Test Bank for International Accounting, 6th Edition
by Timothy Doupnik
Part 1: Translation Methods & Functional Currency
1. Which of the following is not a method of foreign currency
translation mentioned in the text?
a) Current rate method
b) Temporal method
c) Monetary/non-monetary method
d) Working capital method
ANSWERS>: d
Rationale: The working capital method is not a translation
method. The current rate, temporal, and monetary/non-
monetary methods are the three historically used methods.
2. Under the current rate method, at what rate are assets and
liabilities translated?
a) Historical rate
b) Current rate
c) Average rate
d) Spot rate
,ANSWERS>: b
Rationale: The current rate method translates all assets and
liabilities at the current exchange rate (spot rate) at the balance
sheet date.
3. Under the temporal method, at what rate are monetary
assets and liabilities translated?
a) Historical rate
b) Current rate
c) Average rate
d) Budget rate
ANSWERS>: b
Rationale: Because cash and receivables/payables are already
measured in terms of current value, they are translated at the
current rate.
4. Under the temporal method, inventory carried at historical
cost is translated at the:
a) Current rate
b) Historical rate
c) Average rate
,d) Forward rate
ANSWERS>: b
Rationale: The temporal method translates assets carried at
historical cost at the historical exchange rate in effect when the
asset was acquired.
5. Which of the following is true regarding the current rate and
temporal methods?
a) Both methods translate all balance sheet items at the current
rate.
b) Both methods translate income statement items at the
average rate.
c) The current rate method is a pure balance sheet approach;
the temporal method is a hybrid.
d) Both methods result in the same amount of translation
adjustment.
ANSWERS>: c
Rationale: The current rate method is a pure balance sheet
approach because all balance sheet items are translated at the
current rate. The temporal method is a hybrid because some
items use current and some use historical.
, 6. Under U.S. GAAP (ASC 830), how is the appropriate
translation method determined?
a) Based on the parent's functional currency
b) Based on the subsidiary's functional currency
c) Based on the subsidiary's local currency
d) Based on the parent's reporting currency
ANSWERS>: b
Rationale: Under ASC 830, the functional currency of the
foreign operation determines whether the current rate or
temporal method is used.
7. If a foreign subsidiary's functional currency is the local
currency, which translation method is used?
a) Temporal method
b) Current rate method
c) Monetary/non-monetary method
d) Current/non-current method
ANSWERS>: b
Rationale: When the local currency is the functional currency,
the foreign currency financial statements are translated using
the current rate method.
by Timothy Doupnik
Part 1: Translation Methods & Functional Currency
1. Which of the following is not a method of foreign currency
translation mentioned in the text?
a) Current rate method
b) Temporal method
c) Monetary/non-monetary method
d) Working capital method
ANSWERS>: d
Rationale: The working capital method is not a translation
method. The current rate, temporal, and monetary/non-
monetary methods are the three historically used methods.
2. Under the current rate method, at what rate are assets and
liabilities translated?
a) Historical rate
b) Current rate
c) Average rate
d) Spot rate
,ANSWERS>: b
Rationale: The current rate method translates all assets and
liabilities at the current exchange rate (spot rate) at the balance
sheet date.
3. Under the temporal method, at what rate are monetary
assets and liabilities translated?
a) Historical rate
b) Current rate
c) Average rate
d) Budget rate
ANSWERS>: b
Rationale: Because cash and receivables/payables are already
measured in terms of current value, they are translated at the
current rate.
4. Under the temporal method, inventory carried at historical
cost is translated at the:
a) Current rate
b) Historical rate
c) Average rate
,d) Forward rate
ANSWERS>: b
Rationale: The temporal method translates assets carried at
historical cost at the historical exchange rate in effect when the
asset was acquired.
5. Which of the following is true regarding the current rate and
temporal methods?
a) Both methods translate all balance sheet items at the current
rate.
b) Both methods translate income statement items at the
average rate.
c) The current rate method is a pure balance sheet approach;
the temporal method is a hybrid.
d) Both methods result in the same amount of translation
adjustment.
ANSWERS>: c
Rationale: The current rate method is a pure balance sheet
approach because all balance sheet items are translated at the
current rate. The temporal method is a hybrid because some
items use current and some use historical.
, 6. Under U.S. GAAP (ASC 830), how is the appropriate
translation method determined?
a) Based on the parent's functional currency
b) Based on the subsidiary's functional currency
c) Based on the subsidiary's local currency
d) Based on the parent's reporting currency
ANSWERS>: b
Rationale: Under ASC 830, the functional currency of the
foreign operation determines whether the current rate or
temporal method is used.
7. If a foreign subsidiary's functional currency is the local
currency, which translation method is used?
a) Temporal method
b) Current rate method
c) Monetary/non-monetary method
d) Current/non-current method
ANSWERS>: b
Rationale: When the local currency is the functional currency,
the foreign currency financial statements are translated using
the current rate method.
