IM-1
CHAPTER 10 MANAGEMENT OF TRANSLATION EXPOSURE
SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER
QUESTIONS AND PROBLEMS
QUESTIONS
1. Explain the difference in the translation process between the monetary/nonmonetary method and the
temporal method.
Answer:
Under
the
monetary/nonmonetary
method,
all
monetary
balance
sheet
accounts
of
a
foreign
subsidiary are translated at the current exchange rate. Other balance sheet accounts are translated at the
historical rate exchange rate in effect when the account was first recorded. Under the temporal method,
monetary
accounts
are
translated
at
the
current
exchange
rate.
Other
balance
sheet
accounts
are
also
translated
at
the
current
rate,
if
they
are
carried
on
the
books
at
current
value.
If
they
are
carried
at
historical value, they are translated at the rate in effect on the date the item was put on the books. Since
fixed
assets
and
inventory
are
usually
carried
at
historical
costs,
the
temporal
method
and
the
monetary/nonmonetary method will typically provide the same translation.
2.
How
are
translation
gains
and
losses
handled
differently
according
to
the
current
rate
method
in
comparison to the other three methods, that is, the current/noncurrent method, the monetary/nonmonetary
method, and the temporal method?
Answer: Under the current rate method, translation gains and losses are handled only as an adjustment to
net worth through an
equity account named the 鈥渃umulative translation adjustment鈥?nbsp;
account. Nothing
passes through the income statement. The other three translation methods pass foreign exchange gains or
losses through the income statement before they enter on to the balance sheet through the accumulated
retained earnings account.