Hoyle 11e Chapter 10

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McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2013© The McGraw-Hill Companies, Inc., 2013 Hoyle, Schaefer, Doupnik,

Hoyle, Schaefer, Doupnik, Advanced Accounting, Advanced Accounting,11/e 11/e 10-110-1 © 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any © 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any

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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.whole or part.

CHAPTER 10

CHAPTER 10 TRANSLATION OF FOREIGN

TRANSLATION OF FOREIGN

CURRENCY FINANCIAL STATEMENTS

Chapter Outline Chapter Outline I.

I. In today's In today's global economy, global economy, many companies many companies have invested in have invested in operations in foreignoperations in foreign countries.

countries. A.

A. In In preparing preparing consolidated consolidated financial financial statements statements on on a a worldwide worldwide basis, basis, the the foreignforeign currency accounts prepared by foreign operations must be restated into the parent currency accounts prepared by foreign operations must be restated into the parent company's reporting currency.

company's reporting currency.

B. There are two major issues related to the translation of foreign currency financial B. There are two major issues related to the translation of foreign currency financial

statements. statements. 1.

1. Which Which method method should should be be used?used? 2.

2. How should the resultiHow should the resulting translation adjustment be ng translation adjustment be reported on the consolidatedreported on the consolidated financial statements?

financial statements? C.

C. Translation methods differ Translation methods differ on the basis of which on the basis of which accounts are translated at the accounts are translated at the currentcurrent exchange rate

exchange rate and which and which are translated are translated at a at a historical exchistorical exchange rate. hange rate. TranslatingTranslating accounts at the current exchange rate creates

accounts at the current exchange rate creates a translation adjustment.a translation adjustment.

D. Historically, accountants have experimented with a number of different translation D. Historically, accountants have experimented with a number of different translation

methods.

methods. The dominant methods The dominant methods currently in uscurrently in use are the tee are the temporal method and mporal method and thethe current rate method.

current rate method. E.

E. Translation adjustments can be either (1) reported as a gain or loss iTranslation adjustments can be either (1) reported as a gain or loss in income or (2)n income or (2) deferred in the stockholders' equity section of the b

deferred in the stockholders' equity section of the b alance sheet.alance sheet. II.

II. The primary objectivThe primary objective of the tempoe of the temporal method is tral method is to maintain the underlyo maintain the underlying valuation methoding valuation method used by the foreign entity to

used by the foreign entity to account for its assets and liabilities.account for its assets and liabilities. A.

A. Assets Assets and and liabilities liabilities carried carried at at current current or or future future value value are are translated translated at at the the currentcurrent exchange rate.

exchange rate. Assets and liAssets and liabilities carried at cost abilities carried at cost and stockholders' eand stockholders' equity items arequity items are translated at a historical exchange rate.

translated at a historical exchange rate. B.

B. By translating some By translating some assets at the assets at the current exchange rate current exchange rate and others at hisand others at historical rates thetorical rates the temporal method distorts financial ratios calculated in

temporal method distorts financial ratios calculated in the foreign currency.the foreign currency. C.

C. Most income statement itMost income statement items are translated at average-for-the-period rates. Howevems are translated at average-for-the-period rates. However,er, cost-of-goods-sold, depreciation, and amortization expense are translated at relevant cost-of-goods-sold, depreciation, and amortization expense are translated at relevant historical exchange rates.

historical exchange rates. D.

D. Balance sheet exposure under the temporal method is deBalance sheet exposure under the temporal method is defined as cash, marketablefined as cash, marketable securities, and receivables minus

securities, and receivables minus total liabilities. total liabilities. A net liability exposure often exA net liability exposure often exists.ists. 1.

1. When a liability When a liability balance sheet exposure balance sheet exposure exists, depreciation exists, depreciation of the foreign of the foreign currencycurrency results in a positive translation adjustment (gain) and appreciation of the foreign results in a positive translation adjustment (gain) and appreciation of the foreign currency results in a negative translation

currency results in a negative translation adjustment (loss).adjustment (loss). 2.

2. Reporting a translation Reporting a translation loss when the loss when the foreign currency appreciates foreign currency appreciates is thought to is thought to bebe inconsistent with economic reality.

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III. With the current rate method, the net invWith the current rate method, the net investment in a foreign operation is considered to bestment in a foreign operation is considered to bee exposed to foreign exchange risk.

exposed to foreign exchange risk. A.

A. Assets and Assets and liabilities are liabilities are translated translated at the at the current exchange current exchange rate; rate; equity is equity is translated translated atat historical rates.

historical rates. B.

B. Translating assets wTranslating assets which are carried at chich are carried at cost using the cost using the current exchange rate results urrent exchange rate results in ain a translated value which is not readily interpretable; it is neither a current value nor a translated value which is not readily interpretable; it is neither a current value nor a historical cost.

historical cost. C.

C. However, translating all assHowever, translating all assets at the current ratets at the current rate does maintain underlying ratios ande does maintain underlying ratios and relationships that exist in the foreign

relationships that exist in the foreign currency statements.currency statements. D.

D. Revenues and expenses wRevenues and expenses which occur evenly throughout the period are trahich occur evenly throughout the period are translated at thenslated at the average-for-the-period exchange rate.

average-for-the-period exchange rate. Income items, sIncome items, such as gains uch as gains and losses, whichand losses, which are the result of a discrete event, are translated at the actual exchange rate on the date are the result of a discrete event, are translated at the actual exchange rate on the date of occurrence.

of occurrence. E.

E. Balance sheet exposure Balance sheet exposure under the current rate under the current rate method is equal method is equal to the foreign entityto the foreign entity's net's net assets (stockholders' equity).

assets (stockholders' equity). 1.

1. Appreciation in the foreign currency Appreciation in the foreign currency results in a positive tresults in a positive translation adjustmentranslation adjustment (gain); depreciation results in a

(gain); depreciation results in a negative translation adjustment (loss).negative translation adjustment (loss).

IV. FASB Accounting Standards Codification Topic 830, Foreign Currency Matters, (FASB ASC IV. FASB Accounting Standards Codification Topic 830, Foreign Currency Matters, (FASB ASC 830) provides guidelines for the translation of foreign currency financial statements by 830) provides guidelines for the translation of foreign currency financial statements by U.S.-based multinational

based multinational corporations. corporations. The appropriate The appropriate translation method translation method and disposition and disposition ofof translation adjustment depends upon the functional curr

translation adjustment depends upon the functional curr ency of the foreign entity.ency of the foreign entity. A.

A. The The functional functional currency currency is is the the primary primary currency currency of of the the foreign foreign entity's entity's operatingoperating environment.

environment. It can be eIt can be either the U.S. ither the U.S. dollar or a foreign dollar or a foreign currency.currency. 1.

1. U.S. GAAP lists U.S. GAAP lists six indicators six indicators that are to that are to be used in be used in determining an entity's determining an entity's functionalfunctional currency.

currency. There are no guidelines as to how thesThere are no guidelines as to how these indicators are to be weighted.e indicators are to be weighted. B.

B. If a foreign currency is If a foreign currency is the functional currency, the the functional currency, the foreign entity's financial foreign entity's financial statementsstatements are "translated" using the current rate method and the resulting translation adjustment is are "translated" using the current rate method and the resulting translation adjustment is reported as a sepa

reported as a separate component of rate component of equity. equity. The average-for-the-period exchange rateThe average-for-the-period exchange rate is used to translate the foreign

is used to translate the foreign entity's income statement.entity's income statement. 1.

1. Upon the sale or liquidation of a Upon the sale or liquidation of a specific foreign entity, tspecific foreign entity, the cumulative translationhe cumulative translation adjustment related to that entity is taken to income as an adjustment to the gain or adjustment related to that entity is taken to income as an adjustment to the gain or loss on sale or liquidation.

loss on sale or liquidation. C.

C. If the U.S. dollar is the functional currency, foreign currency financial sIf the U.S. dollar is the functional currency, foreign currency financial statements aretatements are "remeasured" using the temporal method with "remeasurement" gains and losses "remeasured" using the temporal method with "remeasurement" gains and losses reported in operating income.

reported in operating income.

D. If a foreign entity operates in a highly inflationary economy (cumulative three-year 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. dollars inflation greater than 100%), its financial statements are remeasured into U.S. dollars using the temporal method and remeasurement gains and losses are reported in using the temporal method and remeasurement gains and losses are reported in income.

income. V.

V. Some companies hedge the balance sheet exSome companies hedge the balance sheet exposures of their foreiposures of their foreign entities so as to avoidgn entities so as to avoid adverse effects on income and/or stockholders' equity.

adverse effects on income and/or stockholders' equity. A.

A. FASB FASB Accounting Accounting Standards Standards Codification Codification Topic Topic 815, 815, Derivatives Derivatives and and Hedging Hedging (FASB(FASB ASC

ASC 815) 815) refers refers to to this this as as a a hedge hedge of of a a net net investment investment in in a a foreign foreign operation operation andand stipulates that gains and losses on hedging instruments used in this manner should be 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) treated in the same fashion as the translation adjustment (remeasurement gain/loss) being hedged.

being hedged.

B. The paradox of hedging balance sheet exposure is that by avoiding a translation 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 adjustment (remeasurement gain/loss), realized foreign exchange gains and losses can arise.

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Answer to Discussion Question:

Answer to Discussion Question: How Do We Report This?How Do We Report This?

This case represents the ongoing debate as to the proper reporting of foreign currency 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 balances. Southwestern has invested the equivalent of $30,000 (150,000 vilseks) in each of three assets.

three assets. The relative vThe relative value of the vilsalue of the vilsek has now changed. ek has now changed. Thus, 150,000 vThus, 150,000 vilseks now canilseks now can be converted into $34,500.

be converted into $34,500. However, the subsidiary However, the subsidiary does not have vilseks--only land, does not have vilseks--only land, inventory,inventory, and investments. Although the current exchange rate is given, the company has no apparent and investments. Although the current exchange rate is given, the company has no apparent plans to convert its assets i

plans to convert its assets into dollars. nto dollars. Instead, these three assets aInstead, these three assets are being held, each with are being held, each with a historical cost of 150,00

historical cost of 150,000 vilseks. 0 vilseks. Under the temporal method, Under the temporal method, these assets (exthese assets (except for thecept for the investments if carried at market value) would be reported in the parent's balance sheet at 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 original cost of $30,000. Unfortunately, as the Finance Director points out, an old, outdated rate is being utilized if the

is being utilized if the $30,000 figure is reported. $30,000 figure is reported. (Of course, given that (Of course, given that prices tend to chanprices tend to changege over time, the same can be said for any asset reported at historical cost.)

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 Conversely, the current rate method requires that each of the three assets be reported at $34,500 based on the current

$34,500 based on the current exchange rate. exchange rate. As the controller indicatAs the controller indicates, though, $34,500 wes, though, $34,500 wasas not the original cost

not the original cost expended by Southwestern. expended by Southwestern. In addition, using the In addition, using the current rate means thacurrent rate means thatt each of the assets will constantly report a "floating" value, one that will change with each each of the assets will constantly report a "floating" value, one that will change with each exchange rate fluctuation.

exchange rate fluctuation. Finally, the $34,500 figure is Finally, the $34,500 figure is based on the current value of the based on the current value of the vilsekvilsek ($.23) and the historical c

($.23) and the historical cost in vilseks ost in vilseks (150,000 vilseks) for (150,000 vilseks) for the three assets. the three assets. The currentThe current exchange rate is only significant if the assets are sold with the proceeds being converted into exchange rate is only significant if the assets are sold with the proceeds being converted into U.S. dollars.

U.S. dollars. Since an imminent sale is Since an imminent sale is not indicated, the validinot indicated, the validity of reporting the $34,500 mightty of reporting the $34,500 might again be questioned.

again be questioned. In addition, even In addition, even if the assets wif the assets were sold, $34,500 does ere sold, $34,500 does not accuratelynot accurately reflect the proceeds in U.S. dollars because 150,000 vilseks is the historical cost and not the reflect the proceeds in U.S. dollars because 150,000 vilseks is the historical cost and not the current market value of each of

current market value of each of these assets.these assets. As a

As a classroom exercise or classroom exercise or written assignment, students written assignment, students could be could be required to required to select a select a reportedreported value for each of the

value for each of the three assets and then dethree assets and then defend their position. fend their position. What figure is actually What figure is actually thethe fairest representation

fairest representation of each of each of the three of the three assets? assets? What figure is What figure is the best the best conveyor ofconveyor of information

information to an to an outside outside party? party? There is There is no sno single best ingle best answer answer to to these questithese questions. ons. TheThe purpose of this type of exercise is to encourage students to consider the objectives of financial purpose of this type of exercise is to encourage students to consider the objectives of financial reporting.

reporting. Students should not just Students should not just assume that the assume that the current official pronouncement current official pronouncement is correct.is correct. One possible approach to the case is to assign several students to represent banks or One possible approach to the case is to assign several students to represent banks or stockholders and discuss the ty

stockholders and discuss the types of information that is pes of information that is most needed by these users. most needed by these users. AnotherAnother group of students can take the position of the company responsible for preparing the information group of students can take the position of the company responsible for preparing the information and discuss management's

and discuss management's preference for provpreference for providing one type oiding one type of information ovf information over another. er another. YetYet another group could take a purely theoretical approach and discuss the goals that accounting another group could take a purely theoretical approach and discuss the goals that accounting has attempted to reach.

has attempted to reach. Although a final resolution may Although a final resolution may not be achieved, some exnot be achieved, some excellent classcellent class discussion is possible.

discussion is possible.

The temporal and current rate methods of translation differ primarily with regard to the exchange 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, rate used to translate those assets that are reported at historical cost--inventories, prepaids, fixed assets

fixed assets, and , and intangibles. intangibles. The debate The debate regarding the regarding the appropriate exchange appropriate exchange rate forate forr translating assets exis

translating assets exists only because some assts only because some assets are reported at historiets are reported at historical cost. cal cost. If all assetsIf all assets were reported at their current value, there would be no need to use the historical exchange rate were reported at their current value, there would be no need to use the historical exchange rate for translating assets

for translating assets in order to maintain the in order to maintain the asset's historical asset's historical cost in U.S. cost in U.S. dollar terms. dollar terms. AllAll assets would be translat

assets would be translated at the current exced at the current exchange rate. hange rate. The differences betwThe differences between the temporaleen the temporal method and current rate method would disappear.

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Answers to Questions Answers to Questions 1.

1. The two major The two major issues related to issues related to the translation of the translation of foreign currency financial foreign currency financial statements are:statements are: (a) which method should be used and (b) where should the resulting translation adjustment (a) which method should be used and (b) where should the resulting translation adjustment be reported in the

be reported in the consolidated financial consolidated financial statements. statements. The first isThe first issue relates to sue relates to determiningdetermining the appropriate exchange rate (historical, current, or average for the current period) for the the appropriate exchange rate (historical, current, or average for the current period) for the translation of forei

translation of foreign currency balances. gn currency balances. Those items tThose items translated at the ranslated at the current exchangecurrent exchange rate are ex

rate are exposed to posed to translation adjustment. translation adjustment. The second The second issue relates to issue relates to whether thewhether the translation adjustment should be treated as a gain or loss in income, or should be deferred translation adjustment should be treated as a gain or loss in income, or should be deferred as a separate component of stockholders’ equity.

as a separate component of stockholders’ equity. 2.

2. Balance sheet exposure Balance sheet exposure arises when a arises when a foreign currency balance iforeign currency balance is translated at the s translated at the currentcurrent exchange rate.

exchange rate. By translating at the By translating at the current exchange rate, current exchange rate, the foreign currency the foreign currency item initem in essence is being revalued in U.S. dollar terms on the consolidated financial statements. essence is being revalued in U.S. dollar terms on the consolidated financial statements. There will be either a net asset balance sheet exposure or net liability balance sheet There will 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 exposure depending upon whether assets translated at the current rate are greater or less than liabilities translated

than liabilities translated at the current rate. at the current rate. Balance sheet exposure Balance sheet exposure generates a translationgenerates a translation adjustment which

adjustment which does not result in does not result in an inflow or an inflow or outflow of cash. outflow of cash. Transaction exposure,Transaction exposure, which results from the receipt or payment of foreign currency, generates foreign exchange which results from the receipt or payment of foreign currency, generates foreign exchange gains and losses which are realized in cash.

gains and losses which are realized in cash. 3.

3. Although balance sheet exposure does not resulAlthough balance sheet exposure does not result in cash inflows and outflowt in cash inflows and outflows, it doess, it does nevertheless affect amounts reported in consolidated financial statements. If the foreign nevertheless affect amounts reported in consolidated financial statements. If the foreign currency is the functional currency, translation adjustments will be reported in stockholders’ currency is the functional currency, translation adjustments will be reported in stockholders’ equity.

equity. If translation If translation adjustments adjustments are negative are negative and therefore and therefore reduce totreduce total stockholders’al stockholders’ equity, there is an adv

equity, there is an adverse (inflationary) impact oerse (inflationary) impact on the debt to equity n the debt to equity ratio. ratio. Companies withCompanies with restrictive debt covenants requiring them to stay below a maximum debt to equity ratio, may 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 find it necessary to hedge their balance sheet exposure so as to avoid negative translation adjustments being reported. If the U.S. dollar is the functional currency or an operation is adjustments being reported. If the U.S. dollar is the functional currency or an operation is located in a high inflation country, remeasurement gains and losses are reported in income. 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 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 adverse impact remeasurement losses can have on consolidated income and earnings per share.

share.

The paradox in hedging balance sheet exposure is that, by agreeing to receive or deliver 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. 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 This transaction exposure is speculative in nature, given that there is no underlying inflow or outflow of

outflow of foreign currency foreign currency that can be that can be used to satisused to satisfy the forwfy the forward contract. ard contract. By hedgingBy hedging balance sheet exposure, a company might incur a

balance sheet exposure, a company might incur a realized realized _{foreign exchange loss to avoid}_{foreign exchange loss to avoid}

an unrealized negative translation adj

an unrealized negative translation adjustment or unrealized remeasurement loss.ustment or unrealized remeasurement loss. 4.

4. The gains and losses arising from financial inThe gains and losses arising from financial instruments used to hedge balance sheetstruments used to hedge balance sheet exposure are treated in a similar manner as the item the hedge is intended to cover. If the 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 will be foreign currency is the functional currency, gains and losses on hedging instruments will be taken

taken to accto accumulated umulated other other comprehensive comprehensive income. income. If If the the U.S. U.S. dollar is dollar is the the functionalfunctional currency, gains and losses on the hedging instruments will be offset against the related currency, gains and losses on the hedging instruments will be offset against the related remeasurement gains and losses.

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5.

5. The major concept The major concept underlying the temporal underlying the temporal method is that method is that the translation process the translation process shouldshould result in a s

result in a set of translated U.S. dollar financial statements as if the foreign subsidiary’set of translated U.S. dollar financial statements as if the foreign subsidiary’s transactions had actuall

transactions had actually been carried y been carried out using U.S. out using U.S. dollars. dollars. To achieve this To achieve this objective,objective, assets carried at historical cost and stockholders’ equity are translated at histori assets carried at historical cost and stockholders’ equity are translated at histori calcal exchange rates; assets carried at current value and liabilities (carried at current value) are exchange rates; assets carried at current value and liabilities (carried at current value) are translated at

translated at the the current exchange current exchange rate. rate. Under this Under this concept, the concept, the foreign subsidiary’sforeign subsidiary’s monetary assets and liabilities are considered to be foreign currency cash, receivables, and monetary assets and liabilities are considered to be foreign currency cash, receivables, and payables of

payables of the parent the parent which which are exposed are exposed to transaction to transaction risk. risk. For example, For example, if the if the foreignforeign currency appreciates, then the foreign currency receivables increase in U.S. dollar value currency appreciates, then the foreign currency receivables increase in U.S. dollar value and a gain is

and a gain is recognized. recognized. Balance sheet exBalance sheet exposure under the temporal posure under the temporal method is analogousmethod is analogous to the net transaction exposure which exists from having both receivables and payables in a to the net transaction exposure which exists from having both receivables and payables in a particular foreign currency.

particular foreign currency.

The major concept underlying the current rate method is that the entire foreign investment is The major concept underlying the current rate method is that the entire foreign investment is exposed to foreign exc

exposed to foreign exchange risk. hange risk. Therefore all assets and Therefore all assets and liabilities are translated liabilities are translated at theat the current exchange ra

current exchange rate. te. Balance sheet exBalance sheet exposure under this posure under this concept is concept is equal to the equal to the netnet investment.

investment. 6.

6. The Retained Earnings balance is cThe Retained Earnings balance is created by a multitude oreated by a multitude of transactions: all revenues,f transactions: all revenues, expenses, gains,

expenses, gains, losses, and losses, and dividends since dividends since the company’s the company’s inception. inception. Identifying eachIdentifying each component of this account (so that a separate translation can be made) would be virtually component of this account (so that a separate translation can be made) would be virtually impossible.

impossible. Therefore, in Therefore, in the initial the initial year thatyear that Statement 52 Statement 52 _{was applied, the ending balance}_{was applied, the ending balance}

calculated under

calculated under Statement 8 Statement 8 _{was merely}_{was merely brought forward.}_{brought forward. Thereafter, the ending}_{Thereafter, the ending balance}_balance

translated each year for retained earnings becomes the beginning figure to be reported for translated each year for retained earnings becomes the beginning figure to be reported for the following year.

the following year. 7.

7. The major differences rThe major differences relate to non-monetary asselate to non-monetary assets carried at histoets carried at historical cost and relatedrical cost and related expenses, i.e., inventory and cost of goods sold; property, plant, and equipment and 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 depreciation expense; and intangible assets and amortization expense. Under the temporal method, these items are all translated at historical exchange rates. Under the current rate method, these items are all translated at historical exchange rates. Under the current rate method, the assets are translated at the current exchange rate and the related expenses are 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.

translated at the average exchange rate for the current period. 8.

8. The The f f unctional currency is unctional currency is the currency of the currency of the subsidiary’s primary economic the subsidiary’s primary economic environment. environment. ItIt is usually identified as the currency in which the company generates and expends cash. is usually identified as the currency in which the company generates and expends cash.

FASB ASC 830

FASB ASC 830 _{recommends that several factors such as the location of primary sales}_{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 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. intercompany transactions should be evaluated in identifying an entity’s functional currency.

FASB ASC 830

FASB ASC 830 _{does not provide any guidance as to how these factors are to be weighted}_{does not provide any guidance as to how these factors are to be weighted}

(equally or otherwise) when identifying an entity’s functional currency. (equally or otherwise) when identifying an entity’s functional currency. 9.

9. The foreign subsidiary's The foreign subsidiary's net asset position in net asset position in foreign currency at the foreign currency at the beginning of the periodbeginning of the period is first determined

is first determined. . Changes in net asseChanges in net assets are determined ts are determined to explain the net asset to explain the net asset balancebalance in foreign currency at

in foreign currency at the end of the pethe end of the period. riod. The beginning net asset poThe beginning net asset position and changessition and changes in net assets are translated at appropriate exchange rates and the ending net asset position in net assets are translated at appropriate exchange rates and the ending net asset position in dollars is determined.

in dollars is determined.

The ending net asset balance in foreign currency is then translated at the current rate and 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 dollars (already calculated). this result is subtracted from the ending net asset position in dollars (already calculated). The difference is

The difference is the translation adjusthe translation adjustment. tment. It is posIt is positive if the itive if the actual dollar net aactual dollar net assetsset position is

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McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2013 Hoyle, Schaefer, Doupnik, Advanced Accounting, 11/e 10-6 © 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any

manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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 mechanically 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 that either theory is considered more appropriate.

11. Translation is required when a foreign currency is the functional currency. Remeasurement is required in two situations:

a. The U.S. dollar is the functional currency.

b. The foreign subsidiary operates in a highly inflationary country.

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 will depreciate significantly. When the historical cost of fixed assets is translated at a significantly lower current exchange rate, the dollar value of fixed assets “disappears.” This problem is avoided by translating at the historical exchange rate as is done under the temporal method.

13. Differences exist between IFRS and U.S. GAAP with regard to (a) the hierarchy of factors used to determine the functional currency and (b) the method used to translate the financial statements of a subsidiary located in a hyperinflationary country.

IAS 21_{establishes primary factors and other factors to be considered in determining an}

entity’s functional currency. When the indicators are mixed and the functional currency is not obvious, the parent must give priority to the primary indicators in determining the foreign entity’s functional currency. U.S. GAAP does not have a similar hierarchy.

In translating the foreign currency financial statements of a subsidiary located in a highly inflationary economy, IAS 21_{requires financial statements to first be restated for local}

inflation and then translated into the parent’s currency using the current exchange rate for all financial statement items. In contrast, U.S. GAAP requires use of the temporal method with no adjustment for inflation in this situation.

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Answers to Problems

1. C (Definition of functional currency)

2. C (Comparison of current rate and temporal methods) 3. C (Translation process (current rate method))

4. B (Determine appropriate translation method and resulting translation adjustment)

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 (Translation process (current rate method) – asset and related expense) All asset accounts are translated at current rates.

6. A (Translation process (current rate method) – assets)

Because the foreign currency is the functional currency, a translation is required. All assets accounts are translated at current rates.

7. C (Remeasurement process (temporal method) – assets)

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 (Translation process (current rate method) – inventory)

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 (Translation process (current rate method) – cost of goods sold)

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 = $18,000].

(9)

11. C (Remeasurement process (temporal method) – marketable securities and inventory)

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 (Highly inflationary economy (temporal method) – cost of goods sold) 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

13. C (Calculation of translation adjustment)

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 (Concepts underlying current rate and temporal methods)

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 (Calculation of remeasurement gain/loss)

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 (Remeasurement process (temporal method))

Marketable equity securities are carried at market value and therefore translated at the current exchange rate under the temporal method.

(10)

17. B (Determine appropriate translation method and treatment of translation adjustment)

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 (Translation process (current rate method) – wages expense and wages payable)

Wages expense is translated at the average exchange rate; wages payable are translated at the current exchange rate.

19. C (Treatment of gains and losses on hedges of net investments)

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 (Presentation of remeasurement gain/loss on income statement)

Remeasurement gains are reported in the income statement as a part of income from continuing operations.

21. (10 minutes) (Specify appropriate exchange rates for the translation of foreign currency financial statements under the current rate method)

R e n t e x p e n s e _—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.

D i v i d e n d s p a i d _—use historical rate at time of recording, the date of

declaration.

E q u i p m e n t _—as an asset, use current rate at the balance sheet date. N o t e s p a y a b l e _—as a liability, use current rate at the balance sheet date.

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.

D e p r ec i a t i o n e x p e n s e _—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

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the date of issuance.

22. (5 minutes) Determine Translated Values under the Current Rate Method

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 appropriate exchange rates under the current rate

fethod [translation] and temporal method [remeasurement])

T r a n s l a t i o n R e m e a s u r e m e n t 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

(12)

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)

R e m e a s u r e m e n t

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 =

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25. (30 minutes) (Prepare financial statements for a foreign subsidiary and then translate them into U.S. dollars)

Fenwicke Company Subsidiary Income Statement

L CU U.S. Doll ars

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

L CU U.S. Doll ars

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

L CU U.S. Doll ars

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

C o m p u t a t io n o f T r an s l a t i o n A d j u s t m e n t

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

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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

L CU 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-

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27. (25 minutes) (Compute translation adjustment and remeasurement gain/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/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 under the current rate method [translation] and temporal method [remeasurement])

(a) Current Rate Method (b) Temporal Method

Account Translation 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) (Determine translation adjustment; prepare journal entries for forward contract hedge of balance sheet exposure; determine amount to be reported in accumulated other comprehensive income)

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 Accumulated 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

C a lc u l a t i o n o f T r a n s l a t io n A d j u s t m e n t

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) Depr eciation 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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31. ( c o n t i n u e d )

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 assets (17,000 KQ) minus ending liabilities (8,000 KQ) – net assets, 12/31 = 9,000 KQ.

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32. (30 minutes) (Translate financial statements of a foreign subsidiary) LIVINGSTON COMPANY

Income Statement

For Year Ending December 31, 2013

Gog hs 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, 2013

Gogh s U.S. Dollars

Retained Earnings, 1/1/13 216,000 given 395,000

Net Income 71,000 above 114,066

Dividends Paid (26,000) x 1/.62 = (41,935)

Retained Earnings, 12/31/13 261,000 467,131

Balance Sheet December 31, 2013

Gog hs 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

T r an s l a t i o n A d j u s t m e n t G o g h s U .S . D o l l ar s

Net assets, 1/1/13 336,000 x 1/.60 = 560,000

Net income, 2013 71,000 above 114,066

Dividends paid (26,000) above (41,935)

Net assets, 12/31/13 381,000 632,131

Net assets at current exchange rate,

12/31/13 381,000 x 1/.65 = 586,154

Translation adjustment, 2013 (negative) 45,977

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33. (35 minutes) (Compute remeasurement gain/loss and translation adjustment) a. R e m e as u r e m e n t G a i n o r L o s s

Net monetary assets, 1/1/13* 2,000 KR x 2.50 = $ 5,000

Increases in net monetary assets:

Issued Common Stock (4/1/13) 10,000 KR x 2.60 = 26,000

Sold Building** (7/1/13) 22,000 KR x 2.80 = 61,600

Sales (2013) 80,000 KR x 2.70 = 216,000

Decreases in net monetary assets:

Purchased Equipment (4/1/13) (30,000) KR x 2.60 = (78,000) Paid Dividends (10/1/13) (32,000) KR x 2.90 = (92,800)

Rent Expense (2013) (14,000) KR x 2.70 = (37,800)

Salary Expense (2013) (20,000) KR x 2.70 = (54,000)

Utilities Expense (2013) ( 5,000) KR x 2.70 = (13,500)

Net monetary assets, 12/31/13 13,000 KR $ 32,500

Net monetary assets, 12/31/13 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 2013, therefore, the accumulated depreciation related to the building sold during 2008 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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33. ( c o n t i n u e d )

b. T r an s l a t i o n A d j u s t m e n t

Net assets, 1/1/13* 100,000 KR x 2.50 = $250,000

Increases in net assets

Issued Common Stock (4/1/13) 10,000 KR x 2.60 = 26,000 Gain on Sale of Building** (7/1/13) 6,000 KR x 2.80 = 16,800

Sales (2013) 80,000 KR x 2.70 = 216,000

Decreases in net assets

Paid Dividends (10/1/13) (32,000) KR x 2.90 = (92,800) Depreciation Expense (2013) (15,000) KR x 2.70 = (40,500) Rent Expense (2013) (14,000) KR x 2.70 = (37,800) Salary Expense (2013) (20,000) KR x 2.70 = (54,000) Utilities Expense (2013) ( 5,000) KR x 2.70 = (13,500) Net assets, 12/31/13 110,000 KR $270,200

current exchange rate 110,000 KR x 3.00 = 330,000

Translation adjustment (positive) $(59,800)

* Net assets: Common stock + Retained earnings

** Selling a building at a gain of KR 6,000 increases net assets by that amount.

Although not required by Part b, the beginning translation adjustment as of January 1, 2013 can be computed by translating the January 1 accounts and assuming that the translation adjustment is the balancing figure:

Common Stock, 1/1/13 70,000 KR x 2.40 = $168,000

Retained Earnings, 1/1/13 30,000 KR given 62,319

Net assets, 1/1/13 100,000 KR $230,319

Net assets, 1/1/13 at current

exchange rate 100,000 KR x 2.50 = 250,000

Cumulative translation adjustment (positive), 1/1/13 $ (19,681)

Translation adjustment (positive), 2013 (59,800)

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34. (90 minutes) (Remeasure non-functional currency accounts into foreign functional currency and then translate foreign functional currency financial statements into U.S. dollars)

a. R e m e as u r e m e n t o f M e x i c a n O p e r a t i o n s

Canadian Dollars P e s o s Debit Credit

Accounts payable 49,000 x .35 C 17,150

Accumulated depreciation 19,000 x .25 H 4,750

Building and equipment 40,000 x .25 H 10,000

Cash 59,000 x .35 C 20,650

Depreciation expense 2,000 x .25 H 500

Inventory (beginning

—income statement) 23,000 x .30 A (’12) 6,900

Inventory (ending

—income statement) 28,000 x .34 A(’13) 9,520

Inventory (ending—balance sheet) 28,000 x .34 A(’13) 9,520

Purchases 68,000 x .34 A(’13) 23,120

Receivables 21,000 x .35 C 7,350

Salary expense 9,000 x .34 A 3,060

Sales 124,000 x .34 A 42,160

Main office 30,000 given 7,530

Remeasurement loss Schedule One 10

Total 81,110 81,110

S c h e d u l e O n e _—R e m e as u r e m e n t L o s s P e s o s C a n a d i an D o l l a rs

Net monetary liabilities, 1/1/13* (16,000) x .32 (5,120) Increases in net monetary assets

Sales 124,000 x .34 42,160

Decreases in net monetary assets

Purchases (68,000) x .34 (23,120)

Salary Expense ( 9,000) x .34 ( 3,060)

Net monetary assets, 12/31/13** 31,000 10,860

current exchange rate 31,000 x .35 10,850

Remeasurement loss 10

* Net monetary liabilities, 1/1/13, can be determined by first determining the net monetary assets at 12/31/13 and then backing out the changes in monetary assets and liabilities during 2013 —sales, purchases, and salary expense.

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34. ( c o n t i n u e d )

b. and c.

The following C$ financial statements are produced by combining the figures from the main operation with the remeasured figures from the branch operation. The Branch Operation and Main Office accounts offset each other. Cost of goods sold for the Mexican branch is determined by combining beginning inventory, purchases, and ending inventory as remeasured in C$.

Income Statement c. Translation in to U.S. do llars _—

For the Year Ended December 31, 2013 Current Rate Method

Sales C$ 354,160 x .67 A = $ 237,287.20

Cost of goods sold (223,500) x .67 A = (149,745.00)

Gross profit 130,660 87,542.20

Depreciation expense (8,500) x .67 A = (5,695.00)

Salary expense (29,060) x .67 A = (19,470.20)

Utility expense (9,000) x .67 A = (6,030.00)

Gain on sale of equipment 5,000 x .68 H = 3,400.00

Remeasurement loss (10) x .67 A = (6.70)

Net income C$ 89,090 $ 59,740.30

Statement of Retained Earnings

For the Year Ended December 31, 2013

Retained earnings, 1/1/13 C$ 135,530 Given $ 70,421.00

Net income (above) 89,090 Above 59,740.30

Dividends paid ( 28,000) x .69 H = (19,320.00)