Solution manual Advanced Accounting 9e by Hoyle - Accounting | Trường Đại học Hà Nội

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FIND MORE SLIDES, EBOOKS, SOLUTION MANUAL AND TESTBANK ON WWW.DOWNLOADSLIDE.COM CHAPTER 10 TRANSLATION OF FOREIGN
CURRENCY FINANCIAL STATEMENTS Chapter Outline I.
In today's global economy, many companies have invested in operations in foreign countries.
A. In preparing consolidated financial statements on a worldwide basis, the foreign
currency accounts prepared by foreign operations must be restated into the parent company's reporting currency.
B. There are two major issues related to the translation of foreign currency financial statements.
1. Which method should be used?
2. How should the resulting translation adjustment be reported on the consolidated financial statements?
C. Translation methods differ on the basis of which accounts are translated at the current
exchange rate and which are translated at a historical exchange rate. Translating
accounts at the current exchange rate creates a translation adjustment.
D. Historical y, accountants have experimented with a number of different translation
methods. The dominant methods currently in use are the temporal method and the current rate method.
E. Translation adjustments can be either (1) reported as a gain or loss in income or (2)
deferred in the stockholders' equity section of the balance sheet.
II. The primary objective of the temporal method is to maintain the underlying valuation method
used by the foreign entity to account for its assets and liabilities.
A. Assets and liabilities carried at current or future value are translated at the current
exchange rate. Assets and liabilities carried at cost and stockholders' equity items are
translated at a historical exchange rate.
B. By translating some assets at the current exchange rate and others at historical rates the
temporal method distorts financial ratios calculated in the foreign currency.
C. Most income statement items are translated at average-for-the-period rates. However,
cost-of-goods-sold, depreciation, and amortization expense are translated at relevant historical exchange rates.
D. Balance sheet exposure under the temporal method is defined as cash, marketable
securities, and receivables minus total liabilities. A net liability exposure often exists.
1. When a liability balance sheet exposure exists, depreciation of the foreign currency
results in a positive translation adjustment (gain) and appreciation of the foreign
currency results in a negative translation adjustment (loss).
2. Reporting a translation loss when the foreign currency appreciates is thought to be
inconsistent with economic reality.
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III. With the current rate method, the net investment in a foreign operation is considered to be
exposed to foreign exchange risk.
A. Assets and liabilities are translated at the current exchange rate; equity is translated at historical rates.
B. Translating assets which are carried at cost using the current exchange rate results in a
translated value which is not readily interpretable; it is neither a current value nor a historical cost.
C. However, translating al assets at the current rate does maintain underlying ratios and
relationships that exist in the foreign currency statements.
D. Revenues and expenses which occur evenly throughout the period are translated at the
average-for-the-period exchange rate. Income items, such as gains and losses, which
are the result of a discrete event, are translated at the actual exchange rate on the date of occurrence.
E. Balance sheet exposure under the current rate method is equal to the foreign entity's net assets (stockholders' equity).
1. Appreciation in the foreign currency results in a positive translation adjustment
(gain); depreciation results in a negative translation adjustment (loss).
IV. FASB Statement No. 52 provides guidelines for the translation of foreign currency financial
statements by U.S.-based multinational corporations. The appropriate translation method and
disposition of translation adjustment depends upon the functional currency of the foreign entity.
A. The functional currency is the primary currency of the foreign entity's operating
environment. It can be either the U.S. dol ar or a foreign currency.
1. SFAS 52 lists six indicators that are to be used in determining an entity's functional
currency. There are no guidelines as to how these indicators are to be weighted.
B. If a foreign currency is the functional currency, the foreign entity's financial statements
are "translated" using the current rate method and the resulting translation adjustment is
reported as a separate component of equity. The average-for-the-period exchange rate
is used to translate the foreign entity's income statement.
1. Upon the sale or liquidation of a specific foreign entity, the cumulative translation
adjustment related to that entity is taken to income as an adjustment to the gain or loss on sale or liquidation.
C. If the U.S. dol ar is the functional currency, foreign currency financial statements are
"remeasured" using the temporal method with "remeasurement" gains and losses reported in operating income.
D. If a foreign entity operates in a highly inflationary economy (cumulative three-year inflation
greater than 100%), its financial statements are remeasured into U.S. dol ars using the
temporal method and remeasurement gains and losses are reported in income.
V. Some companies hedge the balance sheet exposures of their foreign entities so as to avoid
adverse effects on income and/or stockholders' equity.
A. SFAS 133 refers to this as a hedge of a net investment in a foreign operation and stipulates
that gains and losses on hedging instruments used in this manner should be treated in the
same fashion as the translation adjustment (remeasurement gain/loss) being hedged.
B. The paradox of hedging balance sheet exposure is that by avoiding a translation adjustment
(remeasurement gain/loss), realized foreign exchange gains and losses can arise.
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Having completed Chapter 10 of this textbook, "Translation of Foreign Currency Financial
Statements," students should be able to fulfil each of the fol owing learning objectives:
1. Describe the procedures of the current rate and temporal methods of translation.
2. Understand the method by which the retained earnings balance of a foreign subsidiary is translated.
3. Discuss the theoretical underpinnings and limitations of the current rate and temporal methods.
4. Understand balance sheet exposure and explain how it differs from transaction exposure to foreign exchange risk.
5. Discuss SFAS 52 guidelines as to when foreign currency financial statements are to be
"translated" using the current rate method and when they are to be "remeasured" using the temporal method.
6. Translate a foreign subsidiary's financial statements into its parent's reporting currency using
the guidelines of SFAS 52.
7. Determine the amount and placement of the translation adjustment that is reported as a
result of the translation process.
8. Remeasure a foreign subsidiary's financial statements using the guidelines of SFAS 52 and
calculate the associated remeasurement gain or loss.
9. Explain the reason for using the temporal method to translate financial statements of
operations in highly inflationary environments.
10. Understand the rationale for hedging a net investment in a foreign operation and describe
the treatment of gains and losses on forward contracts used for this purpose.
11. Prepare a consolidation worksheet for a parent and its foreign subsidiary.
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Answer to Discussion Question How Do We Report This?
This case represents the ongoing debate as to the proper reporting of foreign currency
balances. Southwestern has invested the equivalent of $30,000 (150,000 vilseks) in each of
three assets. The relative value of the vilsek has now changed. Thus, 150,000 vilseks now can
be converted into $34,500. However, the subsidiary does not have vilseks--only land, inventory,
and investments. Although the current exchange rate is given, the company has no apparent
plans to convert its assets into dol ars. Instead, these three assets are being held, each with a
historical cost of 150,000 vilseks. Under the temporal method, these assets (except for the
investments if carried at market value) would be reported in the parent's balance sheet at the
original cost of $30,000. Unfortunately, as the Finance Director points out, an old, outdated rate
is being utilized if the $30,000 figure is reported. (Of course, given that prices tend to change
over time, the same can be said for any asset reported at historical cost.)
Conversely, the current rate method requires that each of the three assets be reported at
$34,500 based on the current exchange rate. As the control er indicates, though, $34,500 was
not the original cost expended by Southwestern. In addition, using the current rate means that
each of the assets wil constantly report a "floating" value, one that wil change with each
exchange rate fluctuation. Final y, the $34,500 figure is based on the current value of the vilsek
($.23) and the historical cost in vilseks (150,000 vilseks) for the three assets. The current
exchange rate is only significant if the assets are sold with the proceeds being converted into
U.S. dol ars. Since an imminent sale is not indicated, the validity of reporting the $34,500 might
again be questioned. In addition, even if the assets were sold, $34,500 does not accurately
reflect the proceeds in U.S. dol ars because 150,000 vilseks is the historical cost and not the
current market value of each of these assets.
As a classroom exercise or written assignment, students could be required to select a reported value
for each of the three assets and then defend their position. What figure is actually the fairest
representation of each of the three assets? What figure is the best conveyor of information to an
outside party? There is no single best answer to these questions. The purpose of this type of
exercise is to force students to consider the objectives of financial reporting. Students should not just
assume that the current official pronouncement is correct. One possible approach to the case is to
assign several students to represent banks or stockholders and discuss the types of information that
is most needed by these users. Another group of students can take the position of the company
responsible for preparing the information and discuss management's preference for providing one
type of information over another. Yet another group could take a purely theoretical approach and
discuss the goals that accounting has attempted to reach. Although a final resolution may not be
achieved, some excel ent class discussion is possible.
The temporal and current rate methods of translation differ primarily with regard to the exchange
rate used to translate those assets that are reported at historical cost--inventories, prepaids,
fixed assets, and intangibles. The debate regarding the appropriate exchange rate for
translating assets exists only because some assets are reported at historical cost. If al assets
were reported at their current value, there would be no need to use the historical exchange rate
for translating assets in order to maintain the asset's historical cost in U.S. dol ar terms. Al
assets would be translated at the current exchange rate. The differences between the temporal
method and current rate method would disappear.
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1. The two major issues related to the translation of foreign currency financial statements are:
(a) which method should be used and (b) where should the resulting translation adjustment
be reported in the consolidated financial statements. The first issue relates to determining
the appropriate exchange rate (historical, current, or average for the current period) for the
translation of foreign currency balances. Those items translated at the current exchange
rate are exposed to translation adjustment. The second issue relates to whether the
translation adjustment should be treated as a gain or loss in income, or should be deferred
as a separate component of stockholders’ equity.
2. Balance sheet exposure arises when a foreign currency balance is translated at the current
exchange rate. By translating at the current exchange rate, the foreign currency item in
essence is being revalued in U.S. dol ar terms on the consolidated financial statements.
There wil be either a net asset balance sheet exposure or net liability balance sheet
exposure depending upon whether assets translated at the current rate are greater or less
than liabilities translated at the current rate. Balance sheet exposure generates a translation
adjustment which does not result in an inflow or outflow of cash. Transaction exposure,
which results from the receipt or payment of foreign currency, generates foreign exchange
gains and losses which are realized in cash.
3. Although balance sheet exposure does not result in cash inflows and outflows, it does
nevertheless affect amounts reported in consolidated financial statements. If the foreign
currency is the functional currency, translation adjustments will be reported in
stockholders’ equity. If translation adjustments are negative and therefore reduce
total stockholders’ equity, there is an adverse (inflationary) impact on the debt to equity
ratio. Companies with restrictive debt covenants requiring them to stay below a maximum
debt to equity ratio, may find it necessary to hedge their balance sheet exposure so as to
avoid negative translation adjustments being reported. If the U.S. dol ar is the functional
currency or an operation is located in a high inflation country, remeasurement gains and
losses are reported in income. Companies might want to hedge their balance sheet
exposure in this situation to avoid the adverse impact remeasurement losses can have on
consolidated income and earnings per share.
The paradox in hedging balance sheet exposure is that, by agreeing to receive or deliver
foreign currency in the future under a forward contract, a transaction exposure is created.
This transaction exposure is speculative in nature, given that there is no underlying inflow or
outflow of foreign currency that can be used to satisfy the forward contract. By hedging
balance sheet exposure, a company might incur a realized foreign exchange loss to avoid
an unrealized negative translation adjustment or unrealized remeasurement loss.
4. The gains and losses arising from financial instruments used to hedge balance sheet exposure
are treated in a similar manner as the item the hedge is intended to cover. If the foreign currency
is the functional currency, gains and losses on hedging instruments wil be taken to other
comprehensive income. If the U.S. dol ar is the functional currency, gains and losses on the
hedging instruments wil be offset against the related remeasurement gains and losses.
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5. The major concept underlying the temporal method is that the translation process should result
in a set of translated U.S. dol ar financial statements as if the foreign subsidiary’s transactions
had actual y been carried out using U.S. dol ars. To achieve this objective, assets carried at
historical cost and stockholders’ equity are translated at historical exchange rates;
assets carried at current value and liabilities (carried at current value) are translated at the
current exchange rate. Under this concept, the foreign subsidiary’s monetary assets and
liabilities are considered to be foreign currency cash, receivables, and payables of the parent
which are exposed to transaction risk. For example, if the foreign currency appreciates, then the
foreign currency receivables increase in U.S. dol ar value and a gain is recognized. Balance
sheet exposure under the temporal method is analogous to the net transaction exposure which
exists from having both receivables and payables in a particular foreign currency.
The major concept underlying the current rate method is that the entire foreign investment is
exposed to foreign exchange risk. Therefore al assets and liabilities are translated at the
current exchange rate. Balance sheet exposure under this concept is equal to the net investment.
6. The Retained Earnings balance is created by a multitude of transactions: al revenues,
expenses, gains, losses, and dividends since the company’s inception. Identifying each
component of this account (so that a separate translation can be made) would be virtual y
impossible. Therefore, in the initial year that Statement 52 was applied, the ending balance
calculated under Statement 8 was merely brought forward. Thereafter, the ending balance
translated each year for retained earnings becomes the beginning figure to be reported for the fol owing year.
7. The major differences relate to non-monetary assets carried at historical cost and related
expenses, i.e., inventory and cost of goods sold; property, plant, and equipment and
depreciation expense; and intangible assets and amortization expense. Under the temporal
method, these items are al translated at historical exchange rates. Under the current rate
method, the assets are translated at the current exchange rate and the related expenses are
translated at the average exchange rate for the current period.
8. The functional currency is the currency of the subsidiary’s primary economic
environment. It is usual y identified as the currency in which the company generates and
expends cash. SFAS 52 recommends that several factors such as the location of primary
sales markets, sources of materials and labor, the source of financing, and the amount of
intercompany transactions should be evaluated in identifying an entity’s functional
currency. SFAS 52 does not provide any guidance as to how these factors are to be
weighted (equal y or otherwise) when identifying an entity’s functional currency.
9. The foreign subsidiary's net asset position in foreign currency at the beginning of the period
is first determined. Changes in net assets are determined to explain the net asset balance in
foreign currency at the end of the period. The beginning net asset position and changes in
net assets are translated at appropriate exchange rates and the ending net asset position in dol ars is determined.
The ending net asset balance in foreign currency is then translated at the current rate and this
result is subtracted from the ending net asset position in dol ars (already calculated). The
difference is the translation adjustment. It is positive if the actual dol ar net asset position is less
than the net asset position based on the current exchange rate. The translation adjustment is
negative if the actual dol ar net asset position is greater than if translated at the current rate.
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10. One theory mentioned by the FASB identifies the translation adjustment as a measure of
unrealized increases and decreases that have occurred in the value of the foreign subsidiary
because of exchange rate changes. A second theory argues that this adjustment is no more
than a mechanical y derived number that must be included to keep the balance sheet in
equilibrium although the figure has no intrinsic meaning. The FASB did not indicate in
Statement 52 that either theory is considered more appropriate.
11. Remeasurement is required in two situations:
a. The U.S. dol ar is the functional currency.
b. The foreign subsidiary operates in a highly inflationary country.
Translation is required when a foreign currency is the functional currency.
Remeasurement is carried out using the temporal method, with remeasurement gains and
losses reported in consolidated income. Translation is done using the current rate method and the
resulting translation adjustment is carried as a separate component of stockholders’ equity.
12. The temporal method must be used to remeasure the financial statements of operations in highly
inflationary countries. One reason for mandating the use of the temporal method is that it avoids
the disappearing plant problem that exists when the current rate method is used. Under
the current rate method, fixed assets are translated at current exchange rates. With high rates of
inflation, the foreign currency wil depreciate significantly. When the historical cost of fixed
assets is translated at a significantly lower current exchange rate, the dol ar value of fixed
assets “disappears.” This problem is avoided by translating at the historical exchange
rate as is done under the temporal method.
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4. B Because the peso is the functional currency, the financial statements must be
translated using the current rate method. Therefore, answers a and d can be
eliminated. Because the subsidiary has a net asset position and the peso has
appreciated from $.16 to $.19, a positive translation adjustment will result.
5. A All asset accounts are translated at current rates.
6. A Because the foreign currency is the functional currency, a translation is
required. All assets accounts are translated at current rates.
7. C Because the U.S. dollar is the functional currency, a remeasurement is
required. All receivables are remeasured at current rates. Assets carried at
historical cost, such as prepaid insurance and goodwill, are remeasured at historical rates.
8. B The foreign currency is the functional currency, so a translation is
appropriate. All assets (including inventory) are translated at the current
exchange rate [100,000 x $.17].
9. C Cost of goods sold is translated at the exchange rate in effect at the date of
accounting recognition, which is the date the goods were sold [100,000 x $.18].
10. D The foreign currency is the functional currency, so a translation is
appropriate. All assets are translated at the current exchange rate of $.19.
11. C The U.S. dollar is the functional currency, so a remeasurement is
appropriate. Inventory (carried at cost) is remeasured at the historical
exchange rate of $.16. Marketable equity securities (carried at market value)
are remeasured at the current exchange rate of $.19.
12. C Beginning inventory
FCU 200,000 x $1.00 = $ 200,000 Purchases
10,300,000 x $0.80 = 8,240,000 Ending inventory (500,000) x $0.75 = (375,000) Cost of goods sold FCU 10,000,000 $8,065,000
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13. C Beginning net assets, 1/1………….. P20,000 x $.15 = $ 3,000 Increase in net assets:
Income ........................................ 10,000 x $.19 = 1,900
Ending net assets, 12/31 ................. P30,000 $ 4,900 Ending net assets at
current exchange rate ................ P30,000 x $.21 = $ 6,300
Translation Adjustment (positive) . $(1,400)
14. C By translating items carried at historical cost by the historical exchange
rate, the temporal method maintains the underlying valuation method used
by the foreign subsidiary.
15. A Beginning net monetary assets, 1/1 P100,000 x $.16 = $16,000
Increases in net monetary assets:
Sale of inventory ........................ 50,000 x $.20 = 10,000
Decreases in net monetary assets:
Purchase of equipment ............. (60,000) x $.16 = (9,600)
Purchase of inventory ............... (30,000) x $.18 = (5,400)
Transfer to parent ...................... (10,000) x $.21 = (2,100)
Ending net monetary assets, 12/31 P 50,000 $ 8,900
Ending net monetary assets at
the current exchange rate ......... P 50,000 x $.22 = (11,000)
Remeasurement gain ...................... $(2,100)
16. C Marketable equity securities are carried at market value and therefore
translated at the current exchange rate under the temporal method.
17. B When the U.S. dollar is the functional currency, SFAS 52 requires
remeasurement using the temporal method with remeasurement gains and
losses reported in income.
18. B Wages payable is translated at the current exchange rate.
19. C Gains and losses on hedges of net investments (whether through a forward
contract, borrowing, or other technique) are offset against the translation
adjustment being hedged.
20. D Remeasurement gains are reported in the income statement as a part of
income from continuing operations.
21.(10 minutes) (Specify appropriate rates for a translation)
Rent expense—use actual (historical) rate at time of recording. Rent expense
would often be recorded evenly throughout the year so that an average rate
for the period is acceptable.
Dividends paid—use historical rate at time of recording, the date of declaration.
Equipment—as an asset, use current rate at the balance sheet date.
Notes payable—as a liability, use current rate at the balance sheet date.
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Sales—use actual (historical) rate at time of recording. Sales often occur
evenly throughout the year so that an average rate is acceptable. However, if
sales are more prevalent at a particular time during the year, historical rates should be used.
Depreciation expense—use historic rate at time of recording. In most cases,
average rate for the year is acceptable, because depreciation occurs evenly
throughout the year. Depreciation is recorded at year-end only as a matter of convenience.
Cash—as an asset, use the current rate at the balance sheet date.
Accumulated depreciation—as a contra-asset account, use the current ex-
change rate at the balance sheet date.
Common stock—as an equity account, use historic rate at time of recording, the date of issuance.
22. (5 minutes) (Determine translated values)
As a translation, both the asset (inventory) and the liability (accounts
payable) utilize the current exchange rate at the balance sheet date
(December 31). Thus, the translated values are as follows:
Inventory LCU120,000 x 25% left = LCU30,000 x 1/3.0 = $10,000 Accounts
payable LCU120,000 x 40% unpaid = LCU48,000 x 1/3.0 = $16,000
23. (10 minutes) (Determine translation and remeasurement rates) Translation Remeasurement Accounts payable $.16 C $.16 C Accounts receivable $.16 C $.16 C
Accumulated depreciation $.16 C $.26 H Advertising expense $.19 A $.19 A Amortization expense $.19 A $.25 H Buildings $.16 C $.26 H Cash $.16 C $.16 C Common stock $.28 H $.28 H Depreciation expense $.19 A $.26 H Dividends paid (10/1) $.20 H $.20 H Notes payable $.16 C $.16 C Patents (net) $.16 C $.25 H Salary expense $.19 A $.19 A Sales $.19 A $.19 A
* C = current rate, H = historical rate, A = average rate
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24. (20 minutes) (Calculate translation adjustment and remeasurement gain/loss
and explain their economic relevance)
The translation adjustment and remeasurement gain/loss can be determined
as the plug figure that keeps the dollar balance sheet in balance: Translation Remeasurement CHF Rate US$ Rate US$
Cash ............................ 500,000 $.75 C 375,000 $.75 C 375,000
Inventory..................... 1,000,000 $.75 C 750,000 $.70 H 700,000
Fixed assets ............... 3,000,000 $.75 C 2,250,000 $.70 H 2,100,000
Total assets ............... 4,500,000 3,375,000 3,175,000
Notes payable ............. 800,000 $.75 C 600,000 $.75 C 600,000
Owners equity ............ 3,700,000 $.70 H 2,590,000 $.70 H 2,590,000 Translation adjustment 185,000 Retained earnings (remeasurement loss) (15,000)
Total ......................... 4,500,000 3,375,000 3,175,000
Alternatively, the translation adjustment and remeasurement loss can be
calculated by analyzing the subsidiary’s balance sheet exposure: Translation
Beginning net assets, 12/1 CHF3,700,000 x $.70 = $2,590,000
Ending net assets, 12/31 at current exchange rate CHF3,700,000 x $.75 = (2,775,000)
Translation adjustment (positive) $( 185,000) Remeasurement Beginning net monetary
liability position, 12/1 CHF(300,000) x $.70 = $(210,000)
Ending net monetary liability
position, 12/31 at current exchange rate CHF(300,000) x $.75 = (225,000) Remeasurement loss $ 15,000
Economic Relevance of Translation Adjustment
The translation adjustment increases stockholders’ equity by $185,000. The positive
translation adjustment arises because the Swiss subsidiary has a net asset position
of CHF3,700,000 and the Swiss franc appreciates by $.05 [CHF3,700,000 x $.05 =
$185,000]. The positive translation adjustment is not realized in terms of dollar cash
flow. It would be a realized gain only if Stephanie sold this operation on December
31 for exactly CHF3,700,000 and converted the sales proceeds into dollars at the
current exchange rate of $.75 per Swiss franc.
Economic Relevance of Remeasurement Loss
The remeasurement loss arises because the Swiss subsidiary has a net monetary
liability position of CHF300,000 (Cash of CHF500,000 less Notes payable of
CHF800,000) and the Swiss franc has appreciated by $.05 [CHF300,000 x $.05 =
$15,000]. The loss is unrealized. It would be realized only if the Swiss subsidiary
converted its Swiss franc cash into dollars at December 31, thereby realizing a
transaction gain of $25,000 [CHF500,000 x ($.75-$.70)], and the parent paid off the
Swiss franc note payable using U.S. dollars, thereby realizing a transaction loss of
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$40,000 [CHF800,000 x ($.75-$.70)]. (The note could have been paid at December 18
for $560,000 [CHF800,000 x $.70]. At December 31, it takes $600,000 to pay off the
note [CHF800,000 x $.75].)
25. (30 minutes) (Prepare financial statements for a foreign subsidiary and then
translate them into U.S. dollars)
Fenwicke Company Subsidiary Income Statement LCU U.S. Dollars Rent revenue 60,000 x $1.90 A = $114,000 Interest expense (10,000) x $1.90 A = (19,000) Depreciation expense (14,000) x $1.90 A = (26,600) Repair expense (4,000) x $1.85*H = (7,400) Net income 32,000 $ 61,000
* Repair expense is the only expense not incurred evenly throughout the year. Statement of Retained Earnings LCU U.S. Dollars Retained earnings, 1/1 -0- -0- Net income 32,000 (above) $61,000 Dividends paid (5,000) x $1.80 H = (9,000)
Retained earnings, 12/31 27,000 $52,000 Balance Sheet LCU U.S. Dollars Cash 41,000 x $1.80 C = $ 73,800 Accounts receivable 10,000 x $1.80 C = 18,000 Building 140,000 x $1.80 C = 252,000
Accumulated depreciation (14,000) x $1.80 C = (25,200) Total assets 177,000 $318,600 Interest payable 10,000 x $1.80 C = $ 18,000 Note payable 100,000 x $1.80 C = 180,000 Common stock 40,000 x $2.00 H = 80,000 Retained earnings 27,000 (above) 52,000 Translation adjustment (below) (11,400)
Total liabilities and equities 177,000 $318,600
Computation of Translation Adjustment Beginning net assets -0- -0- Increase in net assets: Issued common stock 40,000 x $2.00 = $ 80,000 Net income 32,000 (above) 61,000 Decrease in net assets: Dividends paid (5,000) x $1.80 = (9,000) Ending net assets 67,000 $132,000
Ending net assets at current exchange rate 67,000 x $1.80 = 120,600
Translation adjustment (negative) $ 11,400
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26. (30 minutes) (Prepare a statement of cash flows for a foreign subsidiary and
then translate it into U.S. dollars)
Fenwicke Company Subsidiary Statement of Cash Flows LCU U.S. Dollars Operating Activities: Net income 32,000 (from prob 25) $ 61,000 plus: depreciation 14,000 x $1.9 A = 26,600
less: increase in accounts receivable (10,000) x $1.9 A = (19,000)
plus: increase in interest payable 10,000 x $1.9 A = 19,000
Cash flow from operations 46,000 87,600 Investing Activities: Purchase of building (140,000) x $2.0 H = (280,000) Financing Activities: Sale of common stock 40,000 x $2.0 H = 80,000 Borrowing on note 100,000 x $2.0 H = 200,000 Dividends paid (5,000) x $1.8 H = (9,000) 135,000 271,000 Increase in cash 41,000 78,600
Effect of exchange rate change on cash (4,800) Cash, 1/1 -0- -0- Cash, 12/31 41,000 x $1.80 C = $ 73,800
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27. (25 minutes) (Compute translation adjustment and remeasurement gain or loss)
a. Translation—only changes in net assets have an impact on the computation
of the translation adjustment. Net asset balance 1/1 KM30,000 x $.32 = $ 9,600
Increases in net assets (income):
Sold inventory at a profit 5/1 5,000 x $.34 = 1,700 Sold land at a gain 6/1 1,000 x $.35 = 350
Decreases in net assets: Paid a dividend 12/1 (3,000) x $.41 = (1,230) Depreciation recorded (2,000) x $.37 = ( 740) Net asset balance 12/31 KM31,000 $ 9,680 Net asset balance 12/31
at current exchange rate KM31,000 x $.42 = (13,020)
Translation adjustment—positive $(3,340)
b. Remeasurement—only changes in net monetary assets and liabilities have an
impact on the computation of the remeasurement gain. Beginning net monetary liability position KM (3,000) x $.32 = $ ( 960)
Increases in monetary assets: Sold inventory 5/1 15,000 x $.34 = 5,100 Sold land 6/1 5,000 x $.35 = 1,750
Decreases in monetary assets: Bought inventory 10/1 (12,000) x $.39 = (4,680) Bought land 11/1 (4,000) x $.40 = (1,600) Paid a dividend 12/1 (3,000) x $.41 = (1,230)
Ending net monetary liability position KM(2,000) $(1,620)
Ending net monetary liability position
at current exchange rate KM(2,000) x $.42 = (840) Remeasurement gain $ (780)
Note: The purchase of land on account did not result in a decrease in
monetary assets, rather an increase in monetary liabilities. Payment on the
note payable and collection of accounts receivable do not affect the net
monetary liability position.
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28. (20 minutes) (Compute translation adjustment and remeasurement gain or loss)
a. The translation adjustment is based on changes in the net assets of the subsidiary. Net assets, 1/1 82,000 LCU x $.24 = $19,680 Changes in net assets Rendered services 30,000 LCU x $.25 = 7,500 Incurred expense (18,000) LCU x $.26 = (4,680) Net assets, 12/31 94,000 LCU 22,500 Net assets, 12/31 at current exchange rate 94,000 LCU x $.29 = 27,260
Translation adjustment (positive) $(4,760)
b. The remeasurement gain or loss is based on changes in the net monetary
assets of the subsidiary.
Net monetary assets, 1/1 22,000 LCU x $.24 = $ 5,280
Changes in net monetary assets Rendered services 30,000 LCU x $.25 = 7,500 Incurred expense (18,000) LCU x $.26 = (4,680)
Net monetary assets, 12/31 34,000 LCU $ 8,100
Net monetary assets, 12/31 at current exchange rate 34,000 LCU x $.29 = 9,860 Remeasurement gain $(1,760)
c. Translated value of land 60,000 LCU x $.29 = $17,400
Remeasured value of land 60,000 LCU x $.23 = $13,800
29. (10 minutes) (Determine the appropriate exchange rate) Account (a) Translation (b) Remeasurement Sales 20 A 20 A Inventory 22 C 19 H Equipment 22 C 13 H Rent expense 20 A 20 A Dividends 21 H 21 H Notes receivable 22 C 22 C
Accumulated depreciation--equipment 22 C 13 H Salary payable 22 C 22 C Depreciation expense 20 A 13 H
C = current exchange rate, A = average exchange rate, H = Historical exchange rate
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30. (30 minutes) (Hedge of balance sheet exposure)
a. Net assets, 1/1 (132,000 – 54,000) 78,000 kites x $0.80 = $62,400 Change in net assets: Net income 26,000 kites x $0.77 = 20,020 Dividends, 3/1 (5,000) kites x $0.78 = (3,900) Dividends, 10/1 (5,000) kites x $0.76 = (3,800) Net assets, 12/31 94,000 kites $74,720 Net assets at current exchange rate, 12/31 94,000 kites x $0.75 = 70,500
Translation adjustment (negative) $ 4,220
b. Forward contract journal entries 10/1 No entry 12/31
Forward Contract . . . . . . . . . . . . . . . . . 2,000
Translation Adjustment (positive) .. 2,000
(To record the change in the value of the forward contract as an
adjustment to the translation adjustment)
Foreign Currency (kites) . . . . . . . . . . . 150,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . 150,000
(To record the purchase of 200,000 kites at the spot rate of $.75)
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . 152,000
Foreign Currency (kites) ................. 150,000
Forward Contract . . . . . . . . . . . . . . 2,000
(To record delivery of 200,000 kites, receipt of $152,000, and
close the forward contract account.)
c. The net negative translation adjustment (debit balance) to be reported in
other comprehensive income at 12/31 is $2,220 ($4,220 – $2,000).
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31. (45 minutes) (Translation and remeasurement of foreign subsidiary trial balance)
a. Translation of Subsidiary Trial Balance Debits Credits
Cash…………………………………. 8,000 KQ x 1.62 $12,960
Accounts Receivable…………….. 9,000 KQ x 1.62 14,580
Equipment………………………….. 3,000 KQ x 1.62 4,860
Accumulated Depreciation……… 600 KQ x 1.62 $ 972
Land………………………………… 5,000 KQ x 1.62 8,100
Accounts Payable………………… 3,000 KQ x 1.62 4,860
Notes Payable…………………….. 5,000 KQ x 1.62 8,100
Common Stock…………………… 10,000 KQ x 1.71 17,100
Dividends Paid……………………. 4,000 KQ x 1.66 6,640
Sales………………………………… 25,000 KQ x 1.64 41,000
Salary Expense…………………… 5,000 KQ x 1.64 8,200
Depreciation Expense…………… 600 KQ x 1.64 984
Miscellaneous Expense…………. 9,000 KQ x 1.64 14,760 $71,084
Translation Adjustment (negative) 948 $72,032 $72,032
Calculation of Translation Adjustment
Net assets, 1/1………………………….. -0- -0- Increase in net assets:
Common stock issued………………. 10,000 KQ x 1.71 $17,100
Sales……………………………………. 25,000 KQ x 1.64 41,000 Decrease in net assets:
Dividends paid……………………….. ( 4,000) KQ x 1.66 (6,640)
Salary expense……………………….. ( 5,000) KQ x 1.64 (8,200)
Depreciation expense………………. ( 600) KQ x 1.64 ( 984)
Miscellaneous expense ……………. ( 9,000) KQ x 1.64 (14,760)
Net assets, 12/31………………………. 16,400* KQ $27,516 Net assets, 12/31 at
current exchange rate……………. 16,400 KQ x 1.62 26,568
Translation adjustment (negative) $ 948
* This amount can be verified as ending assets (24,400 KQ) minus ending
liabilities (8,000 KQ) – net assets, 12/31 = 16,400 KQ.
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b. Remeasurement of Subsidiary Trial Balance Debits Credits Cash 8,000 KQ x 1.62 $12,960 Accounts Receivable 9,000 KQ x 1.62 14,580 Equipment 3,000 KQ x 1.71 5,130
Accumulated Depreciation 600 KQ x 1.71 $ 1,026 Land 5,000 KQ x 1.59 7,950 Accounts Payable 3,000 KQ x 1.62 4,860 Notes Payable 5,000 KQ x 1.62 8,100 Common Stock 10,000 KQ x 1.71 17,100 Dividends Paid 4,000 KQ x 1.66 6,640 Sales 25,000 KQ x 1.64 41,000 Salary Expense 5,000 KQ x 1.64 8,200 Depreciation Expense 600 KQ x 1.71 1,026 Miscellaneous Expense 9,000 KQ x 1.64 14,760 $71,246
Remeasurement loss (debit) 840 $72,086 $72,086
Calculation of Remeasurement Loss
Net monetary assets, 1/1 -0- -0-
Increase in net monetary assets: Common stock issued 10,000 KQ x 1.71 $17,100 Sales 25,000 KQ x 1.64 41,000
Decrease in net monetary assets: Acquired equipment
(3,000) KQ x 1.71 (5,130) Acquired land
(5,000) KQ x 1.59 (7,950) Dividends paid
(4,000) KQ x 1.66 (6,640) Salary expense
(5,000) KQ x 1.64 (8,200) Miscellaneous expense
(9,000) KQ x 1.64 (14,760)
Net monetary assets, 12/31 9,000* KQ $15,420
Net monetary assets, 12/31
at current exchange rate 9,000 KQ x 1.62 14,580
Remeasurement loss (debit) $ 840
* This amount can be verified as ending monetary assets (Cash +
Accounts receivable) minus ending monetary liabilities (Accounts
payable + Notes payable): 17,000 KQ – 8,000 KQ = 9,000 KQ.
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32. (30 minutes) (Translate the financial statements of a foreign subsidiary) LIVINGSTON COMPANY Income Statement
For Year Ending December 31, 2009 Goghs U.S. Dollars Sales 270,000 x 1/.63 = 428,571 Cost of Goods Sold
(155,000) x 1/.63 = (246,032) Gross Profit 115,000 182,539 Operating Expenses (54,000) x 1/.63 = (85,714)
Gain on Sale of Equipment 10,000 x 1/.58 = 17,241 Net Income 71,000 114,066
Statement of Retained Earnings
For Year Ending December 31, 2009 Goghs U.S. Dollars
Retained Earnings, 1/1/09 216,000 given 395,000 Net Income 71,000 above 114,066 Dividends Paid (26,000) x 1/.62 = (41,935)
Retained Earnings, 12/31/09 261,000 467,131 Balance Sheet December 31, 2009 Goghs U.S. Dollars Cash 44,000 x 1/.65 = 67,692 Receivables 116,000 x 1/.65 = 178,462 Inventory 58,000 x 1/.65 = 89,231 Fixed Assets (net) 339,000 x 1/.65 = 521,538 Total 557,000 856,923 Liabilities 176,000 x 1/.65 = 270,769 Common Stock 120,000 x 1/.48 = 250,000 Retained Earnings 261,000 above 467,131 Translation Adjustment (130,977) Total 557,000 856,923
Translation Adjustment Goghs U.S. Dollars Net assets, 1/1/09
336,000 x 1/.60 = 560,000 Net income, 2009 71,000 above 114,066 Dividends paid (26,000) above (41,935) Net assets, 12/31/09 381,000 632,131
Net assets at current exchange rate, 12/31/09
381,000 x 1/.65 = 586,154
Translation adjustment, 2009 (negative) 45,977
Cumulative translation adjustment, 1/1/09 (negative) 85,000
Cumulative translation adjustment, 12/31/09 (negative) 130,977
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33. (35 minutes) (Compute translation adjustment and remeasurement gain or
loss) a. Remeasurement Gain or Loss
Net monetary assets, 1/1/09* 2,000 KR x 2.50 = $ 5,000
Increases in net monetary assets:
Issued Common Stock (4/1/09) 10,000 KR x 2.60 = 26,000
Sold Building** (7/1/09) 22,000 KR x 2.80 = 61,600 Sales (2009) 80,000 KR x 2.70 = 216,000
Decreases in net monetary assets:
Purchased Equipment (4/1/09)
(30,000) KR x 2.60 = (78,000)
Paid Dividends (10/1/09)
(32,000) KR x 2.90 = (92,800) Rent Expense (2009)
(14,000) KR x 2.70 = (37,800) Salary Expense (2009)
(20,000) KR x 2.70 = (54,000)
Utilities Expense (2009)
( 5,000) KR x 2.70 = (13,500)
Net monetary assets, 12/31/09 13,000 KR $ 32,500
Net monetary assets, 12/31/09 at current exchange rate 13,000 KR x 3.00 = 39,000
Remeasurement gain (credit) $ (6,500)
* Net monetary assets: (Cash + Accounts Receivable) - (Account Payable + Bonds Payable)
* To determine cash proceeds from the sale of the building, changes in the
Accumulated Depreciation and Buildings accounts must be analyzed along
with Depreciation Expense and Gain on Sale of Building. Depreciation
expense is KR 15,000; KR 5,000 is attributable to equipment (Accumulated
Depreciation—Equipment increases by KR 5,000), KR 10,000 is depreciation
of buildings. Accumulated Depreciation—Buildings increases by only KR
5,000 during 2009, therefore, the accumulated depreciation related to the
building sold during 2009 is KR 5,000. The Buildings account is decreased by
KR 21,000, thus the book value of the building sold must have been KR
16,000 (as given). The Gain on Sale of Building is KR 6,000; therefore, cash
proceeds from the sale are KR 22,000.
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