipment costing
200,000 pesos with accumulated depreciation of 75,000 pesos for 140,000 pesos on
March 1, 2013. The equipment was purchased on January 1, 2012. Relevant
exchange rates for the peso are as follows:
The financial statements for Perez are translated by its U.S. parent. What amount of
gain or loss would be reported in its translated income statement?
A.
B.
C.
D.
E.
$1,530.
$1,575.
$1,590.
$1,090.
$1,650.
8-24
57. Perez Company, a Mexican subsidiary of a U.S. company, sold equipment costing
200,000 pesos with accumulated depreciation of 75,000 pesos for 140,000 pesos on
March 1, 2013. The equipment was purchased on January 1, 2012. Relevant
The financial statements for Perez are remeasured by its U.S. parent. What amount of
gain or loss would be reported in its translated income statement?
A.
B.
C.
D.
E.
$1,530.
$1,575.
$1,590.
$1,090.
$1,650.
58. Certain balance sheet accounts of a foreign subsidiary of Parker Company at

December 31, 2013, have been restated into U.S. dollars as follows:
Assuming the functional currency of the subsidiary is the U.S. dollar, what total
should be included in Parker's consolidated balance sheet at December 31, 2013, for
the above items?
A.
B.
C.
D.
E.
$407,500.
$418,000.
$396,000.
$403,500.
$398,500.
8-25

Assuming the functional currency of the subsidiary is the local currency, what total
should be included in Parker's consolidated balance sheet at December 31, 2013, for
the above items?
A.
B.
C.
D.
E.
$407,500.
$418,000.
$396,000.
$403,500.
$398,500.
8-26

If the current rate used to restate these amounts is $.95, what was the average
historical rate used to arrive at the total amount for historical rates?
A.
B.
C.
D.
E.
$0.9000.
$1.0000.
$0.9500.
$0.9474.
$1.0556.
61. Kennedy Company acquired all of the outstanding common stock of Hastie Company
of Canada for U.S. $350,000 on January 1, 2013, when the exchange rate for the
Canadian dollar (CAD) was U.S. $.70. The fair value of the net assets of Hastie was
equal to their book value of CAD 450,000 on the date of acquisition. Any acquisition
consideration excess over fair value was attributed to an unrecorded patent with a
remaining life of five years. The functional currency of Hastie is the Canadian dollar.
For the year ended December 31, 2013, Hastie's trial balance net income was
translated at U.S. $25,000. The average exchange rate for the Canadian dollar during
2013 was U.S. $.68, and the 2013 year-end exchange rate was U.S. $.65.
Calculate the U.S. dollar amount allocated to the patent at January 1, 2013.
A.
B.
C.
D.
E.
$50,000.
$35,000.
$34,000.
$32,500.
$28,200.
8-27
Amortization of the patent, translated, for 2013 would be
A.
B.
C.
D.
E.
$7,000.
$10,000.
$6,800.
$9,000.
$6,500.
Compute the amount of the patent reported in the consolidated balance sheet at
December 31, 2013.
A.
B.
C.
D.
E.
$28,200.
$25,700.
$35,000.
$27,200.
$26,000.
8-28
Kennedy's share of Hastie's net income for 2013 would be
A.
B.
C.
D.
E.
$18,000.
$15,000.
$18,200.
$16,000.
$18,500.
8-29
65. Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2012.
Selected account balances are available for the year ended December 31, 2013, and
are stated in Euro, the local currency.
Assume the functional currency is the Euro; compute the U.S. income statement
amount for sales for 2013.
A.
B.
C.
D.
E.
$364,000.
$372,000.
$380,000.
$360,000.
$404,000.
8-30
Assume the functional currency is the Euro; compute the U.S. balance sheet amount
for inventory at December 31, 2013.
A.
B.
C.
D.
E.
$18,800.
$19,600.
$18,000.
$20,200.
$19,000.
8-31
for equipment for 2013.
A.
B.
C.
D.
E.
$81,900.
$90,900.
$83,700.
$88,200.
$85,500.
8-32
Assume the functional currency is the Euro; compute the U.S. Statement of Retained
Earnings amount reported for Dividends in 2013.
A.
B.
C.
D.
E.
$19,000.
$20,200.
$18,600.
$19,400.
$19,600.
8-33
for accumulated depreciation for 2013.
A.
B.
C.
D.
E.
$40,950.
$41,850.
$45,450.
$42,750.
$44,100.
8-34
amount for depreciation expense for 2013.
A.
B.
C.
D.
E.
$8,190.
$8,370.
$8,820.
$9,090.
$8,550.
8-35
Assume the functional currency is the U.S. Dollar; compute the U.S. income
statement amount for sales for 2013.
A.
B.
C.
D.
E.
$364,000.
$372,000.
$380,000.
$360,000.
$404,000.
8-36
Assume the functional currency is the U.S. Dollar; compute the U.S. balance sheet
amount for inventory, at cost, for 2013.
A.
B.
C.
D.
E.
$18,800.
$19,600.
$18,000.
$20,200.
$19,000.
8-37
amount for equipment for 2013.
A.
B.
C.
D.
E.
$81,900.
$90,900.
$83,700.
$88,200.
$85,500.
8-38
Assume the functional currency is the U.S. Dollar; compute the U.S. statement of
retained earnings amount for dividends for 2013.
A.
B.
C.
D.
E.
$19,000.
$20,200.
$18,600.
$19,400.
$19,600.
8-39
amount for accumulated depreciation for 2013.
A.
B.
C.
D.
E.
$40,950.
$41,850.
$45,450.
$42,750.
$44,100.
8-40
statement amount for depreciation expense for 2013.
A.
B.
C.
D.
E.
$8,190.
$8,370.
$8,820.
$9,090.
$8,550.
Essay Questions
8-41
77. A foreign subsidiary was acquired on January 1, 2013. Determine the exchange rate
used to restate the following accounts at December 31, 2013. Land was purchased
on October 1, 2013. Relevant exchange dates follow:
(A) January 1, 2013
(B) October 1, 2013
(C) December 31, 2013
(D) Average, 2013
(E) Composite, using multiple dates.
Identify the exchange rate used to translate items 1-5 when the functional currency is
the foreign currency:
____
____
____
____
____
1.
2.
3.
4.
5.
Land.
Equipment.
Bonds payable.
Common stock.
Retained earnings.
Identify the exchange rate used to remeasure the items 6-10 when the functional
currency is the U.S. dollar:
____
____
____
____
____
6. Land.
7. Equipment.
8. Bonds payable.
9. Common stock.
10. Retained earnings.
8-42
78. In translating a foreign subsidiary's financial statements, what exchange rate should
be used for the subsidiary's revenues and expenses?
79. How can a parent corporation determine the functional currency for a foreign
subsidiary that conducts business in more than one country?
80. What exchange rate should be used to translate (a) revenues and expenses that
occur throughout the year and (b) a gain or loss that occurs on a specific day?
8-43
81. Perkle Co. owned a subsidiary in Belgium; the subsidiary's functional currency was
the Belgian franc. During 2013, Perkle engaged in hedging transactions to offset part
of the subsidiary's net asset position. How should the effects of exchange rate
fluctuations on the currency hedge be accounted for?
82. Under what circumstances would the remeasurement of a foreign subsidiary's

financial statements be required?
83. A foreign subsidiary of a U.S. corporation purchased equipment on January 4, 2010.

(A.) How would depreciation expense on the equipment be translated for 2013?
(B.) How would depreciation expense on the equipment be remeasured for 2013?
8-44
84. What exchange rate would be used to translate the asset and liability account
balances of a foreign subsidiary? What justification can be given for using this
exchange rate?
85. Farley Brothers, a U.S. company, had a subsidiary in Italy. Under what conditions
would the U.S. dollar be the functional currency for this subsidiary?
86. What is the justification for the remeasurement of foreign currency transactions?
8-45
87. Contrast the purpose of remeasurement with the purpose of translation.
Short Answer Questions
88. On January 1, 2013, Fandu Corp. began operations of a foreign subsidiary. On April 1,
2013, the subsidiary purchased inventory costing 150,000 stickles. One-fourth of this
inventory remained unsold at the end of 2013 while 40% of the liability from the
purchase had not yet been paid. The pertinent indirect exchange rates were:
Required:
What should have been the December 31, 2013 inventory and accounts payable
balances for this foreign subsidiary as translated into U.S. dollars? (Round your
answers to the nearest whole dollar.)
8-46
89. On January 1, 2013, Veldon Co., a U.S. corporation with the U.S. dollar as its
functional currency, established Malont Co. as a subsidiary. Malont is located in the
country of Sorania, and its functional currency is the stickle (). Malont engaged in
the following transactions during 2013:
Required:
Calculate the translation adjustment for Malont. (Round your answers to the nearest
whole dollar.)
8-47
90. Ginvold Co. began operating a subsidiary in a foreign country on January 1, 2013 by
acquiring all of the common stock for 50,000 Stickles, the local currency. This
subsidiary immediately borrowed 120,000 on a five-year note with ten percent
interest payable annually beginning on January 1, 2014. A building was then
purchased for 170,000 on January 1, 2013. This property had a ten-year anticipated
life and no salvage value and was to be depreciated using the straight-line method.
The building was immediately rented for three years to a group of local doctors for
6,000 per month. By year-end, payments totaling 60,000 had been received. On
October 1, 5,000 were paid for a repair made on that date and it was the only
transaction of this kind for the year. A cash dividend of 6,000 was transferred back
to Ginvold on December 31, 2013. The functional currency for the subsidiary was the
Stickle (). Currency exchange rates were as follows:
Prepare an income statement for this subsidiary in stickles and then translate these
amounts into U.S. dollars.
8-48
Prepare a statement of retained earnings for this subsidiary in stickles and then
translate the amounts into U.S. dollars.
8-49
Prepare a balance sheet for this subsidiary in stickles and then translate the amounts
into U.S. dollars.
8-50
Prepare a statement of cash flows for this subsidiary in stickles and then translate the
8-51
94. Boerkian Co. started 2013 with two assets: Cash of 26,000 (Stickles) and Land that
originally cost 72,000 when acquired on April 4, 2010. On May 1, 2013, the company
rendered services to a customer for 36,000, an amount immediately paid in cash.
On October 1, 2013, the company incurred an operating expense of 22,000 that was
immediately paid. No other transactions occurred during the year so an average
exchange rate is not necessary. Currency exchange rates were as follows:
Assume that Boerkian was a foreign subsidiary of a U.S. multinational company and
the stickle () was the functional currency of the subsidiary. Calculate the translation
adjustment for this subsidiary for 2013 and state whether this is a positive or a
negative adjustment.
8-52
Assume Boerkian was a foreign subsidiary of a U.S. multinational company and the
U.S. dollar was the functional currency of the subsidiary. Prepare a schedule of
changes in the net monetary assets of Boerkian for the year 2013 and properly label
the resulting gain or loss.
8-53
Required:
the local currency of the subsidiary (stickle) is the functional currency. On the
December 31, 2013 balance sheet, what was the translated value of the Land
account?
8-54
the U.S. dollar is the functional currency. On the December 31, 2013 balance sheet,
what was the remeasured value of the Land account?
8-55
Chapter 08 Translation of Foreign Currency Financial

Statements Answer Key
Multiple Choice Questions
1.
In accounting, the term translation refers to
A. the calculation of gains or losses from hedging transactions.

B. the calculation of exchange rate gains or losses on individual transactions in
foreign currencies.
C. the procedure required to identify a company's functional currency.
D. the calculation of gains or losses from all transactions for the year.
E. a procedure to prepare a foreign subsidiary's financial statements for
consolidation.
AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01 Explain the theoretical underpinnings and the limitations of the current rate and
temporal methods.
Topic: Comparison of the Results from Applying the Two Different Methods
Topic: Translation Methods
2.
What is a company's functional currency?
A. the currency of the primary economic environment in which it operates.

B. the currency of the country where it has its headquarters.
C. the currency in which it prepares its financial statements.
D.
the reporting currency of its parent for a subsidiary.
E.
the currency it chooses to designate as such.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-02 Describe guidelines as to when foreign currency financial statements are to be
translated using the current rate method and when they are to be translated using the temporal method.
8-56
Topic: Two Translation Combinations
3.
According to U.S. GAAP for a local currency perspective, which method is usually
required for translating a foreign subsidiary's financial statements into the parent's
reporting currency?
A.
B.
C.
D.
E.
the temporal method.

the current rate method.
the current/noncurrent method.
the monetary/nonmonetary method.
the noncurrent rate method.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
Difficulty: 1 Easy
4.
In translating a foreign subsidiary's financial statements, which exchange rate

does the current method require for the subsidiary's assets and liabilities?
A. the exchange rate in effect when each asset or liability was acquired.
B.
the average exchange rate for the current year.
C.
a calculated exchange rate based on market value.
D. the exchange rate in effect as of the balance sheet date.
E. the exchange rate in effect at the start of the current year.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
Difficulty: 1 Easy
temporal methods.
8-57
5.
The translation adjustment from translating a foreign subsidiary's financial

statements should be shown as
A. an asset or liability (depending on the balance) in the consolidated balance

sheet.
B. a revenue or expense (depending on the balance) in the consolidated income
statement.
C. a component of stockholders' equity in the consolidated balance sheet.
D. a component of cash flows from financing activities in the consolidated
statement of cash flows.
E. an element of the notes which accompany the consolidated financial
statements.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
Difficulty: 1 Easy
temporal methods.
6.
Westmore Ltd., is a British subsidiary of a U.S. company. Westmore's functional

currency is the pound sterling (). The following exchange rates were in effect
during 2013:
Westmore reported sales of 1,500,000 during 2013. What amount (rounded)

would have been included for this subsidiary in calculating consolidated sales?
A.
B.
C.
D.
E.
$2,415,000.
$2,400,000.
$2,385,000.
$943,396.
$931,677.
1,500,000 $1.59 (Avg Rate) = $2,385,000
AACSB: Analytic
AACSB: Diversity
8-58
AICPA BB: Global

Blooms: Apply
Difficulty: 2 Medium
temporal methods.
Learning Objective: 08-03 Translate a foreign subsidiary's financial statements into its parent's reporting
currency using the current rate method and calculate the related translation adjustment.
Topic: Translation of Financial Statements-Current Rate Method
7.
Westmore Ltd., is a British subsidiary of a U.S. company. Westmore's functional

currency is the pound sterling (). The following exchange rates were in effect
during 2013:
On December 31, 2013, Westmore had accounts receivable of 280,000. What

amount (rounded) would have been included for this subsidiary in calculating
consolidated accounts receivable?
A.
B.
C.
D.
E.
$173,913.
$176,100.
$445,200.
$448,000.
$450,800.
280,000 $1.61 = $450,800
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
temporal methods.
8-59
8.
Gunther Co. established a subsidiary in Mexico on January 1, 2013. The subsidiary

engaged in the following transactions during 2013:
What amount of foreign exchange gain or loss would have been recognized in
Gunther's consolidated income statement for 2013?
A.
B.
C.
D.
E.
$800,000 gain.
$760,000 gain.
$320,000 loss.
$280,000 loss.
$440,000 loss.
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
Difficulty: 3 Hard
temporal methods.
Learning Objective: 08-04 Remeasure a foreign subsidiary's financial statements using the temporal method
and calculate the associated remeasurement gain or loss.
Topic: Remeasurement of Financial Statements-Temporal Method
8-60
9.
Darron Co. was formed on January 1, 2013 as a wholly owned foreign subsidiary of
a U.S. corporation. Darron's functional currency was the stickle (). The following
What exchange rate should have been used in translating Darron's revenues and
expenses for 2013?
A.
B.
C.
D.
E.
$1
$1
$1
$1
$1
=
=
=
=
=
.48.
.44.
.46.
.42.
.45.
Average Rate for Revenues & Expenses [$1 = .44]
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
Difficulty: 1 Easy
temporal methods.
8-61
10.
Darron Co. was formed on January 1, 2013 as a wholly owned foreign subsidiary of
a U.S. corporation. Darron's functional currency was the stickle (). The following
A.
B.
C.
D.
E.

[1,000,000 [$.42 - $.48] ($.06) = ($60,000)] + [20,000 [$.42 - $.46] ($.04)]

= ($800) = ($60,800) Loss in Relative Asset Value
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
Difficulty: 3 Hard
temporal methods.
8-62
11.
Sinkal Co. was formed on January 1, 2013 as a wholly owned foreign subsidiary of
a U.S. corporation. Sinkal's functional currency was the stickle (). The following
A.
B.
C.
D.
E.

[1,000,000 [$.42 - $.48] ($.06) = ($60,000)] + [20,000 [$.42 - $.46] ($.04)]

= ($800) = ($60,800) Loss in Relative Asset Value
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
Difficulty: 3 Hard
temporal methods.
8-63
12.
Which accounts are translated using current exchange rates?
A.
B.
C.
D.
E.

AACSB: Diversity
AICPA BB: Global
Blooms: Remember
temporal methods.
13.
Which accounts are remeasured using current exchange rates?
A.
B.
C.
D.
E.

AACSB: Diversity
AICPA BB: Global
Blooms: Remember
temporal methods.
14.
For a foreign subsidiary that uses the U.S. dollar as its functional currency, what
method is required to ready the financial statements for consolidation?
A.
B.
C.
D.
E.
Current/Noncurrent Method.
Monetary/Nonmonetary Method.
Current Rate Method.
Temporal Method.
Indirect Method.
AACSB: Diversity
8-64
AICPA BB: Global

Blooms: Understand
15.
Dilty Corp. owned a subsidiary in France. Dilty concluded that the subsidiary's
Which one of the following statements would justify this conclusion?
A. Most of the subsidiary's sales and purchases were with companies in the U.S.
B. Dilty's functional currency is the dollar and Dilty is the parent.
C. Dilty's other subsidiaries all had the dollar as their functional currency.
D. Generally accepted accounting principles require that the subsidiary's
functional currency must be the dollar if consolidated financial statements are
to be prepared.
E.
Dilty is located in the U.S.
AACSB: Diversity
AICPA BB: Global
Blooms: Analyze
16.
Dilty Corp. owned a subsidiary in France. Dilty concluded that the subsidiary's
What must Dilty do to ready the subsidiary's financial statements for
consolidation?
A.
first translate them, then remeasure them.
B.
first remeasure them, then translate them.
C. state all of the subsidiary's accounts in U.S. dollars using the exchange rate in
effect at the balance sheet date.
D.
translate them.
E.
remeasure them.
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Blooms: Evaluate
8-65
Difficulty: 1 Easy
17.
Certain balance sheet accounts of a foreign subsidiary of the Tulip Co. had been
If the subsidiary's local currency is its functional currency, what total amount
A.
B.
C.
D.
E.
$609,000.
$658,000.
$602,000.
$630,000.
$616,000.
If LC is the Functional Currency, Current Rates Used for All Items = $602,000
AACSB: Analytic
AACSB: Diversity
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Blooms: Apply
Difficulty: 1 Easy
temporal methods.
8-66
18.
Certain balance sheet accounts of a foreign subsidiary of the Tulip Co. had been
If the U.S. dollar is the functional currency of this subsidiary, what total amount
A.
B.
C.
D.
E.
$609,000.
$658,000.
$602,000.
$630,000.
$616,000.
If the Dollar is the Functional Currency, Current Rates Used for Receivables at their
Historical Rate ($280,000 + $140,000 + $77,000 + $119,000) = $616,000
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
temporal methods.
8-67
19.
A subsidiary of Porter Inc., a U.S. company, was located in a foreign country. The
functional currency of this subsidiary was the Stickle (), the local currency where
the subsidiary is located. The subsidiary acquired inventory on credit on November
1, 2012, for 120,000 that was sold on January 17, 2013 for 156,000. The
subsidiary paid for the inventory on January 31, 2013. Currency exchange rates
between the dollar and the Stickle were as follows:
What amount would have been reported for this inventory in Porter's consolidated
balance sheet at December 31, 2012?
A.
B.
C.
D.
E.
$24,000.
$26,400.
$22,800.
$27,600.
$28,800.
120,000 $.20 = $24,000
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
Difficulty: 1 Easy
temporal methods.
8-68
20.
A subsidiary of Porter Inc., a U.S. company, was located in a foreign country. The
functional currency of this subsidiary was the Stickle (), the local currency where
the subsidiary is located. The subsidiary acquired inventory on credit on November
1, 2012, for 120,000 that was sold on January 17, 2013 for 156,000. The
subsidiary paid for the inventory on January 31, 2013. Currency exchange rates
between the dollar and the Stickle were as follows:
What amount would have been reported for cost of goods sold on Porter's
consolidated income statement at December 31, 2013?
A.
B.
C.
D.
E.
$24,000.
$26,400.
$22,800.
$27,600.
$28,800.
120,000 $.24 = $28,800
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
temporal methods.
8-69
21.
A U.S. company's foreign subsidiary had the following amounts in stickles () in

2013:
The average exchange rate during 2013 was 1 = $.96. The beginning inventory
was acquired when the exchange rate was 1 = $1.20. The ending inventory was
acquired when the exchange rate was 1 = $.90. The exchange rate at December
31, 2013 was 1 = $.84. Assuming that the foreign country had a highly
inflationary economy, at what amount should the foreign subsidiary's cost of goods
sold have been reflected in the 2013 U.S. dollar income statement?
A.
B.
C.
D.
E.
$11,253,600.
$11,577,600.
$11,649,600.
$11,613,600.
$11,523,600.
Beginning Inventory [(240,000 $1.20) $288,000] - Purchases [Beginning

Inventory 240,000 - COGS 12,000,000 - Ending Inventory 600,000 =
12,360,000 $.96 = $11,865,600] - Ending Inventory [(600,000 $.90)
$540,000] = COGS $11,613,600
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
Difficulty: 3 Hard
temporal methods.
8-70
22.
A U.S. company's foreign subsidiary had the following amounts in stickles (), the
31, 2013 was 1 = $.84. At what amount should the foreign subsidiary's cost of
goods sold have been reflected in the 2013 U.S. dollar income statement?
A.
B.
C.
D.
E.
$11,253,600.
$11,577,600.
$11,520,000.
$11,613,600.
$11,523,600.
12,000,000 $.96 = $11,520,000
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
Difficulty: 3 Hard
temporal methods.
8-71
23.
A U.S. company's foreign subsidiary had the following amounts in stickles (), the
31, 2013 was 1 = $.84. Assuming that the foreign nation for the subsidiary had a
highly inflationary economy, at what amount should that foreign subsidiary's
purchases have been reflected in the 2013 U.S. dollar income statement?
A.
B.
C.
D.
E.
$11,865,600.
$11,577,600.
$11,520,000.
$11,613,600.
$11,523,600.
Beginning Inventory 240,000 - COGS 12,000,000 - Ending Inventory 600,000 =

Purchases 12,360,000 $.96 = $11,865,600
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
Difficulty: 3 Hard
temporal methods.
24.
A historical exchange rate for common stock of a foreign subsidiary is best

described as
A. The rate at date of the acquisition business combination.

B. The rate when the common stock was originally issued for the acquisition
transaction.
C. The average rate from date of acquisition to the date of the balance sheet.
D.
The rate from the prior year's balances.
E.
The January 1 exchange rate.
AACSB: Diversity
AICPA BB: Global
8-72

Blooms: Analyze
temporal methods.
25.
A net asset balance sheet exposure exists and the foreign currency appreciates.
A.
B.
C.
D.
E.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Analyze
temporal methods.
26.
A net asset balance sheet exposure exists and the foreign currency depreciates.
A.
B.
C.
D.
E.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Analyze
temporal methods.
8-73
27.
A net liability balance sheet exposure exists and the foreign currency appreciates.
A.
B.
C.
D.
E.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Analyze
temporal methods.
28.
A net liability balance sheet exposure exists and the foreign currency depreciates.
A.
B.
C.
D.
E.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Analyze
temporal methods.
29.
Which method of translating a foreign subsidiary's financial statements is correct?
A.
B.
C.
D.
E.

Remeasurement.
Temporal method.
AACSB: Diversity
8-74

AICPA BB: Global
Blooms: Remember
Difficulty: 1 Easy
30.
Which method of remeasuring a foreign subsidiary's financial statements is

correct?
A.
B.
C.
D.
E.

Translation.
Temporal method.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
Difficulty: 1 Easy
31.
Under the temporal method, inventory at market would be remeasured at what

rate?
A.
B.
C.
D.
E.

Average rate.
Current rate.
Historical rate.
Composite amount.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
temporal methods.
8-75
32.
Under the current rate method, inventory at market would be translated at what
rate?
A.
B.
C.
D.
E.

Average rate.
Current rate.
Historical rate.
Composite amount.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
temporal methods.
33.
Under the temporal method, common stock would be remeasured at what rate?
A.
B.
C.
D.
E.

Average rate.
Current rate.
Historical rate.
Composite amount.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
Difficulty: 1 Easy
temporal methods.
34.
Under the current rate method, common stock would be translated at what rate?
A.
B.
C.
D.
E.

Average rate.
Current rate.
Historical rate.
Composite amount.
AACSB: Diversity
8-76
AICPA BB: Global

Blooms: Remember
Difficulty: 1 Easy
temporal methods.
35.
Under the current rate method, property, plant & equipment would be translated
at what rate?
A.
B.
C.
D.
E.

Average rate.
Current rate.
Historical rate.
Composite amount.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
temporal methods.
36.
Under the temporal method, property, plant & equipment would be remeasured at
what rate?
A.
B.
C.
D.
E.

Average rate.
Current rate.
Historical rate.
Composite amount.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
temporal methods.
8-77
37.
Under the current rate method, retained earnings would be translated at what
rate?
A.
B.
C.
D.
E.

Average rate.
Current rate.
Historical rate.
Composite amount.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
temporal methods.
38.
Under the temporal method, retained earnings would be remeasured at what

rate?
A.
B.
C.
D.
E.

Average rate.
Current rate.
Historical rate.
Composite amount.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
temporal methods.
8-78
39.
Under the current rate method, depreciation expense would be translated at what
rate?
A.
B.
C.
D.
E.

Average rate.
Current rate.
Historical rate.
Composite amount.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
temporal methods.
40.
Under the temporal method, depreciation expense would be remeasured at what

rate?
A.
B.
C.
D.
E.

Average rate.
Current rate.
Historical rate.
Composite amount.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
temporal methods.
41.
Under the temporal method, how would cost of goods sold be remeasured?
A.
B.
C.
D.
E.

Average rate.
Current rate.
A single historical rate.
A combination of historical rates.
AACSB: Diversity
8-79

AICPA BB: Global
Blooms: Remember
temporal methods.
42.
Under the current rate method, how would cost of goods sold be translated?
A.
B.
C.
D.
E.

Average rate.
Current rate.
Historical rate.
Composite amount.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
temporal methods.
43.
Where is the disposition of a translation loss reported in the parent company's

financial statements?
A.
B.
C.
D.
E.
Net loss in the income statement.

Cumulative translation adjustment as a deferred asset.
Cumulative translation adjustment as a deferred liability.
Accumulated other comprehensive income.
Retained earnings.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
8-80
44.
Where is the disposition of a remeasurement gain or loss reported in the parent

company's financial statements?
A.
B.
C.
D.
E.
Net income/loss in the income statement.

Cumulative translation adjustment as a deferred asset.
Cumulative translation adjustment as a deferred liability.
Other comprehensive income.
Retained earnings.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
45.
A highly inflationary economy is defined as
A.
B.
C.
D.
E. Any country designated as a company operating in a third-world economy.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
46.
If a subsidiary is operating in a highly inflationary economy, how are the financial

statements to be restated?
A.
B.
C.
D.
E.
Historical rate.
Working capital rate.
Translation.
Remeasurement.
Current rate.
AACSB: Diversity
AICPA BB: Global
8-81

Blooms: Remember
47.
When consolidating a foreign subsidiary, which of the following statements is

true?
A. Parent reports a cumulative translation adjustment from adjusting its

investment account under the equity method.
B. Parent reports a gain or loss in net income from adjusting its investment
account under the equity method.
C. Subsidiary's cumulative translation adjustment is carried forward to the
consolidated balance sheet.
D. Subsidiary's income/loss is carried forward to the consolidated balance sheet.
E. All foreign currency gains/losses are eliminated in the consolidated income
statement and balance sheet.
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 08-06 Prepare a consolidation worksheet for a parent and its foreign subsidiary.
Topic: Consolidation of a Foreign Subsidiary
48.
When preparing a consolidating statement of cash flows, which of the following

statements is false?
A. All operating activity items are translated at an average exchange rate for the
period.
B. A change in accounts receivable is translated using the current rate.
C. A change in long-term debt is translated using the historical rate at the date of
the change.
D. Dividends paid are translated using the historical rate at the date of the
payment.
E. All items follow translation rates used for the balance sheet and the income
statement.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
8-82
49.
When preparing a consolidation worksheet for a parent and its foreign subsidiary
accounted for under the equity method, which of the following statements is
false?
A. The cumulative translation adjustment included in the Investment in Subsidiary

account is eliminated.
B. The excess of fair value over book value since the date of acquisition is
revalued for the change in exchange rate.
C. The amount of equity income recognized by the parent in the current year is
eliminated.
D. The allocations of excess of fair value over book value at the date of acquisition
are eliminated.
E. The subsidiary's stockholders' equity accounts as of the beginning of the year
are eliminated.
AACSB: Diversity
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Blooms: Analyze
8-83
50.
Esposito is an Italian subsidiary of a U.S. company.

year.
Compute the cost of goods sold for 2013 in U.S. dollars using the temporal
method.
A.
B.
C.
D.
E.
$376,650.
$387,750.
$388,800.
$400,950.
$409,050.
Begin Inventory (20,000 $.93 = $18,600) + Purchases (400,000 $.96 =

$384,000) - End Inventory (15,000 $.99 = $14,850) = COGS $387,750
AACSB: Analytic
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Blooms: Apply
temporal methods.
8-84
51.

year.
Compute the cost of goods sold for 2013 in U.S. dollars using the current rate
method.
A.
B.
C.
D.
E.
$376,550.
$387,750.
$388,800.
$400,950.
$409,050.
405,000 $.96 = $388,800
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
temporal methods.
8-85
52.

year.
Compute ending inventory for 2013 under the temporal method.
A.
B.
C.
D.
E.
$13,950.
$14,100.
$14,400.
$14,850.
$15,150.
15,000 $.99 = $14,850
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
temporal methods.
8-86
53.

year.
Compute ending inventory for 2013 under the current rate method.
A.
B.
C.
D.
E.
$13,950.
$14,100.
$14,400.
$14,850.
$15,150.
15,000 $1.01 = $15,150
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
temporal methods.
8-87
54.
A foreign subsidiary uses the first-in first-out inventory method. The following
Compute the December 31, 2013, inventory balance using the lower of cost or
market method under the temporal method.
A.
B.
C.
D.
E.
$429,000.
$457,600.
$596,400.
$568,000.
$426,000.
Inventory at Cost 320,000 LCU $1.43 = $457,600
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
Difficulty: 3 Hard
temporal methods.
8-88
55.
A foreign subsidiary uses the first-in first-out inventory method. The following
Compute the December 31, 2013, inventory balance using the current rate
method.
A.
B.
C.
D.
E.
$454,400.
$457,600.
$596,400.
$568,000.
$426,000.
Inventory at Cost 320,000 LCU $1.42 = $454,400
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
temporal methods.
8-89
56.
Perez Company, a Mexican subsidiary of a U.S. company, sold equipment costing

200,000 pesos with accumulated depreciation of 75,000 pesos for 140,000 pesos
on March 1, 2013. The equipment was purchased on January 1, 2012. Relevant
The financial statements for Perez are translated by its U.S. parent. What amount
of gain or loss would be reported in its translated income statement?
A.
B.
C.
D.
E.
$1,530.
$1,575.
$1,590.
$1,090.
$1,650.
[Sales Price MNP 140,000 .106 = $14,840] - [BV as Historical Cost MNP 200,000 Acc. Deprec. MNP 75,000 = MNP 125,000 .106 = $13,250] = $1,590 Gain
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
temporal methods.
8-90
57.
Perez Company, a Mexican subsidiary of a U.S. company, sold equipment costing

200,000 pesos with accumulated depreciation of 75,000 pesos for 140,000 pesos
on March 1, 2013. The equipment was purchased on January 1, 2012. Relevant
The financial statements for Perez are remeasured by its U.S. parent. What amount
of gain or loss would be reported in its translated income statement?
A.
B.
C.
D.
E.
$1,530.
$1,575.
$1,590.
$1,090.
$1,650.
[Sales Price MNP 140,000 .106 = $14,840] - [BV as Historical Cost MNP 200,000 Acc. Deprec. MNP 75,000 = MNP 125,000 .110 = $13,750] = $1,090 Gain
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
temporal methods.
8-91
58.
Certain balance sheet accounts of a foreign subsidiary of Parker Company at

Assuming the functional currency of the subsidiary is the U.S. dollar, what total
should be included in Parker's consolidated balance sheet at December 31, 2013,
for the above items?
A.
B.
C.
D.
E.
$407,500.
$418,000.
$396,000.
$403,500.
$398,500.
If the Dollar is the Functional Currency, Current Rates Used for All Items except
PP&E at their Historical Values ($47,500 + $95,000 + $76,000 + $54,000 +
$135,000) = $407,500
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AICPA BB: Global
Blooms: Apply
temporal methods.
8-92
59.

Assuming the functional currency of the subsidiary is the local currency, what total
should be included in Parker's consolidated balance sheet at December 31, 2013,
for the above items?
A.
B.
C.
D.
E.
$407,500.
$418,000.
$396,000.
$403,500.
$398,500.
If LC is the Functional Currency, Current Rates Used for All Items = $418,000
AACSB: Analytic
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Blooms: Apply
Difficulty: 1 Easy
temporal methods.
8-93
60.

If the current rate used to restate these amounts is $.95, what was the average
historical rate used to arrive at the total amount for historical rates?
A.
B.
C.
D.
E.
$0.9000.
$1.0000.
$0.9500.
$0.9474.
$1.0556.
$418,000/$.95 = $440,000; $396,000/$440,000 = $.90
AACSB: Analytic
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Blooms: Apply
8-94
61.
Kennedy Company acquired all of the outstanding common stock of Hastie

Company of Canada for U.S. $350,000 on January 1, 2013, when the exchange
rate for the Canadian dollar (CAD) was U.S. $.70. The fair value of the net assets of
Hastie was equal to their book value of CAD 450,000 on the date of acquisition.
Any acquisition consideration excess over fair value was attributed to an
unrecorded patent with a remaining life of five years. The functional currency of
Hastie is the Canadian dollar.
translated at U.S. $25,000. The average exchange rate for the Canadian dollar
during 2013 was U.S. $.68, and the 2013 year-end exchange rate was U.S. $.65.
Calculate the U.S. dollar amount allocated to the patent at January 1, 2013.
A.
B.
C.
D.
E.
$50,000.
$35,000.
$34,000.
$32,500.
$28,200.
$350,000 - FV of Assets (C$450,000 $.70) $315,000 = $35,000 Patent Value
AACSB: Analytic
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Blooms: Apply
8-95
62.

Amortization of the patent, translated, for 2013 would be
A.
B.
C.
D.
E.
$7,000.
$10,000.
$6,800.
$9,000.
$6,500.
Patent Value $35,000/$.70 = Patent Value C$50,000/5 yrs = C$10,000 per year
$.68 = $6,800 Translated
AACSB: Analytic
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AICPA BB: Global
Blooms: Apply
Difficulty: 3 Hard
temporal methods.
8-96
63.

Compute the amount of the patent reported in the consolidated balance sheet at
December 31, 2013.
A.
B.
C.
D.
E.
$28,200.
$25,700.
$35,000.
$27,200.
$26,000.
Patent Value C$50,000 - Amortization for 2013 C$10,000 = BV C$40,000 $.65 =

$26,000 Translated
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
temporal methods.
8-97
64.

Kennedy's share of Hastie's net income for 2013 would be
A.
B.
C.
D.
E.
$18,000.
$15,000.
$18,200.
$16,000.
$18,500.
Translated Net Income $25,000 - Translated Amortization $6,800 = $18,200

Parent's Share of Net Income for 2013
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Blooms: Apply
Difficulty: 3 Hard
8-98
65.
Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1,

2012. Selected account balances are available for the year ended December 31,
2013, and are stated in Euro, the local currency.
amount for sales for 2013.
A.
B.
C.
D.
E.
$364,000.
$372,000.
$380,000.
$360,000.
$404,000.
400,000 $.95 = $380,000
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
Difficulty: 1 Easy
temporal methods.
8-99
66.

Assume the functional currency is the Euro; compute the U.S. balance sheet
amount for inventory at December 31, 2013.
A.
B.
C.
D.
E.
$18,800.
$19,600.
$18,000.
$20,200.
$19,000.
20,000 $1.01 = $20,200
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
Difficulty: 1 Easy
temporal methods.
8-100
67.

A.
B.
C.
D.
E.
$81,900.
$90,900.
$83,700.
$88,200.
$85,500.
90,000 $1.01 = $90,900
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
temporal methods.
8-101
68.

Assume the functional currency is the Euro; compute the U.S. Statement of
Retained Earnings amount reported for Dividends in 2013.
A.
B.
C.
D.
E.
$19,000.
$20,200.
$18,600.
$19,400.
$19,600.
20,000 $.97 = $19,400
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
Difficulty: 1 Easy
8-102
temporal methods.
69.

A.
B.
C.
D.
E.
$40,950.
$41,850.
$45,450.
$42,750.
$44,100.
45,000 $1.01 = $45,450
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
8-103
Blooms: Apply
temporal methods.
70.

amount for depreciation expense for 2013.
A.
B.
C.
D.
E.
$8,190.
$8,370.
$8,820.
$9,090.
$8,550.
9,000 $.95 = $8,550
AACSB: Analytic
AACSB: Diversity
8-104
AICPA BB: Global

Blooms: Apply
temporal methods.
8-105
71.

statement amount for sales for 2013.
A.
B.
C.
D.
E.
$364,000.
$372,000.
$380,000.
$360,000.
$404,000.
400,000 $.95 = $380,000
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
Difficulty: 1 Easy
temporal methods.
8-106
72.

amount for inventory, at cost, for 2013.
A.
B.
C.
D.
E.
$18,800.
$19,600.
$18,000.
$20,200.
$19,000.
20,000 $.94 = $18,800
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
Difficulty: 1 Easy
temporal methods.
8-107
73.

A.
B.
C.
D.
E.
$81,900.
$90,900.
$83,700.
$88,200.
$85,500.
90,000 $.91 = $81,900
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
temporal methods.
8-108
74.

Assume the functional currency is the U.S. Dollar; compute the U.S. statement of
retained earnings amount for dividends for 2013.
A.
B.
C.
D.
E.
$19,000.
$20,200.
$18,600.
$19,400.
$19,600.
20,000 $.97 = $19,400
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
Difficulty: 1 Easy
8-109
temporal methods.
75.

A.
B.
C.
D.
E.
$40,950.
$41,850.
$45,450.
$42,750.
$44,100.
45,000 $.91 = $40,950
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
8-110
Blooms: Apply
temporal methods.
76.

statement amount for depreciation expense for 2013.
A.
B.
C.
D.
E.
$8,190.
$8,370.
$8,820.
$9,090.
$8,550.
9,000 $.91 = $8,190
AACSB: Analytic
AACSB: Diversity
8-111
AICPA BB: Global

Blooms: Apply
temporal methods.
Essay Questions
8-112
77.
A foreign subsidiary was acquired on January 1, 2013. Determine the exchange

rate used to restate the following accounts at December 31, 2013. Land was
purchased on October 1, 2013. Relevant exchange dates follow:
(A) January 1, 2013
(B) October 1, 2013
(C) December 31, 2013
(D) Average, 2013
(E) Composite, using multiple dates.
Identify the exchange rate used to translate items 1-5 when the functional
currency is the foreign currency:
____
____
____
____
____
1.
2.
3.
4.
5.
Land.
Equipment.
Bonds payable.
Common stock.
Retained earnings.
Identify the exchange rate used to remeasure the items 6-10 when the functional
currency is the U.S. dollar:
____
____
____
____
____
6. Land.
7. Equipment.
8. Bonds payable.
9. Common stock.
10. Retained earnings.
(1.) C; (2) C; (3.) C; (4.) A; (5.) E; (6.) B; (7.) A; (8.) C; (9.) A; (10.) E
AACSB: Diversity
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Blooms: Remember
temporal methods.
8-113
78.
In translating a foreign subsidiary's financial statements, what exchange rate

should be used for the subsidiary's revenues and expenses?
The historical rate that was in effect when the revenues and expenses were
incurred should be used unless those revenues and expenses occur throughout the
year, and then a weighted average exchange rate for the year may be used.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
temporal methods.
79.
How can a parent corporation determine the functional currency for a foreign
subsidiary that conducts business in more than one country?
If the foreign subsidiary has distinct and separable operations in different

countries, each of these operations can use a different currency. If the subsidiary
does not have distinct operations in different countries, the currency in which the
most transactions are carried out should be selected.
AACSB: Diversity
AICPA BB: Global
Blooms: Understand
80.
What exchange rate should be used to translate (a) revenues and expenses that
occur throughout the year and (b) a gain or loss that occurs on a specific day?
Revenues and expenses occurring throughout the year may be translated using
the average exchange rate for the year. A gain or loss occurring on a specific date
should be translated using the rate in effect on that day.
AACSB: Diversity
8-114

AICPA BB: Global
Blooms: Remember
Difficulty: 1 Easy
temporal methods.
81.
Perkle Co. owned a subsidiary in Belgium; the subsidiary's functional currency was
the Belgian franc. During 2013, Perkle engaged in hedging transactions to offset
part of the subsidiary's net asset position. How should the effects of exchange rate
fluctuations on the currency hedge be accounted for?
Any effect on the contract resulting from exchange rate fluctuations is classified as
a translation adjustment, rather than as a foreign exchange gain or loss.
AACSB: Diversity
AICPA BB: Global
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 08-05 Understand the rationale for hedging a net investment in a foreign operation and
describe the treatment of gains and losses on hedges used for this purpose.
Topic: Hedging Balance Sheet Exposure
82.
Under what circumstances would the remeasurement of a foreign subsidiary's

financial statements be required?
The remeasurement of a foreign subsidiary's financial statements is required in the

following situations:
(A.) when the subsidiary's functional currency is the U.S. dollar.
(B.) when the subsidiary operates in a highly inflationary economy.
(C.) when the local currency is not the functional currency and the statements first
need to be remeasured from one foreign currency to another foreign currency.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
8-115
83.
A foreign subsidiary of a U.S. corporation purchased equipment on January 4,

2010.
(A.) How would depreciation expense on the equipment be translated for 2013?
(B.) How would depreciation expense on the equipment be remeasured for 2013?
(A.) Depreciation expense would be translated using the average exchange rate
for 2013. (B.) Depreciation expense would be remeasured using the exchange rate
in effect when the equipment was purchased.
AACSB: Diversity
AICPA BB: Global
Blooms: Remember
temporal methods.
84.
What exchange rate would be used to translate the asset and liability account
balances of a foreign subsidiary? What justification can be given for using this
exchange rate?
Assets and liabilities are translated using the current exchange rate, the rate in
effect at the balance sheet date. This rate is chosen because assets and liabilities
are expected to affect future cash flows. Therefore, they should be translated
using the most up-to-date exchange rates available.
AACSB: Diversity
AICPA BB: Global
Blooms: Understand
Difficulty: 1 Easy
temporal methods.
8-116
85.
Farley Brothers, a U.S. company, had a subsidiary in Italy. Under what conditions
would the U.S. dollar be the functional currency for this subsidiary?
To determine the subsidiary's functional currency, Farley Brothers should look at

the volume of the subsidiary's transactions in various currencies. If most of the
subsidiary's sales and purchases are in dollars, the dollar may be the logical choice
for the functional currency. If there are many transactions between the subsidiary
and the parent, and if most of the subsidiary's financing comes from the U.S., the
dollar may be a better choice than the euro.
AACSB: Diversity
AICPA BB: Global
Blooms: Understand
Difficulty: 1 Easy
temporal methods.
86.
What is the justification for the remeasurement of foreign currency transactions?
Remeasurement is needed for transactions denominated in a currency other than

the entity's functional currency. A U.S. company that engages in transactions in
other countries may have to remeasure some of its transactions. The implicit
justification for remeasurement is that foreign currency transactions which affect
monetary assets and liabilities have a direct effect on the entity's cash flows.
There will be direct effects on future cash flows in the functional currency, and
thus an effect on net income.
AACSB: Diversity
AICPA BB: Global
Blooms: Understand
8-117
87.
Contrast the purpose of remeasurement with the purpose of translation.
The purpose of translation is to transform a subsidiary's financial statements,

prepared in its functional currency, into the reporting currency of the parent. The
purpose of remeasurement is to restate transactions from one currency into the
functional currency of the entity. Remeasurement is also required when a
subsidiary's financial statements have been denominated in a currency other than
the subsidiary's functional currency.
AACSB: Diversity
AICPA BB: Global
Blooms: Understand
temporal methods.
Short Answer Questions
8-118
88.
On January 1, 2013, Fandu Corp. began operations of a foreign subsidiary. On April

1, 2013, the subsidiary purchased inventory costing 150,000 stickles. One-fourth
of this inventory remained unsold at the end of 2013 while 40% of the liability from
the purchase had not yet been paid. The pertinent indirect exchange rates were:
Required:
What should have been the December 31, 2013 inventory and accounts payable
balances for this foreign subsidiary as translated into U.S. dollars? (Round your
answers to the nearest whole dollar.)
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
temporal methods.
8-119
89.
On January 1, 2013, Veldon Co., a U.S. corporation with the U.S. dollar as its
functional currency, established Malont Co. as a subsidiary. Malont is located in the
country of Sorania, and its functional currency is the stickle (). Malont engaged in
the following transactions during 2013:
Required:
Calculate the translation adjustment for Malont. (Round your answers to the
nearest whole dollar.)
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
8-120
90.
Ginvold Co. began operating a subsidiary in a foreign country on January 1, 2013

by acquiring all of the common stock for 50,000 Stickles, the local currency. This
purchased for 170,000 on January 1, 2013. This property had a ten-year
anticipated life and no salvage value and was to be depreciated using the straightline method. The building was immediately rented for three years to a group of
local doctors for 6,000 per month. By year-end, payments totaling 60,000 had
been received. On October 1, 5,000 were paid for a repair made on that date and
it was the only transaction of this kind for the year. A cash dividend of 6,000 was
transferred back to Ginvold on December 31, 2013. The functional currency for the
subsidiary was the Stickle (). Currency exchange rates were as follows:
Prepare an income statement for this subsidiary in stickles and then translate
these amounts into U.S. dollars.
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
temporal methods.
8-121
91.

Prepare a statement of retained earnings for this subsidiary in stickles and then
translate the amounts into U.S. dollars.
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
temporal methods.
8-122
8-123
92.

Prepare a balance sheet for this subsidiary in stickles and then translate the
Ginvold Co. Subsidiary

Balance Sheet
December 31, 2013
8-124
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
temporal methods.
8-125
8-126
93.

Prepare a statement of cash flows for this subsidiary in stickles and then translate
the amounts into U.S. dollars.
Ginvold Co. Subsidiary

Statement of Cash Flows
For the Year Ended, December 31, 2013
8-127
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
8-128
94.
Boerkian Co. started 2013 with two assets: Cash of 26,000 (Stickles) and Land
that originally cost 72,000 when acquired on April 4, 2010. On May 1, 2013, the
company rendered services to a customer for 36,000, an amount immediately
paid in cash. On October 1, 2013, the company incurred an operating expense of
22,000 that was immediately paid. No other transactions occurred during the
year so an average exchange rate is not necessary. Currency exchange rates were
as follows:
Assume that Boerkian was a foreign subsidiary of a U.S. multinational company

and the stickle () was the functional currency of the subsidiary. Calculate the
translation adjustment for this subsidiary for 2013 and state whether this is a
positive or a negative adjustment.
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
8-129
95.
as follows:
Assume Boerkian was a foreign subsidiary of a U.S. multinational company and the
U.S. dollar was the functional currency of the subsidiary. Prepare a schedule of
changes in the net monetary assets of Boerkian for the year 2013 and properly
label the resulting gain or loss.
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
Difficulty: 3 Hard
8-130
96.
as follows:
Required:
and the local currency of the subsidiary (stickle) is the functional currency. On the
December 31, 2013 balance sheet, what was the translated value of the Land
account?
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
temporal methods.
8-131
97.
as follows:

and the U.S. dollar is the functional currency. On the December 31, 2013 balance
sheet, what was the remeasured value of the Land account?
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
Blooms: Apply
temporal methods.
8-132

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Chapter 08

Translation of Foreign Currency Financial Statements

Multiple Choice Questions

1. In accounting, the term translation refers to

A. the calculation of gains or losses from hedging transactions.

A. the currency of the primary economic environment in which it operates.

the temporal method.

4. In translating a foreign subsidiary's financial statements, which exchange rate does

A. an asset or liability (depending on the balance) in the consolidated balance sheet.

7. Westmore Ltd., is a British subsidiary of a U.S. company. Westmore's functional

On December 31, 2013, Westmore had accounts receivable of 280,000. What

8. Gunther Co. established a subsidiary in Mexico on January 1, 2013. The subsidiary

What was the amount of the translation adjustment for 2013?

$52,000 decrease in relative value of net assets.

What was the amount of the translation adjustment for 2013?

$52,000 decrease in relative value of net assets.

12. Which accounts are translated using current exchange rates?

all revenues and expenses.

13. Which accounts are remeasured using current exchange rates?

all revenues and expenses.

A. The rate at date of the acquisition business combination.

There is no translation adjustment.

There is no translation adjustment.

There is no translation adjustment.

There is no translation adjustment.

29. Which method of translating a foreign subsidiary's financial statements is correct?

Historical rate method.

30. Which method of remeasuring a foreign subsidiary's financial statements is correct?

Historical rate method.

Beginning of the year rate.

Beginning of the year rate.

Beginning of the year rate.

Beginning of the year rate.

Beginning of the year rate.

Beginning of the year rate.

Beginning of the year rate.

Beginning of the year rate.

Beginning of the year rate.

Beginning of the year rate.

Beginning of the year rate.

Beginning of the year rate.

A. Cumulative 5-year inflation in excess of 100%.

A. Parent reports a cumulative translation adjustment from adjusting its investment

A. The cumulative translation adjustment included in the Investment in Subsidiary

50. Esposito is an Italian subsidiary of a U.S. company.

51. Esposito is an Italian subsidiary of a U.S. company.

52. Esposito is an Italian subsidiary of a U.S. company.

Compute ending inventory for 2013 under the temporal method.

53. Esposito is an Italian subsidiary of a U.S. company.

58. Certain balance sheet accounts of a foreign subsidiary of Parker Company at

59. Certain balance sheet accounts of a foreign subsidiary of Parker Company at

60. Certain balance sheet accounts of a foreign subsidiary of Parker Company at

82. Under what circumstances would the remeasurement of a foreign subsidiary's

83. A foreign subsidiary of a U.S. corporation purchased equipment on January 4, 2010.

87. Contrast the purpose of remeasurement with the purpose of translation.

Short Answer Questions

Chapter 08 Translation of Foreign Currency Financial

Multiple Choice Questions

In accounting, the term translation refers to