Solution manual advanced accounting 9e by hoyle ch10

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.. Translating asse

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, of-goods-sold, depreciation, and amortization expense are translated at relevant historical exchange rates

cost-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

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

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

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 subsidiary’s transactions had actually been carried out using U.S dollars To achieve this objective, assets carried at historical cost and stockholders’ equity are translated at historical exchange rates; assets carried at current value and liabilities (carried at current value) are translated at the current exchange rate Under this concept, the foreign subsidiary’s monetary assets and liabilities are considered to be foreign currency cash, receivables, and payables of the parent which are exposed to transaction risk For example, if the foreign currency appreciates, then the foreign currency receivables increase in U.S dollar value and a gain is recognized Balance sheet exposure under the temporal method is analogous to the net transaction exposure which exists from having both receivables and payables in a particular foreign currency

The major concept underlying the current rate method is that the entire foreign investment is exposed to foreign exchange risk Therefore all assets and liabilities are translated at the current exchange rate Balance sheet exposure under this concept is equal to the net investment

6 The Retained Earnings balance is created by a multitude of transactions: all revenues, expenses, gains, losses, and dividends since the company’s inception Identifying each component of this account (so that a separate translation can be made) would be virtually

impossible Therefore, in the initial year that Statement 52 was applied, the ending balance calculated under Statement 8 was merely brought forward Thereafter, the ending balance

translated each year for retained earnings becomes the beginning figure to be reported for the following year

7 The major differences relate to non-monetary assets carried at historical cost and related expenses, i.e., inventory and cost of goods sold; property, plant, and equipment and depreciation expense; and intangible assets and amortization expense Under the temporal method, these items are all translated at historical exchange rates Under the current rate method, the assets are translated at the current exchange rate and the related expenses are translated at the average exchange rate for the current period

8 The functional currency is the currency of the subsidiary’s primary economic environment It is

usually identified as the currency in which the company generates and expends cash SFAS 52

recommends that several factors such as the location of primary sales markets, sources of materials and labor, the source of financing, and the amount of intercompany transactions

should be evaluated in identifying an entity’s functional currency SFAS 52 does not provide

any guidance as to how these factors are to be weighted (equally or otherwise) when identifying

an entity’s functional currency

9 The foreign subsidiary's net asset position in foreign currency at the beginning of the period is first determined Changes in net assets are determined to explain the net asset balance in foreign currency at the end of the period The beginning net asset position and changes in net assets are translated at appropriate exchange rates and the ending net asset position in dollars

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

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 at

current exchange rate P30,000 x $.21 = $ 6,300

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 at

the current exchange rate P 50,000 x $.22 = (11,000)

16 C Marketable equity securities are carried at market value and therefore

translated at the current exchange rate under the temporal method

17 B When the U.S dollar is the functional currency, SFAS 52 requires

remeasurement using the temporal method with remeasurement gains and losses reported in income

18 B Wages payable is translated at the current exchange rate

19 C Gains and losses on hedges of net investments (whether through a forward

contract, borrowing, or other technique) are offset against the translation adjustment being hedged

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

income from continuing operations

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

Rent expense—use actual (historical) rate at time of recording Rent expense

would often be recorded evenly throughout the year so that an average rate for the period is acceptable

Dividends paid—use historical rate at time of recording, the date of declaration Equipment—as an asset, use current rate at the balance sheet date

21 (continued)

Sales—use actual (historical) rate at time of recording Sales often occur evenly

throughout the year so that an average rate is acceptable However, if sales are more prevalent at a particular time during the year, historical rates should be used

Depreciation expense—use historic rate at time of recording In most cases,

average rate for the year is acceptable, because depreciation occurs evenly throughout the year Depreciation is recorded at year-end only as a matter of convenience

Cash—as an asset, use the current rate at the balance sheet date

Accumulated depreciation—as a contra-asset account, use the current

ex-change rate at the balance sheet date

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)

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

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

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

Retained earnings

(remeasurement loss) (15,000) Total 4,500,000 3,375,000 3,175,000 Alternatively, the translation adjustment and remeasurement loss can be calculated by analyzing the subsidiary’s balance sheet exposure:

Translation

Ending net assets, 12/31 at

Translation adjustment (positive)

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

$40,000 [CHF800,000 x ($.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

* Repair expense is the only expense not incurred evenly throughout the year

Statement of Retained Earnings

Translation adjustment (below) (11,400)

Computation of Translation Adjustment

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

27 (25 minutes) (Compute translation adjustment and remeasurement gain or loss)

a Translation—only changes in net assets have an impact on the computation of the translation adjustment

Increases in net assets (income):

Sold inventory at a profit 5/1 5,000 x $.34 = 1,700

Decreases in net assets:

Net asset balance 12/31

Ending net monetary liability position

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

28 (20 minutes) (Compute translation adjustment and remeasurement gain or loss)

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

Changes in net assets

Net assets, 12/31 at

current exchange rate 94,000 LCU x $.29 = 27,260

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

Net monetary assets, 12/31 at

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

29 (10 minutes) (Determine the appropriate 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 assets at current

b Forward contract journal entries

12/31 Forward Contract 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

Increase in net assets:

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 at

current exchange rate……… 16,400 KQ x 1.62 26,568

* This amount can be verified as ending assets (24,400 KQ) minus ending liabilities (8,000 KQ) – net assets, 12/31 = 16,400 KQ

Calculation of Remeasurement Loss

Increase in net monetary assets:

Common stock issued 10,000 KQ x 1.71 $17,100

Net monetary assets, 12/31

at current exchange rate 9,000 KQ x 1.62 14,580

* 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

Balance Sheet December 31, 2009

33 (35 minutes) (Compute translation adjustment and remeasurement gain or loss)

a Remeasurement Gain or Loss

Increases in net monetary assets:

Issued Common Stock (4/1/09) 10,000 KR x 2.60 = 26,000

Net monetary assets, 12/31/09 at

* Net monetary assets: (Cash + Accounts Receivable) - (Account Payable + Bonds Payable)

** To determine cash proceeds from the sale of the building, changes in the Accumulated Depreciation and Buildings accounts must be analyzed along with Depreciation Expense and Gain on Sale of Building Depreciation expense is KR 15,000; KR 5,000 is attributable to equipment (Accumulated Depreciation—Equipment increases by KR 5,000), KR 10,000 is depreciation

of buildings Accumulated Depreciation—Buildings increases by only KR 5,000 during 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

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

Net monetary assets, 12/31/09 at

current exchange rate 110,000 KR x 3.00 = 330,000

* 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:

Cumulative translation adjustment (positive), 1/1/09 $ (19,681)

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

Inventory (ending—balance sheet) 28,000 x 34 A(’09) 9,520

Net monetary liabilities, 1/1/09* (16,000) x 32 (5,120)

Increases in net monetary assets

Decreases in net monetary assets

Net monetary assets, 12/31/09 at

* 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

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$

For the Year Ended December 31, 2009 Current Rate Method

Statement of Retained Earnings

For the Year Ended December 31, 2009

Cumulative translation adjustment Schedule Two 26,961.70

Schedule Two—Translation Adjustment

Changes in net assets

Net assets, 12/31/09 at

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

Retained earnings, 12/31/09 (324,000) Above (90,498)

Cumulative translation

Cumulative translation adjustment, 12/31/09 (negative) (14,718)

Adjustments and Consolidated

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)

Add’l 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)

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: