Use the following information for Problems 1 and 2.
MNC Corp. (a U.S.-based company) sold parts to a South Korean customer on December 1, 2013, with payment of 10 million South Korean won to be received on March 31, 2014. The following exchange rates apply:
December 1, 2013 $0.0035 $0.0034 December 31, 2013 0.0033 0.0032 March 31, 2014 0.0038 N/A
MNC's incremental borrowing rate is 12 percent. The present value factor for three months at an annual interest rate of 12 percent (1 percent per month) is 0.9706.
1. Assuming that MNC did not enter into a forward contract, how much foreign exchange gain or loss should it report on its 2013 income statement with regard to this transaction?
a. $5,000 gain.
b. $3,000 gain.
c. $2,000 loss.
d. $1,000 loss.
2. Assuming that MNC entered into a forward contract to sell 10 million South Korean won on December 1, 2013, as a fair value hedge of a foreign currency receivable, what is the net impact on its net income in 2013 resulting from a fluctuation in the value of the won?
a. No impact on net income.
b. $58.80 decrease in net income.
c. $2,000 decrease in net income.
d. $1,941.20 increase in net income.
3. What is a subsidiary's functional currency?
a. The parent's reporting currency.
b. The currency in which transactions are denominated.
c. The currency in which the entity primarily generates and expends cash.
d. Always the currency of the country in which the company has its headquarters.
4. In comparing the translation and the remeasurement process, which of the following is true?
a. The reported balance of inventory is normally the same under both methods.
b. The reported balance of equipment is normally the same under both methods.
c. The reported balance of sales is normally the same under both methods.
d. The reported balance of depreciation expense is normally the same under both methods.
5. Which of the following statements is true for the translation process (as opposed to remeasurement)?
a. A translation adjustment can affect consolidated net income.
b. Equipment is translated at the historical exchange rate in effect at the date of its purchase.
c. A translation adjustment is created by the change in the relative value of a subsidiary's net assets caused by exchange rate fluctuations.
d. A translation adjustment is created by the change in the relative value of a subsidiary's monetary assets and monetary liabilities caused by exchange rate fluctuations.
6. This subsidiary's functional currency is a foreign currency. What total should Rose's balance sheet include for the preceding items?
a. $430,000.
b. $435,000.
c. $440,000.
d. $450,000.
7. This subsidiary's functional currency is the U.S. dollar. What total should Rose's balance sheet include for the preceding items?
a. $430,000.
b. $435,000.
c. $440,000.
d. $450,000.