International accounting International accounting Question 1 (4 marks Compare an
ID: 2558425 • Letter: I
Question
International accounting International accounting Question 1 (4 marks Compare and contrast features of the major foreign currency translation methods. Which method do you think is the best? Explain why Question 2 (6 marks Demure Corporation, the Chinese affiliate of a U.S. manufacturer, has the balance sheet shown below. The current exchange rate is $.0.15 CNY? Balance Sheet of Shanghai Corporation (000's) Assets Cash Accounts receivable Inventories (cost-24,000 Fixed assets, net Total assets CNY 19,000 Accounts payable 24,000 Notes payable 22,000 Bonds payabl 35,000 Stockholders' equity CNY21,000 10,000 37,000 32,000 CNY100,000 CNY100,000 Total liabilities & Stockholders' equity Inventories are carried at the lower of cost or market. Required: a. Translate the Chinese dollar balance sheet of Demure Corporation into U.S. dollars at the current exchange rate of $0.15-CNY?. All monetary accounts in Shanghai's balance sheet are denominated in Chinese yuan. b. Assume the Chinese yuan revalues from $0.15 CNY1 to $0.1875 CNY1. What would be the translation effect if Shanghai's balance sheet is translated by the current-noncurrent method? By the monetary-nonmonetary method? c. Assume instead that the Chinese yuan weakens from $0.15-CNY1 to $0.1125 CNY1. What would be the translation effect under each of the two translation methods? d. What would be the translation effect if Demure Corporation's balance sheet were translated by the temporal method assuming the Chinese yuan appreciates by 25 percent? By the current rate method? e. If the Chinese yuan depreciates by 25 percent, what would be the translation effects under each of the two methods in requirement d? Based on your previous calculations, which translation method-current-noncurrent, monetary- nonmonetary, temporal, or current-gives statement readers the most meaningful information? Critically discuss. f.Explanation / Answer
Monetary-Nonmonetary Translation Method
A company uses the monetary-nonmonetary translation method when a foreign subsidiary is highly integrated with the parent company. The goal is to represent translated amounts as if they arose from exports sent from the parent company to the subsidiary’s markets. You translate monetary assets and liabilities such as cash, accounts receivable and accounts payable using the current exchange rate. You use the historical rate when you translate nonmonetary items such as inventory, fixed assets and common stock. For example, you would use the spot rates existing at the time you purchased inventory items.
Temporal Rate Translation Method
The accounting standards call for foreign operations to use the temporal, or historical, rate method when the local currency differs from the functional one. For example, a subsidiary of a Canadian company with foreign operations in a small country in which all business transpires in U.S. dollars, not the country’s local currency, would use the temporal method. When you apply the temporal rate method, you adjust income-generating assets on the balance sheet and related income statement items using historical exchange rates from transaction dates or from the date that the company last assessed the fair market value of the account. You recognize this adjustment as current earnings. According to FASB Rule 52, you also apply the temporal rate method if you operate in a hyperinflationary environment.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.