CHAPTER 7
SOLUTIONS TO MULTIPLE CHOICE QUESTIONS, EXERCISES AND PROBLEMS
MULTIPLE CHOICE QUESTIONS
1.a
Remeasurement changes local currency accounts (euros) to the functional currency (krona).
Translation changes the functional currency accounts (krona) to the reporting currency
(U.S. dollars).
2.d
Remeasure the equipment to U.S. dollars using the rates when the equipment was
purchased. (€1,000,000 x $1.40) + (€3,000,000 x $1.50) = $5,900,000.
3.a
Beginning net assets (200,000 + 600,000)
+ Net income
(4,000,000 – 2,300,000 – 300,000 – 1,200,000)
- Dividends
Ending net assets
Translation loss
€
800,000
Rate
1.45
U.S. $
1,160,000
200,000
(100,000)
1.35
1.32
900,000
1.30
270,000
(132,000)
1,298,000
1,170,000
128,000
4.c
Beginning net assets carried at fair value
(200,000 – 1,400,000)
+ Sales
- Purchases [2,300,000 + (500,000 – 400,000)]
- Out of pocket expenses
- Dividends
Ending net assets carried at fair value
(180,000 – 1,080,000)
Remeasurement gain
Solutions Manual, Chapter 7
€
Rate
U.S. $
(1,200,000)
4,000,000
(2,400,000)
(1,200,000)
(100,000)
1.45
1.35
1.35
1.35
1.32
(1,740,000)
5,400,000
(3,240,000
(1,620,000)
(132,000)
(1,332,000)
(900,000)
1.30
(1,170,000)
162,000
©Cambridge Business Publishers, 2013
1
5.b
Translation multiplies the current ratio numerator and denominator by the same rate.
6.c
A steadily weakening dollar means the direct rate is rising. Translated assets are multiplied by an
increasing rate.
7.b
The direct rate is falling. Entry R debits goodwill at the lower ending rate, and eliminates the
remaining investment balance, created at higher rates, leading to a debit to OCI. Entry O
credits goodwill at the ending rate and debits impairment loss at the higher average rate,
leading to a credit to OCI.
8.c
Reported net income
Goodwill impairment
Equity in net income
£
500,000
(20,000)
480,000
Rate
1.65
1.65
U.S. $
825,000
(33,000)
792,000
Note: the limited life intangibles were written off prior to 2015.
9.b
IFRS: (10,000,000 x 400/100) x £0.01 = £400,000
U.S. GAAP: (10,000,000 x £0.05) = £500,000
10.d
For non-inflationary economies, IFRS and U.S. GAAP remeasurement and translation
procedures are the same.
©Cambridge Business Publishers, 2013
2
Advanced Accounting, 2nd Edition
EXERCISES
E7.1
Translation and Remeasurement of Inventory, Cost of Sales, Plant Assets and
Depreciation
a.(1)20,000 x $0.52 = $10,400
(2)Cost of sales in R is: (100,000 + 75,000 - 20,000) = R155,000
155,000 x $0.475 = $ 73,625
b.(1)20,000 x $0.50 = $10,000
(2)
Purchase
100,000 x $0.45 =
Purchase
75,000 x $0.50 =
Ending inventory
(20,000) x $0.50 =
Cost of sales
c.
$ 45,000
37,500
(10,000)
$ 72,500
Property, plant and equipment at December 31, 2013, in S$, is as follows:
[1,500,000 - (3)(150,000)] =
S$ 1,050,000
[900,000 - (2)(90,000)] =
720,000
PP&E, net
S$ 1,770,000
(1) 1,770,000 x $0.525 = $929,250
(2)(150,000 + 90,000) x $0.55 = $132,000
d.(1)(1,050,000 x $0.675) + (720,000 x $0.625) = $1,158,750
(2) (150,000 x $0.675) + (90,000 x $0.625) = $157,500
E7.2Translation and Remeasurement Gain or Loss Calculations and Consolidation
a.
Remeasurement gain or loss
Exposed position, 9/10/14
Purchase of equipment
Operating expenses
Exposed position, 12/31/14
Remeasurement gain (income statement)
b.
S/
S/ 10,000,000
(2,700,000)
(2,900,000)
$/S/
0.30
0.30
0.31
S/ 4,400,000
0.33
S/
S/ 10,000,000
(2,900,000)
$/S/
0.30
0.31
S/ 7,100,000
0.33
$
$3,000,000
(810,000)
(899,000)
1,291,000
-1,452,000
$(161,000)
Translation gain or loss
Exposed position, 9/10/14
Operating expenses
Exposed position, 12/31/14
Translation gain (OCI)
Solutions Manual, Chapter 7
$
$3,000,000
(899,000)
2,101,000
-2,343,000
$(242,000)
©Cambridge Business Publishers, 2013
3
c.
Globe’s entries, remeasurement
Equity in net loss of sub
Investment in sub
$(738,000) = $(2,900,000 x 0.31) – $161,000
738,000
738,000
Globe’s entries, translation
Equity in net loss of sub
899,000
Investment in sub
OCI
$(899,000) = ($2,900,000 x 0.31)
d.
657,000
242,000
Remeasurement consolidation
Globe
Subsidiary
Dr (Cr)
Dr (Cr)
Dr
Cr
Consol
Cash
$ 500,000 $ 1,452,000
$ 1,952,000
PP&E
22,000,000
810,000
22,810,000
Investment in sub
2,262,000
(C) 738,000 3,000,000 (E)
Liabilities
(16,000,000)
(16,000,000)
Capital
(5,000,000) (3,000,000) (E) 3,000,000
(5,000,000)
RE, beg
(2,000,000)
(2,000,000)
Revenues
(15,000,000)
(15,000,000)
Equity in NL
738,000
738,000 (C)
Expenses
12,500,000
899,000
13,399,000
Remeasurement gain
________
(161,000)
________ ________
(161,000)
$
-0- $
-0$3,738,000 $3,738,000
$
-0Translation consolidation
Globe
Subsidiary
Dr (Cr)
Dr (Cr)
Cash
$ 500,000 $ 1,452,000
PP&E
22,000,000
891,000
Investment in sub
2,343,000
Liabilities
(16,000,000)
Capital
(5,000,000) (3,000,000)
RE, beg
(2,000,000)
AOCI
(242,000)
(242,000)
Revenues
(15,000,000)
Equity in NL
899,000
Expenses
12,500,000
899,000
$
-0- $
-0-
©Cambridge Business Publishers, 2013
4
Dr
Cr
Consol
$ 1,952,000
22,891,000
(C) 899,000 3,242,000 (E)
(E) 3,000,000
(E)
242,000
(16,000,000)
(5,000,000)
(2,000,000)
(242,000)
(15,000,000)
899,000 (C)
________ ________
13,399,000
$4,141,000 $4,141,000
$
-0-
Advanced Accounting, 2nd Edition
E7.3
Translation and Remeasurement of Account Balances
a.
Cash
4,000,000 x $.75
$3,000,000
Inventory is remeasured at historical rates. There are two layers:
(1) quantity acquired in January, 2012; 1,000,000 x $.85
(2) quantity acquired in January, 2014; 2,000,000 x $.78
Total remeasured inventory
$ 850,000
1,560,000
$2,410,000
Machinery and equipment are remeasured at historical rates.
Remaining equipment purchased in January, 2012; 4,000,000 x $.85
Equipment purchased in January, 2013; 7,000,000 x $.80
Total remeasured machinery and equipment
$3,400,000
5,600,000
$9,000,000
Depreciation expense is remeasured at the same historical rate(s) used to remeasure the
related machinery and equipment.
Depreciation expense on remaining January, 2012 equipment:
$.85(4,000,000/10)
$ 340,000
Depreciation expense on January, 2013 equipment:
$.80(7,000,000/10)
560,000
Total remeasured depreciation expense
$ 900,000
b.
Cash
Inventory
Machinery and equipment
Depreciation expense
E7.4
4,000,000 x $.75 = $3,000,000
3,000,000 x $.75 = $2,250,000
11,000,000 x $.75 = $8,250,000
1,100,000 x $.76 = $ 836,000
Translation and Remeasurement Gain and Loss
(in millions)
a.
Exposed position, 1/1/14
Acquisition of plant assets for debt
Purchase of inventory
Sales
Operating expenses
Exposed position, 12/31/14
Remeasurement gain
Solutions Manual, Chapter 7
Amount (£)
£ 700
(1,000)
(3,500)
6,000
(1,200)
£ 1,000
$/£
Amount($)
1.90
$ 1,330
1.95
(1,950)
1.97
(6,895)
1.97
11,820
1.97
(2,364)
1,941
2.01
- 2,010
$
(69)
©Cambridge Business Publishers, 2013
5
NOTE: The following items did not affect the remeasurement gain or loss:
1.
2.
3.
4.
Collection of receivables has no net effect -- one exposed asset (receivables) is
simply replaced by another (cash).
Depreciation expense does not affect the exposed position.
Refinancing of commercial paper has no net effect -- one
liability is simply replaced by another.
Cost of goods sold does not affect the exposed position.
b.
Amount (£)
£ 1,200
1,100
Exposed position, 1/1/14
Net income in 2014 (6,000 – 3,300 – 400 -1,200)
Exposed position, 12/31/14
Translation gain
£ 2,300
E7.5
Translation and Remeasurement Gains and Losses
a.
Calculation of Remeasurement Gain or Loss
January 1, 2014 beginning balance
Purchases
Book value of land sale
Gain on land sale
Sales
Cash operating expenses
December 31, 2014 ending balance
2014 remeasurement gain (income)
b.
$/£
Amount($)
1.90
$ 2,280
1.97
2,167
4,447
2.01
- 4,623
$ (176)
€
€ (12,000,000)
(8,000,000)
700,000
300,000
10,000,000
(1,800,000)
$/€
1.13
1.10
1.15
1.11
1.12
1.12
€ (10,800,000)
1.10
€
€ 9,000,000
$/€
1.13
$
$10,170,000
2,300,000
1.12
€ 11,300,000
1.10
2,576,000
12,746,000
- 12,430,000
$ 316,000
$
$(13,560,000)
(8,800,000)
805,000
333,000
11,200,000
(2,016,000)
(12,038,000)
- (11,880,000)
$ (158,000)
Analysis of Translation Gain or Loss
Exposed position, 1/1/14
Net income (10,000,000 + 300,000 6,000,000 – 1,800,000 - 200,000)
Exposed position, 12/31/14
2014 translation loss (OCI)
©Cambridge Business Publishers, 2013
6
Advanced Accounting, 2nd Edition
E7.6
Effect of Translation and Remeasurement on Ratios
(in thousands)
a.
Rands
return on assets =
1,000/8,000 =
12.5% =
return on sales
1,000/5,000
20%
x
x
x
asset turnover
5,000/8,000
62.5%
$ (remeasurement)
130/2,000 =
6.5% =
130/750
17.3%
x
x
750/2,000
37.5%
$ (translation)
150/1,400 =
10.7% =
150/750
20%
x
x
750/1,400
53.6%
Translation maintains the local currency relationships better than remeasurement.
b.
The direct exchange rate appears to be falling with the dollar strengthening and the rand
weakening. This can be seen by observing that remeasured assets of $2,000,000
(remeasured at historical rates) are higher than translated assets of $1,400,000 (translated
at average of beginning and ending current rates).
Similarly, remeasured operating income of $130,000 is lower than translated operating
income of $150,000, due to depreciation and amortization expenses being remeasured at
higher historical rates when the functional currency is the $.
The declining exchange rate causes the DuPont analysis performance measures to be
distorted by the changing exchange rate. If performance measured in the local currency-rands--is the benchmark, translation does a much better job of preserving the local
currency results than remeasurement.
Under either method, though, changes in exchange rates over the years weaken our ability
to effectively make year-to-year comparisons of $ performance measures.
Solutions Manual, Chapter 7
©Cambridge Business Publishers, 2013
7
E7.7
Remeasured Financial Statements
Sales
Cost of goods sold
Operating expenses
Depreciation expense
Amortization expense
Remeasurement gain
Net income
Mexico City Subsidiary
Statement of Income
For the Year Ended December 31, 2013
P
$/P
P 12,000,000
0.12
(7,000,000)
0.12
(3,000,000)
0.12
(75,000)
0.11
(60,000)
0.10
_________
P 1,865,000
Cash
Inventory
Office equipment, net
Organization costs, net
Total assets
Mexico City Subsidiary
Balance Sheet
December 31, 2013
P
P 8,700,000
2,000,000
925,000
240,000
P 11,865,000
Capital
Retained earnings
Total equity
P 10,000,000
1,865,000
P 11,865,000
$/P
0.15
0.11
0.11
0.10
$
$ 1,305,000
220,000
101,750
24,000
$ 1,650,750
0.10
see above
$ 1,000,000
650,750
$ 1,650,750
Calculation of Remeasurement Gain
P
$/P
Exposed position, 1/2/13 (cash)
P 10,000,000
0.10
Sales
12,000,000
0.12
Organization costs
(300,000)
0.10
Equipment purchase
(1,000,000)
0.11
Merchandise purchase
(2,000,000)
0.11
Merchandise purchase
(7,000,000)
0.12
Cash operating expenses
(3,000,000)
0.12
Exposed position, 12/31/13
Remeasurement gain (income)
©Cambridge Business Publishers, 2013
8
P 8,700,000
$
$ 1,440,000
(840,000)
(360,000)
(8,250)
(6,000)
425,000
$ 650,750
0.15
$
$ 1,000,000
1,440,000
(30,000)
(110,000)
(220,000)
(840,000)
(360,000)
880,000
- 1,305,000
$ (425,000)
Advanced Accounting, 2nd Edition
E7.8
Change in Functional Currency
Exposed position, January 1
Net income
Dividends
Exposed position, December 31
Translation loss
Balance, 1/1/14 (gain) (1)
Balance, 12/31/14 (gain)
C$
C$ 20,000,000
2,500,000
(1,000,000)
$/C$
1.05
1.03
1.02
C$ 21,500,000
1.01
(1)
Translated net assets: $1.05 x 20,000,000 =
Less remeasured net assets
Beginning balance of translation adjustment account 1/1/14 (gain)
E7.9
$
$21,000,000
2,575,000
(1,020,000)
22,555,000
- 21,715,000
840,000
(6,000,000)
$ (5,160,000)
$ 21,000,000
(15,000,000)
$ 6,000,000
Translated/Remeasured Financial Statements
a.
Sales
Cost of goods sold
Depreciation expense
Other expenses
Net income
Income Statement (Translated)
SAR
SAR 85,000,000
(40,000,000)
(10,000,000)
(15,000,000)
SAR 20,000,000
Balance Sheet (Translated)
SAR
Cash
SAR 95,000,000
Inventory
25,000,000
Plant assets
90,000,000
Total assets
SAR210,000,000
Capital
SAR200,000,000
Retained earnings
10,000,000
Accumulated other comprehensive loss
__________
Total equity
SAR210,000,000
Solutions Manual, Chapter 7
$/SAR
.265
.265
.265
.265
$
$ 22,525,000
(10,600,000)
(2,650,000)
(3,975,000)
$ 5,300,000
$/SAR
.25
.25
.25
$
$ 23,750,000
6,250,000
22,500,000
$ 52,500,000
$ 60,000,000
2,750,000
(10,250,000)
$ 52,500,000
.30
(1)
(2)
©Cambridge Business Publishers, 2013
9
(1) Analysis of Retained Earnings (Translated)
Net income
Dividends
Retained earnings, 12/31/13
SAR
SAR 20,000,000
(10,000,000)
SAR 10,000,000
$/SAR
.265
.255
$
$ 5,300,000
(2,550,000)
$ 2,750,000
SAR
SAR 200,000,000
20,000,000
(10,000,000)
$/SAR
.300
.265
.255
SAR 210,000,000
.250
$
$60,000,000
5,300,000
(2,550,000)
62,750,000
- 52,500,000
$10,250,000
(2) Analysis of Translation Loss
Exposed position, 1/1/13
Net income
Dividends
Exposed position, 12/31/13
2013 translation loss
b.
Sales
Cost of goods sold
Depreciation expense
Other expenses
Remeasurement loss
Net income
Cash
Inventory
Plant assets
Total assets
Capital
Retained earnings
Total equity
©Cambridge Business Publishers, 2013
10
Income Statement (Remeasured)
SAR
SAR 85,000,000
(40,000,000)
(10,000,000)
(15,000,000)
__________
SAR 20,000,000
$/SAR
.265
.300
.300
.265
(3)
$
$ 22,525,000
(12,000,000)
(3,000,000)
(3,975,000)
(3,275,000)
$
275,000
Balance Sheet (Remeasured)
SAR
SAR 95,000,000
25,000,000
90,000,000
SAR 210,000,000
$/SAR
.25
(4)
.30
$
$ 23,750,000
6,975,000
27,000,000
$ 57,725,000
.30
(5)
$ 60,000,000
(2,275,000)
$ 57,725,000
SAR 200,000,000
10,000,000
SAR 210,000,000
Advanced Accounting, 2nd Edition
(3) Analysis of Remeasurement Loss
SAR
SAR 50,000,000
85,000,000
(15,000,000)
(15,000,000)
(10,000,000)
$/SAR
.300
.265
.265
.265
.255
SAR 95,000,000
.250
(4) Remeasurement of 12/31/13 Inventory Balance
SAR
Inventory purchased 1/1/13
SAR 10,000,000
Inventory purchased evenly in 2013
15,000,000
Inventory balance, 12/31/13
SAR 25,000,000
$/SAR
.30
.265
$
$ 3,000,000
3,975,000
$ 6,975,000
$/SAR
I/S
.255
$
$
275,000
(2,550,000)
$(2,275,000)
Exposed position, 1/1/13
Sales
Purchases
Cash expenses
Dividends
Exposed position, 12/31/13
2013 remeasurement loss
$
$ 15,000,000
22,525,000
(3,975,000)
(3,975,000)
(2,550,000)
27,025,000
- 23,750,000
$ 3,275,000
(5) Analysis of Retained Earnings (Remeasured)
Net income
Dividends
Retained earnings, 12/31/13
SAR
SAR 20,000,000
(10,000,000)
SAR 10,000,000
E7.10 Exchange Rate Changes and Return on Assets
a.
b.
Return on Assets (000,000 omitted)
$
2014
12/.5(112 + 95) = .116
2015
10.89/.5(95 + 95) = .115
Note: 10 = 12/1.2; 12.1 = 10.89/.9; 80 = 112/1.4
€
10/.5(80 + 95) = .114
12.1/.5( 95+ 95) = .127
Although the ROA based on euro data increased by 11.4% [= (.127 - .114)/.114],
translated data produced an ROA that declined slightly over the period. This distortion
created by translation can be attributed to two factors.
1.
The declining average exchange rate caused translated operating income to fall by
9.3% [= (10.89 - 12)/12] even though euro income rose by 21%. Thus the
numerator of the euro ROA rose while the numerator of the translated ROA fell.
2.
Translated average total assets decreased by 8.2% [= (95 -103.5)/103.5], whereas
average euro assets increased by 8.6% [= (95 - 87.5)/87.5]. This increased the
denominator of the euro ROA relative to the translated ROA.
Solutions Manual, Chapter 7
©Cambridge Business Publishers, 2013
11
The net effect of the changing exchange rate on euro income and average total assets
creates a divergence between the euro ROA -- which suggests improved profitability of
the asset portfolio -- and the slightly weakening ROA based on translated data.
Since the euro is the entity's functional currency, the entity's financial performance is best
measured by euro data. Internal management has these euro data and can decide whether
to make decisions based on translated data. Financial statement users outside the entity,
however, cannot easily determine that translated data provide the wrong performance
signal and factor out the translation effects that produce the wrong performance signal.
E7.11 Comparison of Translation and Remeasurement
a.
The direct exchange rate has been steadily increasing. This means that many remeasured
expenses are lower than translated expenses, since historical rates are lower than average
rates. Since Sears Canada has a positive exposed position for remeasurement, the
increase in rate will result in a remeasurement gain on the income statement. For these
reasons, remeasured income is higher than translated income.
If Sears Canada had a net negative exposed position for remeasurement, a remeasurement
loss would be shown on the income statement, possibly offsetting the effect of lower
expenses. In this case, no clear statement can be made concerning the relationship
between remeasured and translated income.
b.
Remeasured assets are lower than translated assets since historical rates are lower than the
current rate. From above, remeasured income is higher than translated income. These
factors combine to show remeasured ROA as greater than translated ROA.
c.
Remeasured current assets may be slightly lower than translated current assets, as
inventories and possibly prepaids would be remeasured at lower historical rates. Current
liabilities are likely to be the same under both methods. Therefore the remeasured current
ratio is lower than the translated current ratio.
Remeasured and translated debt should be the same. Remeasured total assets are lower
since the older noncurrent assets are remeasured at lower historical rates. Thus
remeasured debt to assets is higher than translated debt to assets.
©Cambridge Business Publishers, 2013
12
Advanced Accounting, 2nd Edition
E7.12 Cash Flow Statement Conversion
The Luh Company
Statement of Cash Flows
For the Year Ended December 31, 2014
(in thousands)
NT$
$/NT$
$
NT$ 100,000,000
45,000,000
(4,000,000)
.0400
.0400
.0400
$ 4,000,000
1,800,000
(160,000)
Decrease in other current operating assets
Decrease in current operating liabilities
Cash provided by operating activities
24,000,000
(32,000,000)
133,000,000
.0400
.0400
960,000 +
(1,280,000)+
5,320,000
Investing Activities
Acquisition of plant assets
Sale of long-term investments
Cash used in investing activities
(85,000,000)
50,000,000
(35,000,000)
.0423
.0394
(3,595,500)
1,970,000
(1,625,500)
(98,000,000)
170,000,000
(65,000,000)
7,000,000
.0394
.0423
.0400
(3,861,200)
7,191,000
(2,600,000)
729,800
(959,300)*
8,820,000
$12,285,000
Operating Activities
Net income
Depreciation and amortization expense
Gain on sale of long-term investments
Financing Activities
Retirement of long-term debt
Issuance of common stock
Dividends paid
Cash provided by financing activities
Effect of exchange rate changes on cash
Cash balance, January 1, 2014
Cash balance, December 31, 2014
210,000,000
NT$ 315,000,000
.0420
.0390
+ These adjustments to income are for items (1) included in income but not using cash
(depreciation, decrease in other current operating assets) or are not operating flows (gain on sale
of investments) or are (2) not included in income (decrease in current operating liabilities) but
using cash. All such items are translated at the rates used for them in the income statement.
Solutions Manual, Chapter 7
©Cambridge Business Publishers, 2013
13
* Effect of exchange rate changes on cash:
Beginning exposed position (cash)
Increases in cash:
Cash provided by operations:
Net income
Depreciation and amortization expense
Gain on sale of long-term investments
Decrease in other current assets
Decrease in current operating liabilities
Sale of long-term investments
Proceeds from stock issuance
Decreases in cash:
Acquisition of plant assets
Retirement of long-term debt
Dividends paid
Ending exposed position (cash)
Translation loss on cash
NT$
NT$ 210,000,000
$/NT$
.0420
100,000,000
45,000,000
(4,000,000)
24,000,000
(32,000,000)
133,000,000
50,000,000
170,000,000
220,000,000
.0400
.0400
.0400
.0400
.0400
(85,000,000)
(98,000,000)
(65,000,000)
(248,000,000)
.0423
.0394
.0400
NT$ 315,000,000
.0394
.0423
.0390
$
$ 8,820,000
4,000,000
1,800,000
(160,000)
960,000
(1,280,000)
5,320,000
1,970,000
7,191,000
9,161,000
(3,595,500)
(3,861,200)
(2,600,000)
(10,056,700)
13,244,300
- 12,285,000
$ 959,300
E7.13 Consolidation of an International Subsidiary at Date of Acquisition
Price paid
Book value
Undervaluation of inventories
Overvaluation of noncurrent assets
Goodwill
P
P 180,000,000
(100,000,000)
(15,000,000)
5,000,000
P 70,000,000
$/P
0.10
0.10
0.10
0.10
U.S.$
$ 18,000,000
(10,000,000)
(1,500,000)
500,000
$ 7,000,000
Entries to consolidate the balance sheets of parent and subsidiary (amounts are in U.S. dollars):
(E)
Capital stock
8,000,000
Retained earnings
2,000,000
Investment in subsidiary
10,000,000
(R)
Inventories
1,500,000
Goodwill
7,000,000
Noncurrent assets
500,000
Investment in subsidiary
8,000,000
©Cambridge Business Publishers, 2013
14
Advanced Accounting, 2nd Edition
PROBLEMS
P7.1
Translating and Remeasuring Selected Accounts
(in millions)
a.
TEurope AG
Remeasurement of Selected Accounts into Dollars
December 31, 2012 and December 31, 2013
December 31, 2013
CHF
$/CHF
Accounts receivable (net)
CHF 40,000
.67
Inventories, at cost
80,000
.58
Property, plant and equipment
163,000 Schedule 1
Long-term debt
100,000
.67
Common stock
50,000
.50
December 31, 2012
Accounts receivable (net)
CHF 35,000
.58
Inventories, at cost
75,000
.50
Property, plant and equipment
150,000
.50
Long-term debt
120,000
.58
Common stock
50,000
.50
$
$ 26,800
46,400
86,090
67,000
25,000
$ 20,300
37,500
75,000
69,600
25,000
Schedule 1
Remeasurement of Property, Plant, and Equipment (Net) into U.S. Dollars
at December 31, 2013
CHF
$/CHF
$
Land purchased on 1/1/12
CHF 24,000
.50
$ 12,000
Plant and equipment purchased on 1/1/12:
Original cost
140,000
.50
70,000
Accumulated depreciation
(28,000)
.50
(14,000)
112,000
56,000
Plant and equipment purchased on 7/4/13:
Original cost
Accumulated depreciation
Total property, plant and equipment
Solutions Manual, Chapter 7
30,000
(3,000)
27,000
CHF 163,000
.67
.67
20,100
(2,010)
18,090
$ 86,090
©Cambridge Business Publishers, 2013
15
b.
TEurope AG
Translation of Selected Accounts into Dollars
December 31, 2013 and December 31, 2012
December 31, 2013
CHF
$/CHF
Accounts receivable (net)
CHF 40,000
.67
Inventories, at cost
80,000
.67
Property, plant and equipment
163,000
.67
Long-term debt
100,000
.67
Common stock
50,000
.50
December 31, 2012
Accounts receivable (net)
CHF 35,000
.58
Inventories, at cost
75,000
.58
Property, plant and equipment
150,000
.58
Long-term debt
120,000
.58
Common stock
50,000
.50
P7.2
$
$ 26,800
53,600
109,210
67,000
25,000
$ 20,300
43,500
87,000
69,600
25,000
Existing Subsidiary—Remeasurement
a.
Valiant Corporation
Remeasured Trial Balance at January 1, 2013
Account
kr
Cash
kr 175,000
Accounts receivable, net
400,000
Plant and equipment, net
2,320,000
Accounts payable
(535,000)
Notes payable
(800,000)
Capital stock
(400,000)
Retained earnings, January 1, 2013
(1,160,000)
kr
0
©Cambridge Business Publishers, 2013
16
$/kr
.16
.16
.16
.16
.16
.16
.16
$
28,000
64,000
371,200
(85,600)
(128,000)
(64,000)
(185,600)
$
0
$
Advanced Accounting, 2nd Edition
Valiant Corporation
Remeasured Trial Balance at December 31, 2013
Account
kr
$/kr
Cash
kr 240,000
.19
Accounts receivable, net
360,000
.19
Plant and equipment, net
2,000,000
.16
Accounts payable
(200,000)
.19
Notes payable
(600,000)
.19
Capital stock
(400,000)
.16
Retained earnings, January 1, 2013
(1,160,000)
.16
Sales
(1,200,000)
.17
Depreciation expense
320,000
.16
Other expenses
640,000
.17
see
Remeasurement loss
_______
sch.
kr
-0Valiant Corporation
Remeasurement Loss for 2013
kr
Exposed position, January 1
kr (760,000)1
Sales
1,200,000
Other expenses
(640,000)
$/kr
.16
.17
.17
Exposed position, December 31
.19
kr (200,000)2
Remeasurement loss
1
Net exposure 1/1/13: (760,000) = 175,000 + 400,000 - 535,000 - 800,000
2
Net exposure 12/31/13: (200,000) = 240,000 + 360,000 - 200,000 - 600,000
Solutions Manual, Chapter 7
$
$ 45,600
68,400
320,000
(38,000)
(114,000)
(64,000)
(185,600)
(204,000)
51,200
108,800
11,600
$
-0-
$
$ (121,600)
204,000
(108,800)
(26,400)
- (38,000)
$ 11,600
©Cambridge Business Publishers, 2013
17
b.
Valiant Corporation
Remeasured Income Statement
For the Year Ended December 31, 2013
Sales
Depreciation expense
Other expenses
Total Expenses
Operating income
Remeasurement loss
Net Income
$204,000
$ 51,200
108,800
$160,000
$ 44,000
11,600
$ 32,400
Valiant Corporation
Remeasured Balance Sheet
December 31, 2013
Assets
Cash
Accounts receivable, net
Plant and equipment, net
Total assets
Liabilities and Stockholders’ Equity
Accounts payable
Notes payable
Capital stock
Retained earnings ($185,600+ $32,400)
Total liabilities and stockholders' equity
©Cambridge Business Publishers, 2013
18
$ 45,600
68,400
320,000
$ 434,000
$ 38,000
114,000
64,000
218,000
$ 434,000
Advanced Accounting, 2nd Edition
P7.3
Existing Subsidiary—Translation
a.
Valiant Corporation
Translated Trial Balance at January 1, 2013
Account
kr
$/kr
Cash
kr 175,000
.16
Accounts receivable, net
400,000
.16
Plant and equipment, net
2,320,000
.16
Accounts payable
(535,000)
.16
Notes payable
(800,000)
.16
Capital stock
(400,000)
.16
Retained earnings, 1/1/13
(1,160,000)
.16
Accumulated other comprehensive income
--kr
-0-
$
$ 28,000
64,000
371,200
(85,600)
(128,000)
(64,000)
(182,400)
-$
-0-
Valiant Corporation
Translated Trial Balance at December 31, 2013
Account
kr
$/kr
Cash
kr 240,000
.19
Accounts receivable, net
360,000
.19
Plant and equipment, net
2,000,000
.19
Accounts payable
(200,000)
.19
Notes payable
(600,000)
.19
Capital stock
(400,000)
.16
Retained earnings, 1/1/13
(1,160,000)
.16
Sales
(1,200,000)
.17
Depreciation expense
320,000
.17
Other expenses
640,000
.17
see
Accumulated other comprehensive gain
-sch.
kr
0
Analysis of Translation Adjustment
kr
Net assets, January 1 (400,000 + 1,160,000)
kr 1,560,000
Net income, 2013 (1,200,000 - 320,000 - 640,000)
240,000
Net assets, December 31
Translation gain
Cumulative translation adjustment, January 1
Cumulative translation gain, December 31
Solutions Manual, Chapter 7
kr 1,800,000
$
$
45,600
68,400
380,000
(38,000)
(114,000)
(64,000)
(185,600)
(204,000)
54,400
108,800
(51,600)
$
0
$/kr
.16
.17
.19
$
$249,600
40,800
290,400
- 342,000
(51,600)
-$(51,600)
©Cambridge Business Publishers, 2013
19
b.
Valiant Corporation
Translated Income Statement
For the Year Ended December 31, 2013
Sales
Depreciation expense
Other expenses
Total expenses
Net income
$204,000
$ 54,400
108,800
$163,200
$ 40,800
Valiant Corporation
Translated Balance Sheet
December 31, 2013
Assets
Cash
Accounts receivable, net
Plant and equipment, net
Total assets
Liabilities and stockholders’ equity
Accounts payable
Notes payable
Capital stock
Retained earnings ($185,600 + $40,800)
Accumulated other comprehensive income
Total liabilities and stockholders' equity
©Cambridge Business Publishers, 2013
20
$ 45,600
68,400
380,000
$ 494,000
$ 38,000
114,000
64,000
226,400
51,600
$ 494,000
Advanced Accounting, 2nd Edition
P7.4
Translation and Performance Evaluation
a.
In euros, net income increased about 42% [= (595 - 420)/420], driven by the 20%
increase in sales. Expenses increased by 14% but, because they amount to less than sales,
there is a much greater impact on the bottom line.
Next, we compare 2015 and 2014 in dollars when the functional currency is the euro.
Translation comparison
2015
€
$/€
$
Sales
€2,400 1.35
$3,240
Cost of sales
1,320 1.35
1,782
Gross margin
1,080
1,458
Other operating expenses
230 1.35
310.5
Profit before taxes
850
1,147.5
Income tax expense
255 1.35
344.25
Net income
€ 595
$803.25
% change in net income
42%
32%
(in thousands)
2014
€
$/€
€2,000
1.45
1,200
1.45
800
200
1.45
600
180
1.45
€ 420
$
$2,900
1,740
1,160
290
870
261
$ 609
Translated net income shows a 32% increase on a 12% increase in sales. This picture is
less favorable than that depicted in euros.
b.
Remeasured net income increases by about 36%, as shown below.
Remeasurement comparison
(in thousands)
2015
2014
€
$/€
$
€
$/€
$
Sales
€2,400 1.35
$ 3,240 €2,000
1.45 $2,900
Cost of sales
1,320 1.37
1,808.4
1,200
1.48 1,776
Gross margin
1,080
1,431.6
800
1,124
Other operating expenses
230 1.37
315.1
200
1.48
296
Profit before taxes
850
1,116.5
600
828
Income tax expense
255 1.35
344.25
180
1.45
261
Net income
€ 595
$ 772.25 € 420
$ 567
% change in net income
42%
36%
Solutions Manual, Chapter 7
©Cambridge Business Publishers, 2013
21
c.
The basic problem with internal performance evaluation based on either translated or
remeasured data is that management is being judged in part on an important factor that it
cannot control--the exchange rate. Moreover, because the exchange rate changes each
year, "comparative" data tend to become incomparable. At least two approaches could be
considered.
First, probably the most obvious approach to avoiding exchange rate distortions is to use
the euro data, particularly when the euro is the entity's functional currency. High inflation
rates or changes in prices of the goods and services bought and sold by the entity weaken
the comparability of the comparative euro data.
A second approach involves removing the effect of year-to-year exchange rate changes.
When the functional currency is the euro, the 2015 euro results can be translated at the
2014 average $/€ rate. Under this approach, 2015 income of €595 translated at the 2014
rate of $1.45/€ amounts to $863, an increase of 42% over 2014's $609.
When the functional currency is the U.S. dollar, both the average rate for 2014 as well as
the historical rates used in 2014 remeasurement must be retained, as shown below. This
approach shows remeasured net 2015 income, using 2014 rates, about 44% higher than
reported in 2014.
(in thousands)
Sales
Cost of sales
Gross margin
Other operating expenses
Profit before taxes
Income tax expense
Net income
% change in net income
€
€2,400
1,320
1,080
230
850
255
€ 595
42%
2015
$/€
1.45
1.48
1.48
1.45
$
€
$3,480 €2,000
1,953.6
1,200
1,526.4
800
340.4
200
1,186
600
369.75
180
$ 816.25 € 420
44%
2014
$/€
1.45
1.48
1.48
1.45
$
$2,900
1,776
1,124
296
828
261
$ 567
For these data, retaining 2014 $/€ exchange rates to translate and remeasure 2015 euro
data provides percentage changes in dollar income close to that observed in euros.
However, as pointed out in the chapter, applying this approach to remeasurement
generally produces similar results only by coincidence.
©Cambridge Business Publishers, 2013
22
Advanced Accounting, 2nd Edition
P7.5
Translation and Ratio Analysis
(in thousands)
a.
Income Statement (*)
Sales
Cost of sales
Operating expenses
Net Income
* $ amounts = € amounts x 1.3
$ 650,000
(416,000)
(182,000)
$ 52,000
Balance Sheet (*)
Cash
$ 11,000 Liabilities
Merchandise inventory
220,000 Capital stock (200,000 x $1.50)
Plant assets
275,000 Retained earnings
Accumulated other
______ comprehensive income
Total assets
$506,000 Stockholders’ Equity
* $ amounts of assets and liabilities = € amounts x 1.1
Analysis of Translation Adjustment for 2014
€
Exposed position (net assets), January 1, 2014
€200,000
Plus net income in 2014 (500,000 - 460,000)
40,000
Exposed position (net assets),December 31, 2014
Translation loss (OCI)
€240,000
$/€
1.50
1.30
1.10
$242,000
300,000
52,000
(88,000)
$506,000
$
$300,000
52,000
352,000
- 264,000
$ 88,000
b.
Income Statement
Sales
Cost of sales (1)
Cash operating expenses (90,000 x 1.3)
Depreciation expense (50,000 x 1.5)
Remeasurement gain (see schedule below)
Net income
$ 650,000
(446,000)
(117,000)
(75,000)
62,000
$ 74,000
(1)
Purchases
Ending inventory
Cost of sales
Solutions Manual, Chapter 7
€
€ 520,000
(200,000)
€ 320,000
$/€
1.30
1.15
$
$ 676,000
(230,000)
$ 446,000
©Cambridge Business Publishers, 2013
23
Balance Sheet
Cash
$ 11,000 Liabilities
Merchandise inventory (2)
230,000 Capital stock
Plant assets (3)
375,000 Retained earnings
Total assets
$616,000 Stockholders’ equity
(2) 200,000 x 1.15; (3) 250,000 x 1.50
Analysis of Remeasurement Gain
€
Exposed position, January 1, 2014
(100,000 – 200,000)
€(100,000)
Plus sales
500,000
Less purchases
(520,000)
Less cash expenses
(90,000)
$/€
1.50
1.30
1.30
1.30
€(210,000)
Exposed position, December 31, 2014
Remeasurement gain (income)
$242,000
300,000
74,000
$616,000
1.10
$
$(150,000)
650,000
(676,000)
(117,000)
(293,000)
- (231,000)
$ (62,000)
c.
$
Net income/sales
Net income/total assets,
12/31/14
€
.080 (=40/500)
translation
.080 (=52/650)
remeasurement
.114 (=74/650)
.087 (=40/460)
.103 (=52/506)
.120 (=74/616)
Note to Instructor: The solution to this problem uses net income. Using operating
income (excluding the remeasurement gain), the ratios using remeasured data are:
Operating income/sales
Operating income/total assets
(12/650) =
(12/616) =
.018
.019
The ratios computed using translated data do a better job of preserving the same
relationships expressed in euros than do the remeasured ratios. With ratios like return on
sales, gross margin percentage and the current ratio, the translated results will be the same
as the euro results. This happens because in translation, the numerator and denominator
of each ratio are multiplied by the same constant (exchange rate) which then cancels out.
Return on assets using translated data will differ somewhat from the euro ratio depending
on how much the exchange rate has changed during the year. In this ratio, translated net
income reflects the weighted average exchange rate for a year while total assets could be
translated at the ending exchange rate or a simple average of beginning and ending rates
which may differ from the weighted average.
©Cambridge Business Publishers, 2013
24
Advanced Accounting, 2nd Edition
Ratios based on remeasured data equal their euro counterparts only by coincidence.
Because some items are translated at historical rates and others at the current rate or the
average rate, the numerator and denominator do not reflect a constant which simply
cancels out.
d.
If the euro continues to weaken, the ratios using translated data improve if the activity
level is held constant. Return on sales is unaffected by the changing exchange rate but
return on assets could increase over the previous year, since assets are translated at the
ending (lower) rate while income is translated at the average (higher) rate. While the
ratio signals improvement in performance, any new investments in that international
country must be considered within the context of its weakening foreign currency.
Use of remeasured data, however, shows a decline in the return on assets. Remeasured
net income, the numerator, falls as it is largely remeasured at the lower average rate. In
contrast, total assets, the denominator, remains high as it is remeasured largely at the
higher historical rates.
Ratio analysis has been and continues to be a tricky business. It should be viewed as a
starting point for further analysis in itself. Management should be aware that certain
ratios based on translated data may provide incorrect signals due to the translation
process.
P7.6
Translation and Remeasurement of Financial Statements
(in thousands)
a.
Cash, receivables
Inventories
Plant and equipment
Accounts and notes payable
Common stock
Retained earnings
(1)
(150,000 - 3,000) x .49 =
(30,000 - 2,000) x .50 =
Solutions Manual, Chapter 7
Balance Sheet
as of December 31, 2013
CHF
$/CHF
CHF 30,000
.55
55,000
.54
175,000
(1)
CHF260,000
CHF120,000
.55
30,000
.49
110,000
see below
CHF260,000
$
$ 16,500
29,700
86,030
$ 132,230
$ 66,000
14,700
51,530
$ 132,230
$72,030
14,000
$86,030
©Cambridge Business Publishers, 2013
25
Income Statement and Statement of Retained Earnings
Year ended December 31, 2013
CHF
$/CHF
Sales
CHF 500,000
.52
Cost of sales
(375,000)
(2)
Operating expenses:
Depreciation
(5,000)
(3)
Other
(70,000)
.52
Remeasurement loss
_______ see below
Net income
50,000
Retained earnings, 1/1
80,000
.49
Dividends
(20,000)
.55
Retained earnings, 12/31
CHF 110,000
(2)
Beginning inventory
Purchases
Ending inventory
Cost of sales
(3)
3,000 x .49 =
2,000 x .50 =
60,000 x .49 =
370,000 x .52 =
(55,000) x .54 =
©Cambridge Business Publishers, 2013
26
(2,470)
(36,400)
(5,700)
23,330
39,200
(11,000)
$ 51,530
$ 29,400
192,400
(29,700)
$192,100
$ 1,470
1,000
$ 2,470
Computation of Remeasurement Loss
Year ended December 31, 2013
CHF
Beginning exposed position
(25,000 – 125,000)
CHF(100,000)
Sales
500,000
Purchases
(370,000)
Cash operating expenses
(70,000)
Dividends
(20,000)
Plant and equipment acquisition
(30,000)
Ending exposed position
(30,000 – 120,000)
Remeasurement loss (income)
$
$ 260,000
(192,100)
CHF (90,000)
$/CHF
$
.49
.52
.52
.52
.55
.50
$ (49,000)
260,000
(192,400)
(36,400)
(11,000)
(15,000)
(43,800)
.55
- (49,500)
$ 5,700
Advanced Accounting, 2nd Edition
b.
Balance Sheet
as of December 31, 2013
CHF
Cash, receivables
CHF 30,000
Inventories
55,000
Plant & equipment
175,000
CHF260,000
Accounts & notes payable
CHF120,000
Common stock
30,000
Retained earnings
110,000
Accumulated other comprehensive
income
_____
CHF260,000
$/CHF
.55
.55
.55
.55
.49
see below
see below
$
$ 16,500
30,250
96,250
$143,000
$ 66,000
14,700
54,200
8,100
$143,000
Income Statement and Statement of Retained Earnings
Year ended December 31, 2013
CHF
$/CHF
$
Sales
CHF 500,000
.52
$ 260,000
Cost of sales
(375,000)
.52
(195,000)
Operating expenses
(75,000)
.52
(39,000)
Net income
50,000
$ 26,000
Retained earnings, 1/1
80,000
.49
39,200
Dividends
(20,000)
.55
(11,000)
Retained earnings, 12/31
CHF 110,000
$ 54,200
Computation of Translation Adjustment
Year ended December 31, 2013
CHF
$/CHF
Beginning exposed position
(30,000 + 80,000)
CHF110,000
.49
Net income
50,000
.52
Dividends
(20,000)
.55
Ending exposed position
(30,000 + 110,000)
Translation gain (OCI)
Solutions Manual, Chapter 7
CHF140,000
.55
$
$ 53,900
26,000
(11,000)
68,900
- 77,000
$ (8,100)
©Cambridge Business Publishers, 2013
27
P7.7
Converting the Cash Flow Statement
(in millions)
a.
Sears Canada Inc.
Statement of Cash Flows
for the Year Ended January 29, 2011
Operating activities
C$
Net income
C$ 150
Depreciation expense
105
Increase in other current operating assets
(99)
Decrease in accounts payable and accruals
(347)
Decrease in income taxes payable
(6)
Cash used for operating activities
(197)
Investing activities
Acquisition of plant assets
Cash used in investing activities
Financing activities
Issuance of long-term debt
Dividends paid
Cash used in financing activities
Effect of exchange rate changes on cash
Decrease in cash
$/C$
.97
.97
.97
.97
.97
$
$ 145.50
101.85
(96.03)
(336.59)
(5.82)
(191.09)
(67)
(67)
.97
(64.99)
(64.99)
115
(807)
(692)
-C$ (956)
.97
.97
111.55
(782.79)
(671.24)
62.76
$(864.56)
(1) Schedule of Translation Effect on Cash
C$
Cash balance, January 30, 2010
C$ 1,382
Cash used for operating activities
(197)
Cash used for investing activities
(67)
Cash used for financing activities
(692)
Cash balance, January 29, 2011
Effect of exchange rate changes on cash (gain)
©Cambridge Business Publishers, 2013
28
C$ 426
(1)
$/C$
$
.94 $1,299.08
.97
(191.09)
.97
(64.99)
.97
(671.24)
371.76
1.02 - 434.52
$ (62.76)
Advanced Accounting, 2nd Edition
b.
Sears Canada Inc.
Analysis of Cumulative Translation Adjustment
for the Year Ended January 29, 2011
C$
$/C$
Balance, January 30, 2010
C$ --2010 translation adjustment:
Exposed position, January 30, 2010
1,658
.94
Plus net income
150
.97
Less dividends paid
(807)
.97
Exposed position, January 29, 2011
2010 translation gain
Balance, January 29, 2011
C$1,001
1.02
$
$ (60.00)
1,558.52
145.50
(782.79)
921.23
- 1,021.02
(99.79)
$(159.79)
c.
The choice of remeasurement versus translation does not affect cash flow statement
totals. Current period cash flows are always converted at current period exchange rates,
repetitive cash transactions at the weighted average rate, large discrete cash transactions
at the rates in effect when the transactions occurred. But in the operating section, if the
indirect approach is used, remeasured depreciation and inventory adjustments will likely
differ from the translated adjustments.
P7.8
Analysis of Translation Adjustment Disclosure
a.
Appearance of the currency translation adjustment as a component of other
comprehensive income in stockholders' equity indicates that the functional currency of
Asiamart’s Hong Kong subsidiaries is the Hong Kong dollar. Thus the translation
adjustments relating to these subsidiaries are carried directly to AOCI in stockholders'
equity, bypassing the income statement.
b.
The following analysis assumes Asiamart’s Hong Kong subsidiaries had positive local
currency net assets (assets > liabilities) during this time period. In 2006 and 2007, the
translation adjustment is positive (gain), meaning that the dollar on average weakened
against the Hong Kong dollar (direct exchange rates increased) and translated net assets
also increased. In 2008, the translation adjustment is negative (loss), so the dollar on
average strengthened against the Hong Kong dollar.
c.
The net currency translation adjustment balance at January 1, 2006 is positive (gain),
implying that the dollar on average weakened against the Hong Kong dollar (exchange
rates increased) for periods prior to 2006. However, the cumulative translation gain at
January 1, 2006 is small in relation to the gains reported in 2006 and 2007, indicating that
in prior years the exchange rate either did not change as much or may have decreased in
prior years.
Solutions Manual, Chapter 7
©Cambridge Business Publishers, 2013
29
d.
In order to measure the earnings impact of remeasurement, we must make an assumption
about the nature of the Hong Kong subsidiaries’ exposed position under remeasurement.
A reasonable assumption is that assets measured at fair value (current money prices) are
less than liabilities, creating a negative (liability) exposure to exchange rate changes.
Since exchange rates decreased in 2008, there would be a remeasurement gain reported
in income on the net liability exposure, since Asiamart’s net liability exposure is
remeasured at lower current rates.
Depreciation and amortization are remeasured at historical rates. In the years 2006 and
2007, rates increased. The initial balance in the currency translation adjustment as of the
beginning of 2006 is also positive, implying that rates have on average increased in the
past, and historical rates were lower. Although rates declined in 2008, this is unlikely to
completely reverse the net impact on remeasured expenses. Using lower historical rates
to remeasure depreciation and amortization produces a positive effect on income.
Cost of goods sold is most likely dominated by purchases made in the current year, and
therefore the remeasured amount is unlikely to differ significantly from the translated
amount. Liquidation of old LIFO layers could create significant differences.
In summary, then, historical rates are lower than current or average rates for Asiamart’s
Hong Kong subsidiaries. So expenses remeasured at historical rates, such as depreciation
and amortization, are lower than expenses measured at average rates. The table below
shows the impact of remeasured expenses and the remeasurement gain on net income.
Expenses remeasured at historical rates
Inclusion of remeasurement gain in income
Impact on 2008
net income
increase
increase
Asiamart’s remeasured 2008 net income therefore is likely to be higher than its translated
income. Asiamart’s operating income, excluding the remeasurement gain, is also higher.
©Cambridge Business Publishers, 2013
30
Advanced Accounting, 2nd Edition
P7.9
Translated/Remeasured Trial Balances
a. and b.
Account
Cash and receivables
Inventory
Plant assets
Accumulated depreciation
Accounts payable
Long-term debt
Equity
Sales
Cost of goods sold
Depreciation expense
Other operating expenses
Remeasurement loss
Other comprehensive income
(a)
(b)
(c)
NOTE:
(d)
£
Balance
£ 2,660
2,500
1,800
(560)
(2,200)
(1,100)
(2,100)
(4,000)
2,000
160
840
$/£
2.20
(a)
(b)
1.80
2.20
2.20
(c)
2.10
2.12
1.80
2.10
(d)
$
Remeasurement
$ 5,852
4,575
3,310
(1,008)
(4,840)
(2,420)
(3,520)
(8,400)
4,240
288
1,764
159
_____
$
0
$/£
2.20
2.20
2.20
2.20
2.20
2.20
(c)
2.10
2.10
2.10
2.10
$
Translation
$ 5,852
5,500
3,960
(1,232)
(4,840)
(2,420)
(4,200)
(8,400)
4,200
336
1,764
_____
(e)
(520)
£
0
$
0
$4,575 = ($1.80 x 2,200) + ($2.05 x 300)
$3,310 = ($1.80 x 1,600) + ($2.15 x 200)
The remeasured (translated) balance of equity at January 1, 2013, is given as
$3,520
($4,200).
Since no depreciation was taken on the plant assets purchased in 2013, both
accumulated depreciation and depreciation expense relate only to the plant
assets purchased when the exchange rate was $1.80/£.
Calculation of Remeasurement Loss
Exposed position, January 1, 2013
Plus sales
Less purchase of plant assets
Less purchase of LIFO layer
Less purchase of goods sold
Less other operating expenses
Exposed position, December 31, 2013
Remeasurement loss (income)
Solutions Manual, Chapter 7
£
£ (1,300)
4,000
(200)
(300)
(2,000)
(840)
$/£
2.00
2.10
2.15
2.05
2.12
2.10
£
2.20
(640)
$
$(2,600)
8,400
(430)
(615)
(4,240)
(1,764)
(1,249)
- (1,408)
$ 159
©Cambridge Business Publishers, 2013
31
(e)
Calculation of Translation Gain
Exposed position (net assets), January 1, 2013
Plus net income in 2013 (4,000-2,000-160-840)
Exposed position (net assets), December 31, 2013
Translation gain (OCI)
£
£2,100
1,000
$/£
2.00
2.10
£3,100
2.20
$
$4,200
2,100
$6,300
- 6,820
$(520)
P7.10 Translating and Remeasuring Financial Statements
SA Company Financial Statements
Year ended December 31, 2014
(a)
Remeasurement
Balance Sheet
P
$/P
$
Cash
P 310,000
.15
$ 46,500
Inventory (purchased 1/5)
200,000
.10
20,000
Inventory (purchased 6/30)
360,000
.12
43,200
Office equipment, net
180,000
.10
18,000
Total assets
1,050,000
127,700
Contributed capital
1,000,000
.10
100,000
Retained earnings
50,000
27,700
Accumulated other
comprehensive income
_______
______
Total Equities
P1,050,000
$127,700
Income Statement
Sales
Cost of goods sold
Rent expense
Depreciation expense
Remeasurement gain
Net income
©Cambridge Business Publishers, 2013
32
P
P 300,000
(200,000)
(30,000)
(20,000)
-P 50,000
$/P
.12
.10
.12
.10
$
$ 36,000
(20,000)
(3,600)
(2,000)
17,300
$ 27,700
(b)
Translation
$/P
$
.15 $ 46,500
.15
30,000
.15
54,000
.15
27,000
157,500
.10
100,000
6,000
51,500
$157,500
$/P
.12
.12
.12
.12
$
$ 36,000
(24,000)
(3,600)
(2,400)
_____
$ 6,000
Advanced Accounting, 2nd Edition
Computation of Translation and Remeasurement Gains
Remeasurement
Translation
P
$/P
$
P
$/P
$
a
a
Exposed position, Jan. 1, 2014
P1,000,000 .10 $ 100,000 P1,000,000 .10
$100,000
Plus: Sale of inventory
300,000 .12
36,000
300,000 .12
36,000
Less:
Purchase of inventory (1/5)
(400,000) .10
(40,000)
Purchase of inventory (6/30)
(360,000) .12
(43,200)
Purchase of office equipment
(200,000) .10
(20,000)
Payment of rent
(30,000) .12
(3,600)
(30,000) .12
(3,600)
Cost of goods sold
(200,000) .12
(24,000)
Depreciation expense
_____
_____
(20,000) .12
(2,400)
29,200
106,000
Exposed position, Dec. 31, 2014
P 310,000b .15
-46,500 P1,050,000c .15
-157,500
Remeasurement/translation gain
$(17,300)
$(51,500)
Notes
a
1,000,000 = cash (1,000,000) = net assets carried at current money prices = net assets.
b
310,000 = cash (310,000) = net assets carried at current money prices.
c
1,050,000 = cash (310,000) + inventory (200,000 + 360,000) + office equipment, net
(180,000) = net assets = 1,000,000 + 50,000 (net income).
P7.11 Consolidated Financial Statements with an International Subsidiary
Step 1: Translation of Standard=s December 31, 2014 trial balance:
£
$/£
Cash and receivables
£ 3,000,000
2.30
Inventory
3,000,000
2.30
Property, plant & equipment, net
5,000,000
2.30
Current liabilities
(4,000,000)
2.30
Long-term debt
(1,000,000)
2.30
Capital stock
(2,000,000)
2.00
Retained earnings, January 1
(3,500,000)
2.00
Dividends
1,000,000
2.10
Accumulated other comprehensive income
-(1)
Sales
(10,000,000)
2.15
Cost of goods sold
6,000,000
2.15
Depreciation expense
500,000
2.15
Other operating expenses
2,000,000
2.15
£
-0-
Solutions Manual, Chapter 7
$
$ 6,900,000
6,900,000
11,500,000
(9,200,000)
(2,300,000)
(4,000,000)
(7,000,000)
2,100,000
(1,675,000)
(21,500,000)
12,900,000
1,075,000
4,300,000
$
-0-
©Cambridge Business Publishers, 2013
33
(1) Calculation of Translation Adjustment for 2014
£
$/£
$
Net assets, January 1, 2014
£ 5,500,000
2.00
$ 11,000,000
Net income
1,500,000
2.15
3,225,000
Dividends
(1,000,000)
2.10
(2,100,000)
12,125,000
Net assets, December 31, 2014
£ 6,000,000
2.30
- 13,800,000
Translation gain (OCI)
$ (1,675,000)
Step 2:Adjust Investment for 2014 Equity in Net Income and Translation Gain
Calculation of Revaluations
Price paid
Book value
Excess of cost over book value
Inventories revaluation
Property, plant and equipment
revaluation
Goodwill
£
£8,000,000
5,500,000
2,500,000
100,000
$/ £
2.00
2.00
500,000
£1,900,000
2.00
1,000,000
$ 3,800,000
£
£1,500,000
$/ £
2.15
U.S.$
$3,225,000
(100,000)
(25,000)
(200,000)
£1,175,000
2.15
2.15
2.15
(215,000)
(53,750)
(430,000)
$2,526,250
2.00
U.S.$
$16,000,000
11,000,000
5,000,000
200,000
Calculation of Equity in Net Income for 2014
Standard’s reported net income
Revaluation write-offs:
Cost of goods sold
Depreciation expense [500,000/20]
Goodwill impairment
Equity in net income
Phillips’ entry to update the investment for 2014 equity in net income and its share of Standard=s
translation gain:
Investment in Standard
4,201,250
Equity in net income of Standard
Accumulated other
comprehensive income
©Cambridge Business Publishers, 2013
34
2,526,250
1,675,000
Advanced Accounting, 2nd Edition
Step 3:Consolidation working paper entries
(C)
Equity in net income of Standard
2,526,250
Dividends
Investment in Standard
To reverse equity method entries for 2014.
(E)
Capital Stock
Retained earnings, beg.
Accumulated other
comprehensive income
2,100,000
426,250
4,000,000
7,000,000
1,675,000
Investment in Standard
To eliminate Standard’s stockholders= equity as of 1/1.
(R)
Inventory (100,000 x $2.30)
PP&E, net (500,000 x $2.30)
Goodwill (1,900,000 x $2.30)
12,675,000
230,000
1,150,000
4,370,000
Investment in Standard
5,000,000
Other comprehensive
income
750,000
To record the beginning-of-year revaluations. $750,000 = ($2.30 - $2.00) x (100,000 + 500,000 +
1,900,000)
(O)
Cost of goods sold
Depreciation expense
Goodwill impairment
Other comprehensive income
215,000
53,750
430,000
48,750
Inventory
Property, plant &
equipment
Goodwill
To write off the revaluations for 2014.
$215,000 = 100,000 x $2.15
$53,750 = (500,000/20) x $2.15
$430,000 = 200,000 x $2.15
$230,000 = 100,000 x $2.30
Solutions Manual, Chapter 7
230,000
57,500
460,000
$57,500 = 25,000 x $2.30
$460,000 = 200,000 x $2.30
$48,750=($2.30-$2.15)x(100,000 + 25,000 +200,000)
©Cambridge Business Publishers, 2013
35
The 2014 consolidation working paper appears below.
December 31, 2014 Consolidation Working Paper
Cash and receivables
Inventory
Property, plant and
equipment, net
Investment in Standard
Goodwill
Current liabilities
Long-term debt
Capital stock
Retained earnings, 1/1
Accumulated other
comprehensive income
Dividends
Sales
Equity in net income
Cost of goods sold
Depreciation expense
Other operating
expenses
Goodwill impairment
Consoli-dated
Dr (Cr)
Phillips
Dr (Cr)
$2,100,000
4,000,000
Standard
Dr (Cr)
$6,900,000
6,900,000
12,000,000
18,101,250
11,500,000 (R)1,150,000
(8,000,000)
(4,000,000)
(10,000,000)
(8,000,000)
(1,675,000)
Dr
Cr
(R)230,000
57,500 (O)
426,250 (C)
12,675,000 (E)
5,000,000 (R)
(R)4,370,000
460,000(O)
(9,200,000)
(2,300,000)
(4,000,000) (E)4,000,000
(7,000,000) (E)7,000,000
(1,675,000) (E)1,675,000
(O) 48,750
2,000,000
2,100,000
(30,000,000) (21,500,000)
(2,526,250)
(C)2,526,250
20,000,000
12,900,000 (O)215,000
1,000,000
1,075,000
(O)53,750
5,000,000
_______
$
-0-
©Cambridge Business Publishers, 2013
36
230,000 (O)
750,000 (R)
2,100,000(C)
4,300,000
_______ (O)430,000 _______
$
-0- $21,698,750 $21,698,75
0
$ 9,000,000
10,900,000
24,592,500
-3,910,000
(17,200,000)
(6,300,000)
(10,000,000)
(8,000,000)
(2,376,250)
2,000,000
(51,500,000)
-33,115,000
2,128,750
9,300,000
430,000
$
-0-
Advanced Accounting, 2nd Edition
Phillips Company and Subsidiary Standard, Ltd.
Consolidated Statement of Income and Retained Earnings
For the Year Ended December 31, 2014
Sales
Cost of goods sold
Depreciation expense
Other operating expenses
Goodwill impairment
Total expenses
Net income
Retained earnings, January 1
Dividends declared and paid
Retained earnings, December 31
$51,500,000
$33,115,000
2,128,750
9,300,000
430,000
$44,973,750
$ 6,526,250
8,000,000
(2,000,000)
$12,526,250
Phillips Company and Subsidiary Standard, Ltd.
Consolidated Balance Sheet
December 31, 2014
Assets
Cash and receivables
Inventory
Property, plant & equipment, net
Goodwill
Total assets
Liabilities and stockholders’ equity
Current liabilities
Long-term debt
Capital stock
Retained earnings
Accumulated other comprehensive income
Total liabilities and stockholders’ equity
Solutions Manual, Chapter 7
$ 9,000,000
10,900,000
24,592,500
3,910,000
$48,402,500
$17,200,000
6,300,000
10,000,000
12,526,250
2,376,250
$48,402,500
©Cambridge Business Publishers, 2013
37
P7.12 Hyperinflationary Economy, U.S. GAAP and IFRS
a.
Because the local currency is highly inflationary, U.S. GAAP requires remeasurement of
the subsidiary’s LC accounts into the reporting currency, U.S. dollars, even though the
local currency is the subsidiary’s functional currency. Remeasurement of the December
31, 2014 balance sheet is as follows:
Account
Cash
Plant assets, net
Liabilities
Capital stock
Sales revenue
Out of pocket operating expenses
Depreciation expense
Remeasurement loss (income)
Balance in LC
Dr (Cr)
125,000
35,000
(50,000)
(50,000)
(200,000)
135,000
5,000
--0-
$/LC
0.10
0.65
0.10
0.65
0.15
0.15
0.65
See sch. 1
$
Dr (Cr)
12,500
22,750
(5,000)
(32,500)
(30,000)
20,250
3,250
8,750
-0-
Schedule 1Calculation of Remeasurement Loss
Beginning exposed position
+ Sales
- Out of pocket operating expenses
Ending exposed position
Remeasurement loss (income)
LC
10,000
200,000
(135,000)
$/LC
0.65
0.15
0.15
75,000
0.10
Remeasured balance sheet
December 31, 2014
$ 12,500 Liabilities
22,750 Capital stock
______ Retained earnings
$ 35,250 Total
Cash
Plant assets, net
Total
$
6,500
30,000
(20,250)
16,250
- 7,500
8,750
$
5,000
32,500
(2,250)
$ 35,250
Remeasured income statement
For the year 2014
Sales revenue
Out of pocket operating expenses
Depreciation expense
Remeasurement loss
Net loss
©Cambridge Business Publishers, 2013
38
$ 30,000
(20,250)
(3,250)
(8,750)
$ (2,250)
Advanced Accounting, 2nd Edition
b.
IFRS requires restatement of the LC accounts to the same price level, and then translation
to the presentation currency, the U.S. dollar.
Price-level
adjusted
Balance in LC Price-level
(LC)
$
Account
Dr (Cr)
adjustment
Dr (Cr)
$/LC
Dr (Cr)
Cash
125,000
-125,000
0.10
12,500
Plant assets, net
35,000
600/100
210,000
0.10
21,000
Liabilities
(50,000)
-(50,000)
0.10
(5,000)
Capital stock
(50,000)
600/100
(300,000)
0.65
(195,000)
Sales revenue
(200,000)
600/400
(300,000)
0.15
(45,000)
Out of pocket
op. expenses
135,000
600/400
202,500
0.15
30,375
Depr. expense
5,000
600/100
30,000
0.15
4,500
Monetary loss
(income)
-See sch. 2
82,500
0.15
12,375
AOCI (loss)
---- See sch. 3 164,250
-0-0-0-0Schedule 2Calculation of Monetary Loss
Beginning monetary position
+ Sales
- Out of pocket operating expenses
Ending monetary position
Monetary loss (income)
LC
10,000
200,000
(135,000)
Price-level
adjustment
600/100
600/400
600/400
75,000
--
Price-level
adjusted
(LC)
60,000
300,000
(202,500)
157,500
- 75,000
82,500
Schedule 3Calculation of Translation Loss
Beginning exposed position
- Net loss
(300,000 – 202,500 – 30,000 – 82,500)
Ending exposed position
Translation loss (OCI)
Solutions Manual, Chapter 7
Price-level
adjusted
(LC)
300,000
$/LC
0.65
$
195,000
(15,000)
0.15
285,000
0.10
(2,250)
192,750
- 28,500
164,250
©Cambridge Business Publishers, 2013
39
Cash
Plant assets, net
Total
Translated balance sheet
December 31, 2014
$ 12,500 Liabilities
21,000 Capital stock
Retained earnings
______ AOCI
$ 33,500 Total
$
5,000
195,000
(2,250)
(164,250)
$ 33,500
Translated income statement
For the year 2014
Sales revenue
Out of pocket operating expenses
Depreciation expense
Monetary loss
Net loss
©Cambridge Business Publishers, 2013
40
$ 45,000
(30,375)
(4,500)
(12,375)
$ (2,250)
Advanced Accounting, 2nd Edition