Nonmonetary Trans Flashcards
Question example
If a nonmonetary exchange has commercial substance, the transaction is accounted for using the fair value of the asset surrendered or received, whichever is more evident. In this question, it appears that the exchange has commercial substance, as it appears to culminate the earnings process (i.e., a truck is exchanged for stock, which would appear in a business sense to have affected the expected configuration of cash). Therefore, the accounting uses the fair value of the asset surrendered or the fair value of the asset received, whichever is more evident, as the value for the exchange. The question indicates that the fair value of the truck is $3,000 on the date of the exchange, and it does not provide the fair value of the stock (don’t use the book value of the stock as an “approximation” of the fair value); therefore, the $3,000 fair value of the truck is used for measuring the transaction.
A transaction was reported as a nonmonetary exchange of assets. Under which of the following circumstances should the exchange be measured based on the reported amount of the nonmonetary asset surrendered?
When a transaction involving a nonmonetary exchange lacks commercial substance, the reported amount of the nonmonetary asset surrendered is used to record the newly acquired asset. If the transaction has commercial substance, the fair value approach is used.
Valuing current costs of inventory and property
Current cost amounts of inventory and property, plant and equipment are measured at current cost or lower recoverable amount at the measurement date
Functional Currency Basis
Rule: The functional currency of a company may be:
A foreign entity’s local currency, which is typically the one in which the entity keeps its books;
The currency in which the financial statements will be presented, which is the currency of the parent company; or
A foreign currency other than the one in which the foreign entity maintains its books.
Rule: The functional currency of an entity generally depends upon the environment in which the entity generates and expends cash (unless there is a requirement by law to use another currency), which may be any of the above three. However, the functional currency cannot be the local currency if the foreign entity operates in a highly inflationary environment (i.e., approximately 100% over three years).
Where are translation adjustments included
Rule: “Translation adjustments” are not included in determining net income for the period but are disclosed and accumulated as a component of other comprehensive income in consolidated equity until disposed of.
However, gains or losses from remeasuring the foreign subsidiary’s financial statements from the local currency to the functional currency should be included in “income from continuing operations” of the parent company.
stockholders’ equity contra account
Cumulative foreign exchange translation loss should be reported as a component of accumulated other comprehensive income. A cumulative foreign exchange translation loss would be a debit to accumulated other comprehensive income; therefore, contra to shareholders’ equity.
Rule: “Translation” adjustments are not included in determining net income for the period but are disclosed and accumulated as a component of other comprehensive income in consolidated equity until sale or until liquidation of the investment takes place.
Exceptions to being valued at historical cost.
Rule: Balance sheet accounts are generally included at the current exchange rate, except for:
A self contained subsidiary with a 3 year inflation rate of 100% or more (hyperinflationary economy).
A foreign entity which does not maintain its accounts in a foreign functional currency.
Weighted Average Exchange Rate
Under the translation (current) method, all income statement items, including salaries expense and sales to external customers, are translated using the weighted-average exchange rate for the current year.
Income Statement Reporting
Absent any information to the contrary, the functional currency of the British subsidiary must be the British pound. To convert from the British pound to the U.S. dollar (the reporting currency), the translation (current) method is used and all income statement items are translated using the average exchange rate.
Translation vs. Remeasurement
Conversion adjustments associated with remeasurement of financial statements is displayed in income. The $40,000 remeasurement loss would be displayed in income, and not netted against the translation gain for display in accumulated other comprehensive income.
The foreign operation’s capital accounts would be translated to the functional currency of the reporting entity using which of the following rates?
Capital accounts are translated into the functional currency using the historical exchange rates.
A foreign subsidiary of a U.S. parent company should measure its assets, liabilities, and operations using:
The functional currency is the currency of the primary economic environment in which the entity operates, usually the local currency or the reporting currency. The foreign subsidiary itself should measure its assets, liabilities, and operations using the currency of its primary economic environment.
Income tax-basis financial statements differ from those prepared under GAAP in that income tax-basis financial statements
Income tax-basis financial statements recognize events when taxable income or deductible expenses are recognized on the entity’s tax return. Non-taxable income and non-deductible expenses are shown on the financial statement and included in the determination of income (and become M-1 adjustments to arrive at taxable income).
Personal financial statements usually consist of
Personal financial statements usually include a statement of financial condition (similar to a balance sheet) and a statement of changes in net worth (similar to an income statement).
Which of the following statements regarding the presentation guidelines for other comprehensive basis of accounting (OCBOA) financial statements is correct
OCBOA financial statement titles should differentiate the financial statements from accrual basis financial statements.
