CHAPTER 10
TRANSLATION OF FOREIGN
CURRENCY FINANCIAL STATEMENTS
ANSWERS TO PROBLEMS
1. C
2. C
3. C
4. B Since the peso is the functional currency, the financial statements must be
translated. 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
Irwin/McGraw-Hill
Advanced Accounting, 6/e
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., 2000
10-1
13. C Beginning net assets, 1/1/01 ..........
Increase in net assets:
Income, 2001 ...................................
Ending net assets, 12/31/01 ............
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.
Irwin/McGraw-Hill
10-2
© The McGraw-Hill Companies, Inc., 2000
Solutions Manual
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
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, 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, 2001).
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
Irwin/McGraw-Hill
Advanced Accounting, 6/e
© The McGraw-Hill Companies, Inc., 2000
10-3
23. (10 minutes) Determine translation and remeasurement rates
Translation
Accounts payable
$.16 C
Accounts receivable
$.16 C
Accumulated depreciation
$.16 C
Advertising expense
$.19 A
Amortization expense
$.19 A
Buildings
$.16 C
Cash
$.16 C
Common stock
$.28 H
Depreciation expense
$.19 A
Dividends paid (10/1/97)
$.20 H
Notes payable--due in 1999
$.16 C
Patents (net)
$.16 C
Salary expense
$.19 A
Sales
$.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
$.19 A
* C = current rate, H = historical rate, A = average rate
Irwin/McGraw-Hill
10-4
© The McGraw-Hill Companies, Inc., 2000
Solutions Manual
24. (20 minutes) (Calculate translation adjustment and remeasurement gain/loss and
explain their economic relevance.)
The translation adjustment and remeasurement gain/loss can be determined as
the plug figure that keeps the dollar balance sheet in balance:
Translation
Remeasurement
Sfr
Rate
US$
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 can be calculated by analyzing the
subsidiary’s balance sheet exposure:
Translation
Beginning net assets, 12/1/01
Sfr3,700,000 x $.70 =
$2,590,000
Ending net assets, 12/31/01 at
current exchange rate
Sfr3,700,000 x $.75 =
(2,775,000)
Translation adjustment (positive)
$ ( 185,000)
Remeasurement
Beginning net monetary
liability position, 12/1/01
Sfr(300,000) x $.70 =
$(210,000)
Ending net monetary liability
position, 12/31/01 at current
exchange rate
Sfr(300,000) x $.75 =
(225,000)
Remeasurement loss
$ 15,000
Economic Relevance of Translation Adjustment
The translation adjustment increases stockholders’ equity by $185,000. The positive
translation adjustment arises because the Swiss subsidiary has a net asset position of
Sfr3,700,000 and the Swiss franc appreciates by $.05 [Sfr3,700,000 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, 2001 for
exactly Sfr3,700,000 and converted the sales proceeds into dollars at the current
exchange rate of $.75 per Sfr.
Economic Relevance of Remeasurement Loss
The remeasurement loss arises because the Swiss subsidiary has a net monetary
liability position of Sfr300,000 (Cash of Sfr500,000 less Notes payable of Sfr800,000) and
the Swiss franc has appreciated by $.05 [Sfr300,000 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, 2001, thereby realizing a transaction gain of $25,000
[Sfr500,000 x ($.75-$.70)], and the parent paid off the Swiss franc note payable using
U.S. dollars, thereby realizing a transaction loss of $40,000 [Sfr800,000 x ($.75-$.70)].
(The note could have been paid at December 1, 2001 for $560,000 [Sfr800,000 x $.70]. At
December 31, 2001, it takes $600,000 to pay off the note [Sfr800,000 x $.75].)
Irwin/McGraw-Hill
Advanced Accounting, 6/e
© The McGraw-Hill Companies, Inc., 2000
10-5
25. (30 minutes) (Prepare financial statements for a foreign subsidiary and then
translate them into U.S. dollars)
Fenwicke Company Subsidiary
Income Statement
2001
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
2001
LCU
U.S. Dollars
Retained earnings, 1/1/01
---0-----0--Net income
32,000
(above)
$61,000
Dividends paid
(5,000) x $1.80 H =
(9,000)
Retained earnings, 12/31/01 27,000
$52,000
Balance Sheet
December 31, 2001
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 equities 177,000
Computation of Translation Adjustment
Beginning net assets
---0--Increase 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
Irwin/McGraw-Hill
10-6
U.S. Dollars
$ 73,800
18,000
252,000
(25,200)
$318,600
$ 18,000
180,000
80,000
52,000
(11,400)
$318,600
---0--$ 80,000
61,000
(9,000)
$132,000
120,600
$ 11,400
© The McGraw-Hill Companies, Inc., 2000
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
2001
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)
35,000
271,000
Increase in cash
41,000
$ 78,600
Effect of exchange rate change on cash
(4,800)
Cash, 1/1/01
--0---0-Cash 12/31/01
41,000
x $1.80 H = $ 73,800
Irwin/McGraw-Hill
Advanced Accounting, 6/e
© The McGraw-Hill Companies, Inc., 2000
10-7
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.
1/1/01 Net asset balance
KM30,000
Increases in net assets (income):
5/1/01 Sold inventory at a profit
5,000
6/1/01 Sold land at a gain
1,000
Decreases in net assets:
12/1/01 Paid a dividend
(3,000)
Average 1997 Depreciation recorded
(2,000)
12/31/01 Net asset balance
KM 31,000
12/31/01 Net asset balance
at current exchange rate
KM31,000
2001 Translation adjustment—positive
x $.32 =
$ 9,600
x $.34 =
x $.35 =
1,700
350
x $.41 =
x $.37 =
(1,230)
( 740)
$ 9,680
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:
5/1/01 Sold inventory
15,000
6/1/01 Sold land
5,000
Decreases in monetary assets:
10/1/01 Bought inventory
(12,000)
11/1/01 Bought land
(4,000)
12/1/01 Paid a dividend
(3,000)
Ending net monetary liability
position
KM(2,000)
Ending net monetary liability position
at current exchange rate
KM(2,000)
2001 Remeasurement gain
x $.32 =
$
960
x $.34 =
x $.35 =
5,100
1,750
x $.39 =
x $.40 =
x $.42 =
(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.
Irwin/McGraw-Hill
10-8
© The McGraw-Hill Companies, Inc., 2000
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, 1/1/01
Changes in net assets
--rendered services
--incurred expense
Net assets, 12/31/01
Net assets, 12/31/01 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, 1/1/01
Changes in net monetary assets
--rendered services
--incurred expense
Net monetary assets, 12/31/01
Net monetary assets, 12/31/01 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 x $.29 =
60,000 LCU x $.23 =
$17,400
$13,800
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
Irwin/McGraw-Hill
Advanced Accounting, 6/e
© The McGraw-Hill Companies, Inc., 2000
10-9
30. (30 minutes) (Hedge of balance sheet exposure.)
a. Net assets, 1/1/01 (132,000 - 54,000) 78,000 kites
Change in net assets, 2001:
Net income, 2001
26,000 kites
Dividends, 3/1/01
(5,000) kites
Dividends, 10/1/01
(5,000) kites
Net assets, 12/31/01
94,000 kites
Net assets at current
exchange rate, 12/31/01
94,000 kites
Translation adjustment--negative (debit)
x $0.80 =
$62,400
x $0.78 =
x $0.77 =
x $0.76 =
20,280
(3,850)
(3,800)
$75,030
x $0.75 =
70,500
$ 4,530
b. Forward contract journal entries
10/1/01
No entry
12/31/01
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.)
The net negative translation adjustment (debit balance) to be reported in other
comprehensive income at 12/31/01 is $2,530 ($4,530 - $2,000).
Irwin/McGraw-Hill
10-10
© The McGraw-Hill Companies, Inc., 2000
Solutions Manual
31. (45 minutes) (Translation and remeasurement of foreign subsidiary trial
balance.)
a. Translation of Subsidiary Trial Balance
Debits
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
5,000 KQ x 1.62
8,100
3,000 KQ x 1.62
5,000 KQ x 1.62
10,000 KQ x 1.71
4,000 KQ x 1.66
6,640
25,000 KQ x 1.64
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
Calculation of Translation Adjustment
Net assets, 1/1/01
-0Increase in net assets:
Common stock issued
10,000 KQ x 1.71
Sales
25,000 KQ x 1.64
Decrease in net assets:
Dividends paid
4,000 KQ x 1.66
Salary expense
5,000 KQ x 1.64
Depreciation expense
600 KQ x 1.64
Miscellaneous expense
9,000 KQ x 1.64
Net assets, 12/31/01
16,400* KQ
Net assets, 12/31/01 at
current exchange rate
16,400 KQ x 1.62
Translation adjustment--negative (debit)
Cash
Accounts Receivable
Equipment
Accumulated Depreciation
Land
Accounts Payable
Notes Payable
Common Stock
Dividends Paid
Sales
Salary Expense
Depreciation Expense
Miscellaneous Expense
Credits
$
972
4,860
8,100
17,100
41,000
$72,032
-0$17,100
41,000
(6,640)
(8,200)
( 984)
(14,760)
$27,516
$
26,568
948
* Can be verified as ending assets (24,400 KQ) minus ending liabilities (8,000
KQ).
Irwin/McGraw-Hill
Advanced Accounting, 6/e
© The McGraw-Hill Companies, Inc., 2000
10-11
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
KQx 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
Calculation of Remeasurement Loss
Net monetary assets, 1/1/01
-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, 12/31/01 9,000*
Net monetary assets, 12/31/01
at current exchange rate
9,000
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 x 1.71
(5,130)
KQ x 1.59
(7,950)
KQ x 1.66
(6,640)
KQ x 1.64
(8,200)
KQ x 1.64 (14,760)
KQ
$15,420
KQ x 1.62
$
14,580
840
* Can be verified as cash and accounts receivable (17,000 KQ) less accounts
payable and notes payable (8,000 KQ).
Irwin/McGraw-Hill
10-12
© The McGraw-Hill Companies, Inc., 2000
Solutions Manual
32. (30 minutes) (Translate the financial statements of a foreign subsidiary)
LIVINGSTON COMPANY
Income Statement
For Year Ending December 31, 2001
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, 2001
Retained Earnings, 1/1/01
Net Income
Dividends Paid
Retained Earnings, 12/31/01
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
*Note to instructor: Text incorrectly reads $397,000; $395,000 is the correct number.
Balance Sheet
December 31, 2001
Cash
Receivables
Inventory
Fixed Assets (net)
Total
Liabilities
Common Stock
Retained Earnings
Translation Adjustment
Total
Goghs
44,000
116,000
58,000
339,000
557,000
176,000
120,000
261,000
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
x 1/.65 = 270,769
x 1/.48 = 250,000
above 467,131
(130,977)
557,000
856,923
Translation Adjustment
Goghs
Net assets, 1/1/97
336,000
Net income, 1997
71,000
Dividends paid
( 26,000)
Net assets, 12/31/97
381,000
Net assets at current exchange rate,
12/31/97
381,000
x 1/.60 =
above
above
x 1/.65 =
U.S. Dollars
560,000
114,066
( 41,935)
632,131
586,154
Translation adjustment, 2001—negative (debit)
45,977
Cumulative translation adjustment, 1/1/01—negative (debit)
85,000
Cumulative translation adjustment, 12/31/01—negative (debit)
130,977
33. (35 minutes) (Compute translation adjustment and remeasurement gain or loss)
Irwin/McGraw-Hill
Advanced Accounting, 6/e
© The McGraw-Hill Companies, Inc., 2000
10-13
a. Remeasurement Gain or Loss
Net monetary assets, 1/1/01*
Increases in net monetary assets
-- issued Common Stock (4/1/01)
-- sold Building** (7/1/01)
-- Sales (2001)
Decreases in net monetary assets
-- purchased Equipment (4/1/01)
-- paid Dividends (10/1/01)
-- Rent Expense (2001)
-- Salary Expense (2001)
-- Utilities Expense (2001)
Net monetary assets, 12/31/01
Net monetary assets, 12/31/01 at
current exchange rate
Remeasurement gain (credit)
2,000 KR x 2.50 = $ 5,000
10,000 KR x 2.60 = 26,000
22,000 KR x 2.80 = 61,600
80,000 KR x 2.70 = 216,000
(30,000)
(32,000)
(14,000)
(20,000)
( 5,000)
13,000
KR x 2.60
KR x 2.90
KR x 2.70
KR x 2.70
KR x 2.70
KR
= (78,000)
= (92,800)
= (37,800)
= (54,000)
= (13,500)
$ 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 1997, therefore, the accumulated depreciation related to the
building sold during 1997 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. The Gain on Sale of Building is KR 6,000; therefore, cash proceeds
from the sale is KR 22,000.
b. Translation Adjustment
Net assets, 1/1/01*
100,000 KR x 2.50 = $250,000
Increases in net assets
-- issued Common Stock (4/1/01)
10,000 KR x 2.60
= 26,000
-- Gain on Sale of Building** (7/1/01) 6,000 KR x 2.80
= 16,800
-- Sales (2001)
80,000 KR x 2.70 = 216,000
Decreases in net assets
-- paid Dividends (10/1/01)
(32,000) KR x 2.90
= (92,800)
-- Depreciation Expense (2001)
(15,000) KR x 2.70
= (40,500)
-- Rent Expense (2001)
(14,000) KR x 2.70
= (37,800)
-- Salary Expense (2001)
(20,000) KR x 2.70
= (54,000)
-- Utilities Expense (2001)
( 5,000) KR x 2.70
= (13,500)
Net assets, 12/31/01
110,000 KR
$270,200
Net monetary assets, 12/31/01 at
current exchange rate
110,000 KR x 3.00 = 330,000
Translation adjustment—positive (credit)
$(59,800)
33. (continued)
Irwin/McGraw-Hill
10-14
© The McGraw-Hill Companies, Inc., 2000
Solutions Manual
* 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, 2001 can be computed by translating the January 1 accounts and
assuming that the translation adjustment is the balancing figure:
Common Stock, 1/1/01
70,000 KR x 2.40 =
$168,000
Retained Earnings, 1/1/01
30,000 KR given
62,319
Net assets, 1/1/01
100,000 KR
$230,319
Net assets, 1/1/01 at current
exchange rate
100,000 KR x 2.50 =
250,000
Cumulative translation adjustment--positive, 1/1/01
$ (19,681)
Translation adjustment--positive, 2001
(59,800)
Cumulative translation adjustment--positive, 12/31/01
$ (79,481)
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 French 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
Irwin/McGraw-Hill
Advanced Accounting, 6/e
Francs
49,000
19,000
40,000
59,000
2,000
x .35 C
x .250435H
x .250435H
x .35 C
x .250435H
23,000
x .30 A(00)
28,000
28,000
68,000
21,000
9,000
124,000
30,000
Deutschemarks
Debit
Credit
17,150
4,750
10,000
20,650
500
6,900
x .34 A(01)
x .34 A(01)
9,520
x .34 A(01) 23,120
x .35 C
x .34 A
x .34 A
given
Schedule One
10
81,110
9,520
7,350
3,060
42,160
7,530
81,110
© The McGraw-Hill Companies, Inc., 2000
10-15
34. (continued)
Schedule One--Remeasurement Loss
Francs
Net monetary liabilities, 1/1/01*
(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, 12/31/01**
31,000
Net monetary assets, 12/31/01 at
current exchange rate
31,000
x
Remeasurement loss
.32
Deutschemarks
(5,120)
.34
42,160
.34
.34
(23,120)
( 3,060)
10,860
.35
10,850
10
* Net monetary liabilities, 1/1/01, can be determined by first determining the
net monetary assets at 12/31/01 and then backing out the changes in
monetary assets and liabilities during 2001--sales, purchases, and salary
expense.
** Net monetary assets, 12/31/01: Cash + Receivables - Accounts Payable
b. The following DM 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 French branch is determined by
combining beginning inventory, purchases, and ending inventory as
remeasured in DM.
Income Statement
c. Translation into U.S. dollars-For the Year Ended December 31,1997
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
DM
354,160
(223,500)
130,660
( 8,500)
( 29,060)
( 9,000)
5,000
(
10)
DM
89,090
x .67 A =
x .67 A =
DM
Given
Above
x .69 H =
x
x
x
x
x
.67 A
.67 A
.67 A
.68 H
.67 A
=
=
=
=
=
$ 237,287.20
(149,745.00)
87,542.20
( 5,695.00)
( 19,470.20)
( 6,030.00)
3,400.00
(
6.70)
$ 59,740.30
Statement of Retained Earnings
2001
Retained earnings, 1/1/01
Net income (above)
Dividends paid
Retained earnings, 12/31/01
Irwin/McGraw-Hill
10-16
DM
135,530
89,090
( 28,000)
196,620
$ 70,421.00
59,740.30
(19,320.00)
$ 110,841.30
© The McGraw-Hill Companies, Inc., 2000
Solutions Manual
34. (continued)
Balance Sheet
December 31, 2001
Cash
Receivables
Inventory
Buildings and equipment
Accumulated depreciation
Total
DM
DM
Accounts payable
DM
Notes payable
Common stock
Retained earnings
Cumulative translation adjustment
Total
DM
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, 1/1/01
DM 185,530
x .70 =
Changes in net assets
--Net income
89,090
Above
--Dividends
(28,000)
x .69 =
Net assets, 12/31/01
DM 246,620
Net assets, 12/31/01 at
current exchange rate
DM 246,620
x .65 =
Translation adjustment, 2001—negative
Cumulative translation adjustment, 1/1/01—positive
Cumulative translation adjustment, 12/31/01—positive
Irwin/McGraw-Hill
Advanced Accounting, 6/e
= $ 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., 2000
10-17
35. (90 minutes) (Translate foreign currency financial statements and prepare
consolidated financial statements.)
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, 10/1/02 (30,000)
0.273
(8,190)
Net income
(241,000)
(66,004)
R/E, 1/1/02
(133,000)
Schedule 1 (38,244)
Net income
(241,000)
Above
(66,004)
Dividends paid
50,000
0.275
13,750
R/E,12/31/02
(324,000)
(90,498)
Cash and receivables
Inventory
Prepaid rent (adjusted)
Fixed assets
Total
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
Accounts payable
(54,000)
0.270
(14,580)
Notes payable
(140,000)
0.270
(37,800)
Common stock
(240,000)
0.300
(72,000)
-in capital
(150,000)
0.300
(45,000)
Retained earnings, 12/31/02
(324,000)
Above
(90,498)
Subtotal
(259,878)
Cumulative translation adjustment—negative Schedule 2 14,718
Total
(908,000)
(245,160)
Schedule 1--Translation of 1/1/02 Retained Earnings
Pounds
Retained earnings, 1/1/01
-0Net income, 2001
(163,000)
0.288
Dividends, 6/1/01
30,000
0.290
Retained earnings, 12/31/01
(133,000)
Irwin/McGraw-Hill
10-18
Dollars
-0(46,944)
8,700
(38,244)
© The McGraw-Hill Companies, Inc., 2000
Solutions Manual
35. (continued)
Schedule 2--Calculation of Cumulative Translation Adjustment at 12/31/98
Pounds
Dollars
Net assets, 1/1/01
(390,000)
0.300
Net income, 2001
(163,000)
0.288
Dividends, 6/1/01
30,000
0.290
Net assets, 12/3/01
(523,000)
Net assets, 12/31/01 at
current exchange rate
(523,000)
0.280
Translation adjustment, 2001--negative
Net assets, 1/1/02
(523,000)
0.280
Net income, 2002
(241,000)Above
Dividends, 6/1/02
50,000
0.275
Net assets, 12/31/02
(714,000)
Net assets, 12/31/02 at
current exchange rate
(714,000)
0.270
Translation adjustment, 2002--negative
Cumulative translation adjustment, 12/31/02--negative
Irwin/McGraw-Hill
Advanced Accounting, 6/e
(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., 2000
10-19
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
0
Gain, 10/1/02
---0--(8,190)
(8,190)
Net income
(72,950) (66,004)
(125,204)
Ret earn, 1/1/02
Net income
Dividends paid
Ret earn, 12/31/02
Cash and receivables
Inventory
Prepaid rent
Investment
Fixed assets
Total
Accounts payable
Notes payable
Common stock
Additional
paid-in capital
Ret earn, 12/31/02
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
(60,800)
(132,000)
(120,000)
(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--122,850
245,160
(C) 38,244 (S)(164,244)
(S) 9,000 (E)
(900)
150,170
178,190
32,700
0
528,950
890,010
(14,580)
(37,800)
(72,000) (S) 72,000
(75,380)
(169,800)
(120,000)
(45,000) (S) 45,000
(90,498)
(259,878)
14,718 (E)
900
(762,750) (245,160)
217,138
(83,000)
(457,448)
(905,628)
15,618
(217,138) (890,010)
(83,000)
(366,950)
Explanation of Adjustment and Elimination Entries
Entry C
Investment in Simbel ...................................................
38,244
Retained earnings, 1/1/02 .......................................
38,244
To accrue 2001 increase in subsidiary book value (see Schedule 1). Entry is
needed because parent is using the cost method.
Irwin/McGraw-Hill
10-20
© The McGraw-Hill Companies, Inc., 2000
Solutions Manual
35. (continued)
Entry S
Common Stock (Simbel) ................ 72,000
Add'l Paid-in-capital (Simbel) ............ 45,000
Retained earnings, 1/1/02 (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, 1/1/01 ..............................................
Common stock .................................................
(72,000)
A'ddl 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 1/1/01, the date of purchase, is $9,000 (P30,000 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 12/31/02
P30,000 x $.27 = $8,100
U.S. dollar equivalent at 1/1/01
P30,000 x $.30 = 9,000
Cumulative translation adjustment
related to excess, 12/31/02—negative
$( 900)
Irwin/McGraw-Hill
Advanced Accounting, 6/e
© The McGraw-Hill Companies, Inc., 2000
10-21
36. (90 minutes) (Translate foreign currency financial statements using U.S. GAAP
and explain sign of translation adjustment [remeasurement gain/loss])
Part I (a). Czech crown is the functional currency--current rate method
KCS
Sales
25,000,000
Cost of goods sold
(12,000,000)
Depreciation expense—equipment
(500,000)
Depreciation expense—building
(1,800,000)
Research and development expense (1,200,000)
Other expenses
(1,000,000)
Net income
6,500,000
Retained earnings, 1/1/02
500,000
Dividends paid, 12/15/02
(1,500,000)
Retained earnings, 12/31/02
5,500,000
Cash
Accounts receivable
Inventory
Equipment
Accum. deprec.—equipment
Building
Accum. deprec.—equipment
Land
Total assets
Accounts payable
Long-term debt
Common stock
Additional paid in capital
Retained earnings, 12/31/02
Translation adjustment
Total liabilities and equities
Irwin/McGraw-Hill
10-22
2,000,000
3,300,000
8,500,000
25,000,000
(8,500,000)
72,000,000
(30,300,000)
6,000,000
78,000,000
2,500,000
50,000,000
5,000,000
15,000,000
5,500,000
--78,000,000
Exchange
Rate
US$
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
plug (438,500)
2,340,000
© The McGraw-Hill Companies, Inc., 2000
Solutions Manual
36.
(continued)
Calculation of Translation Adjustment
The cumulative translation adjustment at 12/31/02 is derived as a plug figure.
The 2002 translation adjustment can be calculated directly. Information
regarding the average exchange rate for the year and the payment of dividends
is needed to calculate the 2001 translation adjustment. Assuming no dividends
in 2001 and an average exchange rate of $.045, the cumulative translation
adjustment can be calculated as follows:
KCS
ER
Net assets, 1/1/01
20,000,000
0.050
Net income, 2001
500,000
0.045
Net assets, 12/31/01
20,500,000
Net assets, 12/31/01 at current
exchange rate
20,500,000
0.040
Translation adjustment, 2001—negative
Net assets, 1/1/02
20,500,000
0.040
Net income, 2002
6,500,000
0.035
Dividends, 12/15/02
(1,500,000)
0.031
Net assets, 12/31/02
25,500,000
Net assets, 12/31/02 at current
exchange rate
25,500,000
0.030
Translation adjustment, 2002—negative
Cumulative translation adjustment, 12/31/02—negative
Irwin/McGraw-Hill
Advanced Accounting, 6/e
US$
1,000,000
22,500
1,022,500
820,000
202,500
820,000
227,500
(46,500)
1,001,000
765,000
236,000
438,500
© The McGraw-Hill Companies, Inc., 2000
10-23
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
60,000
KCS
Rate
Sales
25,000,000
0.035
Cost of goods sold
(12,000,000) Sched.A
Depreciation expense—equipment
(500,000) Sched.B
Depreciation expense—building
(1,800,000) Sched.C
Research and development expense (1,200,000)
0.035
Other expenses
(1,000,000)
0.035
Income before remeasurement gain
6,500,000
Remeasurement gain, 2002
--plug
Net income
6,500,000
Retained earnings, 1/1/02
500,000
given
Dividends paid, 12/15/02
(1,500,000)
0.031
Retained earnings, 12/31/02
5,500,000
Cash
2,000,000
0.030
Accounts receivable
3,300,000
0.03099,000
Inventory
8,500,000
0.032
272,000
Equipment
25,000,000 Sched.B 1,180,000
Accum. deprec.—equipment
(8,500,000) Sched.B (418,000)
Building
72,000,000 Sched.C 3,408,000
Accum. deprec.—equipment
(30,300,000) Sched.C (1,510,200)
Land
6,000,000
0.050
300,000
Total assets
78,000,000
3,390,800
Accounts payable
2,500,000
0.030
75,000
Long-term debt
50,000,000
0.030 1,500,000
Common stock
5,000,000
0.050
250,000
Additional paid in capital
15,000,000
0.050
750,000
Retained earnings, 12/31/02
5,500,000
above
815,800
Total liabilities and equities
78,000,000
3,390,800
Schedule A—Cost of goods sold
Beginning inventory
Purchases
Ending inventory
Cost of goods sold
Irwin/McGraw-Hill
10-24
KCS
6,000,000
14,500,000
(8,500,000)
12,000,000
ER
0.043
0.035
0.032
US$
258,000
507,500
(272,000)
493,500
© The McGraw-Hill Companies, Inc., 2000
Solutions Manual
36. (continued)
Schedule B—Equipment
Old Equipment--at 1/1/02
New Equipment--acquired 1/3/02
Total
Acc/Dep—Old Equipment
Acc/Dep—New Equipment
Total
Deprec expense—Old Equipment
Deprec expense—New Equipment
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
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 1/1/01
New Building—acquired 3/5/02
Total
Acc/Dep—Old Building
Acc/Dep—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
10,000
85,200
Calculation of Remeasurement Gain
Net mon liab, 1/1/02
Increase in mon assets:
Sales
Decrease in mon assets:
Purch of inventory
Research and development
Other expenses
Dividends paid, 12/15/02
Purchase of equipment, 1/3/02
Purchase of buildings, 3/5/02
Net mon liab, 12/31/02
Net mon liab, 12/31/02 at
current exchange rate
Remeasurement gain—2002
Irwin/McGraw-Hill
Advanced Accounting, 6/e
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., 2000
10-25
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, 2002
--plug
(92,000)
Net income
6,500,000
9,300
Retained earnings, 1/1/02
500,000
given (147,000)
Dividends paid, 12/15/02
(1,500,000)
0.031
(46,500)
Retained earnings, 12/31/02
5,500,000
below (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, 12/31/02
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
0.030
0.050
0.050
plug
75,000
0
1,000,000
2,500,000
(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)
Irwin/McGraw-Hill
10-26
© The McGraw-Hill Companies, Inc., 2000
Solutions Manual
36. (continued)
Calculation of Remeasurement Loss
Net monetary assets, 1/1/02
Increase in monetary assets:
Sales
Decrease in monetary assets:
Purchase of inventory
Research and development
Other expenses
Dividends paid, 12/15/02
Purchase of equipment, 1/3/02
Purchase of buildings, 3/5/02
Net monetary assets, 12/31/02
Net monetary assets, 12/31/02
at current exchange rate
Remeasurement loss--2002
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
crown has depreciated against the U.S. dollar during 2002 (from $.040 at
1/1/02 to $.030 at 12/31/02). A net asset balance sheet exposure exists
because all assets are translated at the current exchange rate and exceeds
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 liability balance sheet exposure and (2) the Czech crown 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 crown amount of liabilities translated at the current rate exceeds the
Czech crown amount of assets translated at the current rate, a net liability
balance sheet exposure exists.
The remeasurement loss in Part I (c) arises because of two factors: (1) there
is a net asset balance sheet exposure and (2) the Czech crown has
depreciated against the U.S. dollar during 2002. 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 crown amount of assets translated at the
current rate exceeds the Czech crown amount of liabilities translated at the
current rate, a net asset balance sheet exposure exists.
Irwin/McGraw-Hill
Advanced Accounting, 6/e
© The McGraw-Hill Companies, Inc., 2000
10-27
37. (75-90 minutes) (Translate foreign subsidiary trial balance, prepare
consolidation worksheet for parent and subsidiary, and prepare consolidated
financial statements under three different exchange rate scenarios)
This problem requires translation of foreign currency financial statements under
three different sets of assumptions regarding changes in the U.S. dollar value of
the British pound. Under the first set of assumptions, the British pound
appreciates steadily from $1.60 at 1/1/01 to $1.68 at 12/31/02. Under the second
set of assumptions, the exchange rate remains $1.60 from 1/1/01 to 12/31/02.
Under the third set of assumptions, the British pound depreciates steadily from
$1.60 at 1/1/01 to $1.52 at 12/31/02.
Part 1--Appreciating Foreign Currency
Relevant exchange rates:
January 1, 2001
2001 Average
December 31, 2001
January 30, 2002
2002 Average
December 31, 2002
$1.60
$1.62
$1.64
$1.65
$1.66
$1.68
a. Translation of Suffolk’s December 31, 2002 trial balance from British pounds
to U.S. dollars.
Suffolk PLC
Trial Balance
December 31, 2002
Cash
£
Accounts receivable
Inventory
Property, plant, & equip (net)
Accounts payable
Long-term debt
Common stock
Retained earnings, 1/l/02
Sales
Cost of goods sold
Depreciation
Other expenses
Dividends paid (1/30/02)
Cumulative translation
adjustment--positive (credit balance)
Pounds
1,500,000
5,200,000
18,000,000
36,000,000
(1,450,000)
(5,000,000)
(44,000,000)
(8,000,000)
(28,000,000)
16,000,000
2,000,000
6,000,000
1,750,000
£
0
Note: Amounts in parentheses are credit balances.
Irwin/McGraw-Hill
10-28
Exchange
Rate
$1.68
$1.68
$1.68
$1.68
$1.68
$1.68
$1.60
Schedule A
$1.66
$1.66
$1.66
$1.66
$1.65
Dollars
$ 2,520,000
8,736,000
30,240,000
60,480,000
(2,436,000)
(8,400,000)
(70,400,000)
(12,840,000)
(46,480,000)
26,560,000
3,320,000
9,960,000
2,887,500
$
(4,147,500)
0
© The McGraw-Hill Companies, Inc., 2000
Solutions Manual
37. (continued)
Schedule A
Retained earnings, 1/1/01
Net income, 2001
Retained earnings, 12/31/01
Pounds
£(6,000,000)
(2,000,000)
£(8,000,000)
Exchange
Rate
$1.60
$1.62
Dollars
$ (9,600,000)
(3,240,000)
$(12,840,000)
b. Schedule detailing the change in Suffolk’s cumulative translation adjustment
for 2001 and 2002.
Determination of Cumulative
ExchangeExchange
Translation Adjustment
Pounds
Rate
Rate
Dollars
Net assets, 1/1/01
£(50,000,000)
$1.64
$1.60$(2,000,000)
Net income, 2001
(2,000,000)
$1.64
$1.62
(40,000)
Translation adjustment, 2001
($2,040,000)
Net assets, 1/1/02
£(52,000,000)
$1.68
$1.64 (2,080,000)
Net income, 2002
(4,000,000)
$1.68
$1.66
(80,000)
Dividends, 2002
1,750,000
$1.68
$1.65
52,500
Translation adjustment, 2002
(2,107,500)
Net assets, 12/31/02
£ 54,250,000
Cumulative Translation
Adjustment, 12/31/02
($4,147,500)
Cost Allocation Schedule
Cost
Book value
Excess of cost over book value
Translation Adjustment Related to
Excess of Cost Over Book Value
Excess of cost over book value
U.S. dollar value at 12/31/02
U.S. dollar value at 1/l/01
Translation adjustment related
to excess, 12/31/02--positive
Irwin/McGraw-Hill
Advanced Accounting, 6/e
Pounds
£52,000,000
50,000,000
£ 2,000,000
Pounds
£2,000,000
Exchange
Rate
$1.60
$1.60
Exchange
Rate
$1.68
$1.60
Dollars
$83,200,000
80,000,000
$ 3,200,000
Dollars
$3,360,000
3,200,000
$ 160,000
© The McGraw-Hill Companies, Inc., 2000
10-29
37. (continued)
c. Consolidation Worksheet--December 31, 2002
Parker
Suffolk
($70,000,000)
($46,480,000)
($116,480,000)
Cost of goods sold
34,000,000
26,560,000
60,560,000
Depreciation
20,000,000
3,320,000
23,320,000
6,000,000
9,960,000
15,960,000
Sales
Other expenses
Dividend income
Adjustments & Eliminations
(2,887,500)
2,887,500
Consolidated
0
Net income
($12,887,500)
($6,640,000)
Ret. earnings, 1/1/02
($48,000,000)
($12,840,000)
(12,887,500)
(6,640,000)
4,500,000
2,887,500
($56,387,500)
($16,592,500)
($63,380,000)
Cash
$3,687,500
$2,520,000
$6,207,500
Accounts receivable
10,000,000
8,736,000
18,736,000
Inventory
30,000,000
30,240,000
60,240,000
Investment in Suffolk
83,200,000
Net income
Dividends
Ret. earnings, 12/31/02
($16,640,000)
12,840,000
3,240,000
($51,240,000)
(16,640,000)
2,887,500
3,240,000
83,240,000
4,500,000
0
3,200,000
Plant, prop, & eq (net)
105,000,000
60,480,000
3,200,000
168,840,000
160,000
Accounts payable
(25,500,000)
(2,436,000)
(27,936,000)
Long-term debt
(50,000,000)
(8,400,000)
(58,400,000)
Common stock
(100,000,000)
(70,400,000)
(56,387,500)
(16,592,500)
Ret. earnings, 12/31/02
Cum. trans. adj.
$0
(100,000,000)
(63,380,000)
(4,147,500)
$0
Irwin/McGraw-Hill
10-30
70,400,000
$92,727,500
160,000
(4,307,500)
$92,727,500
$0
© The McGraw-Hill Companies, Inc., 2000
Solutions Manual
37. (continued)
d. Consolidated income statement and balance sheet--2002.
Parker, Inc.
Consolidated Income Statement
For the year ending December 31, 2002
Sales
Cost of goods sold
Depreciation
Other expenses
Net income
$ 116,480,000
(60,560,000)
(23,320,000)
(15,960,000)
$ 16,640,000
Parker, Inc.
Consolidated Balance Sheet
December 31, 2002
Assets
Cash
Accounts receivable
Inventory
Plant, property, & equip (net)
Total
$
6,207,500
18,736,000
60,240,000
168,840,000
$254,023,500
Liabilities and Shareholders' Equity
Accounts payable
$ 27,936,000
Long-term debt
58,400,000
Common stock
100,000,000
Retained earnings
63,380,000
Other comprehensive income
4,307,500
Total
$254,023,500
Irwin/McGraw-Hill
Advanced Accounting, 6/e
© The McGraw-Hill Companies, Inc., 2000
10-31
37. (continued)
Part 2--Stable Foreign Currency
Relevant exchange rates:
January 1, 2001
2001 Average
December 31, 2001
January 30, 2002
2002 Average
December 31, 2002
$1.60
$1.60
$1.60
$1.60
$1.60
$1.60
a. Translation of Suffolk’s December 31, 2002 trial balance from British pounds to
U.S. dollars.
Suffolk PLC
Trial Balance
December 31, 2002
Cash
Accounts receivable
Inventory
Property, plant, & equip (net)
Accounts payable
Long-term debt
Common stock
Retained earnings, 1/l/02
Sales
Cost of goods sold
Depreciation
Other expenses
Dividends paid (1/30/02)
Cumulative translation
adjustment
£
Pounds
1,500,000
5,200,000
18,000,000
36,000,000
(1,450,000)
(5,000,000)
(44,000,000)
(8,000,000)
(28,000,000)
16,000,000
2,000,000
6,000,000
1,750,000
Exchange
Rate
Dollars
$1.60
$ 2,400,000
$1.60
8,320,000
$1.60
28,800,000
$1.60
57,600,000
$1.60
(2,320,000)
$1.60
(8,000,000)
$1.60
(70,400,000)
Schedule A
(12,800,000)
$1.60
(44,800,000)
$1.60
25,600,000
$1.60
3,200,000
$1.60
9,600,000
$1.60
2,800,000
£
0
Note: Amounts in parentheses are credit balances.
Schedule A
Retained earnings, 1/1/01
Net income, 2001
Retained earnings, 12/31/01
Irwin/McGraw-Hill
10-32
Pounds
£(6,000,000)
(2,000,000)
£(8,000,000)
$
Exchange
Rate
$1.60
$1.60
0
0
Dollars
$ (9,600,000)
(3,200,000)
$(12,800,000)
© The McGraw-Hill Companies, Inc., 2000
Solutions Manual
37. (continued)
b. Schedule detailing the change in Suffolk’s cumulative translation adjustment
for 2001 and 2002.
Determination of Cumulative
ExchangeExchange
Translation Adjustment
Pounds
Rate
Rate
Net assets, 1/1/01
£(50,000,000)
$1.60
$1.60
Net income, 2001
(2,000,000)
$1.60
$1.60
Translation adjustment, 2001
Net assets, 1/1/02
£(52,000,000)
$1.60
$1.60
Net income, 2002
(4,000,000)
$1.60
$1.60
Dividends, 2002
1,750,000
$1.60
$1.60
Translation adjustment, 2002
Net assets, 12/31/02
£ 54,250,000
Cumulative Translation
Adjustment, 12/31/02
Cost Allocation Schedule
Cost
Book value
Excess of cost over book value
Translation Adjustment Related to
Excess of Cost Over Book Value
Excess of cost over book value
U.S. dollar value at 12/31/02
U.S. dollar value at 1/l/01
Translation adjustment related
to excess, 12/31/02
Irwin/McGraw-Hill
Advanced Accounting, 6/e
Pounds
£52,000,000
50,000,000
£ 2,000,000
Pounds
£2,000,000
Exchange
Rate
$1.60
$1.60
Dollars
$0
0
$0
0
0
0
0
$0
Dollars
$83,200,000
80,000,000
$ 3,200,000
Exchange
Rate
Dollars
$1.60
$1.60
$3,200,000
3,200,000
$0
© The McGraw-Hill Companies, Inc., 2000
10-33
37. (continued)
c. Consolidation Worksheet--December 31, 2002
Parker
Suffolk
($70,000,000)
($44,800,000)
($114,800,000)
Cost of goods sold
34,000,000
25,600,000
59,600,000
Depreciation
20,000,000
3,200,000
23,200,000
6,000,000
9,600,000
15,600,000
Sales
Other expenses
Dividend income
Adjustments & Eliminations
(2,800,000)
2,800,000
Consolidated
0
Net income
($12,800,000)
($6,400,000)
Ret. earnings, 1/1/02
($48,000,000)
($12,800,000)
(12,800,000)
(6,400,000)
4,500,000
2,800,000
($56,300,000)
($16,400,000)
($63,100,000)
Cash
$3,600,000
$2,400,000
$6,000,000
Accounts receivable
10,000,000
8,320,000
18,320,000
Inventory
30,000,000
28,800,000
58,800,000
Investment in Suffolk
83,200,000
Net income
Dividends
Ret. earnings, 12/31/02
($16,400,000)
12,800,000
3,200,000
($51,200,000)
(16,400,000)
2,800,000
3,200,000
83,200,000
4,500,000
0
3,200,000
Plant, prop, & eq (net)
105,000,000
57,600,000
3,200,000
165,800,000
0
Accounts payable
(25,500,000)
(2,320,000)
(27,820,000)
Long-term debt
(50,000,000)
(8,000,000)
(58,000,000)
Common stock
(100,000,000)
(70,400,000)
(56,300,000)
(16,400,000)
Ret. earnings, 12/31/02
Cum. trans. adj.
$0
(100,000,000)
(63,100,000)
0
$0
Irwin/McGraw-Hill
10-34
70,400,000
$92,400,000
0
0
$92,400,000
$0
© The McGraw-Hill Companies, Inc., 2000
Solutions Manual
37. (continued)
d. Consolidated income statement and balance sheet--2002.
Parker, Inc.
Consolidated Income Statement
For the year ending December 31, 2002
Sales
Cost of goods sold
Depreciation
Other expenses
Net income
$ 114,800,000
(59,600,000)
(23,200,000)
(15,600,000)
$ 16,400,000
Parker, Inc.
Consolidated Balance Sheet
December 31, 2002
Assets
Cash
Accounts receivable
Inventory
Plant, property, & equip (net)
Total
$
6,000,000
18,320,000
58,800,000
165,800,000
$248,920,000
Liabilities and Shareholders' Equity
Accounts payable
$ 27,820,000
Long-term debt
58,000,000
Common stock
100,000,000
Retained earnings
63,100,000
Other comprehensive income
0
Total
$248,920,000
Irwin/McGraw-Hill
Advanced Accounting, 6/e
© The McGraw-Hill Companies, Inc., 2000
10-35
37. (continued)
Part 3--Depreciating Foreign Currency
Relevant exchange rates:
January 1, 2001
2001 Average
December 31, 2001
January 30, 2002
2002 Average
December 31, 2002
$1.60
$1.58
$1.56
$1.55
$1.54
$1.52
a. Translation of Suffolk’s December 31, 2002 trial balance from British pounds to
U.S. dollars.
Suffolk PLC
Trial Balance
December 31, 2002
Cash
£
Accounts receivable
Inventory
Property, plant, & equip (net)
Accounts payable
Long-term debt
Common stock
Retained earnings, 1/l/02
Sales
Cost of goods sold
Depreciation
Other expenses
Dividends paid (1/30/02)
Cumulative translation
adjustment--negative (debit balance)
Pounds
1,500,000
5,200,000
18,000,000
36,000,000
(1,450,000)
(5,000,000)
(44,000,000)
(8,000,000)
(28,000,000)
16,000,000
2,000,000
6,000,000
1,750,000
Exchange
Rate
Dollars
$1.52
$ 2,280,000
$1.52
7,904,000
$1.52
27,360,000
$1.52
54,720,000
$1.52
(2,204,000)
$1.52
(7,600,000)
$1.60
(70,400,000)
Schedule A
(12,760,000)
$1.54
(43,120,000)
$1.54
24,640,000
$1.54
3,080,000
$1.54
9,240,000
$1.55
2,712,500
£
0
Note: Amounts in parentheses are credit balances.
Schedule A
Retained earnings, 1/1/01
Net income, 2001
Retained earnings, 12/31/01
Irwin/McGraw-Hill
10-36
Pounds
£(6,000,000)
(2,000,000)
£(8,000,000)
$
Exchange
Rate
$1.60
$1.58
4,147,500
0
Dollars
$ (9,600,000)
(3,160,000)
$(12,760,000)
© The McGraw-Hill Companies, Inc., 2000
Solutions Manual
37. (continued)
b. Schedule detailing the change in Suffolk’s cumulative translation adjustment
for 2001 and 2002.
Determination of Cumulative
ExchangeExchange
Translation Adjustment
Pounds
Rate
Rate
Dollars
Net assets, 1/1/01
£(50,000,000)
$1.56
$1.60 $2,000,000
Net income, 2001
(2,000,000)
$1.56
$1.58
40,000
Translation adjustment, 2001
$2,040,000
Net assets, 1/1/02
£(52,000,000)
$1.52
$1.56 2,080,000
Net income, 2002
(4,000,000)
$1.52
$1.54
80,000
Dividends, 2002
1,750,000
$1.52
$1.55
(52,500)
Translation adjustment, 2002
2,107,500
Net assets, 12/31/02
£ 54,250,000
Cumulative Translation
Adjustment, 12/31/02
$4,147,500
Cost Allocation Schedule
Cost
Book value
Excess of cost over book value
Translation Adjustment Related to
Excess of Cost Over Book Value
Excess of cost over book value
U.S. dollar value at 12/31/02
U.S. dollar value at 1/l/01
Translation adjustment related
to excess, 12/31/02--negative
Irwin/McGraw-Hill
Advanced Accounting, 6/e
Pounds
£52,000,000
50,000,000
£ 2,000,000
Pounds
£2,000,000
Exchange
Rate
$1.60
$1.60
Exchange
Rate
$1.52
$1.60
Dollars
$83,200,000
80,000,000
$ 3,200,000
Dollars
$3,040,000
3,200,000
$(160,000)
© The McGraw-Hill Companies, Inc., 2000
10-37
37. (continued)
c. Consolidation Worksheet--December 31, 2002
Parker
Suffolk
($70,000,000)
($43,120,000)
($113,120,000)
Cost of goods sold
34,000,000
24,640,000
58,640,000
Depreciation
20,000,000
3,080,000
23,080,000
6,000,000
9,240,000
15,240,000
Sales
Other expenses
Dividend income
Adjustments & Eliminations
(2,712,500)
2,712,500
Consolidated
0
Net income
($12,712,500)
($6,160,000)
Ret. earnings, 1/1/02
($48,000,000)
($12,760,000)
(12,712,500)
(6,160,000)
4,500,000
2,712,500
($56,212,500)
($16,207,500)
($62,820,000)
Cash
$3,512,500
$2,280,000
$5,792,500
Accounts receivable
10,000,000
7,904,000
17,904,000
Inventory
30,000,000
27,360,000
57,360,000
Investment in Suffolk
83,200,000
Net income
Dividends
Ret. earnings, 12/31/02
($16,160,000)
12,760,000
3,160,000
($51,160,000)
(16,160,000)
2,712,500
3,160,000
83,160,000
4,500,000
0
3,200,000
Plant, prop, & eq (net)
105,000,000
54,720,000
3,200,000
162,760,000
160,000
Accounts payable
(25,500,000)
(2,204,000)
(27,704,000)
Long-term debt
(50,000,000)
(7,600,000)
(57,600,000)
Common stock
(100,000,000)
(70,400,000)
(56,212,500)
(16,207,500)
Ret. earnings, 12/31/02
Cum. trans. adj.
$0
Irwin/McGraw-Hill
10-38
70,400,000
(100,000,000)
(62,820,000)
4,147,500
160,000
$0
$92,392,500
4,307,500
$92,392,500
$0
© The McGraw-Hill Companies, Inc., 2000
Solutions Manual
37. (continued)
d. Consolidated income statement and balance sheet--2002.
Parker, Inc.
Consolidated Income Statement
For the year ending December 31, 2002
Sales
Cost of goods sold
Depreciation
Other expenses
Net income
$ 113,120,000
(58,640,000)
(23,080,000)
(15,240,000)
$ 16,160,000
Parker, Inc.
Consolidated Balance Sheet
December 31, 2002
Assets
Cash
Accounts receivable
Inventory
Plant, property, & equip (net)
Total
$
5,792,500
17,904,000
57,360,000
162,760,000
$243,816,500
Liabilities and Shareholders' Equity
Accounts payable
$ 27,704,000
Long-term debt
57,600,000
Common stock
100,000,000
Retained earnings
62,820,000
Other comprehensive income
(4,307,500)
Total
$243,816,500
Irwin/McGraw-Hill
Advanced Accounting, 6/e
© The McGraw-Hill Companies, Inc., 2000
10-39
37. (continued)
Part 4—Risk Assessment Report and Financial Management Recommendations
Net income
Percentage difference
Cash flow--dividends
Percentage difference
Total Liabilities
Total Stockholders’ equity
Debt-to-equity ratio
Percentage difference
December 31, 2002 Exchange Rate
$1.68
$1.60
$1.52
$12,887,500
$12,800,000
$12,712,500
100.7%
100%
99.3%
$2,887,500
$2,800,000
$2,712,500
103%
100%
97%
$86,336,000
$85,820,000
$85,304,000
$167,687,500 $163,100,000 $158,512,500
51.5%
52.6%
53.8%
98%
100%
102%
An appreciation in the British pound from $1.60 to $1.68 results in income
being .7% higher, cash flow from dividends being 3% greater, and the debt-toequity ratio being 2% lower than if there had been no change in exchange
rates.
A depreciation in the British pound from $1.60 to $1.52 would have resulted in
income being .7% lower, cash flow from dividends being 3% smaller, and the
debt-to-equity ratio being 2% higher than if there had been no change in
exchange rates.
An increase in the dollar value of the British pound results in higher
profitability, greater cash inflow, and an improved debt-to-equity ratio. The
opposite is true for a decrease in the dollar value of the British pound.
If the British pound is expected to appreciate, Parker should not hedge its
British pound exposure associated with its investment in Suffolk. However, if
the British pound is expected to depreciate, Parker may wish to hedge its
British pound net asset and cash flow exposure in some way. The decline in
dollar value of future British pound dividend payments could be hedged by
selling British pounds forward or by purchasing a British pound put option.
The negative translation adjustment reported in other comprehensive income
could be avoided using an option or forward contract, or by taking out a loan
in British pounds.
Irwin/McGraw-Hill
10-40
© The McGraw-Hill Companies, Inc., 2000
Solutions Manual