Exam 8: Accounting for Foreign Investments

Crimson Lights Inc. (CL)is a 100% wholly owned subsidiary with operations in France. CL was purchased by a Canadian parent on January 1, 2012. The financial records of CL are maintained in euros and provide the following information with respect to equipment, and goodwill. Equipment - purchased on January 1, 2012 for €250,000 - depreciated over 5 years on a straight-line basis. Equipment - purchased on January 1, 2013 for €175,000 - depreciated over 5 years on a straight-line basis. Goodwill - € 375,000 Foreign exchange rates were as follows: January 1, 2012 €1 = 1.50 Average for 2012 €1 = 1.48 January 1, 2013 €1 = 1.46 Average for 2013 €1 = 1.45 January 1, 2014 €1 = 1.51 Average for 2014 €1 = 1.58 December 31, 2014 €1 = 1.62 Required: Assume that CL's functional currency is the euro. Calculate the translated Canadian dollar balances for the following accounts at December 31, 2014. a. Equipment b. Accumulated depreciation - equipment c. Depreciation expense d. Goodwill

When an item is deemed to hedge a net investment in a foreign subsidiary, any gain or loss on the hedging items is recorded in income.

Consolidation adjustments must be restated to the presentation currency.

When the functional currency of a foreign subsidiary is identified as the Canadian dollar, and land purchased by the foreign subsidiary, after the controlling interest was acquired by the parent company who is presenting consolidated financial statements in the Canadian dollar, the land should be translated for consolidation using the

A parent company may lend money to a foreign subsidiary where the settlement terms are neither planned nor likely to occur in the foreseeable future. This loan would likely be denominated on the individual company's financial statements in:

The following balance sheet accounts of a foreign subsidiary at December 31, 2014, have been translated into Canadian dollars as follows: Translated at Current Rates Historical Rates Accounts receivable, current \ 600,000 \ 660,000 Accounts receivable, long-term 300,000 324,000 Inventories carried at market 180,000 198,000 Goodwill 190,000 220,000 \1 ,270,000 \1 ,402,000 What total should be included in the translated balance sheet at December 31, 2014 for the above items? Assume the Canadian dollar is the functional currency.

Which of the following statements regarding the preparation of foreign currency adjustments, for consolidation or the application of the equity method, is FALSE?

When would a change in the functional currency of an entity occur, and how is it accounted for?

Consolidation adjustments must be restated to the _______________ currency.

Assuming no significant inflation, gains resulting from the process of translating a foreign entity's financial statements from the functional currency to Canadian dollars should be included as a(n)

Goodwill and fair value adjustments related to a foreign operation are treated as gains and losses of the foreign operation for the purposes of foreign currency translation.

Which of the following factors is a PRIMARY indicator used to choose a functional currency?

Goodwill and fair value adjustments related to a foreign operation are treated as ___________ of the foreign operation for the purposes of foreign currency translation.

Monetary balances are eliminated using the rate when the transaction occurred.

When a subsidiary has foreign currency transactions, and records foreign currency gains or losses, the non-controlling interest will be allocated a portion of those gains or losses since it shares in the net income of the subsidiary.

When the functional currency is not clearly evident from the application of the primary indicators, then a secondary indicator such as the currency in which funds from _______ activities are generated should be considered.

When the currency selected for presentation purposes differs from an entity's functional currency, the financial statements need to be translated into this selected presentation currency.

What are the steps involved in the process of consolidation when an entity controls one or more other entities?

When the functional currency is being determined for a foreign operation (i.e. a subsidiary, branch, associate or joint venture, of a parent entity), in addition to the primary and secondary indicators, all of the following factors should be considered in this determination EXCEPT

Intracompany transactions are eliminated at the rate when the transaction occurred.