Question #4
Reading: Reading 10 Multinational Operations
PDF File: Reading 10 Multinational Operations.pdf
Page: 2
Status: Correct
Correct Answer: B
Question
Which of the following currency translation methods is most appropriate in a hyperinflationary economy under US GAAP? The:
Answer Choices:
A. current rate method since the translation gain or loss is shown on the income statement
B. current/non-current method since current assets and liabilities are translated at the current exchange rate
C. temporal method because all non-monetary accounts are translated at the historical rate
Explanation
The temporal rate method is most appropriate because the value of non-monetary assets
and liabilities is translated at the historical rate. Under IFRS, the firm restates the
financials using an inflation index, and then translates using the current rate method.
(Module 10.3, LOS 10.e)
Scud Co. is a Swiss subsidiary of the U.S. firm Patriot, Inc. On December 31, 20X7 the $/SF
exchange rate was 0.77. Assume that this is the historical rate, except as noted below. One
year later the Swiss Franc had appreciated to 0.85 $/SF. Scud Co. pays no dividends. The
average exchange rate for the year was 0.80 $/SF. Scud pays no taxes. Assume that Scud
uses a periodic inventory system and that inventory is accounted for using the LIFO
inventory assumption, was bought and sold evenly throughout the year.
Scud Co. Int'l
Balance Sheet (in SF thousands)
Dec. 31, 20X7
Dec. 31, 20X8
Cash & A/R
400
600
Inventory
500
500
Net Fixed Assets
700
600
Total Assets
1,600
1,700
A/P
100
200
Long-term debt
200
100
Common Stock
1,300
1,300
Retained Earnings
0
100
Total Liabilities
1,600
1,700
Income Statement (in SF thousands)
December 31, 20X8
In SF
Sales
7,000
COGS
(6,800)
Depreciation
(100)
Remeasurement Gain/Loss
--
Net Income
100
Assume that the functional currency is the U.S. dollar when answering the following
questions.