Advanced Accounting 10th Beams Solutions

Advanced accounting 10 by Floyd Beams-
solutions manual
SAMPLE
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SAMPLE START
Part of Chaper 12:
Chapter Outline

A
FASB Statement No. 52, "Foreign Currency Translation," as amended by FASB
Statement No. 133, stipulates

1
At the date a transaction is recognized, each element shall be measured and
recorded in the functional currency of the recording entity using the
exchange rate in effect on that date

2
At each balance sheet date, recorded balances that are denominated in a foreign
currency shall be adjusted to reflect the current exchange rate.

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B
Definitions of currencies from FAS 52:

1
An entity's functional currency is the currency of the primary environment in
which it operates. This is normally the currency in which it generates and
expends cash. Company management determines the functional currency.


2
Foreign currency is a currency other than the entity's functional currency.


3
Local currency is the currency of a particular country being referred to.


4
Reporting currency is the currency in which an enterprise prepares its financial
statements.

C
A transaction is measured in a particular currency if its magnitude is expressed in that
currency and included in the financial records in that currency.

1
Assets and liabilities are denominated in a currency if their amounts are fixed
in terms of that currency and will be settled in that currency.

a
For example, US Company buys merchandise from a Mexican firm for 500,000 pesos,
payable in 10 days. The transaction is denominated in pesos; however, US Company must
measure the purchase in US dollars before it can be recorded. This is done through the use of
exchange rates.
D
An exchange rate is the ratio between a unit of one currency and the amount of another
currency for which that unit can be exchanged. From the viewpoint of a U.S. company:

---

1
A direct quotation is expressed in U.S. dollars. It is the U.S. dollar equivalent
of 1 unit of a foreign currency.

a
A direct quotation for Mexican pesos might be $.1333. The purchase
denominated at 500,000 pesos is measured at $66,650 U.S. dollars
(500,000 pesos x $.1333).


2
An indirect quotation is expressed in the foreign currency. It is the foreign
currency equivalents to one U.S. dollar.

a
An indirect quotation for Mexican pesos is expressed as 7.5019 pesos.
The 500,000 pesos purchase is measured at $66,650 (500,000 pesos /
7.5019 pesos).


3
A spot rate is the exchange rate for immediate delivery of currencies exchanged.


4
The current rate is the rate at which one unit of currency can be exchanged for
another currency at the balance sheet date or the transaction date.


5
The historical rate is the rate in effect at the date a specific transaction or event
occurred.
INTERPRETATION OF FOREIGN EXCHANGE RATE CHANGES

Case 1

The British pound is quoted at $1.50 against the U.S. dollar on January 15, 20X6 and at
$1.40 on March 15, 20X6. Is the U.S. dollar strengthening or weakening against the British
pound?

---

The U.S. dollar is strengthening. The cost to a U.S. company of 1 British pound on
January 15 was $1.50, but only $1.40 on March 15.


Case 2

The German mark is quoted at $.45 on April 10, 20X7 and at $.50 on May 10, 20X7.
Is the dollar strengthening or weakening against the German mark?

The U.S. dollar is weakening. The cost of 1 mark on April 10 was $.45, but on May
10, it was $.50. Alternatively, a U.S. firm could have obtained 222 marks for $100 on
April 10, but only 200 marks for $100 on May 10.


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