..CHAPTER10MANAGEMENTOFTRANSLATIONEXPOSURESUGGESTEDANSWERSANDSOLUTIONSTOEND-OF-CHAPTERQUESTIONSANDPROBLEMSQUESTIONS1.Explainthedifferenceinthetranslationprocessbetweenthemonetary/nonmonetarymethodandthetemporalmethod.Answer:Underthemonetary/nonmonetarymethod,allmonetarybalancesheetaccountsofaforeignsubsidiaryaretranslatedatthecurrentexchangerate.Otherbalancesheetaccountsaretranslatedatthehistoricalrateexchangerateineffectwhentheaccountwasfirstrecorded.Underthetemporalmethod,monetaryaccountsaretranslatedatthecurrentexchangerate.Otherbalancesheetaccountsarealsotranslatedatthecurrentrate,iftheyarecarriedonthebooksatcurrentvalue.Iftheyarecarriedathistoricalvalue,theyaretranslatedattherateineffectonthedatetheitemwasputonthebooks.Sincefixedassetsandinventoryareusuallycarriedathistoricalcosts,thetemporalmethodandthemonetary/nonmonetarymethodwilltypicallyprovidethesametranslation.2.Howaretranslationgainsandlosseshandleddifferentlyaccordingtothecurrentratemethodinparisontotheotherthreemethods,thatis,thecurrent/noncurrentmethod,themonetary/nonmonetarymethod,andthetemporalmethod?Answer:Underthecurrentratemethod,translationgainsandlossesarehandledonlyasanadjustmenttonetworththroughanequityaccountnamedthe“cumulativetranslationadjustment〞account.Nothingpassesthroughtheinestatement.Theotherthreetranslationmethodspassforeignexchangegainsorlossesthroughtheinestatementbeforetheyenterontothebalancesheetthroughtheaccumulatedretainedearningsaccount...word.zl.....word.zl...3.IdentifysomeinstancesunderFASB52whenaforeignentity’sfunctionalcurrencywouldbethesameastheparentfirm’scurrency.Answer:ThreeexamplesunderFASB52,wheretheforeignentity’sfunctionalcurrencywillbethesameastheparentfirm’scurrency,are:i)theforeignentity’scashflowsdirectlyaffecttheparent’scashflowsandarereadilyavailableforremittancetotheparentfirm;ii)thesalespricesfortheforeignentity’sproductsareresponsiveonashort-termbasistoexchangeratechanges,wheresalespricesaredeterminedthroughworldwidepetition;and,iii)thesalesmarketisprimarilylocatedintheparent’scountryorsalescontractsaredenominatedintheparent’scurrency.4.DescribetheremeasurementandtranslationprocessunderFASB52ofawhollyownedaffiliatethatkeepsitsbooksinthelocalcurrencyofthecountryinwhichitoperates,whichisdifferentthanitsfunctionalcurrency.Answer:Foraforeignentitythatkeepsitsbooksinitslocalcurrency,whichisdifferentfromitsfunctionalcurrency,thetranslationprocessaccordingtoFASB52isto:first,remeasurethefinancialreportsfromthelocalcurrencyintothefunctionalcurrencyusingthetemporalmethodoftranslation,andsecond,translatefromthefunctionalcurrencyintothereportingcurrencyusingthecurrentratemethodoftranslation.5.Itis,generally,notpossibletopletelyeliminatebothtranslationexposureandtransactionexposure.Insomecases,theeliminationofoneexposurewillalsoeliminatetheother.Butinothercases,theeliminationofoneexposureactuallycreatestheother.Discusswhichexposuremightbeviewedasthemostimportanttoeffectivelymanage,ifaconflictbetweencontrollingbotharises.Also,discussandcritiquethemonmethodsforcontrollingtranslationexposure.Answer:Sinceitis,generally,notpossibletopletelyeliminatebothtransactionandtranslationexposure,weremendthattransactionexposurebegivenfirstprioritysinceitinvolvesrealcashflows.Thetranslation..word.zl...process,on-the-otherhand,hasnodirecteffectonreportingcurrencycashflows,andwi...
