Exercise 12-6
Agentel Corporation is a U.S. –based importing-exporting company. The company entered into the
following transactions during the month of November.
Nov. 6 Purchased merchandise from AGT, a Swiss firm, for 600,000 francs.
5 Sold merchandise to SLS Inc, a firm located in rio De Janeiro, for $200,000.
18 Sold merchandise to TNT, Ltd., a British firm, for 130,000 pounds.
20 Purchased merchandise from SDS, Ltd., a British firm, for $160,000.
All the transactions were unsettled at December 31, Agentel’s fiscal year-end. Spot rates are as follows:
Currency
Date
Franc
Real
Pound
November 6
$.490
$.412
$1.520
November 15
$.487
$.409
$1.509
November 18
$.476
$.414
$1.506
November 20
$.468
$.405
$1.498
November 31
$.460
$.398
$1.482
A. Compute the amount that Agentel would report for each unsettled receivable and payable in its
balance sheet prepared at December 31.
B. Compute the transactions gain or loss on each unsettled receivable and payable that would be
reported in the income statement prepared for the year ended December 31.
Exercise 12-7
ASI recently completed the development and installation of an accounting information system for a
company located in Rio De Janeiro, Brazil. The company considered that all revenue realization criteria
were satisfied and accordingly recorded on October 2, 2008, a receivable from the foreign company.
The receivable is to be settled in 120 days on February 1 by the delivery of 300,000 Real. To hedge
against an unfavorable change in the foreign exchange rate, ASI acquired a forward contract to sell
300,000 real on February 1 for $.4730 per real. The following exchange rates were quoted:
Date
Spot Rate
Forward Rate (Delivery on 2/1)
October 2
$.4737
$.4730
December 31
$.4895
$.4810
February 1
$.4950
--
ASI is a calendar-year company.
A. Prepare the journal entries to record the transactions, adjust the accounts on December 31, and
settle the receivable and forward contract on February 1.
B. (1) Based on the data given above, complete the following table.
2008
2009
Revenue
_______
_________
Transaction gain (loss) related to the exposed receivable bal.
_______
_________
Transaction gain (loss) related to the forward contract
_______
_________
Effect on net income
_______
_________
(2) What was the cumulative effect on net income (ie., 2008 plus 2009)?
(3) How much cash was received when the account was settled?
Pr 12-2
Crystal Exporting Co. is a U.S. wholesaler engaged in foreign trade. The following transactions are
representative of its business dealings. The company used a periodic inventory system and is ona
calendar-year basis. All exchange rates are direct quotations.
Dec. 1 Crystal Exporting purchased merchandise from Chang’s Ltd., a Hong Kong manufacturer. The
invoice was 210,000 Hong Kong dollars, payable on April 1. On this same date, Crystal Exporting
acquired a forward contract to buy 210,000 Hong Kong dollars on April 1 for $.1314.
Dec. 29 Crystal Exporting sold merchandise to Zintel Retailers for 120,000 Hong Kong dollars, receivable
in 90 days. No hedging was involved.
April 1 Crystal Exporting received 120,000 Hong Kong dollars from Zintel Retailers.
1 Crystal Exporting submitted full payment of 210,000 Hong Kong dollars to Chang’s, Ltd., after
obtaining the 210,000 Hong Kong dollars on its forward contract.
Spot rates and the forward rates for the Hong Kong dollar were as follows:
Dec 1
Spot Rate
Forward rate for Apr. 1 Delivery
$.1265
$.1314
Dec. 29
$.1240
$.1305
Dec. 31
$.1259
$.1308
April 1
$.1430
A. Prepare journal entries for the transactions including the necessary adjustments on December
31.
B. Explain the income statement treatment given to any transaction gains and losses recognized at
December 31.
Ex 13-2
Select the best answer for each of the following items:
1. Golf Company acquired 80% of the outstanding common stock of Ping Company, a foreign
company, in an acquisition accounted for as a purchase transaction. In preparing consolidated
statements, the paid-in capital of Ping Company should be translated into dollars at the
a. Current exchange rate in effect at the balance sheet date.
b. Exchange rate in effect at the date the capital transactions of the subsidiary took
place.
c. Exchange rate in effect at the date Golf Company purchased the Ping Company
stock.
d. Exchange rate effective when Ping Company was organized.
2. The account balances of a foreign entity are required by SFAS No. 52 to be measured using that
entity’s functional currency. The functional currency of an entity is defined as
a. The currency in which the entity’s transactions are recorded.
b. The currency of the primary economic environment in which the entity operates.
c. The U.S. dollar.
d. The local currency of the country in which the entity is physically located.
3. When translating foreign currency financial statements for an entity whose functional currency
is the local currency of the country in which it is physically located, which of the following
accounts is translated using current exchange rates?
Bonds payable
Inventories carried at market
a. No
No
b. Yes
No
c. No
Yes
d. Yes
Yes
4. A translation adjustment (or translation gain) that is a consequence of translation of a functional
currency that is different from the reporting currency should be
a. Deferred and amortized over a period not to exceed 40 years.
b. Deferred until a subsequent year when a loss occurs and offset it against that loss.
c. Included as a separate item in the equity section of the balance sheet.
d. Included in net income in the period in which it occurs.
5. A wholly owned foreign subsidiary of Import Corporation has certain expense accounts for the
year ended December 31, 2008, stated in local currency units (LCU) as follows:
LCU
Amortization of patent (patent was acquired 01/01/2006)
40,000
Provision for doubtful accounts
40,000
Rent
120,000
The exchange rates at various dates are as follows:
Dollar Equivalent of 1 LCU
December 31, 2008
$.20
Average for the year ended December 31, 2008
$.24
January 1, 2006
$.25
The subsidiary’s operations were an extension of the parent company’s operations. What total dollar
amount should be included in Import’s income statement to reflect the foregoing expenses for the year
ended December 31, 2008?
a. $48,000
b. $40,000
c. $48,400
d. $42,000
Ex 13-3
Select the best answer choice for each of the following items.
1. Perez Company’s operations are unrelated to the operations of its subsidiary. Certain balance
sheet accounts of the foreign subsidiary at December 31, 2008, have been translated into U.S.
dollars as follows:
Translated at:
Current rates
Historical rates
Accounts receivable, current
$200,000
$220,000
Accounts receivable, long-term
$130,000
$140,000
Prepaid insurance
$50,000
$55,000
Goodwill
$100,000
$110,000
If the accounting is in accordance with SFAS No. 52, what total should be included in Perez’s balance
sheet at December 31, 2008, for the foregoing items?
a. $480,000
b. $490,000
c. $495,000
d. $580,000
2. When the functional currency of a foreign operation is the U.S. dollar, translation gains and
losses resulting from translating (remeasuring) foreign currency financial statements into U.S.
dollars should be included as
a. An extraordinary items in the income statement for the period in which the rate changes.
b. An ordinary item in the income statement for losses but deferred for gains in accordance
with the conservatism convention.
c. An ordinary item in the income statement for the period in which the rate changes.
d. A deferred item in the balance sheet.
3. Pal Company is translating account balances of its foreign subsidiary into dollars for its
December 31, 2008, balance sheet and its 2008 income statement. The functional currency was
identified as the local currency of the foreign subsidiary. The average exchange rate for 2008b
should be used to translate
a. Retained earnings at January 1, 2008
b. Equipment purchased in 2008
c. Sales for 2008
d. Cash at December 31, 2008
4. One of the first steps in translating the financial statements of a foreign subsidiary is the
identification of the functional currency of that entity. Which of the following indicates that the
functional currency is the local currency of the foreign entity?
a. There is a high volume of intercompany transactions
b. Financing is primarily denominated in the local currency
c. Sales are mostly in the United States, or sales contracts are denominated in dollars
d. Sales prices are primarily responsive in the short term to exchange rate changes
5. When the foreign operations are conducted in a highly inflationary economy, at what translation
rates should the goodwill and accounts receivable accounts in foreign statements be translated
into U.S. dollars?
Goodwill
Accounts Receivable
A. Current
Average for year
B. Historical
Current
C. Historical
Historical
D. Current
Current
Pr 13-3
On January 2, 2008, P Company, a U.S. based company, acquired for 2,000,000 francs an 80% interest in
SFr Company, a Swiss company. On January 2, 2008, SFr Company reported a retained earnings balance
of 480,000 francs. SFr’s books are maintained in francs and are in conformity with U.S. generally
accepted accounting principles. Trial balances of the two companies as of December 31, 2009, are
presented here:
Debits
P Company (dollars)
SFr Company (francs)
Cash
500,200
962,500
Accounts Receivable
516,400
660,000
Inventories (FIFO cost)
627,800
1,037,500
Investment in SFr Company
300,000
--
Land
450,000
500,000
Buildings (net)
610,000
550,000
Equipment (net)
290,000
405,000
Dividends declared
200,000
375,000
Cost of goods sold
2,720,000
2,312,500
Depreciation expense
210,000
125,000
Other expense
914,000
818,750
Income tax expense
100,000
102,500
7,438,400
7,848,750
Accounts payable
540,000
800,000
Short-term notes payable
300,000
650,750
Bonds payable
700,000
850,000
Common stock
800,000
960,000
Additional paid-in capital
300,000
300,000
Retained earnings, 1/1
544,400
513,000
Sales
4,200,000
3,775,000
Dividend income
54,000
--
7,438,400
7,848,750
Totals
Credits
Totals
Other information related to the subsidiary follows:
1. Beginning inventory of 830,000 francs was acquired when the exchange rate was $.165.
2. Purchases made uniformly throughout 2009 were 2,520,000 francs.
3. The franc is identified as the subsidiary’s functional currency.
4. The subsidiary’s beginning (1/1/09) retained earnings and cumulative translation adjustment
(credit) in dollars were $75,948 and $36,462, respectively.
5. All plant assets were acquired before the parent obtained controlling interest in the subsidiary.
6. Sales are made and all expenses are incurred uniformly throughout the year.
7. The ending inventory was acquired during the last quarter.
8. The subsidiary declared and paid dividends of 375,000 francs on September 2.
9. The following direct exchange rate quotations were available:
Date of subsidiary acquisition
$.15
Average for 2008
$.156
January 1, 2009
$.17
September 2, 2009
$.18
December 31, 2009
$.19
Average for the 4th quarter, 2009
$.185
Average for 2009
$.176
A. Prepare a translated balance sheet and combined statement of income and retained earnings
for the subsidiary.
B. Prepare a schedule to verify the translation adjustment.
C. Compute the following ratios based on the franc and the U.S. dollar financial statements.
1. Current ratio
2. Debt to equity
3. Gross profit percentage
4. Net income to sales
E12-6)
Part A Accounts Receivable
Amount
SLS, Inc. (denominated in $)
TNT, Ltd. (130,000$1.482)
$200,000
192,660
Accounts Payable
AGT (600,000$.460)
276,000
SDS, Ltd. (denominated in $)
$160,000
Part B
Receivable
SLS, Inc.
Transaction date
TNT, Ltd.
Payable
AGT
SDS, Ltd.
$200,000
$195,780*
$294,000**
$160,000
Balance sheet date
200,000
192,660
276,000
160,000
Transaction gain (loss)
$
$ ( 3,120)
$ 18,000
$
0
0

* 130,000$1.506 = $195,780
** 600,000$0.490 = $294,000
E12-7)
Part A Oct. 2 Accounts Receivable (300,000$.4737)
142,110
Service Revenue
2 Dollars Receivable from Exchange Dealer
FC Payable to Exchange Dealer
142,110
141,900
141,900
(300,000$.473= $141,900)
Dec 31 Accounts Receivable
4,740
Transaction Gain [(300,000$.4895 = 146,850) - 142,110]
31 Transaction Loss [(300,000$.4810 = $144,300) - $141,900]
4,740
2,400
FC Payable to Exchange Dealer
2,400
Feb 1 Accounts Receivable
1,650
Transaction Gain [(300,000$.4950 = $148,500) - $146,850]
1 Transaction Loss [(300,000$.4950 = $148,500) - $144,300]
1,650
4,200
FC Payable to Exchange Dealer
Feb. 1 Investment in FC
4,200
148,500
Accounts Receivable (300,000$.4950)
Feb. 1 Cash
148,500
141,900
FC Payable to Exchange Dealer
148,500
Investment in FC
148,500
Dollars Receivable from Exchange Dealer
141,900
2008
Part B 1. Revenue
Transaction gain (loss) related to the exposed receivable balance
Transaction gain (loss) related to the forward contract
Effect on net income
2. Cumulative effect on net income: $144,450 - $2,550 = $141,900
3. Cash received = $141,900
$142,110
4,740
(2,400)
$144,450
2009
$
0
1,650
(4,200)
$(2,550)
Pr12-2)
Part A Dec 1
Purchases
26,565
Accounts Payable (210,000$.1265)
1
FC Receivable from Exchange Dealer
26,565
27,594
Dollars Payable to Exchange Dealer
27,594
(210,000$.1314 = $27,594)
Dec. 29 Accounts Receivable (120,000$.1240)
14,880
Sales
14,880
31 Accounts Payable
126
Transaction Gain [(210,000$.1259 = $26,439) - $26,565]
31 Transaction Loss
126
126
FC Receivable from Exchange Dealer
126
[(210,000$.1308 = $27,468) - $27,594]
31 Accounts Receivable
228
Transaction Gain [(120,000$.1259 = $15,108) - $14,880]
Apr. 1
Cash (120,000.1430)
Accounts Receivable
Transaction Gain
228
17,160
15,108
2,052
1
Transaction Loss
3,591
Accounts Payable [(210,000$.1430 = $30,030) - $26,439]
1
FC Receivable from Exchange Dealer
2,562
Transaction Gain [(210,000$.1430 = $30,030 - $27,468]
1
1
3,591
2,562
Investment in FC
30,030
Dollars Payable to Exchange Dealer
27,594
Cash
27,594
FC Receivable from Exchange Dealer
30,030
Accounts Payable
Investment in Foreign Currency
30,030
30,030
Part B The aggregate transaction gain of $228 ($126 - $126 + $228) is included in the firm's
income
statement as part of continuing operations.
E13-2)
1. c 2. b 3. d 4. d 5. c
E13-3)
1. a 2. c 3. c 4. b 5. b
Pr13-3)
Balance Sheet
Cash
Accounts Receivable
Inventories
Land
Buildings (net)
Equipment (net)
962,500
660,000
1,037,500
500,000
550,000
405,000
4,115,000
Accounts Payable
Short-term Notes Payable
Bonds Payable
Common Stock
Additional Paid-in Capital
Retained Earnings
Cumulative Translation Adjustment (Credit)
800,000
650,750
850,000
960,000
300,000
554,250
--4,115,000
Part B Verification of the Translation Adjustment
T
Exposed net asset position - 1/1
Adjustments for changes in net asset position during the year:
Net income for the year
Dividends declared
Net asset position translated using rate in effect at date of transaction
Exposed net asset position - 12/31
Change in cumulative translation adjustment during the year - net increase
Cumulative translation adjustment - 1/1 (Given)
Cumulative translation adjustment - 12/31 (Credit balance)
** Difference of $1.00 ($74,000 compared to $73,999) due to rounding.
* Common stock
Additional paid-in capital
Retained earnings
960,000
300,000
513,000
1,773,000
Francs
2,660,000
= 1.83
1,450,750
$
505,400
= 1.83
275,643
Debt to equity
2,300,750
= 1.27
1,814,250
437,143
= 1.27
344,707
Gross profit percentage
1,462,500
= 38.7%
3,775,000
257,400
= 38.7%
664,400
Part C Current ratio
Francs
1,773,000*
416,250
(375,000)
--1,814,250
Net income to sales
416,250
= 11.0%
3,775,000
73,260
= 11.0%
664,400