Chapter 10: Foreign currency translation
US corporations with subsidiaries in other countries must include these
subsidiaries in their consolidated financial statements. In order to
accomplish this, the financial statements of the foreign subsidiaries must be
stated in terms of US dollars. If it is a normal practice of the foreign
subsidiaries to prepare their financial statements in terms of a foreign
currency, such statements must be converted into US dollars. The process of
converting foreign currency financial statements into US dollar financial
statements is commonly referred to as foreign currency translation.
I. Foreign Currency Translation Methods
From a practical standpoint, the process of converting foreign-currency
financial statements into US-currency financial statements depends upon
the business environment in which the foreign subsidiary operates.
If the foreign subsidiary operates in a business environment in which
most transactions are based on a foreign currency and the subsidiary
maintains its accounting records in the foreign currency, which
translation method must be used, the current method, the temporal
method, or neither method? Select one.
If the foreign subsidiary operates in a business environment in which
most transactions are based on a foreign currency, the translation method
to be used in the conversion is the current method.
If the foreign subsidiary operates in a business environment in which the
vast majority of transactions are based on US dollars but the subsidiary
maintains its accounting records in the foreign currency, which
translation method must be used, the current method, the temporal
method, or neither method? Select one.
If the foreign subsidiary operates in a business environment in which the
vast majority of transactions are based on US dollars, the translation
method to be used in the conversion is the temporal method.
If the foreign subsidiary maintains its accounting records in US dollars,
which translation method must be used, the current method, the temporal
method, or neither method? Select one.
If the foreign subsidiary maintains its accounting records in US dollars,
no translation is needed because the resulting financial statements will
already be in US dollars.
Complete the following table to summarize the translation options.
Business Environment
(Functional Currency)
Foreign currency
US Dollars
Subsidiary’s Accounting Records
in Foreign Currency
Current method
Business Environment
(Functional Currency)
Foreign currency
US Dollars
Subsidiary’s Accounting Records
in Foreign Currency
Current method
Temporal method
Subsidiary’s Accounting Records
in US Dollars
No translation needed
Subsidiary’s Accounting Records
in US Dollars
No translation needed
No translation needed
A. Briefly describe the “current” method.
The current method is used when the foreign subsidiary is operating
on a foreign currency basis and maintaining its accounting records on
a foreign currency basis.
As a result, the subsidiary would be unaffected by any changes in the
foreign currency exchange rate.
The current method is based on the idea that the foreign subsidiary
operates as a relatively separate entity from the US parent company
and keeps its accounting records in a foreign currency by choice.
In essence, the current method converts the foreign subsidiary’s
financial data from a foreign currency basis to a US dollar basis as if
the net assets of the foreign subsidiary were one individual investment
of the parent company.
By using in its conversion process only one exchange rate for assets
and liabilities and one exchange rate for income statement items, the
current method maintains all balance sheet relationships and all
income statement relationships reported in the foreign currency based
financial statements.
B. Briefly describe the “temporal” method.
The temporal method is used when the foreign subsidiary is operating
on a dollar basis but maintaining its accounting records on a foreign
currency basis.
As a result, the subsidiary would be affected by any changes in the
foreign currency exchange rate.
The temporal method is based on the idea that the foreign subsidiary
maintains very close ties with the US parent company and would keep
its accounting records in US dollars if possible.
In essence, the temporal method converts the foreign subsidiary’s
individual asset, liability, and stockholders’ equity accounts from a
foreign currency basis to a US dollar basis as if the US dollar had
been used in the foreign subsidiary’s accounting system at all times.
By using in its conversion process several different exchange rates for
assets, liabilities, and income statement items, the temporal method
usually does not maintain the balance sheet relationships and income
statement relationships reported in the foreign currency based
financial statements.
II. Illustration of foreign currency translation.
During 2009, the foreign exchange rate of FC currency to US dollars
was:
January 1 – February 28
March 1 - April 30
May 1 - June 30
July 1 - August 30
September 1 – October 31
November 1 – December 31
2009 average
Fourth quarter 2009 average
1.10
1.11
1.12
1.13
1.14
1.15
1.125
1.147
(1 FC unit = 1.10 US dollars)
During 2010, the foreign exchange rate of FC currency to US dollars
was:
September 1 - October 31
November 1 – December 31
2010 average
1.18
1.19
1.16
During 2009, a foreign subsidiary of the Lowell Corporation generated
the account balances shown in the first two columns of the following
table. The foreign subsidiary maintains its accounting records in Foreign
Currency (FC) and uses the FIFO inventory method.
A. Converting a foreign subsidiary’s December 31, 2009 foreign
currency accounting records to US dollars by applying the current
method.
Using the foreign exchange rates on the previous page, insert the
appropriate rates in the Translation Rate column of the table below.
Once you insert the rates, check your work by multiplying the
amounts in the FC column by the corresponding translation rates in
the Translation Rate column to arrive at the amounts in the US $
column.
Account
Cash
FC
84,000
Translation
Rate
US $
96,600
Accounts Receivable
Merchandise Inventory
Total Current Assets
Equipment (purchased 7/1/09)
Accumulated Depreciation, Equipment
Total Property, Plant, and Equipment
Total Assets
Accounts Payable
Total Current Liabilities
Notes Payable
Total Long-term Liabilities
Total Liabilities
Common Stock
Additional Paid-in Capital, Common Stock
Retained Earnings, 1/1/09
Dividends, 9/30/09
Sales
Cost of Goods Sold
Operating Expenses (Cash)
Depreciation Expense, Equipment
Interest Expense
Income Taxes Expense
Cumulative Translation Adjustment
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
188,000
430,000
702,000
900,000
(40,000)
860,000
1,562,000
(310,000)
(310,000)
(900,000)
(900,000)
(1,210,000)
(10,000)
(70,000)
0
30,000
(1,728,000)
970,000
240,000
40,000
36,000
140,000
0
(352,000)
(1,562,000)
216,200
494,500
807,300
1,035,000
(46,000)
989,000
1,796,300
(356,500)
(356,500)
(1,035,000)
(1,035,000)
(1,391,500)
(11,000)
(77,000)
0
34,200
(1,944,000)
1,091,250
270,000
45,000
40,500
157,500
(404,800)
(1,796,300)
Translation
Account
Cash
Accounts Receivable
Merchandise Inventory
Total Current Assets
Equipment (purchased 7/1/09)
Accumulated Depreciation, Equipment
Total Property, Plant, and Equipment
Total Assets
Accounts Payable
Total Current Liabilities
Notes Payable
Total Long-term Liabilities
Total Liabilities
Common Stock
Additional Paid-in Capital, Common Stock
Retained Earnings, 1/1/09
Dividends, 9/30/09
Sales
Cost of Goods Sold
Operating Expenses (Cash)
Depreciation Expense, Equipment
Interest Expense
Income Taxes Expense
Cumulative Translation Adjustment
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
FC
84,000
188,000
430,000
702,000
900,000
(40,000)
860,000
1,562,000
(310,000)
(310,000)
(900,000)
(900,000)
(1,210,000)
(10,000)
(70,000)
0
30,000
(1,728,000)
970,000
240,000
40,000
36,000
140,000
0
(352,000)
(1,562,000)
Rate
1.15 C
1.15 C
1.15 C
1.15 C
1.15 C
1.15 C
1.15 C
1.10 H
1.10 H
1.14 H
1.125 A
1.125 A
1.125 A
1.125 A
1.125 A
1.125 A
US $
96,600
216,200
494,500
807,300
1,035,000
(46,000)
989,000
1,796,300
(356,500)
(356,500)
(1,035,000)
(1,035,000)
(1,391,500)
(11,000)
(77,000)
0
34,200
(1,944,000)
1,091,250
270,000
45,000
40,500
157,500
(11,250)
(404,800)
(1,796,300)
Translation rate: A = average for the year, C = current, H = historical.
Calculate the Cumulative Translation Adjustment and insert it in the
US $ column in the above table.
Based on the data in the previous table, complete the following tables
to determine some relationships resulting from the use of the current
method.
Item as a Percentage of Sales
Sales
Cost of Goods Sold
Operating Expenses
Net Income
Item as a Percentage of Sales
Sales
Cost of Goods Sold
Operating Expenses
Net Income
FC
100.0%
56.1% *
US$
100.0%
FC
100.0%
56.1% *
16.2%
17.5%
US$
100.0%
56.1%
16.2%
17.5%
* 970,000 / 1,728,000 = .561
Item as a Percentage of Total Assets
Current Assets
Total Assets
FC
100.0%
US $
100.0%
Long-term Liabilities
Stockholders' Equity
Total Liabilities and Stockholders' Equity
Item as a Percentage of Total Assets
Current Assets
Total Assets
Long-term Liabilities
Stockholders' Equity
Total Liabilities and Stockholders' Equity
57.6% *
FC
44.9%
100.0%
57.6%
22.5%
100.0%
US $
44.9%
100.0%
57.6% *
22.5%
100.0%
* 1,035,000 / 1,796,300 = .576
Note from the above statistics that the financial statements'
fundamental relationships did not change as a result of using the
current method to translate the foreign currency data.
Calculation of 2009 translation adjustment: It is possible to calculate
the translation adjustment directly, instead of calculating the “plug”
figure as shown above in the table on page 4. Complete the following
table to determine the translation adjustment for 2009.
Translation
Item
Net asset balance 1/1/09
Less: Net asset balance, 12/31/09
Total change in net assets
FC
80,000
352,000
272,000
Change in net assets:
Plus: Net income, 2009
Less: Dividends, 2009
Plus: Translation adjustment
Total change in net assets
272,000
Item
Net asset balance 1/1/09
Less: Net asset balance, 12/31/09
Total change in net assets
FC
80,000
352,000
272,000
Change in net assets:
Plus: Net income, 2009
Less: Dividends, 2009
Plus: Translation adjustment
Total change in net assets
302,000
(30,000)
0
272,000
Rate
1.10 H
1.15 C
US $
88,000
404,800
316,800
316,800
Translation
Rate
1.10 H
1.15 C
1.125 A
1.14 H
US $
88,000
404,800
316,800
339,750
(34,200)
11,250
316,800
Briefly describe where the translation adjustment for a specific year
would be reported in a company’s financial statements.
Under the requirements for reporting comprehensive income, the
current year’s translation adjustment (the change in the cumulative
translation adjustment) would be excluded from net income but would
be included in comprehensive income.
Briefly describe where the cumulative translation would be reported
in a company’s financial statements.
The cumulative translation adjustment is reported as a separate
component of stockholders' equity until the foreign subsidiary is sold.
At that time, the cumulative translation adjustment must be removed
from stockholders' equity and reported as part of the gain or loss on
the sale of the foreign subsidiary.
B. Converting a foreign subsidiary’s December 31, 2010 foreign
currency accounting records to US dollars by applying the current
method.
Using the foreign exchange rates on page 3, insert the appropriate
rates in the Translation Rate column of the table on the next page.
Once you insert the rates, check your work by multiplying the
amounts in the FC column by the corresponding translation rates in
the Translation Rate column to arrive at the amounts in the US $
column. Hint: Be particularly careful with the retained earnings,
1/1/10 balance. The US $ amount does not come from simply
multiplying the FC amount by a specific translation rate.
Account
Cash
Accounts Receivable
Merchandise Inventory
Total Current Assets
Equipment (purchased 7/1/09)
Accumulated Depreciation, Equipment
Total Property, Plant, and Equipment
Total Assets
Accounts Payable
Total Current Liabilities
Notes Payable
Total Long-term Liabilities
Total Liabilities
Common Stock
Additional Paid-in Capital, Common Stock
Retained Earnings, 1/1/10
Dividends, 9/30/10
FC
291,000
240,000
470,000
1,001,000
900,000
(80,000)
820,000
1,821,000
(320,000)
(320,000)
(850,000)
(850,000)
(1,170,000)
(10,000)
(70,000)
(272,000)
33,000
Translation
Rate
US $
346,290
285,600
559,300
1,191,190
1,071,000
(95,200)
975,800
2,166,990
(380,800)
(380,800)
(1,011,500)
(1,011,500)
(1,392,300)
(11,000)
(77,000)
38,940
Sales
Cost of Goods Sold
Operating Expenses (Cash)
Depreciation Expense, Equipment
Interest Expense
Income Taxes Expense
Cumulative Translation Adjustment
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
Account
Cash
Accounts Receivable
Merchandise Inventory
Total Current Assets
Equipment (purchased 7/1/09)
Accumulated Depreciation, Equipment
Total Property, Plant, and Equipment
Total Assets
Accounts Payable
Total Current Liabilities
Notes Payable
Total Long-term Liabilities
Total Liabilities
Common Stock
Additional Paid-in Capital, Common Stock
(1,901,000)
1,067,000
264,000
44,000
40,000
154,000
0
(651,000)
(1,821,000)
(2,205,160)
1,237,720
306,240
51,040
46,400
178,640
(774,690)
(2,166,990)
Translation
FC
Rate
US $
291,000
1.19 C
346,290
240,000
1.19 C
285,600
470,000
1.19 C
559,300
1,001,000
1,191,190
900,000
1.19 C
1,071,000
(80,000)
1.19 C
(95,200)
820,000
975,800
1,821,000
2,166,990
(320,000)
1.19 C
(380,800)
(320,000)
(380,800)
(850,000)
1.19 C
(1,011,500)
(850,000)
(1,011,500)
(1,170,000)
(1,392,300)
(10,000)
1.10 H
(11,000)
(70,000)
1.10 H
(77,000)
Retained Earnings, 1/1/10
Dividends, 9/30/10
Sales
Cost of Goods Sold
Operating Expenses (Cash)
Depreciation Expense, Equipment
Interest Expense
Income Taxes Expense
Cumulative Translation Adjustment
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
(272,000)
33,000
(1,901,000)
1,067,000
264,000
44,000
40,000
154,000
0
(651,000)
(1,821,000)
**
1.18 H
1.16 A
1.16 A
1.16 A
1.16 A
1.16 A
1.16 A
(305,550)
38,940
(2,205,160)
1,237,720
306,240
51,040
46,400
178,640
(34,960)
(774,690)
(2,166,990)
Translation rate: A = average for the
year, C = current, H = historical.
** Retained earnings, 1/1/10 in US
dollars:
Retained earnings, 1/1/09
Plus: 2009 net income
Less: 2009 dividends
Retained earnings, 1/1/10
$0
$339,750
$34,200
$305,550
Calculation of 2010 translation adjustment: Complete the following
table to determine the translation adjustment for 2010.
Item
Net asset balance 1/1/10
Less: Net asset balance, 12/31/10
Total change in net assets
Change in net assets:
Plus: Net income, 2010
Less: Dividends, 2010
FC
352,000
651,000
299,000
Translation
Rate
US $
404,800
774,690
369,890
385,120
(38,940)
Plus: Translation adjustment
Total change in net assets
369,890
Item
Net asset balance 1/1/10
Less: Net asset balance, 12/31/10
Total change in net assets
FC
352,000
651,000
299,000
Change in net assets:
Plus: Net income, 2010
Less: Dividends, 2010
Plus: Translation adjustment
Total change in net assets
332,000
(33,000)
0
299,000
Translation
Rate
1.15 H
1.19 C
1.16 A
1.18 H
US $
404,800
774,690
369,890
385,120
(38,940)
23,710
369,890
Complete the following table to verify the 12/31/10 cumulative
translation adjustment:
2009 translation adjustment
2010 translation adjustment
12/31/10 cumulative translation adjustment
($34,960)
2009 translation adjustment
2010 translation adjustment
12/31/10 cumulative translation adjustment
($11,250)
($23,710)
($34,960)
C. Converting a foreign subsidiary’s December 31, 2009 foreign
currency accounting records to US dollars by applying the temporal
method.
Using the foreign exchange rates on page 3, insert the appropriate
rates in the Remeasurement Rate column of the table below. Once
you insert the rates, check your work by multiplying the amounts in
the FC column by the corresponding remeasurement rates in the
Remeasurement Rate column to arrive at the amounts in the US $
column. You must calculate the cost of goods sold on the following
page before you complete the table below.
Account
FC
Remeasurement
Rate
US $
Cash
Accounts Receivable
Merchandise Inventory
Total Current Assets
Equipment (purchased 7/1/09)
Accumulated Depreciation, Equipment
Total Property, Plant, and Equipment
Total Assets
Accounts Payable
Total Current Liabilities
Notes Payable
Total Long-term Liabilities
Total Liabilities
Common Stock
Additional Paid-in Capital, Common Stock
Retained Earnings, 1/1/09
Dividends (9/30/09)
Sales
Cost of Goods Sold
Operating Expenses (Cash)
Depreciation Expense, Equipment
Interest Expense
Income Taxes Expense
Remeasurement (Gain) or Loss
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
84,000
188,000
430,000
702,000
900,000
(40,000)
860,000
1,562,000
(310,000)
(310,000)
(900,000)
(900,000)
(1,210,000)
(10,000)
(70,000)
0
30,000
(1,728,000)
970,000
240,000
40,000
36,000
140,000
0
(352,000)
(1,562,000)
96,600
216,200
493,210
806,010
1,017,000
(45,200)
971,800
1,777,810
(356,500)
(356,500)
(1,035,000)
(1,035,000)
(1,391,500)
(11,000)
(77,000)
0
34,200
(1,944,000)
1,081,790
270,000
45,200
40,500
157,500
(386,310)
(1,777,810)
Account
Cash
Accounts Receivable
Merchandise Inventory
Total Current Assets
Equipment (purchased 7/1/09)
Accumulated Depreciation, Equipment
Total Property, Plant, and Equipment
Total Assets
Accounts Payable
Total Current Liabilities
Notes Payable
Total Long-term Liabilities
Total Liabilities
Common Stock
Additional Paid-in Capital, Common Stock
Retained Earnings, 1/1/09
Dividends (9/30/09)
Sales
Cost of Goods Sold
Operating Expenses (Cash)
Depreciation Expense, Equipment
Interest Expense
Income Taxes Expense
Remeasurement (Gain) or Loss
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
Remeasurement
FC
Rate
84,000
1.15 C
188,000
1.15 C
430,000 1.147 A4Q
702,000
900,000
1.13 H
(40,000)
1.13 H
860,000
1,562,000
(310,000)
1.15 C
(310,000)
(900,000)
1.15 C
(900,000)
(1,210,000)
(10,000)
1.10 H
(70,000)
1.10 H
0
30,000
1.14 H
(1,728,000)
1.125 A
970,000
Below
240,000
1.125 A
40,000
1.13 H
36,000
1.125 A
140,000
1.125 A
0
(352,000)
(1,562,000)
US $
96,600
216,200
493,210
806,010
1,017,000
(45,200)
971,800
1,777,810
(356,500)
(356,500)
(1,035,000)
(1,035,000)
(1,391,500)
(11,000)
(77,000)
0
34,200
(1,944,000)
1,081,790
270,000
45,200
40,500
157,500
16,500
(386,310)
(1,777,810)
Remeasurement rate: A = average for the year, A4Q = average for the
fourth quarter of the year, C = current, H = historical.
Complete the following table and insert the cost of goods sold in the
table on the previous page. Remember the company uses the FIFO
inventory method. Once you insert the cost of goods sold into the
previous table, calculate the remeasurement (gain) or loss and insert it
into the table.
Item
Beginning inventory, 1/1/09
Plus: Purchases
Less: Ending inventory, 12/31/09
Cost of Goods Sold
Item
Beginning inventory, 1/1/09
Plus: Purchases
Less: Ending inventory, 12/31/09
Cost of Goods Sold
Remeasurement
Rate
FC
US $
0
0
970,000
FC
0
1,400,000
430,000
970,000
Remeasurement
Rate
1.125 A
1.147 A4Q
US $
0
1,575,000
493,210
1,081,790
Complete the following tables to determine some relationships
resulting from the use of the temporal method.
Item as a Percentage of Sales
Sales
Cost of Goods Sold
Operating Expenses
Net Income
Item as a Percentage of Sales
Sales
Cost of Goods Sold
Operating Expenses
Net Income
Item as a Percentage of Total Assets
Current Assets
Total Assets
Long-term Liabilities
Stockholders' Equity
Total Liabilities and Stockholders' Equity
FC
100.0%
56.1%
16.2%
17.5%
US$
100.0%
55.6%
16.2%
17.1%
FC
100.0%
56.1%
16.2%
17.5%
US$
100.0%
55.6%
16.2%
17.1%
FC
100.0%
US $
100.0%
Item as a Percentage of Total Assets
Current Assets
Total Assets
Long-term Liabilities
Stockholders' Equity
Total Liabilities and Stockholders' Equity
FC
44.9%
100.0%
57.6%
22.5%
100.0%
US $
45.3%
100.0%
58.2%
21.7%
100.0%
Note from the above statistics that the financial statements’
fundamental relationships did change as a result of using the temporal
method to restate (translate) the foreign currency data.
Calculation of 2009 remeasurement gain or loss: It is possible to
calculate the remeasurement gain or loss directly, instead of
calculating the “plug” figure as shown above in the table on page 8.
Complete the following table to determine the remeasurement gain or
loss for 2009.
Item
Net monetary assets, 1/1/09
Net monetary assets, 12/31/09
Total change in net monetary assets
Change in monetary assets:
Plus: Sales
Less: Purchases
Less: Cash expenses
Less: Interest expense
Translation
FC
Rate
US $
80,000
1.10 H
88,000
(938,000)
1.15 C
(1,078,700)
(1,018,000)
(1,166,700)
Less: Income taxes expense
Less: Equipment purchase
Less: Dividends
Plus: Remeasurement Gain or (Loss)
Total change in net monetary assets
(1,018,000)
Item
Net monetary assets, 1/1/09
Net monetary assets, 12/31/09
Total change in net monetary assets
Translation
FC
Rate
US $
80,000
1.10 H
88,000
(938,000)
1.15 C
(1,078,700)
(1,018,000)
(1,166,700)
Change in monetary assets:
Plus: Sales
Less: Purchases
Less: Cash expenses
Less: Interest expense
Less: Income taxes expense
Less: Equipment purchase
Less: Dividends
Plus: Remeasurement Gain or (Loss)
Total change in net monetary assets
1,728,000
(1,400,000)
(240,000)
(36,000)
(140,000)
(900,000)
(30,000)
0
(1,018,000)
(1,166,700)
1.125 A
1.125 A
1.125 A
1.125 A
1.125 A
1.13 H
1.14 H
1,944,000
(1,575,000)
(270,000)
(40,500)
(157,500)
(1,017,000)
(34,200)
(16,500)
(1,166,700)
Briefly describe where the remeasurement gain or loss for a specific
year would be reported in a company’s financial statements.
The remeasurement gain or loss is reported as a separate component
of net income.
Note that unlike the translation adjustment in the current method, the
remeasurement gain or loss does affect the Lowell Corporation's
consolidated income statement. More than likely, this explains why
most companies use the current method for foreign currency
translation.
III. Comparison of translated financial statements with remeasured financial
statements. The following data relates to the US Corporation’s 2009
operations. Obtain the two missing items from the tables prepared
earlier.
Account
Cash
Accounts Receivable
Merchandise Inventory
Equipment
Translated:
Current
Method
96,600
216,200
494,500
1,035,000
Remeasured:
Temporal
Method
96,600
216,200
493,210
1,017,000
Accumulated Depreciation, Equipment
Accounts Payable
Notes Payable
Common Stock
Additional Paid-in Capital, Common Stock
Retained Earnings, 1/1/09
Dividends
Sales
Cost of Goods Sold
Operating Expenses (Cash)
Depreciation Expense, Equipment
Interest Expense
Income Taxes Expense
Cumulative Translation Adjustment
Remeasurement (Gain) or Loss
Totals
Account
Cash
Accounts Receivable
Merchandise Inventory
Equipment
Accumulated Depreciation, Equipment
Accounts Payable
Notes Payable
(46,000)
(356,500)
(1,035,000)
(11,000)
(77,000)
0
34,200
(1,944,000)
1,091,250
270,000
45,000
40,500
157,500
(45,200)
(356,500)
(1,035,000)
(11,000)
(77,000)
0
34,200
(1,944,000)
1,081,790
270,000
45,200
40,500
157,500
0
0
0
0
Translated:
Current
Method
96,600
216,200
494,500
1,035,000
(46,000)
(356,500)
(1,035,000)
Remeasured:
Temporal
Method
96,600
216,200
493,210
1,017,000
(45,200)
(356,500)
(1,035,000)
Common Stock
Additional Paid-in Capital, Common Stock
Retained Earnings, 1/1/09
Dividends
Sales
Cost of Goods Sold
Operating Expenses (Cash)
Depreciation Expense, Equipment
Interest Expense
Income Taxes Expense
Cumulative Translation Adjustment
Remeasurement (Gain) or Loss
Totals
(11,000)
(77,000)
0
34,200
(1,944,000)
1,091,250
270,000
45,000
40,500
157,500
(11,250)
0
0
(11,000)
(77,000)
0
34,200
(1,944,000)
1,081,790
270,000
45,200
40,500
157,500
0
16,500
0
Complete the US Corporation’s simplified income statement for the
year ended December 31, 2009.
Account
Revenues
Expenses
Net Income
Translated:
Current
Method
$1,944,000
1,604,250
0
$339,750
Remeasured:
Temporal
Method
$1,944,000
1,594,990
Account
Revenues
Expenses
Remeasurement loss
Net Income
Translated:
Current
Method
$1,944,000
1,604,250
0
$339,750
Remeasured:
Temporal
Method
$1,944,000
1,594,990
16,500
$332,510
Complete the US Corporation’s simplified statement of retained
earnings for the year ended December 31, 2009.
Account
Retained Earnings, 1/1/09
Plus: Net Income, 2009
Less: Dividends, 2009
Retained Earnings, 12/31/09
Account
Retained Earnings, 1/1/09
Translated:
Current
Method
Remeasured:
Temporal
Method
$0
339,750
34,200
$305,550
Translated:
Current
Method
$0
34,200
Remeasured:
Temporal
Method
$0
$0
Plus: Net Income, 2009
Less: Dividends, 2009
Retained Earnings, 12/31/09
339,750
34,200
$305,550
332,510
34,200
$298,310
Complete the US Corporation’s simplified condensed balance sheet as
of December 31, 2009.
Account
Assets
Liabilities
Stockholders' Equity
Contributed Capital
Retained Earnings
Total Stockholders' Equity
Total Liabilities & Stockholders' Equity
Account
Assets
Liabilities
Translated:
Current
Method
$1,796,300
1,391,500
Remeasured:
Temporal
Method
$1,777,810
1,391,500
88,000
305,550
404,800
1,796,300
88,000
298,310
0
386,310
1,777,810
Translated:
Current
Method
$1,796,300
1,391,500
Remeasured:
Temporal
Method
$1,777,810
1,391,500
Stockholders' Equity
Contributed Capital
Retained Earnings
Cumulative translation adjustment
Total Stockholders' Equity
Total Liabilities & Stockholders' Equity
88,000
305,550
11,250
404,800
1,796,300
88,000
298,310
0
386,310
1,777,810
Based on the US Corporation’s financial statements, briefly answer
the following questions.
1. Why did the current method and temporal method result in
different measures of net income?
The temporal method reports a remeasurement gain or loss on the
income statement, while the current method does not.
2. Why did the current method and temporal method result in
different measures of retained earnings?
The temporal method reports a remeasurement gain or loss on the
income statement, while the current method does not. These
different income measures carried over to the statement of retained
earnings.
3. Why did the current method and temporal method result in
different measures of assets, liabilities, and stockholders' equity?
The two methods may use different exchange rates to convert some
assets, liabilities, and expenses. Also, the current method results in
a separate, cumulative translation adjustment reported in
stockholders' equity.