CHAPTER 10
TRANSLATION OF FOREIGN
CURRENCY FINANCIAL STATEMENTS
Answers to Questions
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. dollar terms on the consolidated financial statements. 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 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. dollar 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 will be taken to other
comprehensive income. If the U.S. dollar is the functional currency, gains and losses on the
hedging instruments will be offset against the related remeasurement gains and losses.
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
© The McGraw-Hill Companies, Inc., 2007
10-1
5. The major concept underlying the temporal method is that the translation process should result
in a set of translated U.S. dollar financial statements as if the foreign subsidiary’s transactions
had actually been carried out using U.S. dollars. 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. dollar 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 all 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: all 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 virtually
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
following 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 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
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
usually 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 (equally 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 dollars
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 dollars (already calculated). The
difference is the translation adjustment. It is positive if the actual dollar net asset position is less
than the net asset position based on the current exchange rate. The translation adjustment is
negative if the actual dollar net asset position is greater than if translated at the current rate.
McGraw-Hill/Irwin
1-2
© The McGraw-Hill Companies, Inc., 2007
Solutions Manual
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 in
Statement 52 that either theory is considered more appropriate.
11. 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.
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 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.
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
© The McGraw-Hill Companies, Inc., 2007
10-3
Answers to Problems
1. C
2. C
3. C
4. B Since 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 Since the foreign currency is the functional currency, a translation is required.
All assets accounts are translated at current rates.
7. C Since 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
Purchases
Ending inventory
Cost of goods sold
McGraw-Hill/Irwin
1-4
FCU
200,000 x $1.00 = $ 200,000
10,300,000 x $0.80 = 8,240,000
(500,000) x $0.75 =
(375,000)
FCU 10,000,000
$8,065,000
© The McGraw-Hill Companies, Inc., 2007
Solutions Manual
13. C Beginning net assets, 1/1…………..
Increase in net assets:
Income ........................................
Ending net assets, 12/31 .................
Ending net assets at
current exchange rate ................
Translation Adjustment (positive) .
P20,000
x $.15 =
$ 3,000
10,000
P30,000
x $.19 =
1,900
$ 4,900
P30,000
x $.21 =
$ 6,300
$(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
Increases in net monetary assets:
Sale of inventory ........................
Decreases in net monetary assets:
Purchase of equipment .............
Purchase of inventory................
Transfer to parent ......................
Ending net monetary assets, 12/31
Ending net monetary assets at
the current exchange rate .........
Remeasurement gain ......................
P100,000
x $.16 =
$16,000
50,000
x $.20 =
10,000
(60,000)
(30,000)
(10,000)
P 50,000
x $.16 =
x $.18 =
x $.21 =
(9,600)
(5,400)
(2,100)
$ 8,900
P 50,000
x $.22 =
(11,000)
$(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.
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
© The McGraw-Hill Companies, Inc., 2007
10-5
21. (continued)
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 exchange 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)
Accounts payable
Accounts receivable
Accumulated depreciation
Advertising expense
Amortization expense
Buildings
Cash
Common stock
Depreciation expense
Dividends paid (10/1)
Notes payable
Patents (net)
Salary expense
Sales
Translation
$.16 C
$.16 C
$.16 C
$.19 A
$.19 A
$.16 C
$.16 C
$.28 H
$.19 A
$.20 H
$.16 C
$.16 C
$.19 A
$.19 A
Remeasurement
$.16 C
$.16 C
$.26 H
$.19 A
$.25 H
$.26 H
$.16 C
$.28 H
$.26 H
$.20 H
$.16 C
$.25 H
$.19 A
$.19 A
* C = current rate, H = historical rate, A = average rate
McGraw-Hill/Irwin
1-6
© The McGraw-Hill Companies, Inc., 2007
Solutions Manual
24. (20 minutes) (Calculate translation adjustment and remeasurement gain/loss and
explain their economic relevance)
The translation adjustment and remeasurement gain/loss can be determined as
the plug figure that keeps the dollar balance sheet in balance:
Translation
Remeasurement
CHF
Rate
US$
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
Ending net assets, 12/31 at
current exchange rate
Translation adjustment (positive)
Remeasurement
Beginning net monetary
liability position, 12/1
Ending net monetary liability
position, 12/31 at current
exchange rate
Remeasurement loss
CHF3,700,000
x $.70 = $2,590,000
CHF3,700,000
x $.75 = (2,775,000)
$( 185,000)
CHF(300,000)
x $.70 = $(210,000)
CHF(300,000)
x $.75 =
(225,000)
$ 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 $40,000 [CHF800,000 x ($.75-$.70)].
(The note could have been paid at December 1 for $560,000 [CHF800,000 x $.70]. At
December 31, it takes $600,000 to pay off the note [CHF800,000 x $.75].)
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
© The McGraw-Hill Companies, Inc., 2007
10-7
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
* Repairs is the only expense which is not incurred evenly throughout the year.
Statement of Retained Earnings
LCU
U.S. Dollars
Retained earnings, 1/1
-0-0Net 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
Cash
41,000 x $1.80 C =
Accounts receivable
10,000 x $1.80 C =
Building
140,000 x $1.80 C =
Accumulated depreciation (14,000) x $1.80 C =
Total assets
177,000
Interest payable
10,000 x $1.80 C =
Note payable
100,000 x $1.80 C =
Common stock
40,000 x $2.00 H =
Retained earnings
27,000
(above)
Translation adjustment
(below)
Total liabilities and equities177,000
Computation of Translation Adjustment
Beginning net assets
-0-0Increase in net assets:
Issued common stock
40,000
x $2.00 =
Net income
32,000
(above)
Decrease in net assets:
Dividends paid
(5,000) x $1.80 =
Ending net assets
67,000
Ending net assets at current
exchange rate
67,000
x $1.80 =
Translation adjustment (negative)
McGraw-Hill/Irwin
1-8
U.S. Dollars
$ 73,800
18,000
252,000
(25,200)
$318,600
$ 18,000
180,000
80,000
52,000
(11,400)
$318,600
$ 80,000
61,000
(9,000)
$132,000
120,600
$ 11,400
© The McGraw-Hill Companies, Inc., 2007
Solutions Manual
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
-0-0Cash, 12/31
41,000
x $1.80 C = $ 73,800
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
© The McGraw-Hill Companies, Inc., 2007
10-9
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
Increases in net assets (income):
Sold inventory at a profit 5/1
Sold land at a gain 6/1
Decreases in net assets:
Paid a dividend 12/1
Depreciation recorded
Net asset balance 12/31
Net asset balance 12/31
at current exchange rate
Translation adjustment—positive
KM30,000
x $.32 =
$ 9,600
5,000
1,000
x $.34 =
x $.35 =
1,700
350
(3,000)
(2,000)
KM31,000
x $.41 =
x $.37 =
(1,230)
( 740)
$ 9,680
KM31,000
x $.42 =
(13,020)
$(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)
Increases in monetary assets:
Sold inventory 5/1
15,000
Sold land 6/1
5,000
Decreases in monetary assets:
Bought inventory 10/1
(12,000)
Bought land 11/1
(4,000)
Paid a dividend 12/1
(3,000)
Ending net monetary liability
position
KM(2,000)
Ending net monetary liability position
at current exchange rate
KM(2,000)
Remeasurement gain
x $.32 =
$ ( 960)
x $.34 =
x $.35 =
5,100
1,750
x $.39 =
x $.40 =
x $.41 =
(4,680)
(1,600)
(1,230)
$(1,620)
x $.42 =
(840)
$ (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.
McGraw-Hill/Irwin
1-10
© The McGraw-Hill Companies, Inc., 2007
Solutions Manual
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
Changes in net assets
Rendered services
Incurred expense
Net assets, 12/31
Net assets, 12/31 at
current exchange rate
Translation adjustment (positive)
82,000 LCU x $.24 =
$19,680
30,000 LCU x $.25 =
(18,000) LCU x $.26 =
94,000 LCU
7,500
(4,680)
22,500
94,000 LCU x $.29 =
27,260
$(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
Changes in net monetary assets
Rendered services
Incurred expense
Net monetary assets, 12/31
Net monetary assets, 12/31 at
current exchange rate
Remeasurement gain
c. Translated value of land
Remeasured value of land
22,000 LCU x $.24 =
$ 5,280
30,000 LCU x $.25 =
(18,000) LCU x $.26 =
34,000 LCU
7,500
(4,680)
$ 8,100
34,000 LCU x $.29 =
9,860
$(1,760)
60,000 LCU
60,000 LCU
$17,400
$13,800
x $.29 =
x $.23 =
29. (10 minutes) (Determine the appropriate exchange rate)
Account
(a) Translation
Sales
20 A
Inventory
22 C
Equipment
22 C
Rent expense
20 A
Dividends
21 H
Notes receivable
22 C
Accumulated depreciation--equipment 22 C
Salary payable
22 C
Depreciation expense
20 A
(b) Remeasurement
20 A
19 H
13 H
20 A
21 H
22 C
13 H
22 C
13 H
C = current exchange rate, A = average exchange rate, H = Historical exchange
rate
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
© The McGraw-Hill Companies, Inc., 2007
10-11
30. (30 minutes) (Hedge of balance sheet exposure)
a. Net assets, 1/1 (132,000 – 54,000)
Change in net assets:
Net income
Dividends, 3/1
Dividends, 10/1
Net assets, 12/31
Net assets at current
exchange rate, 12/31
Translation adjustment (negative)
78,000 kites
x $0.80 =
$62,400
26,000 kites x $0.77 =
(5,000) kites x $0.78 =
(5,000) kites x $0.76 =
94,000 kites
20,020
(3,900)
(3,800)
$74,720
94,000 kites
70,500
$ 4,220
x $0.75 =
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).
McGraw-Hill/Irwin
1-12
© The McGraw-Hill Companies, Inc., 2007
Solutions Manual
31. (45 minutes) (Translation and remeasurement of foreign subsidiary trial
balance)
a. Translation of Subsidiary Trial Balance
Debits
Credits
8,000 KQ x 1.62 $12,960
9,000 KQ x 1.62 14,580
3,000 KQ x 1.62
4,860
600 KQ x 1.62
$ 972
5,000 KQ x 1.62
8,100
3,000 KQ x 1.62
4,860
5,000 KQ x 1.62
8,100
10,000 KQ x 1.71
17,100
4,000 KQ x 1.66
6,640
25,000 KQ x 1.64
41,000
5,000 KQ x 1.64
8,200
600 KQ x 1.64
984
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…………………………..
-0-0Increase 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)
Cash………………………………….
Accounts Receivable……………..
Equipment…………………………..
Accumulated Depreciation………
Land…………………………………
Accounts Payable…………………
Notes Payable……………………..
Common Stock……………………
Dividends Paid…………………….
Sales…………………………………
Salary Expense……………………
Depreciation Expense……………
Miscellaneous Expense………….
Net assets, 12/31……………………….
Net assets, 12/31 at
current exchange rate…………….
Translation adjustment (negative)
16,400* KQ
$27,516
16,400 KQ x 1.62
26,568
$ 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.
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
© The McGraw-Hill Companies, Inc., 2007
10-13
31. (continued)
b. Remeasurement of Subsidiary Trial Balance
Cash
Accounts Receivable
Equipment
Accumulated Depreciation
Land
Accounts Payable
Notes Payable
Common Stock
Dividends Paid
Sales
Salary Expense
Depreciation Expense
Miscellaneous Expense
8,000
9,000
3,000
600
5,000
3,000
5,000
10,000
4,000
25,000
5,000
600
9,000
KQ x 1.62
KQ x 1.62
KQ x 1.71
KQ x 1.71
KQ x 1.59
KQ x 1.62
KQ x 1.62
KQ x 1.71
KQ x 1.66
KQ x 1.64
KQ x 1.64
KQ x 1.71
KQ x 1.64
Remeasurement loss (debit)
Calculation of Remeasurement Loss
Net monetary assets, 1/1
-0Increase in net monetary assets:
Common stock issued
10,000
Sales
25,000
Decrease in net monetary assets:
Acquired equipment
(3,000)
Acquired land
(5,000)
Dividends paid
(4,000)
Salary expense
(5,000)
Miscellaneous expense
(9,000)
Net monetary assets, 12/31
Net monetary assets, 12/31
at current exchange rate
Remeasurement loss (debit)
Debits
$12,960
14,580
5,130
Credits
$ 1,026
7,950
4,860
8,100
17,100
6,640
41,000
8,200
1,026
14,760
$71,246
840
$72,086
$72,086
-0KQ x 1.71 $17,100
KQ x 1.64 41,000
KQ
KQ
KQ
KQ
KQ
x 1.71
(5,130)
x 1.59
(7,950)
x 1.66
(6,640)
x 1.64
(8,200)
x 1.64 (14,760)
9,000* KQ
$15,420
9,000 KQ x 1.62
$
14,580
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.
McGraw-Hill/Irwin
1-14
© The McGraw-Hill Companies, Inc., 2007
Solutions Manual
32. (30 minutes) (Translate the financial statements of a foreign subsidiary)
LIVINGSTON COMPANY
Income Statement
For Year Ending December 31, 2007
Sales
Cost of Goods Sold
Gross Profit
Operating Expenses
Gain on Sale of Equipment
Net Income
Goghs
270,000
(155,000)
115,000
(54,000)
10,000
71,000
U.S. Dollars
x 1/.63 = 428,571
x 1/.63 = (246,032)
182,539
x 1/.63 = (85,714)
x 1/.58 =
17,241
114,066
Statement of Retained Earnings
For Year Ending December 31, 2007
Retained Earnings, 1/1/07
Net Income
Dividends Paid
Retained Earnings, 12/31/07
Goghs
U.S. Dollars
216,000 given
395,000
71,000 above
114,066
(26,000) x 1/.62 = (41,935)
261,000
467,131
Balance Sheet
December 31, 2007
Cash
Receivables
Inventory
Fixed Assets (net)
Total
Goghs
44,000
116,000
58,000
339,000
557,000
Liabilities
Common Stock
Retained Earnings
Translation Adjustment
Total
176,000 x 1/.65 = 270,769
120,000 x 1/.48 = 250,000
261,000 above 467,131
(130,977)
557,000
856,923
Translation Adjustment
Goghs
Net assets, 1/1/07
336,000
Net income, 2007
71,000
Dividends paid
(26,000)
Net assets, 12/31/07
381,000
Net assets at current exchange rate,
12/31/07
381,000
U.S. Dollars
x 1/.65 = 67,692
x 1/.65 = 178,462
x 1/.65 = 89,231
x 1/.65 = 521,538
856,923
U.S. Dollars
x 1/.60 = 560,000
above 114,066
above
(41,935)
632,131
x 1/.65 = 586,154
Translation adjustment, 2007 (negative)
Cumulative translation adjustment, 1/1/07 (negative)
Cumulative translation adjustment, 12/31/07 (negative)
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
45,977
85,000
130,977
© The McGraw-Hill Companies, Inc., 2007
10-15
33. (35 minutes) (Compute translation adjustment and remeasurement gain or loss)
a. Remeasurement Gain or Loss
Net monetary assets, 1/1/07*
Increases in net monetary assets:
Issued Common Stock (4/1/07)
Sold Building** (7/1/07)
Sales (2007)
Decreases in net monetary assets:
Purchased Equipment (4/1/07)
Paid Dividends (10/1/07)
Rent Expense (2007)
Salary Expense (2007)
Utilities Expense (2007)
Net monetary assets, 12/31/07
Net monetary assets, 12/31/07 at
current exchange rate
Remeasurement gain (credit)
2,000
KR x 2.50 = $ 5,000
10,000
22,000
80,000
KR x 2.60 = 26,000
KR x 2.80 = 61,600
KR x 2.70 = 216,000
(30,000)
(32,000)
(14,000)
(20,000)
( 5,000)
13,000
KR x 2.60 = (78,000)
KR x 2.90 = (92,800)
KR x 2.70 = (37,800)
KR x 2.70 = (54,000)
KR x 2.70 = (13,500)
KR
$ 32,500
13,000
KR x 3.00 = 39,000
$ (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 2007, therefore, the accumulated depreciation related to the
building sold during 2007 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.
McGraw-Hill/Irwin
1-16
© The McGraw-Hill Companies, Inc., 2007
Solutions Manual
33. (continued)
b. Translation Adjustment
Net assets, 1/1/07*
100,000 KR x 2.50
Increases in net assets
Issued Common Stock (4/1/07)
10,000 KR x 2.60
Gain on Sale of Building** (7/1/07) 6,000 KR x 2.80
Sales (2007)
80,000 KR x 2.70
Decreases in net assets
Paid Dividends (10/1/07)
(32,000) KR x 2.90
Depreciation Expense (2007)
(15,000) KR x 2.70
Rent Expense (2007)
(14,000) KR x 2.70
Salary Expense (2007)
(20,000) KR x 2.70
Utilities Expense (2007)
( 5,000) KR x 2.70
Net assets, 12/31/07
110,000 KR
Net monetary assets, 12/31/07 at
current exchange rate
110,000 KR x 3.00
Translation adjustment (positive)
= $250,000
=
=
=
26,000
16,800
216,000
=
=
=
=
=
(92,800)
(40,500)
(37,800)
(54,000)
(13,500)
$270,200
=
330,000
$(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, 2007 can be computed by translating the January 1 accounts and
assuming that the translation adjustment is the balancing figure:
Common Stock, 1/1/07
70,000 KR x 2.40 =
$168,000
Retained Earnings, 1/1/07
30,000 KR given
62,319
Net assets, 1/1/07
100,000 KR
$230,319
Net assets, 1/1/07 at current
exchange rate
100,000 KR x 2.50 =
250,000
Cumulative translation adjustment (positive), 1/1/07
$ (19,681)
Translation adjustment (positive), 2007
(59,800)
Cumulative translation adjustment (positive), 12/31/07
$ (79,481)
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
© The McGraw-Hill Companies, Inc., 2007
10-17
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. Remeasurement of Mexican Operations
Accounts payable
Accumulated depreciation
Building and equipment
Cash
Depreciation expense
Inventory (beginning
—income statement)
Inventory (ending
—income statement)
Inventory (ending—balance sheet)
Purchases
Receivables
Salary expense
Sales
Main office
Remeasurement loss
Total
Canadian Dollars
Debit
Credit
17,150
4,750
10,000
20,650
500
Pesos
49,000
19,000
40,000
59,000
2,000
x .35 C
x .25 H
x .25 H
x .35 C
x .25 H
23,000
x .30 A (’06)
28,000
28,000
68,000
21,000
9,000
124,000
30,000
6,900
x .34 A(’07)
x .34 A(’07)
9,520
x .34 A(’07) 23,120
x .35 C
7,350
x .34 A
3,060
x .34 A
given
Schedule One
10
81,110
Schedule One—Remeasurement Loss
Pesos
Net monetary liabilities, 1/1/07*
(16,000)
x
Increases in net monetary assets
Sales
124,000
x
Decreases in net monetary assets
Purchases
(68,000)
x
Salary Expense
( 9,000)
x
Net monetary assets, 12/31/07**
31,000
Net monetary assets, 12/31/07 at
current exchange rate
31,000
x
Remeasurement loss
.32
9,520
42,160
7,530
81,110
Canadian Dollars
(5,120)
.34
42,160
.34
.34
(23,120)
( 3,060)
10,860
.35
10,850
10
* Net monetary liabilities, 1/1/07, can be determined by first determining the
net monetary assets at 12/31/07 and then backing out the changes in
monetary assets and liabilities during 2007—sales, purchases, and salary
expense.
** Net monetary assets, 12/31/07: Cash + Receivables – Accounts Payable
McGraw-Hill/Irwin
1-18
© The McGraw-Hill Companies, Inc., 2007
Solutions Manual
34. (continued)
b. 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$.
Income Statement
c. Translation into U.S. dollars—
For the Year Ended December 31, 2007
Current Rate Method
Sales
Cost of goods sold
Gross profit
Depreciation expense
Salary expense
Utility expense
Gain on sale of equipment
Remeasurement loss
Net income
C$
354,160
(223,500)
130,660
(8,500)
(29,060)
(9,000)
5,000
(10)
C$
89,090
x .67 A =
x .67 A =
x
x
x
x
x
$ 237,287.20
(149,745.00)
87,542.20
.67 A =
(5,695.00)
.67 A =
(19,470.20)
.67 A =
(6,030.00)
.68 H =
3,400.00
.67 A =
(6.70)
$ 59,740.30
Statement of Retained Earnings
For the Year Ended December 31, 2007
Retained earnings, 1/1/07
Net income (above)
Dividends paid
Retained earnings, 12/31/07
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
C$
C$
135,530
89,090
( 28,000)
196,620
Given
Above
x .69 H =
$ 70,421.00
59,740.30
(19,320.00)
$110,841.30
© The McGraw-Hill Companies, Inc., 2007
10-19
34. (continued)
Balance Sheet
December 31, 2007
Cash
Receivables
Inventory
Buildings and equipment
Accumulated depreciation
Total
C$
C$
Accounts payable
C$
Notes payable
Common stock
Retained earnings
Cumulative translation adjustment
Total
C$
46,650
75,350
107,520
177,000
(31,750)
374,770
52,150
76,000
50,000
196,620
374,770
x
x
x
x
x
.65 C
.65 C
.65 C
.65 C
.65 C
x .65 C = $ 33,897.50
x .65 C =
49,400.00
x .45 H =
22,500.00
Above
110,841.30
Schedule Two 26,961.70
$ 243,600.50
Schedule Two—Translation Adjustment
Net assets, 1/1/07
C$ 185,530
x .70 =
Changes in net assets
Net income
89,090
Above
Dividends
(28,000)
x .69 =
Net assets, 12/31/07
C$ 246,620
Net assets, 12/31/07 at
current exchange rate
C$ 246,620
x .65 =
Translation adjustment, 2007 (negative)
Cumulative translation adjustment, 1/1/07 (positive)
Cumulative translation adjustment, 12/31/07 (positive)
McGraw-Hill/Irwin
1-20
= $ 30,322.50
=
48,977.50
=
69,888.00
= 115,050.00
= (20,637.50)
$243,600.50
$129,871.00
59,740.30
(19,320.00)
$170,291.30
160,303.00
9,988.30
(36,950.00)
$(26,961.70)
$
© The McGraw-Hill Companies, Inc., 2007
Solutions Manual
35. (90 minutes) (Translate foreign currency financial statements and prepare
consolidation worksheet)
Step One
Simbel's financial statements are first translated into U.S. dollars after
reclassification of the 10,000 pound expenditure for rent from rent expense to
prepaid rent. Credit balances are in parentheses.
Translation Worksheet
Exchange
Account
Pounds
Rate
Dollars
Sales
(800,000)
0.274
(219,200)
Cost of goods sold
420,000
0.274
115,080
Salary expense
74,000
0.274
20,276
Rent expense (adjusted)
36,000
0.274
9,864
Other expenses
59,000
0.274
16,166
Gain on sale of fixed
assets, 10/1/08
(30,000)
0.273
(8,190)
Net income
(241,000)
(66,004)
R/E, 1/1/08
Net income
Dividends paid
R/E,12/31/08
(133,000)
(241,000)
50,000
(324,000)
Cash and receivables
Inventory
Prepaid rent (adjusted)
Fixed assets
Total
Accounts payable
Notes payable
Common stock
Add’l paid-in capital
Retained earnings, 12/31/08
Subtotal
Cumulative translation
adjustment (negative)
Total
Schedule 1 (38,244)
Above
(66,004)
0.275
13,750
(90,498)
146,000
297,000
10,000
455,000
908,000
0.270
0.270
0.270
0.270
39,420
80,190
2,700
122,850
245,160
(54,000)
(140,000)
(240,000)
(150,000)
(324,000)
0.270
0.270
0.300
0.300
Above
(14,580)
(37,800)
(72,000)
(45,000)
(90,498)
(259,878)
Schedule 2
14,718
(245,160)
(908,000)
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
© The McGraw-Hill Companies, Inc., 2007
10-21
35. (continued)
Schedule 1—Translation of 1/1/08 Retained Earnings
Retained earnings, 1/1/07
Net income, 2007
Dividends, 6/1/07
Retained earnings, 12/31/07
Pounds
-0(163,000)
30,000
(133,000)
0.288
0.290
Dollars
-0(46,944)
8,700
(38,244)
Schedule 2—Calculation of Cumulative Translation Adjustment at 12/31/08
Pounds
Dollars
Net assets, 1/1/07
(390,000)
0.300
Net income, 2007
(163,000)
0.288
Dividends, 6/1/07
30,000
0.290
Net assets, 12/3/07
(523,000)
Net assets, 12/31/07 at
current exchange rate
(523,000)
0.280
Translation adjustment, 2007 (negative)
Net assets, 1/1/08
(523,000)
0.280
Net income, 2008
(241,000)
Above
Dividends, 6/1/08
50,000
0.275
Net assets, 12/31/08
(714,000)
Net assets, 12/31/08 at
current exchange rate
(714,000)
0.270
Translation adjustment, 2008 (negative)
Cumulative translation adjustment, 12/31/08 (negative)
McGraw-Hill/Irwin
1-22
(117,000)
(46,944)
8,700
(155,244)
(146,440)
(8,804)
(146,440)
(66,004)
13,750
(198,694)
(192,780)
(5,914)
(14,718)
© The McGraw-Hill Companies, Inc., 2007
Solutions Manual
35. (continued)
Step Two
Cayce and Simbel's U.S. dollar accounts are then consolidated. Necessary
adjustments and eliminations are made.
Consolidation Worksheet
Adjustments and Consolidated
Cayce
Simbel
Eliminations
Balances
Account
Dollars
Dollars
Debit
Credit
Dollars
Sales
(200,000) (219,200)
(419,200)
Cost of goods sold
93,800 115,080
208,880
Salary expense
19,000
20,276
39,276
Rent expense
7,000
9,864
16,864
Other expenses
21,000
16,166
37,166
Dividend income
(13,750)
-0(I) 13,750
-0Gain, 10/1/08
-0(8,190)
(8,190)
Net income
(72,950) (66,004)
(125,204)
Ret earn, 1/1/08
Net income
Dividends paid
Ret earn, 12/31/08
Cash and receivables
Inventory
Prepaid rent
Investment
Fixed assets
Total
Accounts payable
Notes payable
Common stock
Additional PIC
Ret earn, 12/31/08
Subtotal
Cum trans adjust
Total
(318,000)
(72,950)
24,000
(366,950)
110,750
98,000
30,000
126,000
398,000
762,750
(38,244) (S) 38,244 (*C) (38,244) (356,244)
(66,004)
(125,204)
13,750
(I) (13,750)
24,000
(90,498)
(457,448)
39,420
80,190
2,700
-0- (*C) 38,244 (S)(164,244)
122,850 (S) 9,000 (E)
(900)
245,160
(60,800)
(132,000)
(120,000)
(83,000)
(366,950)
(14,580)
(37,800)
(72,000) (S) 72,000
(45,000) (S) 45,000
(90,498)
(259,878)
14,718 (E)
900
(762,750) (245,160)
217,138
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
150,170
178,190
32,700
-0528,950
890,010
(75,380)
(169,800)
(120,000)
(83,000)
(457,448)
(905,628)
15,618
(217,138) (890,010)
© The McGraw-Hill Companies, Inc., 2007
10-23
35. (continued)
Explanation of Adjustment and Elimination Entries
Entry *C
Investment in Simbel ...................................................
38,244
Retained earnings, 1/1/08 .......................................
38,244
To accrue 2007 increase in subsidiary book value (see Schedule 1). Entry is
needed because parent is using the cost method.
Entry S
Common Stock (Simbel) ................ 72,000
Add'l Paid-in-capital (Simbel) ............ 45,000
Retained earnings, 1/1/08 (Simbel) ... 38,244
Fixed assets (revaluation) ................
9,000
Investment in Simbel ................
164,244
To eliminate subsidiary's stockholders' equity accounts and allocate the excess
of purchase price over book value to land (fixed assets).
The excess of cost over book value is calculated as follows:
Purchase price ...................................................
$126,000
Book value, 1/1/07 ..............................................
Common stock .................................................
(72,000)
Add’l paid-in capital .........................................
(45,000)
Excess of purchase price over book value ......
$ 9,000
The excess of cost over book value is 30,000 pounds. The U.S. dollar
equivalent at 1/1/07, the date of purchase, is $9,000 (£E30,000 x $.30).
Entry I
Dividend income ................................................
13,750
Dividends paid ...............................................
13,750
To eliminate intercompany dividend payments recorded by parent as income.
Entry E
Cumulative translation adjustment...................
900
Fixed assets (revaluation) ...........................
900
To revalue (write-down) the excess of cost over book value for the change in
exchange rate since the date of acquisition with the counterpart recognized in
the consolidated cumulative translation adjustment.
The revaluation of "excess" is calculated as follows:
Excess of cost over book value
U.S. dollar equivalent at 12/31/08
£E30,000 x $.27 = $8,100
U.S. dollar equivalent at 1/1/07
£E30,000 x $.30 = 9,000
Cumulative translation adjustment
related to excess, 12/31/08 (negative)
$( 900)
McGraw-Hill/Irwin
1-24
© The McGraw-Hill Companies, Inc., 2007
Solutions Manual
36. (90 minutes) (Translate foreign currency financial statements using U.S. GAAP
and explain sign of translation adjustment [remeasurement gain/loss].)
Part I (a). Czech koruna is the functional currency—current rate method
KCS
Sales
25,000,000
Cost of goods sold
(12,000,000)
Depreciation expense—equipment
(2,500,000)
Depreciation expense—building
(1,800,000)
Research and development expense (1,200,000)
Other expenses
(1,000,000)
Net income
6,500,000
Retained earnings, 1/1/08
500,000
Dividends paid, 12/15/08
(1,500,000)
Retained earnings, 12/31/08
5,500,000
Cash
Accounts receivable
Inventory
Equipment
Accum. deprec.—equipment
Building
Accum. deprec.—equipment
Land
Total assets
Accounts payable
Long-term debt
Common stock
Additional paid-in capital
Retained earnings, 12/31/08
Translation adjustment
Total liabilities and equities
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
2,000,000
3,300,000
8,500,000
25,000,000
(8,500,000)
72,000,000
(30,300,000)
6,000,000
78,000,000
2,500,000
50,000,000
5,000,000
15,000,000
5,500,000
78,000,000
Exchange
Rate
US$
0.035
875,000
0.035
(420,000)
0.035
(87,500)
0.035
(63,000)
0.035
(42,000)
0.035
(35,000)
227,500
given
22,500
0.031
(46,500)
203,500
0.030
0.030
0.030
0.030
0.030
0.030
0.030
0.030
60,000
99,000
255,000
750,000
(255,000)
2,160,000
(909,000)
180,000
2,340,000
0.030
75,000
0.030 1,500,000
0.050
250,000
0.050
750,000
above
203,500
to balance (438,500)
2,340,000
© The McGraw-Hill Companies, Inc., 2007
10-25
36.
(continued)
Calculation of Translation Adjustment
Translation adjustment, 2007 (negative)
Net assets, 1/1/08
20,500,000
0.040
Net income, 2008
6,500,000
0.035
Dividends, 12/15/08
(1,500,000)
0.031
Net assets, 12/31/08
25,500,000
Net assets, 12/31/08 at current
exchange rate
25,500,000
0.030
Translation adjustment, 2008 (negative)
Cumulative translation adjustment, 12/31/08 (negative)
McGraw-Hill/Irwin
1-26
202,500
820,000
227,500
(46,500)
1,001,000
765,000
236,000
438,500
© The McGraw-Hill Companies, Inc., 2007
Solutions Manual
36. (continued)
Part I (b). U.S. dollar is the functional currency—temporal method
Exchange
US$
875,000
(493,500)
(118,000)
(85,200)
(42,000)
(35,000)
101,300
408,000
509,300
353,000
(46,500)
815,800
KCS
Sales
25,000,000
Cost of goods sold
(12,000,000)
Depreciation expense—equipment
(2,500,000)
Depreciation expense—building
(1,800,000)
Research and development expense (1,200,000)
Other expenses
(1,000,000)
Income before remeasurement gain
6,500,000
Remeasurement gain, 2008
Net income
6,500,000
Retained earnings, 1/1/08
500,000
Dividends paid, 12/15/08
(1,500,000)
Retained earnings, 12/31/08
5,500,000
Rate
0.035
Sched.A
Sched.B
Sched.C
0.035
0.035
Cash
Accounts receivable
Inventory
Equipment
Accum. deprec.—equipment
Building
Accum. deprec.—equipment
Land
Total assets
0.030
60,000
0.030
99,000
0.032
272,000
Sched.B 1,180,000
Sched.B (418,000)
Sched.C 3,408,000
Sched.C (1,510,200)
0.050
300,000
3,390,800
Accounts payable
Long-term debt
Common stock
Additional paid-in capital
Retained earnings, 12/31/08
Total liabilities and equities
2,000,000
3,300,000
8,500,000
25,000,000
(8,500,000)
72,000,000
(30,300,000)
6,000,000
78,000,000
given
0.031
2,500,000
50,000,000
5,000,000
15,000,000
5,500,000
78,000,000
0.030
0.030
0.050
0.050
above
KCS
6,000,000
14,500,000
(8,500,000)
12,000,000
ER
0.043
0.035
0.032
75,000
1,500,000
250,000
750,000
815,800
3,390,800
Schedule A—Cost of goods sold
Beginning inventory
Purchases
Ending inventory
Cost of goods sold
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
US$
258,000
507,500
(272,000)
493,500
© The McGraw-Hill Companies, Inc., 2007
10-27
36. (continued)
Schedule B—Equipment
Old Equipment—at 1/1/08
New Equipment—acquired 1/3/08
Total
KCS
20,000,000
5,000,000
25,000,000
ER
0.050
0.036
US$
1,000,000
180,000
1,180,000
Accum. Depr.—Old Equipment
Accum. Depr.—New Equipment
Total
Deprec expense—Old Equipment
Deprec expense—New Equipment
Total
8,000,000
500,000
8,500,000
2,000,000
500,000
2,500,000
0.050
0.036
400,000
18,000
418,000
100,000
18,000
118,000
KCS
60,000,000
12,000,000
72,000,000
30,000,000
300,000
30,300,000
1,500,000
300,000
1,800,000
ER
0.050
0.034
0.050
0.036
Schedule C—Building
Old Building—at 1/1/07
New Building—acquired 3/5/08
Total
Accum. Depr.—Old Building
Accum. Depr.—New Building
Total
Deprec. expense—Old Building
Deprec. expense—New Building
Total
0.050
0.034
0.050
0.034
US$
3,000,000
408,000
3,408,000
1,500,000
10,200
1,510,200
75,000
10,200
85,200
Calculation of Remeasurement Gain
Net mon. liab., 1/1/08
Increase in mon. assets:
Sales
Decrease in mon. assets:
Purchase of inventory
Research and development
Other expenses
Dividends paid, 12/15/08
Purchase of equipment, 1/3/08
Purchase of buildings, 3/5/08
Net mon liab, 12/31/08
Net mon liab, 12/31/08 at
current exchange rate
Remeasurement gain—2008
McGraw-Hill/Irwin
1-28
KCS
(37,000,000)
ER
US$
0.040 (1,480,000)
25,000,000
0.035
875,000
(14,500,000)
(1,200,000)
(1,000,000)
(1,500,000)
(5,000,000)
(12,000,000)
(47,200,000)
0.035
0.035
0.035
0.031
0.036
0.034
(47,200,000)
0.030 (1,416,000)
(408,000)
(507,500)
(42,000)
(35,000)
(46,500)
(180,000)
(408,000)
(1,824,000)
© The McGraw-Hill Companies, Inc., 2007
Solutions Manual
36. (continued)
Part I (c). U.S. dollar is the functional currency—temporal method (no longterm debt)
Exchange
KCS
Rate
US$
Sales
25,000,000
0.035
875,000
Cost of goods sold
(12,000,000) Sched.A (493,500)
Depreciation expense—equipment
(2,500,000) Sched.B (118,000)
Depreciation expense—building
(1,800,000) Sched.C (85,200)
Research and development expense
(1,200,000)
0.035
(42,000)
Other expenses
(1,000,000)
0.035
(35,000)
Income before remeasurement loss
6,500,000
101,300
Remeasurement loss, 2008
(92,000)
Net income
6,500,000
9,300
Retained earnings, 1/1/08
500,000
given (147,000)
Dividends paid, 12/15/08
(1,500,000)
0.031
(46,500)
Retained earnings, 12/31/08
5,500,000
(184,200)
Cash
Accounts receivable
Inventory
Equipment
Accum. deprec.—equipment
Building
Accum. deprec.—equipment
Land
Total assets
2,000,000
3,300,000
8,500,000
25,000,000
(8,500,000)
72,000,000
(30,300,000)
6,000,000
78,000,000
Accounts payable
Long-term debt
Common stock
Additional paid in capital
Retained earnings, 12/31/08
Total liabilities and equities
2,500,000
0
20,000,000
50,000,000
5,500,000
78,000,000
0.030
60,000
0.030
99,000
0.032
272,000
Sched.B 1,180,000
Sched.B (418,000)
Sched.C 3,408,000
Sched.C(1,510,200)
0.050
300,000
3,390,800
0.030
75,000
0.030
0
0.050 1,000,000
0.050 2,500,000
above (184,200)
3,390,800
Schedule A—Cost of goods sold - same as in Part I (b)
Schedule B—Equipment
- same as in Part I (b)
Schedule C—Building
- same as in Part I (b)
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
© The McGraw-Hill Companies, Inc., 2007
10-29
36. (continued)
Calculation of Remeasurement Loss
Net monetary assets, 1/1/08
Increase in monetary assets:
Sales
Decrease in monetary assets:
Purchase of inventory
Research and development
Other expenses
Dividends paid, 12/15/08
Purchase of equipment, 1/3/08
Purchase of buildings, 3/5/08
Net monetary assets, 12/31/08
Net monetary assets, 12/31/08
at current exchange rate
Remeasurement loss—2008
KCS
13,000,000
ER
0.040
US$
520,000
25,000,000
0.035
875,000
(14,500,000)
(1,200,000)
(1,000,000)
(1,500,000)
(5,000,000)
(12,000,000)
2,800,000
0.035
0.035
0.035
0.031
0.036
0.034
(507,500)
(42,000)
(35,000)
(46,500)
(180,000)
(408,000)
176,000
2,800,000
0.030
84,000
92,000
Part II. Explanation of the negative translation adjustment in Part I (a),
remeasurement gain in Part I (b), and remeasurement loss in Part I (c).
The negative translation adjustment in Part I (a) arises because of two factors:
(1) there is a net asset balance sheet exposure and (2) the Czech koruna has
depreciated against the U.S. dollar during 2008 (from $.040 at 1/1/08 to $.030 at
12/31/08). A net asset balance sheet exposure exists because all assets are
translated at the current exchange rate and exceed total liabilities which are also
translated at the current exchange rate.
The remeasurement gain in Part I (b) arises because of two factors: (1) there is a
net monetary liability balance sheet exposure and (2) the Czech koruna has
depreciated against the U.S. dollar. Under the temporal method, Cash and
Accounts Receivable are the only assets translated at the current exchange rate
(total KCS 5,300,000). Accounts Payable and Long-term Debt are also translated
at the current exchange rate (total KCS 52,500,000). Because the Czech koruna
amount of liabilities translated at the current rate exceeds the Czech koruna
amount of assets translated at the current rate, a net monetary liability balance
sheet exposure exists.
The remeasurement loss in Part I (c) arises because of two factors: (1) there is a
net monetary asset balance sheet exposure and (2) the Czech koruna has
depreciated against the U.S. dollar during 2008. Cash and Accounts Receivable
are the only assets translated at the current exchange rate (total KCS 5,300,000).
Because there is no Long-term Debt in part 1(c), Accounts Payable is the only
liability translated at the current exchange rate (total KCS 2,500,000). Because
the Czech koruna amount of assets translated at the current rate exceeds the
Czech koruna amount of liabilities translated at the current rate, a net monetary
asset balance sheet exposure exists.
McGraw-Hill/Irwin
1-30
© The McGraw-Hill Companies, Inc., 2007
Solutions Manual
Excel Case—Translating Foreign Currency Financial Statements
1.2. Spreadsheet for the translation (current rate method) and remeasurement
(temporal method) of the FC financial statements of Charles Edward
Company’s foreign subsidiary.
Temporal Method
December 31, 2007
Sales
Cost of goods sold
Gross profit
Selling expense
Depreciation expense
Remeasurement gain/loss
Income before tax
Income taxes
Net income
Retained earnings, 1/1/07
Retained earn, 12/31/07
FC
5,000
(3,000)
2,000
(400)
(600)
0
1,000
(300)
700
0
700
Cash
Inventory
Fixed assets
Less: accum/deprec
Total assets
1,000
2,000
6,000
(600)
8,400
Current liabilities
Long-term debt
Contributed capital
Cum. trans. adjust.
Retained earnings
Total liab and stock equity
1,500
3,000
3,200
0
700
8,400
Exchange Rates
January 1-31, 2007
Average 2007
December 31, 2007
Inventory purchases
Key:
Average Exchange Rate
Current Exchange Rate
Historical Exchange Rate
Rate
USD
$0.45 A
calculation
subtotal
$0.45 A
$0.50 H
to balance
subtotal
$0.45 A
subtotal
from B/S
$0.38
$0.43
$0.50
$0.50
total
C
H
H
H
$0.38 C
$0.38 C
$0.50 H
n/a
to balance
A=L+SE
$2,250
Current Rate Method
Rate
$0.45 A $2,250
(1,360)
890
(180)
(300)
355
765
(135)
630
0
630
$0.45
subtotal
$0.45
$0.45
n/a
subtotal
$0.45
subtotal
380
860
3,000
(300)
3,940
$0.38
$0.38
$0.38
$0.38
total
570
1,140
1,600
0
630
3,940
USD
A
A
A
A
total
C
C
C
C
$0.38 C
$0.38 C
$0.50 H
to balance
from I/S
A=L+SE
(1,350)
900
(180)
(270)
0
450
(135)
315
0
315
380
760
2,280
(228)
3,192
570
1,140
1,600
(433)*
315
3,192
Temporal method—COGS (on a FIFO basis)
$0.50
BI
1,000
$0.50 H
$500
$0.45
P
4,000
$0.43 H
1,720
$0.38
EI
(2,000)
$0.43 H
(860)
$0.43
COGS
3,000
$1,360
A
C
H
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
© The McGraw-Hill Companies, Inc., 2007
10-31
*Computation of Translation Adjustment
FC
Net assets, 1/1/07
3,200
Net income, 2007
700
Net assets, 12/31/07
3,900
Net assets, 12/31/07
at current exchange rate
3,900
Translation adjustment (negative)
$0.50
$0.45
$0.38
USD
1,600
315
1,915
1,482
433
3. With the FC as functional currency, the U.S. dollar net income reflected in the
consolidated income statement is $315. If the U.S. dollar were the functional
currency, the amount would be twice as much—$630. The amount of total assets
reported on the consolidated balance sheet is 23.4% smaller than if the U.S.
dollar were functional currency [($3,940 – $3,192)/$3,192].
The relations between the current ratio, the debt to equity ratio, and profit margin
calculated from the FC financial statements and from the translated U.S. dollar
financial statements are shown below.
McGraw-Hill/Irwin
1-32
© The McGraw-Hill Companies, Inc., 2007
Solutions Manual
FC
Current ratio
CA
CL
Debt to equity ratio
Total liabilities
Total stockholders’
equity
Profit margin
NI
Sales
Return on equity
NI
Average TSE
Inventory turnover
COGS
Average Inventory
Temporal
Current Rate
3,000
1,500
2.0
1,240
570
2.1754
1,140
570
2.0
4,500
3,900
1,710
2,230
1,710
1,482
1.15385
0.76682
1.15385
700
5,000
0.14
630
2,250
0.28
315
2,250
0.14
700
3,550
0.19718
630
1,915
0.32898
315
1,541
0.20441
3,000
1,000
3
1,360
430
3.16279
1,350
380
3.55263
These results show that the temporal method distorts all ratios as calculated
from the original foreign currency financial statements. The current rate
method maintains all ratios that use numbers in the numerator and
denominator from the balance sheet only (current ratio, debt-to-equity ratio) or
the income statement only (profit margin). For ratios that combine numbers
from the income statement and balance sheet (return on equity, inventory
turnover), even the current rate method creates distortions.
The U.S. dollar amounts reported under the temporal method for inventory and
fixed assets reflect the equivalent U.S. dollar cost of those assets as if the
parent had sent dollars to the subsidiary to purchase the assets. For example,
to purchase FC 6,000 worth of fixed assets when the exchange rate was
$.50/FC, the parent would have had to provide the subsidiary with $3,000.
The U.S. dollar amounts reported under the current rate method for inventory
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
© The McGraw-Hill Companies, Inc., 2007
10-33
and fixed assets reflect neither the equivalent U.S. dollar cost of those assets
nor their U.S. dollar current value. By multiplying the FC historical cost by the
current exchange rate, these assets are reported at what they would have cost
in U.S. dollars if the current exchange rate had been in effect when they were
purchased. This is a hypothetical number with little, if any, meaning.
McGraw-Hill/Irwin
1-34
© The McGraw-Hill Companies, Inc., 2007
Solutions Manual