CFA Institute CFA-Level-II Exam - Topic 1 Question 99 Discussion

Actual exam question for CFA Institute's CFA-Level-II exam

Question #: 99
Topic #: 1

Jenna Stuart is a financial analyst for Deuce Hardware Company, a U .S . company that reports its results in U .S . dollars. Wayward Distributing, Inc., is a foreign subsidiary of Deuce Hardware, which began operations on January 1,2007. Wayward is located in a foreign country and reports its results in the local currency called the Rho. Selected balance sheet information for Wayward is shown in the following table.

Stuart has been asked to analyze how the reported financial results of Wayward will be affected by the choice of the all-current or temporal methods of accounting for foreign operations. She has gathered the following exchange rate information on the $/Rho exchange rate:

* Spot rate on 1/01/08: $0.35 per Rho

* Spot rate on 12/31/08: $0.45 per Rho

* Average spot rate during 2008: $0.42 per Rho

Will the all-current method report a translation gain or loss for 2008, and will that gain or loss be reported on Deuce's income statement or the balance sheet?

AGain on the balance sheet.

BGain on the income statement.

CLoss on the balance sheet and a gain on the income statement.

Show Suggested Answer

Suggested Answer: C

Credit risk in a swap is generally highest in rhe middle of the swap. At the end of the swap there are few potential payments left and the probability of either party defaulting on their commitment is relatively low. Therefore, Widby's first comment is incorrect. It Jacobs wants to delay establishing a swap position, a swaption would potentially be an appropriate investment. However, Jacobs should buy a receiver swaption, not a payer swaption. In a payer swaption, Jacobs would pay the fixed-rate and receive the equity index return. The swap underlying a payer swaption would not offset Jacobs's current position. (Study Session 17, LOS 6l.f,i)

by Rose at Feb 10, 2025, 06:50 PM

Limited Time Offer

25%

Off

Get Premium CFA-Level-II Questions as Interactive Web-Based Practice Test or PDF

Contribute your Thoughts:

Submit Cancel

Michael

4 months ago

I agree, but I’m not sure about the income statement part.

upvoted 0 times

...

Launa

4 months ago

Definitely a gain on the balance sheet!

upvoted 0 times

...

Yuonne

5 months ago

Wait, how can there be a gain if the rate went up?

upvoted 0 times

...

Refugia

5 months ago

I think it’s a gain on the income statement, right?

upvoted 0 times

...

Lea

5 months ago

All-current method usually shows gains on the balance sheet.

upvoted 0 times

...

Maricela

5 months ago

I recall that if the local currency strengthens, it could lead to a loss under the temporal method, but I'm confused about how that applies here with the all-current method.

upvoted 0 times

...

Aaron

6 months ago

This question feels similar to one we practiced where we had to determine gains or losses based on exchange rates. I think it might be a gain on the balance sheet.

upvoted 0 times

...

Timothy

6 months ago

I'm not entirely sure, but I think the translation adjustments go to the balance sheet, not the income statement.

upvoted 0 times

...

Lizbeth

6 months ago

I remember studying the all-current method, and I think it translates assets at the current rate, which might lead to a gain since the spot rate increased.

upvoted 0 times

...

Helga

6 months ago

I'm a bit unsure about this one. The exchange rate information and balance sheet details seem straightforward, but I want to make sure I'm applying the all-current method correctly. I'll need to take my time and double-check my work.

upvoted 0 times

...

Herminia

6 months ago

This looks like a straightforward application of the all-current method. I'm confident I can work through this and determine whether the translation impact will be a gain or loss, and where it will be reported.

upvoted 0 times

...

Bobbye

6 months ago

I think the key here is understanding how the all-current method works and how it differs from the temporal method. I'll need to refresh my memory on those foreign currency translation concepts.

upvoted 0 times

...

Ruthann

6 months ago

Okay, let's see. The spot rate increased from $0.35 to $0.45 per Rho, so that suggests a potential translation gain. But I'll need to work through the calculations to be sure.

upvoted 0 times

...

Roosevelt

6 months ago

Hmm, this seems like a tricky one. I'll need to carefully review the exchange rate information and the balance sheet details to determine how the all-current method will impact the translation gain or loss.

upvoted 0 times

...

Erick

11 months ago

Ah, the age-old dilemma of foreign currency translation. Option A seems like the way to go - a gain on the balance sheet. Although, if I had a Rho for every time I got tripped up by these exchange rate questions, I'd be a rich man!

upvoted 0 times

Kaycee

9 months ago

Definitely, a gain on the balance sheet seems like the right answer here.

upvoted 0 times

...

Galen

9 months ago

I'm leaning towards option A as well, it just makes sense.

upvoted 0 times

...

Cristy

9 months ago

I think so too, it's always tricky dealing with foreign currencies.

upvoted 0 times

...

Ula

9 months ago

I agree, option A seems like the most logical choice.

upvoted 0 times

...

Penney

11 months ago

I'm not sure about this one. The question seems to be trying to trip us up with the different exchange rates. But I think the correct answer is A - gain on the balance sheet. Who knows, maybe the exam writers just have a twisted sense of humor.

upvoted 0 times

Angelo

10 months ago

Let's go with A - gain on the balance sheet.

upvoted 0 times

...

Kelvin

10 months ago

I agree, the question does seem tricky with the exchange rates.

upvoted 0 times

...

Shawna

10 months ago

I think you're right, A seems like the correct answer.

upvoted 0 times

...

Cruz

11 months ago

Hmm, this is a tricky one. I'm going to go with option A - gain on the balance sheet. The question mentions the all-current method, and that usually means gains or losses are reported on the balance sheet, not the income statement.

upvoted 0 times

Nieves

10 months ago

Yes, option A is the most likely answer. The balance sheet is where we would see the translation gain or loss under the all-current method.

upvoted 0 times

...

Alline

10 months ago

I agree, option A makes sense. It's important to remember the differences in reporting between the balance sheet and income statement when dealing with foreign operations.

upvoted 0 times

...

Geoffrey

10 months ago

I think you're right, option A seems like the best choice. The balance sheet is where translation gains or losses are usually reported with the all-current method.

upvoted 0 times

...

Arlean

12 months ago

I'm not sure about this. Can someone explain why there would be a gain on the income statement with the all-current method?

upvoted 0 times

...

Solange

12 months ago

The all-current method will result in a translation gain, which should be reported on the balance sheet. The question clearly states that the spot rate on 12/31/08 is higher than the spot rate on 1/01/08, indicating a gain in the value of the Rho.

upvoted 0 times