SM Hoyle AdvAcc11e Ch10

Find more slides, ebooks, solution manual and testbank on www.downloadslide.
com
CHAPTER 10
TRANSLATION OF FOREIGN
CURRENCY FINANCIAL STATEMENTS
Chapter Outline
I. In today's global economy, many companies have invested in operations in foreign countries.
A. In preparing consolidated financial statements on a worldwide basis, the foreign currency
accounts prepared by foreign operations must be restated into the parent company's
reporting currency.
B. There are two major issues related to the translation of foreign currency financial
statements.
1. Which method should be used?
2. How should the resulting translation adjustment be reported on the consolidated
financial statements?
C. Translation methods differ on the basis of which accounts are translated at the current
exchange rate and which are translated at a historical exchange rate. Translating accounts
at the current exchange rate creates a translation adjustment.
D. Historically, accountants have experimented with a number of different translation methods.
The dominant methods currently in use are the temporal method and the current rate
method.
E. Translation adjustments can be either (1) reported as a gain or loss in income or (2)
deferred in the stockholders' equity section of the balance sheet.
II. The primary objective of the temporal method is to maintain the underlying valuation method
used by the foreign entity to account for its assets and liabilities.
A. Assets and liabilities carried at current or future value are translated at the current exchange
rate. Assets and liabilities carried at cost and stockholders' equity items are translated at a
historical exchange rate.
B. By translating some assets at the current exchange rate and others at historical rates the
temporal method distorts financial ratios calculated in the foreign currency.
C. Most income statement items are translated at average-for-the-period rates. However, cost-
of-goods-sold, depreciation, and amortization expense are translated at relevant historical
exchange rates.
D. Balance sheet exposure under the temporal method is defined as cash, marketable
securities, and receivables minus total liabilities. A net liability exposure often exists.
1. When a liability balance sheet exposure exists, depreciation of the foreign currency
results in a positive translation adjustment (gain) and appreciation of the foreign
currency results in a negative translation adjustment (loss).
2. Reporting a translation loss when the foreign currency appreciates is thought to be
inconsistent with economic reality.
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009

Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 10-1
Find more slides, ebooks, solution manual and testbank on www.downloadslide.com
III. With the current rate method, the net investment in a foreign operation is considered to be
exposed to foreign exchange risk.
A. Assets and liabilities are translated at the current exchange rate; equity is translated at
historical rates.
B. Translating assets which are carried at cost using the current exchange rate results in a
translated value which is not readily interpretable; it is neither a current value nor a historical
cost.
C. However, translating all assets at the current rate does maintain underlying ratios and
relationships that exist in the foreign currency statements.
D. Revenues and expenses which occur evenly throughout the period are translated at the
average-for-the-period exchange rate. Income items, such as gains and losses, which are
the result of a discrete event, are translated at the actual exchange rate on the date of
occurrence.
E. Balance sheet exposure under the current rate method is equal to the foreign entity's net
assets (stockholders' equity).
1. Appreciation in the foreign currency results in a positive translation adjustment (gain);
depreciation results in a negative translation adjustment (loss).
IV. FASB Statement No. 52 provides guidelines for the translation of foreign currency financial
statements by U.S.-based multinational corporations. The appropriate translation method and
disposition of translation adjustment depends upon the functional currency of the foreign entity.
A. The functional currency is the primary currency of the foreign entity's operating environment.
It can be either the U.S. dollar or a foreign currency.
1. SFAS 52 lists six indicators that are to be used in determining an entity's functional
currency. There are no guidelines as to how these indicators are to be weighted.
B. If a foreign currency is the functional currency, the foreign entity's financial statements are
"translated" using the current rate method and the resulting translation adjustment is
reported as a separate component of equity. The average-for-the-period exchange rate is
used to translate the foreign entity's income statement.
1. Upon the sale or liquidation of a specific foreign entity, the cumulative translation
adjustment related to that entity is taken to income as an adjustment to the gain or loss
on sale or liquidation.
C. If the U.S. dollar is the functional currency, foreign currency financial statements are
"remeasured" using the temporal method with "remeasurement" gains and losses reported
in operating income.
D. If a foreign entity operates in a highly inflationary economy (cumulative three-year inflation
greater than 100%), its financial statements are remeasured into U.S. dollars using the
temporal method and remeasurement gains and losses are reported in income.
V. Some companies hedge the balance sheet exposures of their foreign entities so as to avoid
adverse effects on income and/or stockholders' equity.
A. SFAS 133 refers to this as a hedge of a net investment in a foreign operation and stipulates
that gains and losses on hedging instruments used in this manner should be treated in the
same fashion as the translation adjustment (remeasurement gain/loss) being hedged.
B. The paradox of hedging balance sheet exposure is that by avoiding a translation adjustment
(remeasurement gain/loss), realized foreign exchange gains and losses can arise.

10-2 Solutions Manual
Learning Objectives
Having completed Chapter 10 of this textbook, "Translation of Foreign Currency Financial
Statements," students should be able to fulfill each of the following learning objectives:
1. Describe the procedures of the current rate and temporal methods of translation.
2. Understand the method by which the retained earnings balance of a foreign subsidiary is
translated.
3. Discuss the theoretical underpinnings and limitations of the current rate and temporal methods.
4. Understand balance sheet exposure and explain how it differs from transaction exposure to
foreign exchange risk.
5. Discuss SFAS 52 guidelines as to when foreign currency financial statements are to be

"translated" using the current rate method and when they are to be "remeasured" using the
temporal method.
6. Translate a foreign subsidiary's financial statements into its parent's reporting currency using
the guidelines of SFAS 52.
7. Determine the amount and placement of the translation adjustment that is reported as a result
of the translation process.
8. Remeasure a foreign subsidiary's financial statements using the guidelines of SFAS 52 and
calculate the associated remeasurement gain or loss.
9. Explain the reason for using the temporal method to translate financial statements of operations
in highly inflationary environments.
10. Understand the rationale for hedging a net investment in a foreign operation and describe the
treatment of gains and losses on forward contracts used for this purpose.
11. Prepare a consolidation worksheet for a parent and its foreign subsidiary.

Answer to Discussion Question

How Do We Report This?
This case represents the ongoing debate as to the proper reporting of foreign currency balances.
Southwestern has invested the equivalent of $30,000 (150,000 vilseks) in each of three assets.
The relative value of the vilsek has now changed. Thus, 150,000 vilseks now can be converted
into $34,500. However, the subsidiary does not have vilseks--only land, inventory, and
investments. Although the current exchange rate is given, the company has no apparent plans to
convert its assets into dollars. Instead, these three assets are being held, each with a historical
cost of 150,000 vilseks. Under the temporal method, these assets (except for the investments if
carried at market value) would be reported in the parent's balance sheet at the original cost of
$30,000. Unfortunately, as the Finance Director points out, an old, outdated rate is being utilized if
the $30,000 figure is reported. (Of course, given that prices tend to change over time, the same
can be said for any asset reported at historical cost.)
Conversely, the current rate method requires that each of the three assets be reported at $34,500
based on the current exchange rate. As the controller indicates, though, $34,500 was not the
original cost expended by Southwestern. In addition, using the current rate means that each of the
assets will constantly report a "floating" value, one that will change with each exchange rate
fluctuation. Finally, the $34,500 figure is based on the current value of the vilsek ($.23) and the
historical cost in vilseks (150,000 vilseks) for the three assets. The current exchange rate is only
significant if the assets are sold with the proceeds being converted into U.S. dollars. Since an
imminent sale is not indicated, the validity of reporting the $34,500 might again be questioned. In
addition, even if the assets were sold, $34,500 does not accurately reflect the proceeds in U.S.
dollars because 150,000 vilseks is the historical cost and not the current market value of each of
these assets.
As a classroom exercise or written assignment, students could be required to select a reported

value for each of the three assets and then defend their position. What figure is actually the fairest
representation of each of the three assets? What figure is the best conveyor of information to an
outside party? There is no single best answer to these questions. The purpose of this type of
exercise is to force students to consider the objectives of financial reporting. Students should not
just assume that the current official pronouncement is correct. One possible approach to the case
is to assign several students to represent banks or stockholders and discuss the types of
information that is most needed by these users. Another group of students can take the position of
the company responsible for preparing the information and discuss management's preference for
providing one type of information over another. Yet another group could take a purely theoretical
approach and discuss the goals that accounting has attempted to reach. Although a final resolution
may not be achieved, some excellent class discussion is possible.
The temporal and current rate methods of translation differ primarily with regard to the exchange
rate used to translate those assets that are reported at historical cost--inventories, prepaids, fixed
assets, and intangibles. The debate regarding the appropriate exchange rate for translating assets
exists only because some assets are reported at historical cost. If all assets were reported at their
current value, there would be no need to use the historical exchange rate for translating assets in
order to maintain the asset's historical cost in U.S. dollar terms. All assets would be translated at
the current exchange rate. The differences between the temporal method and current rate method
would disappear.

Answers to Questions
1. The two major issues related to the translation of foreign currency financial statements are: (a)
which method should be used and (b) where should the resulting translation adjustment be
reported in the consolidated financial statements. The first issue relates to determining the
appropriate exchange rate (historical, current, or average for the current period) for the
translation of foreign currency balances. Those items translated at the current exchange rate
are exposed to translation adjustment. The second issue relates to whether the translation
adjustment should be treated as a gain or loss in income, or should be deferred as a separate
component of stockholders equity.
2. Balance sheet exposure arises when a foreign currency balance is translated at the current
exchange rate. By translating at the current exchange rate, the foreign currency item in
essence is being revalued in U.S. dollar terms on the consolidated financial statements. There
will be either a net asset balance sheet exposure or net liability balance sheet exposure
depending upon whether assets translated at the current rate are greater or less than liabilities
translated at the current rate. Balance sheet exposure generates a translation adjustment
which does not result in an inflow or outflow of cash. Transaction exposure, which results from
the receipt or payment of foreign currency, generates foreign exchange gains and losses which
are realized in cash.
3. Although balance sheet exposure does not result in cash inflows and outflows, it does
nevertheless affect amounts reported in consolidated financial statements. If the foreign
currency is the functional currency, translation adjustments will be reported in stockholders
equity. If translation adjustments are negative and therefore reduce total stockholders equity,
there is an adverse (inflationary) impact on the debt to equity ratio. Companies with restrictive
debt covenants requiring them to stay below a maximum debt to equity ratio, may find it
necessary to hedge their balance sheet exposure so as to avoid negative translation
adjustments being reported. If the U.S. dollar is the functional currency or an operation is
located in a high inflation country, remeasurement gains and losses are reported in income.
Companies might want to hedge their balance sheet exposure in this situation to avoid the
adverse impact remeasurement losses can have on consolidated income and earnings per
share.
The paradox in hedging balance sheet exposure is that, by agreeing to receive or deliver
foreign currency in the future under a forward contract, a transaction exposure is created. This
transaction exposure is speculative in nature, given that there is no underlying inflow or outflow
of foreign currency that can be used to satisfy the forward contract. By hedging balance sheet
exposure, a company might incur a realized foreign exchange loss to avoid an unrealized
negative translation adjustment or unrealized remeasurement loss.
4. The gains and losses arising from financial instruments used to hedge balance sheet exposure
are treated in a similar manner as the item the hedge is intended to cover. If the foreign
currency is the functional currency, gains and losses on hedging instruments will be taken to
other comprehensive income. If the U.S. dollar is the functional currency, gains and losses on
the hedging instruments will be offset against the related remeasurement gains and losses.

5. The major concept underlying the temporal method is that the translation process should result
in a set of translated U.S. dollar financial statements as if the foreign subsidiarys transactions
had actually been carried out using U.S. dollars. To achieve this objective, assets carried at
historical cost and stockholders equity are translated at historical exchange rates; assets
carried at current value and liabilities (carried at current value) are translated at the current
exchange rate. Under this concept, the foreign subsidiarys monetary assets and liabilities are
considered to be foreign currency cash, receivables, and payables of the parent which are
exposed to transaction risk. For example, if the foreign currency appreciates, then the foreign
currency receivables increase in U.S. dollar value and a gain is recognized. Balance sheet
exposure under the temporal method is analogous to the net transaction exposure which exists
from having both receivables and payables in a particular foreign currency.
The major concept underlying the current rate method is that the entire foreign investment is
exposed to foreign exchange risk. Therefore all assets and liabilities are translated at the
current exchange rate. Balance sheet exposure under this concept is equal to the net
investment.
6. The Retained Earnings balance is created by a multitude of transactions: all revenues,

expenses, gains, losses, and dividends since the companys inception. Identifying each
component of this account (so that a separate translation can be made) would be virtually
impossible. Therefore, in the initial year that Statement 52 was applied, the ending balance
calculated under Statement 8 was merely brought forward. Thereafter, the ending balance
translated each year for retained earnings becomes the beginning figure to be reported for the
following year.
7. The major differences relate to non-monetary assets carried at historical cost and related
expenses, i.e., inventory and cost of goods sold; property, plant, and equipment and
depreciation expense; and intangible assets and amortization expense. Under the temporal
method, these items are all translated at historical exchange rates. Under the current rate
method, the assets are translated at the current exchange rate and the related expenses are
translated at the average exchange rate for the current period.
8. The functional currency is the currency of the subsidiarys primary economic environment. It is
usually identified as the currency in which the company generates and expends cash. SFAS 52
recommends that several factors such as the location of primary sales markets, sources of
materials and labor, the source of financing, and the amount of intercompany transactions
should be evaluated in identifying an entitys functional currency. SFAS 52 does not provide
any guidance as to how these factors are to be weighted (equally or otherwise) when identifying
an entitys functional currency.
9. The foreign subsidiary's net asset position in foreign currency at the beginning of the period is
first determined. Changes in net assets are determined to explain the net asset balance in
foreign currency at the end of the period. The beginning net asset position and changes in net
assets are translated at appropriate exchange rates and the ending net asset position in dollars
is determined.
The ending net asset balance in foreign currency is then translated at the current rate and this
result is subtracted from the ending net asset position in dollars (already calculated). The
difference is the translation adjustment. It is positive if the actual dollar net asset position is less
than the net asset position based on the current exchange rate. The translation adjustment is
negative if the actual dollar net asset position is greater than if translated at the current rate.

10. One theory mentioned by the FASB identifies the translation adjustment as a measure of
unrealized increases and decreases that have occurred in the value of the foreign subsidiary
because of exchange rate changes. A second theory argues that this adjustment is no more
than a mechanically derived number that must be included to keep the balance sheet in
equilibrium although the figure has no intrinsic meaning. The FASB did not indicate in
Statement 52 that either theory is considered more appropriate.
11. Remeasurement is required in two situations:
a. The U.S. dollar is the functional currency.

b. The foreign subsidiary operates in a highly inflationary country.
Translation is required when a foreign currency is the functional currency.

Remeasurement is carried out using the temporal method, with remeasurement gains and
losses reported in consolidated income. Translation is done using the current rate method and
the resulting translation adjustment is carried as a separate component of stockholders equity.
12. The temporal method must be used to remeasure the financial statements of operations in
highly inflationary countries. One reason for mandating the use of the temporal method is that it
avoids the disappearing plant problem that exists when the current rate method is used. Under
the current rate method, fixed assets are translated at current exchange rates. With high rates
of inflation, the foreign currency will depreciate significantly. When the historical cost of fixed
assets is translated at a significantly lower current exchange rate, the dollar value of fixed
assets disappears. This problem is avoided by translating at the historical exchange rate as is
done under the temporal method.

Answers to Problems
1. C
2. C
3. C
4. B Because the peso is the functional currency, the financial statements must be
translated using the current rate method. Therefore, answers a and d can be
eliminated. Because the subsidiary has a net asset position and the peso has
appreciated from $.16 to $.19, a positive translation adjustment will result.
5. A All asset accounts are translated at current rates.
6. A Because the foreign currency is the functional currency, a translation is

required. All assets accounts are translated at current rates.
7. C Because 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 FCU 200,000 x $1.00 = $ 200,000

Purchases 10,300,000 x $0.80 = 8,240,000
Ending inventory (500,000) x $0.75 = (375,000)
Cost of goods sold FCU 10,000,000 $8,065,000

13. C Beginning net assets, 1/1.. P20,000 x $.15 = $ 3,000

Increase in net assets:
Income ........................................ 10,000 x $.19 = 1,900
Ending net assets, 12/31 ................. P30,000 $ 4,900
Ending net assets at
current exchange rate ................ P30,000 x $.21 = $ 6,300
Translation Adjustment (positive) . $(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 P100,000 x $.16 = $16,000

Increases in net monetary assets:
Sale of inventory ........................ 50,000 x $.20 = 10,000
Decreases in net monetary assets:
Purchase of equipment ............. (60,000) x $.16 = (9,600)
Purchase of inventory ............... (30,000) x $.18 = (5,400)
Transfer to parent ...................... (10,000) x $.21 = (2,100)
Ending net monetary assets, 12/31 P 50,000 $ 8,900
Ending net monetary assets at
the current exchange rate ......... P 50,000 x $.22 = (11,000)
Remeasurement gain ...................... $(2,100)
16. C Marketable equity securities are carried at market value and therefore
translated at the current exchange rate under the temporal method.
17. B When the U.S. dollar is the functional currency, SFAS 52 requires
remeasurement using the temporal method with remeasurement gains and
losses reported in income.
18. B Wages payable is translated at the current exchange rate.
19. C Gains and losses on hedges of net investments (whether through a forward
contract, borrowing, or other technique) are offset against the translation
adjustment being hedged.
20. D Remeasurement gains are reported in the income statement as a part of

income from continuing operations.
21. (10 minutes) (Specify appropriate rates for a translation)
Rent expenseuse 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 paiduse historical rate at time of recording, the date of declaration.
Equipmentas an asset, use current rate at the balance sheet date.
Notes payableas a liability, use current rate at the balance sheet date.
21. (continued)
Salesuse 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 expenseuse 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.
Cashas an asset, use the current rate at the balance sheet date.
Accumulated depreciationas a contra-asset account, use the current ex-

change rate at the balance sheet date.
Common stockas an equity account, use historic rate at time of recording, the
date of issuance.
22. (5 minutes) (Determine translated values)
As a translation, both the asset (inventory) and the liability (accounts payable)
utilize the current exchange rate at the balance sheet date (December 31). Thus,
the translated values are as follows:
Inventory LCU120,000 x 25% left = LCU30,000 x 1/3.0 = $10,000
Accounts payable LCU120,000 x 40% unpaid = LCU48,000 x 1/3.0 = $16,000
23. (10 minutes) (Determine translation and remeasurement rates)
Translation Remeasurement
Accounts payable $.16 C $.16 C
Accounts receivable $.16 C $.16 C
Accumulated depreciation $.16 C $.26 H
Advertising expense $.19 A $.19 A
Amortization expense $.19 A $.25 H
Buildings $.16 C $.26 H
Cash $.16 C $.16 C
Common stock $.28 H $.28 H
Depreciation expense $.19 A $.26 H
Dividends paid (10/1) $.20 H $.20 H
Notes payable $.16 C $.16 C
Patents (net) $.16 C $.25 H
Salary expense $.19 A $.19 A
Sales $.19 A $.19 A
* C = current rate, H = historical rate, A = average rate

24. (20 minutes) (Calculate translation adjustment and remeasurement gain/loss and
explain their economic relevance)
The translation adjustment and remeasurement gain/loss can be determined as
the plug figure that keeps the dollar balance sheet in balance:
Translation Remeasurement
CHF Rate US$ Rate US$
Cash ............................ 500,000 $.75 C 375,000 $.75 C 375,000
Inventory..................... 1,000,000 $.75 C 750,000 $.70 H 700,000
Fixed assets ............... 3,000,000 $.75 C 2,250,000 $.70 H 2,100,000
Total assets ............... 4,500,000 3,375,000 3,175,000
Notes payable............. 800,000 $.75 C 600,000 $.75 C 600,000
Owners equity ............ 3,700,000 $.70 H 2,590,000 $.70 H 2,590,000
Translation adjustment 185,000
Retained earnings
(remeasurement loss) (15,000)
Total ......................... 4,500,000 3,375,000 3,175,000
Alternatively, the translation adjustment and remeasurement loss can be
calculated by analyzing the subsidiarys balance sheet exposure:
Translation
Beginning net assets, 12/1 CHF3,700,000 x $.70 = $2,590,000
Ending net assets, 12/31 at
current exchange rate CHF3,700,000 x $.75 = (2,775,000)
Translation adjustment (positive)
$( 185,000)
Remeasurement
Beginning net monetary
liability position, 12/1 CHF(300,000) x $.70 = $(210,000)
Ending net monetary liability
position, 12/31 at current
exchange rate CHF(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
CHF3,700,000 and the Swiss franc appreciates by $.05 [CHF3,700,000 x $.05 =
$185,000]. The positive translation adjustment is not realized in terms of dollar cash
flow. It would be a realized gain only if Stephanie sold this operation on December 31
for exactly CHF3,700,000 and converted the sales proceeds into dollars at the current
exchange rate of $.75 per Swiss franc.
Economic Relevance of Remeasurement Loss
The remeasurement loss arises because the Swiss subsidiary has a net monetary
liability position of CHF300,000 (Cash of CHF500,000 less Notes payable of
CHF800,000) and the Swiss franc has appreciated by $.05 [CHF300,000 x $.05 =
$15,000]. The loss is unrealized. It would be realized only if the Swiss subsidiary
converted its Swiss franc cash into dollars at December 31, thereby realizing a
transaction gain of $25,000 [CHF500,000 x ($.75-$.70)], and the parent paid off the
Swiss franc note payable using U.S. dollars, thereby realizing a transaction loss of
$40,000 [CHF800,000 x ($.75-$.70)]. (The note could have been paid at December 18 for
$560,000 [CHF800,000 x $.70]. At December 31, it takes $600,000 to pay off the note
[CHF800,000 x $.75].)
25. (30 minutes) (Prepare financial statements for a foreign subsidiary and then
translate them into U.S. dollars)
Fenwicke Company Subsidiary

Income Statement
LCU U.S. Dollars
Rent revenue 60,000 x $1.90 A = $114,000
Interest expense (10,000) x $1.90 A = (19,000)
Depreciation expense (14,000) x $1.90 A = (26,600)
Repair expense (4,000) x $1.85*H = (7,400)
Net income 32,000 $ 61,000
* Repair expense is the only expense not incurred evenly throughout the year.
Statement of Retained Earnings

LCU U.S. Dollars
Retained earnings, 1/1 -0- -0-
Net income 32,000 (above) $61,000
Dividends paid (5,000) x $1.80 H = (9,000)
Retained earnings, 12/31 27,000 $52,000
Balance Sheet
LCU U.S. Dollars
Cash 41,000 x $1.80 C = $ 73,800
Accounts receivable 10,000 x $1.80 C = 18,000
Building 140,000 x $1.80 C = 252,000
Accumulated depreciation (14,000) x $1.80 C = (25,200)
Total assets 177,000 $318,600
Interest payable 10,000 x $1.80 C = $ 18,000
Note payable 100,000 x $1.80 C = 180,000
Common stock 40,000 x $2.00 H = 80,000
Retained earnings 27,000 (above) 52,000
Translation adjustment (below) (11,400)
Total liabilities and equities 177,000 $318,600
Computation of Translation Adjustment

Beginning net assets -0- -0-
Issued common stock 40,000 x $2.00 = $ 80,000
Net income 32,000 (above) 61,000
Decrease in net assets:
Dividends paid (5,000) x $1.80 = (9,000)
Ending net assets 67,000 $132,000
Ending net assets at current
exchange rate 67,000 x $1.80 = 120,600
Translation adjustment (negative) $ 11,400

26. (30 minutes) (Prepare a statement of cash flows for a foreign subsidiary and
then translate it into U.S. dollars)
Fenwicke Company Subsidiary

Statement of Cash Flows
LCU U.S. Dollars
Operating Activities:
Net income 32,000 (from prob 25) $ 61,000
plus: depreciation 14,000 x $1.9 A = 26,600
less: increase in accounts receivable (10,000) x $1.9 A = (19,000)
plus: increase in interest payable 10,000 x $1.9 A = 19,000
Cash flow from operations 46,000 87,600
Investing Activities:
Purchase of building (140,000) x $2.0 H = (280,000)
Financing Activities:
Sale of common stock 40,000 x $2.0 H = 80,000
Borrowing on note 100,000 x $2.0 H = 200,000
Dividends paid (5,000) x $1.8 H = (9,000)
135,000 271,000
Increase in cash 41,000 78,600
Effect of exchange rate change on cash (4,800)
Cash, 1/1 -0- -0-
Cash, 12/31 41,000 x $1.80 C = $ 73,800

27. (25 minutes) (Compute translation adjustment and remeasurement gain or loss)
a. Translationonly changes in net assets have an impact on the computation of

the translation adjustment.
Net asset balance 1/1 KM30,000 x $.32 = $ 9,600

Increases in net assets (income):
Sold inventory at a profit 5/1 5,000 x $.34 = 1,700
Sold land at a gain 6/1 1,000 x $.35 = 350
Decreases in net assets:
Paid a dividend 12/1 (3,000) x $.41 = (1,230)
Depreciation recorded (2,000) x $.37 = ( 740)
Net asset balance 12/31 KM31,000 $ 9,680
Net asset balance 12/31
at current exchange rate KM31,000 x $.42 = (13,020)
Translation adjustmentpositive $(3,340)
b. Remeasurementonly 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) x $.32 = $ ( 960)
Increases in monetary assets:
Sold inventory 5/1 15,000 x $.34 = 5,100
Sold land 6/1 5,000 x $.35 = 1,750
Decreases in monetary assets:
Bought inventory 10/1 (12,000) x $.39 = (4,680)
Bought land 11/1 (4,000) x $.40 = (1,600)
Paid a dividend 12/1 (3,000) x $.41 = (1,230)
Ending net monetary liability
position KM(2,000) $(1,620)
Ending net monetary liability position
at current exchange rate KM(2,000) x $.42 = (840)
Remeasurement gain $ (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.

a. The translation adjustment is based on changes in the net assets of the

subsidiary.
Net assets, 1/1 82,000 LCU x $.24 = $19,680

Changes in net assets
Rendered services 30,000 LCU x $.25 = 7,500
Incurred expense (18,000) LCU x $.26 = (4,680)
Net assets, 12/31 94,000 LCU 22,500
Net assets, 12/31 at
current exchange rate 94,000 LCU x $.29 = 27,260
Translation adjustment (positive) $(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 22,000 LCU x $.24 = $ 5,280

Changes in net monetary assets
Rendered services 30,000 LCU x $.25 = 7,500
Incurred expense (18,000) LCU x $.26 = (4,680)
Net monetary assets, 12/31 34,000 LCU $ 8,100
Net monetary assets, 12/31 at
current exchange rate 34,000 LCU x $.29 = 9,860
Remeasurement gain $(1,760)
c. Translated value of land 60,000 LCU x $.29 = $17,400

Remeasured value of land 60,000 LCU x $.23 = $13,800
29. (10 minutes) (Determine the appropriate exchange rate)
Account (a) Translation (b) Remeasurement

Sales 20 A 20 A
Inventory 22 C 19 H
Equipment 22 C 13 H
Rent expense 20 A 20 A
Dividends 21 H 21 H
Notes receivable 22 C 22 C
Accumulated depreciation--equipment 22 C 13 H
Salary payable 22 C 22 C
Depreciation expense 20 A 13 H
C = current exchange rate, A = average exchange rate, H = Historical exchange

rate

30. (30 minutes) (Hedge of balance sheet exposure)
a. Net assets, 1/1 (132,000 54,000) 78,000 kites x $0.80 = $62,400

Change in net assets:
Net income 26,000 kites x $0.77 = 20,020
Dividends, 3/1 (5,000) kites x $0.78 = (3,900)
Dividends, 10/1 (5,000) kites x $0.76 = (3,800)
Net assets, 12/31 94,000 kites $74,720
Net assets at current
exchange rate, 12/31 94,000 kites x $0.75 = 70,500
Translation adjustment (negative) $ 4,220
b. Forward contract journal entries

10/1 No entry
12/31 Forward Contract ................................. 2,000

Translation Adjustment (positive) .. 2,000
(To record the change in the value of the forward contract as an
adjustment to the translation adjustment)
Foreign Currency (kites) ...................... 150,000

Cash ................................................. 150,000
(To record the purchase of 200,000 kites at the spot rate of $.75)
Cash .................................................... 152,000

Foreign Currency (kites) ................. 150,000
Forward Contract ............................ 2,000
(To record delivery of 200,000 kites, receipt of $152,000, and
close the forward contract account.)
c. The net negative translation adjustment (debit balance) to be reported in

other comprehensive income at 12/31 is $2,220 ($4,220 $2,000).

31. (45 minutes) (Translation and remeasurement of foreign subsidiary trial

balance)
a. Translation of Subsidiary Trial Balance

Debits Credits
Cash. 8,000 KQ x 1.62 $12,960
Accounts Receivable.. 9,000 KQ x 1.62 14,580
Equipment.. 3,000 KQ x 1.62 4,860
Accumulated Depreciation 600 KQ x 1.62 $ 972
Land 5,000 KQ x 1.62 8,100
Accounts Payable 3,000 KQ x 1.62 4,860
Notes Payable.. 5,000 KQ x 1.62 8,100
Common Stock 10,000 KQ x 1.71 17,100
Dividends Paid. 4,000 KQ x 1.66 6,640
Sales 25,000 KQ x 1.64 41,000
Salary Expense 5,000 KQ x 1.64 8,200
Depreciation Expense 600 KQ x 1.64 984
Miscellaneous Expense. 9,000 KQ x 1.64 14,760
$71,084
Translation Adjustment (negative) 948
$72,032 $72,032
Calculation of Translation Adjustment
Net assets, 1/1.. -0- -0-
Common stock issued. 10,000 KQ x 1.71 $17,100
Sales. 25,000 KQ x 1.64 41,000
Decrease in net assets:
Dividends paid.. ( 4,000) KQ x 1.66 (6,640)
Salary expense.. ( 5,000) KQ x 1.64 (8,200)
Depreciation expense. ( 600) KQ x 1.64 ( 984)
Miscellaneous expense . ( 9,000) KQ x 1.64 (14,760)
Net assets, 12/31. 16,400* KQ $27,516
Net assets, 12/31 at
current exchange rate. 16,400 KQ x 1.62 26,568
Translation adjustment (negative) $ 948
* This amount can be verified as ending assets (24,400 KQ) minus ending
liabilities (8,000 KQ) net assets, 12/31 = 16,400 KQ.

31. (continued)
b. Remeasurement of Subsidiary Trial Balance
Debits Credits
Cash 8,000 KQ x 1.62 $12,960
Accounts Receivable 9,000 KQ x 1.62 14,580
Equipment 3,000 KQ x 1.71 5,130
Accumulated Depreciation 600 KQ x 1.71 $ 1,026
Land 5,000 KQ x 1.59 7,950
Accounts Payable 3,000 KQ x 1.62 4,860
Notes Payable 5,000 KQ x 1.62 8,100
Common Stock 10,000 KQ x 1.71 17,100
Dividends Paid 4,000 KQ x 1.66 6,640
Sales 25,000 KQ x 1.64 41,000
Salary Expense 5,000 KQ x 1.64 8,200
Depreciation Expense 600 KQ x 1.71 1,026
Miscellaneous Expense 9,000 KQ x 1.64 14,760
$71,246
Remeasurement loss (debit) 840
$72,086 $72,086
Calculation of Remeasurement Loss
Net monetary assets, 1/1 -0- -0-
Increase in net monetary assets:
Common stock issued 10,000 KQ x 1.71 $17,100
Sales 25,000 KQ x 1.64 41,000
Decrease in net monetary assets:
Acquired equipment (3,000) KQ x 1.71 (5,130)
Acquired land (5,000) KQ x 1.59 (7,950)
Dividends paid (4,000) KQ x 1.66 (6,640)
Salary expense (5,000) KQ x 1.64 (8,200)
Miscellaneous expense (9,000) KQ x 1.64 (14,760)
Net monetary assets, 12/31 9,000* KQ $15,420
Net monetary assets, 12/31
at current exchange rate 9,000 KQ x 1.62 14,580
Remeasurement loss (debit) $ 840
* This amount can be verified as ending monetary assets (Cash + Accounts

receivable) minus ending monetary liabilities (Accounts payable + Notes
payable): 17,000 KQ 8,000 KQ = 9,000 KQ.

32. (30 minutes) (Translate the financial statements of a foreign subsidiary)
LIVINGSTON COMPANY
Income Statement
For Year Ending December 31, 2009
Goghs U.S. Dollars

Sales 270,000 x 1/.63 = 428,571
Cost of Goods Sold (155,000) x 1/.63 = (246,032)
Gross Profit 115,000 182,539
Operating Expenses (54,000) x 1/.63 = (85,714)
Gain on Sale of Equipment 10,000 x 1/.58 = 17,241
Net Income 71,000 114,066

For Year Ending December 31, 2009
Goghs U.S. Dollars

Retained Earnings, 1/1/09 216,000 given 395,000
Net Income 71,000 above 114,066
Dividends Paid (26,000) x 1/.62 = (41,935)
Retained Earnings, 12/31/09 261,000 467,131
Balance Sheet
December 31, 2009
Goghs U.S. Dollars

Cash 44,000 x 1/.65 = 67,692
Receivables 116,000 x 1/.65 = 178,462
Inventory 58,000 x 1/.65 = 89,231
Fixed Assets (net) 339,000 x 1/.65 = 521,538
Total 557,000 856,923
Liabilities 176,000 x 1/.65 = 270,769

Common Stock 120,000 x 1/.48 = 250,000
Retained Earnings 261,000 above 467,131
Translation Adjustment (130,977)
Total 557,000 856,923
Translation Adjustment Goghs U.S. Dollars

Net assets, 1/1/09 336,000 x 1/.60 = 560,000
Net income, 2009 71,000 above 114,066
Dividends paid (26,000) above (41,935)
Net assets, 12/31/09 381,000 632,131
Net assets at current exchange rate,
12/31/09 381,000 x 1/.65 = 586,154
Translation adjustment, 2009 (negative) 45,977

Cumulative translation adjustment, 1/1/09 (negative) 85,000
a. Remeasurement Gain or Loss
Net monetary assets, 1/1/09* 2,000 KR x 2.50 = $ 5,000

Increases in net monetary assets:
Issued Common Stock (4/1/09) 10,000 KR x 2.60 = 26,000
Sold Building** (7/1/09) 22,000 KR x 2.80 = 61,600
Sales (2009) 80,000 KR x 2.70 = 216,000
Decreases in net monetary assets:
Purchased Equipment (4/1/09) (30,000) KR x 2.60 = (78,000)
Paid Dividends (10/1/09) (32,000) KR x 2.90 = (92,800)
Rent Expense (2009) (14,000) KR x 2.70 = (37,800)
Salary Expense (2009) (20,000) KR x 2.70 = (54,000)
Utilities Expense (2009) ( 5,000) KR x 2.70 = (13,500)
Net monetary assets, 12/31/09 13,000 KR $ 32,500
Net monetary assets, 12/31/09 at
current exchange rate 13,000 KR x 3.00 = 39,000
Remeasurement gain (credit) $ (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
DepreciationEquipment increases by KR 5,000), KR 10,000 is depreciation
of buildings. Accumulated DepreciationBuildings increases by only KR
5,000 during 2009, therefore, the accumulated depreciation related to the
building sold during 2009 is KR 5,000. The Buildings account is decreased
by KR 21,000, thus the book value of the building sold must have been KR
16,000 (as given). The Gain on Sale of Building is KR 6,000; therefore, cash
proceeds from the sale are KR 22,000.

33. (continued)
b. Translation Adjustment
Net assets, 1/1/09* 100,000 KR x 2.50 = $250,000

Increases in net assets
Issued Common Stock (4/1/09) 10,000 KR x 2.60 = 26,000
Gain on Sale of Building** (7/1/09) 6,000 KR x 2.80 = 16,800
Sales (2009) 80,000 KR x 2.70 = 216,000
Decreases in net assets
Paid Dividends (10/1/09) (32,000) KR x 2.90 = (92,800)
Depreciation Expense (2009) (15,000) KR x 2.70 = (40,500)
Rent Expense (2009) (14,000) KR x 2.70 = (37,800)
Salary Expense (2009) (20,000) KR x 2.70 = (54,000)
Utilities Expense (2009) ( 5,000) KR x 2.70 = (13,500)
Net assets, 12/31/09 110,000 KR $270,200
current exchange rate 110,000 KR x 3.00 = 330,000
Translation adjustment (positive) $(59,800)
* Net assets: Common stock + Retained earnings

** Selling a building at a gain of KR 6,000 increases net assets by that amount.
Although not required by Part b, the beginning translation adjustment as of
January 1, 2009 can be computed by translating the January 1 accounts and
assuming that the translation adjustment is the balancing figure:
Common Stock, 1/1/09 70,000 KR x 2.40 = $168,000
Retained Earnings, 1/1/09 30,000 KR given 62,319
Net assets, 1/1/09 100,000 KR $230,319
Net assets, 1/1/09 at current
exchange rate 100,000 KR x 2.50 = 250,000
Cumulative translation adjustment (positive), 1/1/09 $ (19,681)
Translation adjustment (positive), 2009 (59,800)
Cumulative translation adjustment (positive), 12/31/09 $ (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 Mexican Operations

Canadian Dollars
Pesos Debit Credit
Accounts payable 49,000 x .35 C 17,150
Accumulated depreciation 19,000 x .25 H 4,750
Building and equipment 40,000 x .25 H 10,000
Cash 59,000 x .35 C 20,650
Depreciation expense 2,000 x .25 H 500
Inventory (beginning
income statement) 23,000 x .30 A (08) 6,900
Inventory (ending
income statement) 28,000 x .34 A(09) 9,520
Inventory (endingbalance sheet) 28,000 x .34 A(09) 9,520
Purchases 68,000 x .34 A(09) 23,120
Receivables 21,000 x .35 C 7,350
Salary expense 9,000 x .34 A 3,060
Sales 124,000 x .34 A 42,160
Main office 30,000 given 7,530
Remeasurement loss Schedule One 10
Total 81,110 81,110
Canadian
Schedule OneRemeasurement Loss Pesos Dollars
Net monetary liabilities, 1/1/09* (16,000) x .32 (5,120)
Increases in net monetary assets
Sales 124,000 x .34 42,160
Decreases in net monetary assets
Purchases (68,000) x .34 (23,120)
Salary Expense ( 9,000) x .34 ( 3,060)
Net monetary assets, 12/31/09** 31,000 10,860
current exchange rate 31,000 x .35 10,850
Remeasurement loss 10
* Net monetary liabilities, 1/1/09, can be determined by first determining the

net monetary assets at 12/31/09 and then backing out the changes in
monetary assets and liabilities during 2009sales, purchases, and salary
expense.
** Net monetary assets, 12/31/09: Cash + Receivables Accounts Payable

34. (continued)
b. The following C$ financial statements are produced by combining the

figures from the main operation with the remeasured figures from the branch
operation. The Branch Operation and Main Office accounts offset each
other. Cost of goods sold for the Mexican branch is determined by
combining beginning inventory, purchases, and ending inventory as
remeasured in C$.
Income Statement c. Translation into U.S. dollars
For the Year Ended December 31, 2009 Current Rate Method
Sales C$ 354,160 x .67 A = $ 237,287.20

Cost of goods sold (223,500) x .67 A = (149,745.00)
Gross profit 130,660 87,542.20
Depreciation expense (8,500) x .67 A = (5,695.00)
Salary expense (29,060) x .67 A = (19,470.20)
Utility expense (9,000) x .67 A = (6,030.00)
Gain on sale of equipment 5,000 x .68 H = 3,400.00
Remeasurement loss (10) x .67 A = (6.70)
Net income C$ 89,090 $ 59,740.30

For the Year Ended December 31, 2009
Retained earnings, 1/1/09 C$ 135,530 Given $ 70,421.00

Net income (above) 89,090 Above 59,740.30
Dividends paid ( 28,000) x .69 H = (19,320.00)
Retained earnings, 12/31/09 C$ 196,620 $110,841.30

34. (continued)
Balance Sheet
December 31, 2009
Cash C$ 46,650 x .65 C = $ 30,322.50

Receivables 75,350 x .65 C = 48,977.50
Inventory 107,520 x .65 C = 69,888.00
Buildings and equipment 177,000 x .65 C = 115,050.00
Accumulated depreciation (31,750) x .65 C = (20,637.50)
Total C$ 374,770 $243,600.50
Accounts payable C$ 52,150 x .65 C = $ 33,897.50

Notes payable 76,000 x .65 C = 49,400.00
Common stock 50,000 x .45 H = 22,500.00
Retained earnings 196,620 Above 110,841.30
Cumulative translation adjustment Schedule Two 26,961.70
Total C$ 374,770 $ 243,600.50
Schedule TwoTranslation Adjustment

Net assets, 1/1/09 C$ 185,530 x .70 = $129,871.00
Changes in net assets
Net income 89,090 Above 59,740.30
Dividends (28,000) x .69 = (19,320.00)
Net assets, 12/31/09 C$ 246,620 $170,291.30
Net assets, 12/31/09 at
current exchange rate C$ 246,620 x .65 = 160,303.00
Translation adjustment, 2009 (negative) $ 9,988.30
Cumulative translation adjustment, 1/1/09 (positive) (36,950.00)
Cumulative translation adjustment, 12/31/09 (positive) $(26,961.70)

35. (90 minutes) (Translate foreign currency financial statements and prepare
consolidation worksheet)
Step One
Simbel's financial statements are first translated into U.S. dollars after
reclassification of the 10,000 pound expenditure for rent from rent expense to
prepaid rent. Credit balances are in parentheses.
Translation Worksheet
Exchange
Account Pounds Rate Dollars
Sales (800,000) 0.274 (219,200)
Cost of goods sold 420,000 0.274 115,080
Salary expense 74,000 0.274 20,276
Rent expense (adjusted) 36,000 0.274 9,864
Other expenses 59,000 0.274 16,166
Gain on sale of fixed
assets, 10/1/09 (30,000) 0.273 (8,190)
Net income (241,000) (66,004)
R/E, 1/1/09 (133,000) Schedule 1 (38,244)

Net income (241,000) Above (66,004)
Dividends paid 50,000 0.275 13,750
R/E,12/31/09 (324,000) (90,498)
Cash and receivables 146,000 0.270 39,420

Inventory 297,000 0.270 80,190
Prepaid rent (adjusted) 10,000 0.270 2,700
Fixed assets 455,000 0.270 122,850
Total 908,000 245,160
Accounts payable (54,000) 0.270 (14,580)

Notes payable (140,000) 0.270 (37,800)
Common stock (240,000) 0.300 (72,000)
Addl paid-in capital (150,000) 0.300 (45,000)
Retained earnings, 12/31/09 (324,000) Above (90,498)
Subtotal (259,878)
Cumulative translation
adjustment (negative) Schedule 2 14,718
Total (908,000) (245,160)

35. (continued)
Schedule 1Translation of 1/1/09 Retained Earnings
Pounds Dollars
Retained earnings, 1/1/08 -0- -0-
Net income, 2008 (163,000) 0.288 (46,944)
Dividends, 6/1/08 30,000 0.290 8,700
Retained earnings, 1/1/09 (133,000) (38,244)
Schedule 2Calculation of Cumulative Translation Adjustment at 12/31/09
Pounds Dollars
Net assets, 1/1/08 (390,000) 0.300 (117,000)

Net income, 2008 (163,000) 0.288 (46,944)
Dividends, 6/1/08 30,000 0.290 8,700
Net assets, 12/3/08 (523,000) (155,244)
current exchange rate (523,000) 0.280 (146,440)
Translation adjustment, 2008 (negative) (8,804)
Net assets, 1/1/09 (523,000) 0.280 (146,440)

Net income, 2009 (241,000) Above (66,004)
Dividends, 6/1/09 50,000 0.275 13,750
Net assets, 12/31/09 (714,000) (198,694)
current exchange rate (714,000) 0.270 (192,780)
Translation adjustment, 2009 (negative) (5,914)
Cumulative translation adjustment, 12/31/09 (negative) (14,718)

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, 10/1/09 -0- (8,190) (8,190)
Net income (72,950) (66,004) (125,204)
Ret earn, 1/1/09 (318,000) (38,244) (S) 38,244 (*C) (38,244) (356,244)
Net income (72,950) (66,004) (125,204)
Dividends paid 24,000 13,750 (I) (13,750) 24,000
Ret earn, 12/31/09 (366,950) (90,498) (457,448)
Cash and receivables 110,750 39,420 150,170

Inventory 98,000 80,190 178,190
Prepaid rent 30,000 2,700 32,700
Investment 126,000 -0- (*C) 38,244 (S)(164,244) -0-
Fixed assets 398,000 122,850 (S) 9,000 (E) (900) 528,950
Total 762,750 245,160 890,010
Accounts payable (60,800) (14,580) (75,380)

Notes payable (132,000) (37,800) (169,800)
Common stock (120,000) (72,000) (S) 72,000 (120,000)
Additional PIC (83,000) (45,000) (S) 45,000 (83,000)
Ret earn, 12/31/09 (366,950) (90,498) (457,448)
Subtotal (259,878) (905,628)
Cum trans adjust 14,718 (E) 900 15,618
Total (762,750) (245,160) 217,138 (217,138) (890,010)

35. (continued)
Explanation of Adjustment and Elimination Entries
Entry *C
Investment in Simbel ................................................... 38,244
Retained earnings, 1/1/09 ....................................... 38,244
To accrue the 2008 increase in subsidiary book value (see Schedule 1). Entry is
needed because parent is using the cost method.
Entry S
Common Stock (Simbel) ............... 72,000
Add'l Paid-in-capital (Simbel) ............ 45,000
Retained earnings, 1/1/09 (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 fair value over book value to land (fixed assets).
The excess of fair value over book value is calculated as follows:

Consideration paid (equal to fair value) .......... $126,000 E420,000 x $0.30
Book value, 1/1/08 .............................................
Common stock ................................................ (72,000) (E240,000 x $0.30)
Addl paid-in capital ........................................ (45,000) (E150,000 x $0.30)
Excess of fair value over book value ............... $ 9,000 E 30,000 x $0.30
The excess of fair value over book value is 30,000 pounds. The U.S. dollar
equivalent at 1/1/08, the date of acquisition, is $9,000 (E30,000 x $.30).
Entry I
Dividend income ............................................... 13,750
Dividends paid ............................................. 13,750
To eliminate intercompany dividend payments recorded by parent as income.
Entry E
Cumulative translation adjustment .................. 900
Fixed assets (revaluation) .......................... 900
To revalue (write-down) the excess of fair value 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 fair value over book value
U.S. dollar equivalent at 12/31/09 E30,000 x $.27 = $8,100
U.S. dollar equivalent at 1/1/08 E30,000 x $.30 = 9,000
Cumulative translation adjustment
related to excess, 12/31/09 (negative) $( 900)

36. (90 minutes) (Translate foreign currency financial statements using U.S. GAAP
and explain sign of translation adjustment [remeasurement gain/loss].)
Part I (a). Czech koruna is the functional currencycurrent rate method
Exchange
KCS Rate US$
Sales 25,000,000 0.035 875,000
Cost of goods sold (12,000,000) 0.035 (420,000)
Depreciation expenseequipment (2,500,000) 0.035 (87,500)
Depreciation expensebuilding (1,800,000) 0.035 (63,000)
Research and development expense (1,200,000) 0.035 (42,000)
Other expenses (1,000,000) 0.035 (35,000)
Net income 6,500,000 227,500
Retained earnings, 1/1/09 500,000 given 22,500
Dividends paid, 12/15/09 (1,500,000) 0.031 (46,500)
Retained earnings, 12/31/09 5,500,000 203,500
Cash 2,000,000 0.030 60,000

Accounts receivable 3,300,000 0.030 99,000
Inventory 8,500,000 0.030 255,000
Equipment 25,000,000 0.030 750,000
Accum. deprec.equipment (8,500,000) 0.030 (255,000)
Building 72,000,000 0.030 2,160,000
Accum. deprec.equipment (30,300,000) 0.030 (909,000)
Land 6,000,000 0.030 180,000
Total assets 78,000,000 2,340,000
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, 12/31/09 5,500,000 above 203,500
Translation adjustment - to balance (438,500)
Total liabilities and equities 78,000,000 2,340,000

36. (continued)
Calculation of Translation Adjustment
Net assets, 1/1/09 20,500,000 0.040 820,000

Net income, 2009 6,500,000 0.035 227,500
Dividends, 12/15/09 (1,500,000) 0.031 (46,500)
Net assets, 12/31/09 25,500,000 1,001,000
Net assets, 12/31/09 at current
exchange rate 25,500,000 0.030 765,000
Translation adjustment, 2009 (negative) 236,000

36. (continued)
Part I (b). U.S. dollar is the functional currencytemporal method
Exchange
KCS Rate US$
Sales 25,000,000 0.035 875,000
Cost of goods sold (12,000,000) Sched.A (493,500)
Depreciation expenseequipment (2,500,000) Sched.B (118,000)
Depreciation expensebuilding (1,800,000) Sched.C (85,200)
Other expenses (1,000,000) 0.035 (35,000)
Income before remeasurement gain 6,500,000 101,300
Remeasurement gain, 2009 - 408,000
Net income 6,500,000 509,300
Retained earnings, 1/1/09 500,000 given 353,000
Dividends paid, 12/15/09 (1,500,000) 0.031 (46,500)
Retained earnings, 12/31/09 5,500,000 815,800
Cash 2,000,000 0.030 60,000

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

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, 12/31/09 5,500,000 above 815,800
Total liabilities and equities 78,000,000 3,390,800
Schedule ACost of goods sold
KCS ER US$
Beginning inventory 6,000,000 0.043 258,000
Purchases 14,500,000 0.035 507,500
Ending inventory (8,500,000) 0.032 (272,000)
Cost of goods sold 12,000,000 493,500

36. (continued)
Schedule BEquipment
KCS ER US$
Old Equipmentat 1/1/09 20,000,000 0.050 1,000,000
New Equipmentacquired 1/3/09 5,000,000 0.036 180,000
Total 25,000,000 1,180,000
Accum. Depr.Old Equipment 8,000,000 0.050 400,000

Accum. Depr.New Equipment 500,000 0.036 18,000
Total 8,500,000 418,000
Deprec expenseOld Equipment 2,000,000 0.050 100,000
Deprec expenseNew Equipment 500,000 0.036 18,000
Total 2,500,000 118,000
Schedule CBuilding
KCS ER US$
Old Buildingat 1/1/09 60,000,000 0.050 3,000,000
New Buildingacquired 3/5/09 12,000,000 0.034 408,000
Total 72,000,000 3,408,000
Accum. Depr.Old Building 30,000,000 0.050 1,500,000
Accum. Depr.New Building 300,000 0.034 10,200
Total 30,300,000 1,510,200
Deprec. expenseOld Building 1,500,000 0.050 75,000
Deprec. expenseNew Building 300,000 0.034 10,200
Total 1,800,000 85,200
Calculation of Remeasurement Gain

KCS ER US$
Net monetary liabilities, 1/1/09 (37,000,000) 0.040 (1,480,000)
Increase in monetary assets:
Sales 25,000,000 0.035 875,000
Decrease in monetary assets:
Purchase of inventory (14,500,000) 0.035 (507,500)
Research and development (1,200,000) 0.035 (42,000)
Other expenses (1,000,000) 0.035 (35,000)
Dividends paid, 12/15/09 (1,500,000) 0.031 (46,500)
Purchase of equipment, 1/3/09 (5,000,000) 0.036 (180,000)
Purchase of buildings, 3/5/09 (12,000,000) 0.034 (408,000)
Net monetary liab, 12/31/09 (47,200,000) (1,824,000)
Net monetary liab, 12/31/09 at
current exchange rate (47,200,000) 0.030 (1,416,000)
Remeasurement gain2009 (408,000)

36. (continued)
Part I (c). U.S. dollar is the functional currencytemporal method (no long-
term 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 expenseequipment (2,500,000) Sched.B (118,000)
Depreciation expensebuilding (1,800,000) Sched.C (85,200)
Other expenses (1,000,000) 0.035 (35,000)
Income before remeasurement loss 6,500,000 101,300
Remeasurement loss, 2009 - (92,000)
Net income 6,500,000 9,300
Retained earnings, 1/1/09 500,000 given (147,000)
Dividends paid, 12/15/09 (1,500,000) 0.031 (46,500)
Retained earnings, 12/31/09 5,500,000 (184,200)
Cash 2,000,000 0.030 60,000

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

Long-term debt 0 0.030 0
Common stock 20,000,000 0.050 1,000,000
Additional paid in capital 50,000,000 0.050 2,500,000
Retained earnings, 12/31/09 5,500,000 above (184,200)
Total liabilities and equities 78,000,000
3,390,800
Schedule ACost of goods sold - same as in Part I (b)

Schedule BEquipment - same as in Part I (b)
Schedule CBuilding - same as in Part I (b)

36. (continued)
Calculation of Remeasurement Loss
KCS ER US$
Net monetary assets, 1/1/09 13,000,000 0.040520,000
Increase in monetary assets:
Sales 25,000,000 0.035 875,000
Decrease in monetary assets:
Purchase of inventory (14,500,000) 0.035 (507,500)
Research and development (1,200,000) 0.035 (42,000)
Other expenses (1,000,000) 0.035 (35,000)
Dividends paid, 12/15/09 (1,500,000) 0.031 (46,500)
Purchase of equipment, 1/3/09 (5,000,000) 0.036 (180,000)
Purchase of buildings, 3/5/09 (12,000,000) 0.034 (408,000)
Net monetary assets, 12/31/09 2,800,000 176,000
Net monetary assets, 12/31/09
at current exchange rate 2,800,000 0.030 84,000
Remeasurement loss2009 92,000
Part II. Explanation of the negative translation adjustment in Part I (a),
remeasurement gain in Part I (b), and remeasurement loss in Part I (c).
The negative translation adjustment in Part I (a) arises because of two factors:
(1) there is a net asset balance sheet exposure and (2) the Czech koruna has
depreciated against the U.S. dollar during 2009 (from $.040 at 1/1/09 to $.030 at
12/31/09). A net asset balance sheet exposure exists because all assets are
translated at the current exchange rate and exceed total liabilities which are also
translated at the current exchange rate.
The remeasurement gain in Part I (b) arises because of two factors: (1) there is a
net monetary liability balance sheet exposure and (2) the Czech koruna has
depreciated against the U.S. dollar. Under the temporal method, Cash and
Accounts Receivable are the only assets translated at the current exchange rate
(total KCS 5,300,000). Accounts Payable and Long-term Debt are also translated
at the current exchange rate (total KCS 52,500,000). Because the Czech koruna
amount of liabilities translated at the current rate exceeds the Czech koruna
amount of assets translated at the current rate, a net monetary liability balance
sheet exposure exists.
The remeasurement loss in Part I (c) arises because of two factors: (1) there is a
net monetary asset balance sheet exposure and (2) the Czech koruna has
depreciated against the U.S. dollar during 2009. Cash and Accounts Receivable
are the only assets translated at the current exchange rate (total KCS 5,300,000).
Because there is no Long-term Debt in part 1(c), Accounts Payable is the only
liability translated at the current exchange rate (total KCS 2,500,000). Because
the Czech koruna amount of assets translated at the current rate exceeds the
Czech koruna amount of liabilities translated at the current rate, a net monetary
asset balance sheet exposure exists.

Answers to Develop Your Skills Cases
Research Case 1Foreign Currency Translation and Hedging Activities
The responses to this assignment will depend upon the company selected by
the student for analysis. It is unlikely that the company selected will disclose
the amount of any remeasurement gains and losses. The amount of translation
adjustment reported in other comprehensive income usually can be found in a
statement of stockholders equity. A positive translation adjustment indicates
that the foreign currency in which the company operates, on average, increased
in dollar value during the year. A negative translation adjustment indicates the
opposite.
Research Case 2Foreign Currency Translation Disclosures in the Computer

Industry
a. In 2005, IBM provided information in the annual report related to foreign

currency translation and hedging activities in the following locations:
i. Management Discussion.
ii. Note A. Significant Accounting Policies, under Translation of Non-U.S
Currency Amounts.
iii. Note L. Derivatives and Hedging Transactions.
In its Form 10-K for the year ended January 28, 2006, Dell provided
information related to foreign currency translation and hedging activities in
the following locations:
i. Item 1A. Risk Factors.
ii. Item 7. Management Discussion and Analysis of Financial Condition and
Results of Operations, under Market Risk.
iii. Note 1. Description of Business and Summary of Significant Accounting
Policies.
iv. Note 2. Financial Instruments.
b. IBMs foreign operations do not have a predominant functional currency.

The company indicates that it operates in multiple functional currencies.
The majority of Dells foreign operations have the U.S. dollar as their
functional currency. Most of IBMs foreign operations probably have the
foreign currency as functional currency and therefore are translated into
dollars using the current rate method with translation adjustments reflected
in stockholders equity. Dells foreign operations, on the other hand, are
remeasured into dollars using the temporal method with remeasurement
gains and losses reflected in net income. These differences in translation
method and disposition of the translation adjustment reduces the
comparability of information provided by the two companies.
c. From the Statement of Stockholders Equity, it can be seen that IBM reported
translation adjustments as follows over the period 2003-2005:
2003 positive $1,768 million

2004 positive $1,055 million
2005 negative $1,153 million
The positive signs of the translation adjustments in 2003 and 2004 indicate
that, on average, the foreign currency functional currencies of IBMs foreign
operations increased in value against the U.S. dollar in those years. The
negative sign of the translation adjustment in 2005 indicates that, on
average, the foreign currency functional currencies of IBMs foreign
operations decreased in value against the U.S. dollar in that year.
Dell reported translation adjustments in other comprehensive income as

follows:
Fiscal 2003 negative $35 million
Fiscal 2004 positive $1 million
Fiscal 2005 negative $8 million
On average, the foreign currency functional currencies of Dells foreign
operations decreased in value against the U.S. dollar in 2003 and 2005, and
increased in value in 2004.
The magnitude of the translation adjustments reported in stockholders

equity is much larger for IBM than for Dell. This undoubtedly occurs
because Dell has a much smaller balance sheet exposure related to foreign
currency functional currency operations. For Dell, the magnitude of the
remeasurement gain/loss reported in net income is probably larger (unless
hedged away) than the translation adjustment in stockholders equity. Dell
indicates that remeasurement gains/losses are reported in Investment and
Other Income, Net on the income statement but does not disclose the
amount.
d. In Note L. Derivatives and Hedging Transactions, IBM indicates that a

significant portion of the companys foreign currency denominated debt is
designated as a hedge of its foreign currency balance sheet exposures. The
company also uses currency swaps and forward contracts to hedge its net
investments in foreign operations.
Although Dell hedges foreign currency transactions, firm commitments, and
forecasted transactions, the company makes no mention of hedging its
balance sheet exposures.
e. The response to this requirement will vary from student to student. Much of
the information provided in requirements a. d. above can be included in a
formal report to satisfy this requirement.

FARS Case 1More than One Functional Currency
a. Using the advanced query function in the FARS database to search for the
phrase different functional currencies returns two hits: FAS 52, paragraphs
7 and 43. Paragraph 43 is part of Appendix A: Determination of the Functional
Currency.
b. FAS 52, paragraph 7 indicates that if an entity has more than one distinct and
separable operation, each operation may be considered a separate entity. If
those operations are conducted in different economic environments, they
might have different functional currencies.
FARS Case 2Change in Functional Currency
a. Using the advanced query function in the FARS database to search for the
phrase functional currency has changed returns two hits: FAS 52,
paragraphs 9 and 45. Paragraph 45 is part of Appendix A: Determination of
the Functional Currency. A search for the phrase change in the functional
currency returns one hit: FAS 52, paragraph 9.
b. FAS 52, paragraph 9 indicates that once the functional currency for a foreign
entity is determined, that determination shall be used consistently. A change
in functional currency is appropriate if significant changes in economic facts
and circumstances indicate clearly that the functional currency has changed.
There is no restatement of previously issued financial statements for changes
in the functional currency.

Analysis CaseBellSouth Corporation
a. The Brazilian operations are equity method investments, which means that
BellSouth must report investment income (loss) for its percentage ownership
interest in the U.S. dollar translated income (loss) of the operations. The
company states that its Brazilian operations had net U.S. dollar denominated
liabilities. The U.S. dollar liabilities were revalued upward by the Brazilian
operations with offsetting foreign exchange losses reported in Brazilian real
(BRL) income.
The foreign exchange loss on U.S. dollar liabilities might have been large
enough to cause negative net income (a net loss) in BRL terms, which when
translated at the average exchange rate for the quarter (under the current rate
method) resulted in a U.S. dollar loss being reported by BellSouth.
Alternatively, the temporal method of translation was used, the Brazilian

operations had net BRL asset exposures, and the devaluation caused a large
enough remeasurement loss that a net U.S. dollar loss resulted. Given that
liabilities were denominated in U.S. dollars, it is likely that BRL assets exceed
BRL liabilities generating a net BRL asset exposure.
b. The company appears to be saying that the exchange loss is not yet realized.
If, subsequent to the January 1999 devaluation, the Brazilian real appreciates
against the U.S. dollar, the unrealized loss will become smaller. On the other
hand, the loss will become even larger if the real continues to depreciate.
c. The objective of reporting normalized net income is to remove from net

income the effect of one-time only events that do not qualify under U.S. GAAP
as extraordinary items or discontinued operations, and therefore are not
reported separately in the income statement. The company appears to be
signaling its belief that the foreign currency loss is a nonrecurring
(extraordinary) item.
d. This assessment is valid if one compares normalized diluted EPS in the first
quarter of 1999, which excluded a large loss, with normalized diluted EPS in
the first quarter of 1998, which excluded a large gain. Whether financial
analysts would use normalized EPS rather than reported EPS in making
decisions about BellSouth is an empirical question.

Excel CaseTranslating Foreign Currency Financial Statements

a.b. Spreadsheet for the translation (current rate method) and remeasurement
(temporal method) of the FC financial statements of Charles Edward
Companys foreign subsidiary.
Temporal Method Current Rate Method
December 31, 2009 FC Rate USD Rate USD
Sales 5,000 $0.45 A $2,250 $0.45 A $2,250
Cost of goods sold (3,000) calculation (1,360) $0.45 A (1,350)
Gross profit 2,000 subtotal 890 subtotal 900
Selling expense (400) $0.45 A (180) $0.45 A (180)
Depreciation expense (600) $0.50 H (300) $0.45 A (270)
Remeasurement gain/loss 0 to balance 355 n/a 0
Income before tax 1,000 subtotal 765 subtotal 450
Income taxes (300) $0.45 A (135) $0.45 A (135)
Net income 700 subtotal 630 subtotal 315
Retained earnings, 1/1/09 0 0 0
Retained earn, 12/31/09 700 from B/S 630 total 315
Cash 1,000 $0.38 C 380 $0.38 C 380

Inventory 2,000 $0.43 H 860 $0.38 C 760
Fixed assets 6,000 $0.50 H 3,000 $0.38 C 2,280
Less: accum/deprec (600) $0.50 H (300) $0.38 C (228)
Total assets 8,400 total 3,940 total 3,192
Current liabilities 1,500 $0.38 C 570 $0.38 C 570

Long-term debt 3,000 $0.38 C 1,140 $0.38 C 1,140
Contributed capital 3,200 $0.50 H 1,600 $0.50 H 1,600
Cum. trans. adjust. 0 n/a 0 to balance (433)*
Retained earnings 700 to balance 630 from I/S 315
Total liab and stock equity 8,400 A=L+SE 3,940 A=L+SE 3,192
Exchange Rates Temporal methodCOGS (on a FIFO basis)

January 1-31, 2009 $0.50 BI 1,000 $0.50 H $500
Average 2009 $0.45 P 4,000 $0.43 H 1,720
December 31, 2009 $0.38 EI (2,000) $0.43 H (860)
Inventory purchases $0.43 COGS 3,000 $1,360
Key:
Average Exchange Rate A
Current Exchange Rate C
Historical Exchange Rate H

*Computation of Translation Adjustment

FC USD
Net assets, 1/1/09 3,200 $0.50 1,600
Net income, 2009 700 $0.45 315
Net assets, 12/31/09 3,900 1,915
Net assets, 12/31/09
at current exchange rate 3,900 $0.38 1,482
Translation adjustment (negative) 433
c. With the FC as functional currency, the U.S. dollar net income reflected in the
consolidated income statement is $315. If the U.S. dollar were the functional
currency, the amount would be twice as much$630. The amount of total assets
reported on the consolidated balance sheet is 23.4% smaller than if the U.S.
dollar were functional currency [($3,940 $3,192)/$3,192].
The relations between the current ratio, the debt to equity ratio, and profit margin
calculated from the FC financial statements and from the translated U.S. dollar
financial statements are shown below.

FC Temporal Current Rate

Current ratio
CA 3,000 1,240 1,140
CL 1,500 570 570
2.0 2.1754 2.0
Debt to equity ratio

Total liabilities 4,500 1,710 1,710
Total stockholders 3,900 2,230 1,482
equity
1.15385 0.76682 1.15385
Profit margin
NI 700 630 315
Sales 5,000 2,250 2,250
0.14 0.28 0.14
Return on equity
NI 700 630 315
Average TSE 3,550 1,915 1,541
0.19718 0.32898 0.20441
Inventory turnover
COGS 3,000 1,360 1,350
Average Inventory 1,000 430 380
3 3.16279 3.55263
These results show that the temporal method distorts all ratios as calculated
from the original foreign currency financial statements. The current rate
method maintains all ratios that use numbers in the numerator and denominator
from the balance sheet only (current ratio, debt-to-equity ratio) or the income
statement only (profit margin). For ratios that combine numbers from the
income statement and balance sheet (return on equity, inventory turnover),
even the current rate method creates distortions.
The U.S. dollar amounts reported under the temporal method for inventory and
fixed assets reflect the equivalent U.S. dollar cost of those assets as if the
parent had sent dollars to the subsidiary to purchase the assets. For example,
to purchase FC 6,000 worth of fixed assets when the exchange rate was
$.50/FC, the parent would have had to provide the subsidiary with $3,000.

The U.S. dollar amounts reported under the current rate method for inventory
and fixed assets reflect neither the equivalent U.S. dollar cost of those assets
nor their U.S. dollar current value. By multiplying the FC historical cost by the
current exchange rate, these assets are reported at what they would have cost
in U.S. dollars if the current exchange rate had been in effect when they were
purchased. This is a hypothetical number with little, if any, meaning.

Excel and Analysis CaseParker Inc. and Suffolk PLC
This assignment 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 1/1/08 to $1.68 at 12/31/09. Under the
second set of assumptions, the exchange rate remains $1.60 from 1/1/08 to
12/31/09. Under the third set of assumptions, the British pound depreciates
steadily from $1.60 at 1/1/08 to $1.52 at 12/31/09.
Part IAppreciating Foreign Currency
Relevant exchange rates: January 1, 2008 $1.60

2008 Average $1.62
December 31, 2008 $1.64
January 30, 2009 $1.65
2009 Average $1.66
December 31, 2009 $1.68

a. Translation of Suffolks December 31, 2009 trial balance from British pounds
to U.S. dollars.
Suffolk PLC
Trial Balance
December 31, 2009
Exchange
Pounds Rate Dollars
Cash 1,500,000 $1.68 $ 2,520,000
Accounts receivable 5,200,000 $1.68 8,736,000
Inventory 18,000,000 $1.68 30,240,000
Property, plant, & equipment (net) 36,000,000 $1.68 60,480,000
Accounts payable (1,450,000) $1.68 (2,436,000)
Long-term debt (5,000,000) $1.68 (8,400,000)
Common stock (44,000,000) $1.60 (70,400,000)
Retained earnings, 1/1/09 (8,000,000) Schedule A (12,840,000)
Sales (28,000,000) $1.66 (46,480,000)
Cost of goods sold 16,000,000 $1.66 26,560,000
Depreciation 2,000,000 $1.66 3,320,000
Other expenses 6,000,000 $1.66 9,960,000
Dividends paid (1/30/09) 1,750,000 $1.65 2,887,500
adjustmentpositive (credit balance) (4,147,500)
0 $ 0
Note: Amounts in parentheses are credit balances.
Exchange
Schedule A Pounds Rate Dollars
Retained earnings, 1/1/08 (6,000,000) $1.60 $ (9,600,000)
Net income, 2008 (2,000,000) $1.62 (3,240,000)
Retained earnings, 12/31/08 (8,000,000) $(12,840,000)

b. Schedule detailing the change in Suffolks cumulative translation adjustment

for 2008 and 2009.
Determination of Cumulative Exchange Exchange

Translation Adjustment Pounds Rate Rate Dollars
Net assets, 1/1/08 50,000,000 $1.64 $1.60 $2,000,000
Net income, 2008 2,000,000 $1.64 $1.62 40,000
Translation adjustment, 2008
(positive) $2,040,000
Net assets, 1/1/09 52,000,000 $1.68 $1.64 2,080,000
Net income, 2009 4,000,000 $1.68 $1.66 80,000
Dividends, 2009 (1,750,000) $1.68 $1.65 (52,500)
(positive) 2,107,500
Net assets, 12/31/09 54,250,000
Cumulative Translation
Adjustment, 12/31/09(positive) $4,147,500
Exchange
Consideration Paid Allocation Schedule Pounds Rate Dollars
Consideration paid (equal to fair value) 52,000,000 $1.60 $83,200,000
Book value 50,000,000 $1.60 80,000,000
Excess of fair value over book value 2,000,000 $ 3,200,000
Translation Adjustment Related to Exchange

Excess of Fair Value Over Book Value Pounds Rate Dollars
Excess of fair value over book value 2,000,000
U.S. dollar value at 12/31/09 $1.68 $3,360,000
U.S. dollar value at 1/1/08 $1.60 3,200,000
Translation adjustment related
to excess, 12/31/09positive $ 160,000

c. Consolidation WorksheetDecember 31, 2009
Parker Suffolk Adjustments & Eliminations Consolidated
Sales ($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
Other expenses 6,000,000 9,960,000 15,960,000
Dividend income (2,887,500) 2,887,500 0
Net income ($12,887,500) ($6,640,000) ($16,640,000)
Ret. earnings, 1/1/09 ($48,000,000) ($12,840,000) 12,840,000 3,240,000 ($51,240,000)
Net income (12,887,500) (6,640,000) (16,640,000)
Dividends 4,500,000 2,887,500 2,887,500 4,500,000
Ret. earnings, ($56,387,500) ($16,592,500) ($63,380,000)

12/31/09
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 3,240,000 83,240,000 0
3,200,000
Prop, plant & 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) 70,400,000 (100,000,000)
Ret. earnings, (56,387,500) (16,592,500) (63,380,000)

12/31/09
Cum. trans. adj. (4,147,500) 160,000 (4,307,500)
$0 $0 $92,727,500 $92,727,500 $0

d. Consolidated income statement and balance sheet2009.
Parker, Inc.
Consolidated Income Statement
For the year ended December 31, 2009
Sales $ 116,480,000
Cost of goods sold (60,560,000)
Depreciation (23,320,000)
Other expenses (15,960,000)
Net income $ 16,640,000
Parker, Inc.
Consolidated Balance Sheet
December 31, 2009
Assets
Cash $ 6,207,500
Accounts receivable 18,736,000
Inventory 60,240,000
Property, plant & equipment (net) 168,840,000
Total $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

Part IIStable Foreign Currency

2008 Average $1.60
December 31, 2008 $1.60
January 30, 2009 $1.60
2009 Average $1.60
December 31, 2009 $1.60
1. Translation of Suffolks December 31, 2009 trial balance from British pounds
to U.S. dollars.
Suffolk PLC
Trial Balance
December 31, 2009
Exchange
Pounds Rate Dollars
Cash 1,500,000 $1.60 $ 2,400,000
Inventory 18,000,000 $1.60 28,800,000
Long-term debt (5,000,000) $1.60 (8,000,000)
Common stock (44,000,000) $1.60 (70,400,000)
Sales (28,000,000) $1.60 (44,800,000)
Depreciation 2,000,000 $1.60 3,200,000
Other expenses 6,000,000 $1.60 9,600,000
Dividends paid, 1/30/09 1,750,000 $1.60 2,800,000
Cumulative translation adjustment 0
0 $ 0
Exchange
Net income, 2008 (2,000,000) $1.60 (3,200,000)

2. Schedule detailing the change in Suffolks cumulative translation adjustment

for 2008 and 2009.

Net assets, 1/1/08 50,000,000 $1.60 $1.60 $0
Net income, 2008 2,000,000 $1.60 $1.60 0
Translation adjustment, 2008 $0
Net assets, 1/1/09 52,000,000 $1.60 $1.60 0
Net income, 2009 4,000,000 $1.60 $1.60 0
Dividends, 2009 (1,750,000) $1.60 $1.60 0
Translation adjustment, 2009 0
Net assets, 12/31/09 54,250,000
Adjustment, 12/31/09 $0
Exchange
Consideration paid (equals fair value) 52,000,000 $1.60 $83,200,000
Book value 50,000,000 $1.60 80,000,000

Excess of fair value over book value 2,000,000
Translation adjustment related to excess, 12/31/09 $0

3. Consolidation WorksheetDecember 31, 2009
Sales ($70,000,000) ($44,800,000) ($114,800,000)
Depreciation 20,000,000 3,200,000 23,200,000
Other expenses 6,000,000 9,600,000 15,600,000
Dividend income (2,800,000) 2,800,000 0
Net income ($12,800,000) ($6,400,000) ($16,400,000)
Ret. earnings, 1/1/09 ($48,000,000) ($12,800,000) 12,800,000 3,200,000 ($51,200,000)
Net income (12,800,000) (6,400,000) (16,400,000)
Dividends 4,500,000 2,800,000 2,800,000 4,500,000
Ret. earnings, ($56,300,000) ($16,400,000) ($63,100,000)

12/31/09
Cash $3,600,000 $2,400,000 $6,000,000
Inventory 30,000,000 28,800,000 58,800,000
3,200,000
Prop, plant & eq (net) 105,000,000 57,600,000 3,200,000 165,800,000
Long-term debt (50,000,000) (8,000,000) (58,000,000)
Common stock (100,000,000) (70,400,000) 70,400,000 (100,000,000)
Ret. earnings, (56,300,000) (16,400,000) (63,100,000)

12/31/08
Cum. Trans. adj. 0 0 0
$0 $0 $92,400,000 $92,400,000 $0

Parker, Inc.
Sales $114,800,000
Net income $ 16,400,000
Parker, Inc.
December 31, 2009
Assets
Cash $ 6,000,000
Total $248,920,000

Other comprehensive income 0
Total $248,920,000

Part IIIDepreciating Foreign Currency

2008 Average $1.58
December 31, 2008 $1.56
January 30, 2009 $1.55
2009 Average $1.54
December 31, 2009 $1.52
a. Translation of Suffolks December 31, 2009 trial balance from British pounds to
U.S. dollars.
Suffolk PLC
Trial Balance
December 31, 2009
Exchange
Pounds Rate Dollars
Cash 1,500,000 $1.52 $ 2,280,000
Inventory 18,000,000 $1.52 27,360,000
Long-term debt (5,000,000) $1.52 (7,600,000)
Common stock (44,000,000) $1.60 (70,400,000)
Sales (28,000,000) $1.54 (43,120,000)
Depreciation 2,000,000 $1.54 3,080,000
Other expenses 6,000,000 $1.54 9,240,000
Dividends paid (1/30/09) 1,750,000 $1.55 2,712,500
adjustmentnegative (debit balance) 4,147,500
0 $ 0
Exchange
Net income, 2008 (2,000,000) $1.58 (3,160,000)

2. Schedule detailing the change in Suffolks cumulative translation adjustment

for 2008 and 2009.

Net assets, 1/1/08 50,000,000 $1.56 $1.60 $(2,000,000)
Net income, 2008 2,000,000 $1.56 $1.58 (40,000)
(negative) $(2,040,000)
Net assets, 1/1/09 52,000,000 $1.52 $1.56 (2,080,000)
Net income, 2009 4,000,000 $1.52 $1.54 (80,000)
Dividends, 2009 (1,750,000) $1.52 $1.55 52,500
(negative) (2,107,500)
Net assets, 12/31/09 54,250,000
Adjustment, 12/31/09 (negative) $(4,147,500)
Exchange
Consideration paid (equal to fair value) 52,000,000 $1.60 $83,200,000
Book value 50,000,000 $1.60 80,000,000

Excess of cost over book value 2,000,000
Translation adjustment related
to excess, 12/31/09negative $(160,000)

c. Consolidation WorksheetDecember 31, 2009
Sales ($70,000,000) ($43,120,000) ($113,120,000)
Depreciation 20,000,000 3,080,000 23,080,000
Other expenses 6,000,000 9,240,000 15,240,000
Dividend income (2,712,500) 2,712,500 0
Net income ($12,712,500) ($6,160,000) ($16,160,000)
Ret. earnings, 1/1/09 ($48,000,000) ($12,760,000) 12,760,000 3,160,000 ($51,160,000)
Net income (12,712,500) (6,160,000) (16,160,000)
Dividends 4,500,000 2,712,500 2,712,500 4,500,000
Ret. earnings, ($56,212,500) ($16,207,500) ($62,820,000)

12/31/09
Cash $3,512,500 $2,280,000 $5,792,500
Inventory 30,000,000 27,360,000 57,360,000
3,200,000
Prop, plant & eq (net) 105,000,000 54,720,000 3,200,000 162,760,000
160,000
Long-term debt (50,000,000) (7,600,000) (57,600,000)
Common stock (100,000,000) (70,400,000) 70,400,000 (100,000,000)
Ret. earnings, (56,212,500) (16,207,500) (62,820,000)

12/31/09
Cum. Trans. adj. 4,147,500 160,000 4,307,500
$0 $0 $92,392,500 $92,392,500 $0

Parker, Inc.
Sales $ 113,120,000
Net income $ 16,160,000
Parker, Inc.
December 31, 2009
Assets
Cash $ 5,792,500
Total $243,816,500

Other comprehensive income (4,307,500)
Total $243,816,500

Part IVRisk Assessment Report and Financial Management Recommendations
December 31, 2009 Exchange Rate

$1.68 $1.60 $1.52
Consolidated net income $16,640,000 $16,400,000 $16,160,000
Percentage difference 101.5% 100% 98.5%
+ 1.5% -- - 1.5%
Cash flow from dividends $2,887,500 $2,800,000 $2,712,500

Percentage difference 103% 100% 97%
+ 3% -- - 3%
Total Liabilities $86,336,000 $85,820,000 $85,304,000

Total Stockholders equity $167,687,500 $163,100,000 $158,512,500
Debt-to-equity ratio 51.5% 52.6% 53.8%
Percentage difference 98% 100% 102%
- 2% -- + 2%
Appreciation of the British pound from $1.60 to $1.68 results in consolidated net
income being 1.5% higher, cash flow from dividends being 3% higher, and the
debt-to-equity ratio being 2% lower than if there had been no change in exchange
rates.
Depreciation of the British pound from $1.60 to $1.52 would have resulted in
income being 1.5% lower, cash flow from dividends being 3% lower, 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.


SM Hoyle AdvAcc11e Ch10

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

SM Hoyle AdvAcc11e Ch10

Uploaded by

Copyright:

Available Formats

Find more slides, ebooks, solution manual and testbank on www.downloadslide.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009

5. Discuss SFAS 52 guidelines as to when foreign currency financial statements are to be

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009

Answer to Discussion Question

As a classroom exercise or written assignment, students could be required to select a reported

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009

6. The Retained Earnings balance is created by a multitude of transactions: all revenues,

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009

11. Remeasurement is required in two situations:

a. The U.S. dollar is the functional currency.

Translation is required when a foreign currency is the functional currency.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009

5. A All asset accounts are translated at current rates.

6. A Because the foreign currency is the functional currency, a translation is

7. C Because the U.S. dollar is the functional currency, a remeasurement is

8. B The foreign currency is the functional currency, so a translation is

10. D The foreign currency is the functional currency, so a translation is

11. C The U.S. dollar is the functional currency, so a remeasurement is appropriate.

12. C Beginning inventory FCU 200,000 x $1.00 = $ 200,000

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009

13. C Beginning net assets, 1/1.. P20,000 x $.15 = $ 3,000

15. A Beginning net monetary assets, 1/1 P100,000 x $.16 = $16,000

18. B Wages payable is translated at the current exchange rate.

20. D Remeasurement gains are reported in the income statement as a part of

21. (10 minutes) (Specify appropriate rates for a translation)

Rent expenseuse actual (historical) rate at time of recording. Rent expense

Dividends paiduse historical rate at time of recording, the date of declaration.

Equipmentas an asset, use current rate at the balance sheet date.

Depreciation expenseuse historic rate at time of recording. In most cases,

Accumulated depreciationas a contra-asset account, use the current ex-

22. (5 minutes) (Determine translated values)

23. (10 minutes) (Determine translation and remeasurement rates)

* C = current rate, H = historical rate, A = average rate

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009

Economic Relevance of Translation Adjustment

Fenwicke Company Subsidiary

Statement of Retained Earnings

Computation of Translation Adjustment

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009

Fenwicke Company Subsidiary

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009

a. Translationonly changes in net assets have an impact on the computation of

Net asset balance 1/1 KM30,000 x $.32 = $ 9,600

b. Remeasurementonly changes in net monetary assets and liabilities have an

Beginning net monetary

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009

a. The translation adjustment is based on changes in the net assets of the

Net assets, 1/1 82,000 LCU x $.24 = $19,680

Net monetary assets, 1/1 22,000 LCU x $.24 = $ 5,280

c. Translated value of land 60,000 LCU x $.29 = $17,400

29. (10 minutes) (Determine the appropriate exchange rate)

Account (a) Translation (b) Remeasurement

C = current exchange rate, A = average exchange rate, H = Historical exchange

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009

30. (30 minutes) (Hedge of balance sheet exposure)

a. Net assets, 1/1 (132,000 54,000) 78,000 kites x $0.80 = $62,400

b. Forward contract journal entries

12/31 Forward Contract ................................. 2,000

Foreign Currency (kites) ...................... 150,000

Cash .................................................... 152,000

c. The net negative translation adjustment (debit balance) to be reported in