Use the following information for Problems 11 and 12.
MNC Corp. (a U.S.–based company) sold parts to a South Korean customer on December 1, 2013, with payment of 10 million South Korean won to be received on March 31, 2014. The following exchange rates apply:
MNC’s incremental borrowing rate is 12 percent. The present value factor for three months at an annual interest rate of 12 percent (1 percent per month) is 0.9706.
Assuming that MNC did not enter into a forward contract, how much foreign exchange gain or loss should it report on its 2013 income statement with regard to this transaction?
a. $5,000 gain.
b. $3,000 gain.
c. $2,000 loss.
d. $1,000 loss.
What is a subsidiary’s functional currency?
a. The parent’s reporting currency.
b. The currency in which transactions are denominated.
c. The currency in which the entity primarily generates and expends cash.
d. Always the currency of the country in which the company has its headquarters.
LO3, LO4 2.
In comparing the translation and the remeasurement process, which of the following is true?
a. The reported balance of inventory is normally the same under both methods.
b. The reported balance of equipment is normally the same under both methods.
c. The reported balance of sales is normally the same under both methods.
d. The reported balance of depreciation expense is normally the same under both methods.
Which of the following statements is true for the translation process (as opposed to remeasurement)?
a. A translation adjustment can affect consolidated net income.
b. Equipment is translated at the historical exchange rate in effect at the date of its purchase.
c. A translation adjustment is created by the change in the relative value of a subsidiary’s net assets caused by exchange rate fluctuations.
d. A translation adjustment is created by the change in the relative value of a subsidiary’s monetary assets and monetary liabilities caused by exchange rate fluctuations.
Problems 6 and 7 are based on the following information.
Certain balance sheet accounts of a foreign subsidiary of Rose Company have been stated in U.S. dollars as follows:
Accounts receivable, current
Accounts receivable, long term
LO2, LO3 6.
This subsidiary’s functional currency is a foreign currency. What total should Rose’s balance sheet include for the preceding items?
LO2, LO4 7.
This subsidiary’s functional currency is the U.S. dollar. What total should Rose’s balance sheet include for the preceding items?
In accordance with U.S. generally accepted accounting principles, which translation combination is appropriate for a foreign operation whose functional currency is the U.S. dollar?