[jessanqi]

Anyone could help this? I think this question should use current rate method since the functional currency is the foreign currency.
Under this method, all assets and liability should use current rate. so I don’t understand why the other two use historical rate instead.

Thank you in advance!!

Question

Certain balance sheet accounts in a foreign subsidiary of Rose Company at December 31, 1980, have been translated into United States dollars as follows:

Translated at
Current Rates Translated at
Historical Rates
Accounts receivable, current $200,000 $220,000
Accounts receivable, long-term $100,000 $110,000
Prepaid insurance $50,000 $55,000
Goodwill $80,000 $85,000

The subsidiary’s functional currency is a foreign currency. What total should be included in Rose’s balance sheet at December 31, 1980, for the above items?

you chose A. $430,000
B. $435,000
C. $440,000
D. $450,000

Explanation
The correct answer is C. FASB Statement No. 8 provides for the rates to be used in translating various asset and liability accounts. It provides that the “current” rate is always to be used in translating accounts receivable, regardless of whether or not such receivables are considered to be current or long-term. Further, it states that the “historical” rate is to be used to translate both prepaid insurance and goodwill. Thus, we have as follows:
Item Rate Used Amount
Accounts receivable, current Current $200,000
Accounts receivable, long-term Current $100,000
Prepaid insurance Historical $55,000
Goodwill Historical $85,000
Total
$440,000

[Radez]

The thing with foreign currency on the balance sheet is you have to keep in mind what balances are monetary vs. non-monetary. A good guide I've used to for identifying something as monetary vs. non-monetary is thinking about when the cash transaction occurred/will occur. IE. A/R is a monetary balance because it represents a cash transaction in the future. Same with A/P. On the flip side, things like PP&E, Prepaid assets, and deferred revenue are all non-monetary transactions. Those balances are created by cash transactions, not created in advance of cash transactions. Foreign currency translation is all about foreign exchange risk. There's no foreign currency risk associated with transactions where cash already changed hands. There's only foreign currency risk with transactions where cash hasn't changed hands yet.

Therefore, you use historical rates for the non-monetary and current rates for the monetary.

Goodwill would be non-monetary also because it is created during a business acquisition, which is when cash would have been exchanged.

[jessanqi]

Hi Radez,

thanks so much for the advise.

But what I'm confused is, according to my textbook, there are two method. one is current rate method and another is remeasurement method.

When using the remeasurement method, we need to think about monetary and nonmonetary just like you said. under the current rate method, all assets and liability are using current rate.

I think this question should use the current rate method since the functional currency is not the US DOLLARS.

Please advise…

Thank you!!!

[Radez]

You're right, I gave too much deference to the problem solution, and wasn't thinking translation. I was thinking remeasurement.

However, this has provided an opportunity to learn some accounting history. For a company in 1980, that WAS the correct treatment. FAS 8.12 does in fact indicate for items other than A/R and A/P, ” the particular measurement basis used shall determine the translation rate. Several measurement bases are used in financial accounting under present generally accepted accounting principles.6 A measurement may be based on a price in a past exchange (for example, historical cost), a price in a current purchase exchange (for example, replacement cost), or a price in a current sale exchange (for example, market price). ”

I.E. non-monetary would be translated at historical rates.

This statement was released in 1976. It was superseded by FAS 52 in 1981. FAS 52.12 is when FASB makes a switch to translating all assets and liabilities at the current rate. ASC 830-30-45-3 straight up says the same thing. For translation of financial statements, it's current method for BS.

I can't believe that's actually a review question though. How can 30 year old accounting rules that no longer apply be relevant for the exam?

Also, I don't know if you have accounts with FASB and IASB, but I've found it super useful to look up what the standards are saying themselves both in studying and in situations I've encountered at work. Basic accounts are free for both orgs.

[jessanqi]

Thank so much for the help!!! 🙂

[Author]

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