Find more at www.downloadslide.com CHAPTER SOLUTIONS TO MULTIPLE CHOICE QUESTIONS, EXERCISES AND PROBLEMS MULTIPLE CHOICE QUESTIONS a Remeasurement changes local currency accounts (euros) to the functional currency (krona) Translation changes the functional currency accounts (krona) to the reporting currency (U.S dollars) d Remeasure the equipment to U.S dollars using the rates when the equipment was purchased (€1,000,000 x $1.40) + (€3,000,000 x $1.50) = $5,900,000 a Beginning net assets (200,000 + 600,000) + Net income (4,000,000 – 2,300,000 – 300,000 – 1,200,000) - Dividends Ending net assets Translation loss € 800,000 Rate 1.45 U.S $ 1,160,000 200,000 (100,000) 1.35 1.32 900,000 1.30 270,000 (132,000) 1,298,000 1,170,000 128,000 c Beginning net assets carried at fair value (200,000 – 1,400,000) + Sales - Purchases [2,300,000 + (500,000 – 400,000)] - Out of pocket expenses - Dividends Ending net assets carried at fair value (180,000 – 1,080,000) Remeasurement gain Solutions Manual, Chapter € Rate U.S $ (1,200,000) 4,000,000 (2,400,000) (1,200,000) (100,000) 1.45 1.35 1.35 1.35 1.32 (1,740,000) 5,400,000 (3,240,000 (1,620,000) (132,000) (1,332,000) (900,000) 1.30 (1,170,000) 162,000 ©Cambridge Business Publishers, 2013 Find more at www.downloadslide.com b Translation multiplies the current ratio numerator and denominator by the same rate c A steadily weakening dollar means the direct rate is rising Translated assets are multiplied by an increasing rate b The direct rate is falling Entry R debits goodwill at the lower ending rate, and eliminates the remaining investment balance, created at higher rates, leading to a debit to OCI Entry O credits goodwill at the ending rate and debits impairment loss at the higher average rate, leading to a credit to OCI c Reported net income Goodwill impairment Equity in net income £ 500,000 (20,000) 480,000 Rate 1.65 1.65 U.S $ 825,000 (33,000) 792,000 Note: the limited life intangibles were written off prior to 2015 b IFRS: (10,000,000 x 400/100) x £0.01 = £400,000 U.S GAAP: (10,000,000 x £0.05) = £500,000 10 d For non-inflationary economies, IFRS and U.S GAAP remeasurement and translation procedures are the same ©Cambridge Business Publishers, 2013 Advanced Accounting, 2nd Edition Find more at www.downloadslide.com EXERCISES E7.1 Translation and Remeasurement of Inventory, Cost of Sales, Plant Assets and Depreciation a (1) 20,000 x $0.52 = $10,400 (2) Cost of sales in R is: (100,000 + 75,000 - 20,000) = R155,000 155,000 x $0.475 = $ 73,625 b (1) 20,000 x $0.50 = $10,000 (2) Purchase 100,000 x $0.45 = Purchase 75,000 x $0.50 = Ending inventory (20,000) x $0.50 = Cost of sales c $ 45,000 37,500 (10,000) $ 72,500 Property, plant and equipment at December 31, 2013, in S$, is as follows: [1,500,000 - (3)(150,000)] = S$ 1,050,000 [900,000 - (2)(90,000)] = 720,000 PP&E, net S$ 1,770,000 (1) 1,770,000 x $0.525 = $929,250 (2) (150,000 + 90,000) x $0.55 = $132,000 d (1) (1,050,000 x $0.675) + (720,000 x $0.625) = $1,158,750 (2) (150,000 x $0.675) + (90,000 x $0.625) = $157,500 E7.2 Translation and Remeasurement Gain or Loss Calculations and Consolidation a Remeasurement gain or loss Exposed position, 9/10/14 Purchase of equipment Operating expenses Exposed position, 12/31/14 Remeasurement gain (income statement) b S/ S/ 10,000,000 (2,700,000) (2,900,000) $/S/ 0.30 0.30 0.31 S/ 4,400,000 0.33 S/ S/ 10,000,000 (2,900,000) $/S/ 0.30 0.31 S/ 7,100,000 0.33 $ $3,000,000 (810,000) (899,000) 1,291,000 -1,452,000 $(161,000) Translation gain or loss Exposed position, 9/10/14 Operating expenses Exposed position, 12/31/14 Translation gain (OCI) Solutions Manual, Chapter $ $3,000,000 (899,000) 2,101,000 -2,343,000 $(242,000) ©Cambridge Business Publishers, 2013 Find more at www.downloadslide.com c Globe’s entries, remeasurement Equity in net loss of sub Investment in sub $(738,000) = $(2,900,000 x 0.31) – $161,000 738,000 738,000 Globe’s entries, translation Equity in net loss of sub 899,000 Investment in sub OCI $(899,000) = ($2,900,000 x 0.31) d 657,000 242,000 Remeasurement consolidation Globe Subsidiary Dr (Cr) Dr (Cr) Dr Cr Consol Cash $ 500,000 $ 1,452,000 $ 1,952,000 PP&E 22,000,000 810,000 22,810,000 Investment in sub 2,262,000 (C) 738,000 3,000,000 (E) Liabilities (16,000,000) (16,000,000) Capital (5,000,000) (3,000,000) (E) 3,000,000 (5,000,000) RE, beg (2,000,000) (2,000,000) Revenues (15,000,000) (15,000,000) Equity in NL 738,000 738,000 (C) Expenses 12,500,000 899,000 13,399,000 Remeasurement (161,000) (161,000) gain $ -0- $ -0$3,738,000 $3,738,000 $ -0Translation consolidation Cash PP&E Investment in sub Liabilities Capital RE, beg AOCI Revenues Equity in NL Expenses Globe Subsidiary Dr (Cr) Dr (Cr) $ 500,000 $ 1,452,000 22,000,000 891,000 2,343,000 (16,000,000) (5,000,000) (3,000,000) (2,000,000) (242,000) (242,000) (15,000,000) 899,000 12,500,000 899,000 $ -0- $ -0- ©Cambridge Business Publishers, 2013 Dr (C) Consol $ 1,952,000 22,891,000 899,000 3,242,000 (E) (E) 3,000,000 (E) Cr 242,000 (16,000,000) (5,000,000) (2,000,000) (242,000) (15,000,000) 899,000 (C) 13,399,000 $4,141,000 $4,141,000 $ -0- Advanced Accounting, 2nd Edition Find more at www.downloadslide.com E7.3 Translation and Remeasurement of Account Balances a Cash 4,000,000 x $.75 $3,000,000 Inventory is remeasured at historical rates There are two layers: (1) quantity acquired in January, 2012; 1,000,000 x $.85 (2) quantity acquired in January, 2014; 2,000,000 x $.78 Total remeasured inventory $ 850,000 1,560,000 $2,410,000 Machinery and equipment are remeasured at historical rates Remaining equipment purchased in January, 2012; 4,000,000 x $.85 Equipment purchased in January, 2013; 7,000,000 x $.80 Total remeasured machinery and equipment $3,400,000 5,600,000 $9,000,000 Depreciation expense is remeasured at the same historical rate(s) used to remeasure the related machinery and equipment Depreciation expense on remaining January, 2012 equipment: $.85(4,000,000/10) $ 340,000 Depreciation expense on January, 2013 equipment: $.80(7,000,000/10) 560,000 Total remeasured depreciation expense $ 900,000 b Cash Inventory Machinery and equipment Depreciation expense E7.4 4,000,000 x $.75 = $3,000,000 3,000,000 x $.75 = $2,250,000 11,000,000 x $.75 = $8,250,000 1,100,000 x $.76 = $ 836,000 Translation and Remeasurement Gain and Loss (in millions) a Exposed position, 1/1/14 Acquisition of plant assets for debt Purchase of inventory Sales Operating expenses Exposed position, 12/31/14 Remeasurement gain Solutions Manual, Chapter Amount (£) £ 700 (1,000) (3,500) 6,000 (1,200) £ 1,000 $/£ Amount($) 1.90 $ 1,330 1.95 (1,950) 1.97 (6,895) 1.97 11,820 1.97 (2,364) 1,941 2.01 - 2,010 $ (69) ©Cambridge Business Publishers, 2013 Find more at www.downloadslide.com NOTE: The following items did not affect the remeasurement gain or loss: Collection of receivables has no net effect one exposed asset (receivables) is simply replaced by another (cash) Depreciation expense does not affect the exposed position Refinancing of commercial paper has no net effect one liability is simply replaced by another Cost of goods sold does not affect the exposed position b Amount (£) £ 1,200 1,100 Exposed position, 1/1/14 Net income in 2014 (6,000 – 3,300 – 400 -1,200) Exposed position, 12/31/14 Translation gain £ 2,300 E7.5 Translation and Remeasurement Gains and Losses a Calculation of Remeasurement Gain or Loss January 1, 2014 beginning balance Purchases Book value of land sale Gain on land sale Sales Cash operating expenses December 31, 2014 ending balance 2014 remeasurement gain (income) b $/£ Amount($) 1.90 $ 2,280 1.97 2,167 4,447 2.01 - 4,623 $ (176) € € (12,000,000) (8,000,000) 700,000 300,000 10,000,000 (1,800,000) $/€ 1.13 1.10 1.15 1.11 1.12 1.12 € (10,800,000) 1.10 € € 9,000,000 $/€ 1.13 $ $10,170,000 2,300,000 1.12 € 11,300,000 1.10 2,576,000 12,746,000 - 12,430,000 $ 316,000 $ $(13,560,000) (8,800,000) 805,000 333,000 11,200,000 (2,016,000) (12,038,000) - (11,880,000) $ (158,000) Analysis of Translation Gain or Loss Exposed position, 1/1/14 Net income (10,000,000 + 300,000 6,000,000 – 1,800,000 - 200,000) Exposed position, 12/31/14 2014 translation loss (OCI) ©Cambridge Business Publishers, 2013 Advanced Accounting, 2nd Edition Find more at www.downloadslide.com E7.6 Effect of Translation and Remeasurement on Ratios (in thousands) a Rands return on assets = 1,000/8,000 = 12.5% = return on sales 1,000/5,000 20% x x x asset turnover 5,000/8,000 62.5% $ (remeasurement) 130/2,000 = 6.5% = 130/750 17.3% x x 750/2,000 37.5% $ (translation) 150/1,400 = 10.7% = 150/750 20% x x 750/1,400 53.6% Translation maintains the local currency relationships better than remeasurement b The direct exchange rate appears to be falling with the dollar strengthening and the rand weakening This can be seen by observing that remeasured assets of $2,000,000 (remeasured at historical rates) are higher than translated assets of $1,400,000 (translated at average of beginning and ending current rates) Similarly, remeasured operating income of $130,000 is lower than translated operating income of $150,000, due to depreciation and amortization expenses being remeasured at higher historical rates when the functional currency is the $ The declining exchange rate causes the DuPont analysis performance measures to be distorted by the changing exchange rate If performance measured in the local currency-rands is the benchmark, translation does a much better job of preserving the local currency results than remeasurement Under either method, though, changes in exchange rates over the years weaken our ability to effectively make year-to-year comparisons of $ performance measures Solutions Manual, Chapter ©Cambridge Business Publishers, 2013 Find more at www.downloadslide.com E7.7 Remeasured Financial Statements Sales Cost of goods sold Operating expenses Depreciation expense Amortization expense Remeasurement gain Net income Mexico City Subsidiary Statement of Income For the Year Ended December 31, 2013 P $/P P 12,000,000 0.12 (7,000,000) 0.12 (3,000,000) 0.12 (75,000) 0.11 (60,000) 0.10 _ P 1,865,000 Cash Inventory Office equipment, net Organization costs, net Total assets Mexico City Subsidiary Balance Sheet December 31, 2013 P P 8,700,000 2,000,000 925,000 240,000 P 11,865,000 Capital Retained earnings Total equity P 10,000,000 1,865,000 P 11,865,000 $/P 0.15 0.11 0.11 0.10 $ $ 1,305,000 220,000 101,750 24,000 $ 1,650,750 0.10 see above $ 1,000,000 650,750 $ 1,650,750 Calculation of Remeasurement Gain P $/P Exposed position, 1/2/13 (cash) P 10,000,000 0.10 Sales 12,000,000 0.12 Organization costs (300,000) 0.10 Equipment purchase (1,000,000) 0.11 Merchandise purchase (2,000,000) 0.11 Merchandise purchase (7,000,000) 0.12 Cash operating expenses (3,000,000) 0.12 Exposed position, 12/31/13 Remeasurement gain (income) ©Cambridge Business Publishers, 2013 P 8,700,000 $ $ 1,440,000 (840,000) (360,000) (8,250) (6,000) 425,000 $ 650,750 0.15 $ $ 1,000,000 1,440,000 (30,000) (110,000) (220,000) (840,000) (360,000) 880,000 - 1,305,000 $ (425,000) Advanced Accounting, 2nd Edition Find more at www.downloadslide.com E7.8 Change in Functional Currency Exposed position, January Net income Dividends Exposed position, December 31 Translation loss Balance, 1/1/14 (gain) (1) Balance, 12/31/14 (gain) C$ C$ 20,000,000 2,500,000 (1,000,000) $/C$ 1.05 1.03 1.02 C$ 21,500,000 1.01 (1) Translated net assets: $1.05 x 20,000,000 = Less remeasured net assets Beginning balance of translation adjustment account 1/1/14 (gain) E7.9 $ $21,000,000 2,575,000 (1,020,000) 22,555,000 - 21,715,000 840,000 (6,000,000) $ (5,160,000) $ 21,000,000 (15,000,000) $ 6,000,000 Translated/Remeasured Financial Statements a Sales Cost of goods sold Depreciation expense Other expenses Net income Income Statement (Translated) SAR SAR 85,000,000 (40,000,000) (10,000,000) (15,000,000) SAR 20,000,000 Balance Sheet (Translated) SAR Cash SAR 95,000,000 Inventory 25,000,000 Plant assets 90,000,000 Total assets SAR210,000,000 Capital SAR200,000,000 Retained earnings 10,000,000 Accumulated other comprehensive loss Total equity SAR210,000,000 Solutions Manual, Chapter $/SAR 265 265 265 265 $ $ 22,525,000 (10,600,000) (2,650,000) (3,975,000) $ 5,300,000 $/SAR 25 25 25 $ $ 23,750,000 6,250,000 22,500,000 $ 52,500,000 $ 60,000,000 2,750,000 (10,250,000) $ 52,500,000 30 (1) (2) ©Cambridge Business Publishers, 2013 Find more at www.downloadslide.com (1) Analysis of Retained Earnings (Translated) Net income Dividends Retained earnings, 12/31/13 SAR SAR 20,000,000 (10,000,000) SAR 10,000,000 $/SAR 265 255 $ $ 5,300,000 (2,550,000) $ 2,750,000 SAR SAR 200,000,000 20,000,000 (10,000,000) $/SAR 300 265 255 SAR 210,000,000 250 $ $60,000,000 5,300,000 (2,550,000) 62,750,000 - 52,500,000 $10,250,000 (2) Analysis of Translation Loss Exposed position, 1/1/13 Net income Dividends Exposed position, 12/31/13 2013 translation loss b Sales Cost of goods sold Depreciation expense Other expenses Remeasurement loss Net income Cash Inventory Plant assets Total assets Capital Retained earnings Total equity ©Cambridge Business Publishers, 2013 10 Income Statement (Remeasured) SAR SAR 85,000,000 (40,000,000) (10,000,000) (15,000,000) SAR 20,000,000 $/SAR 265 300 300 265 (3) $ $ 22,525,000 (12,000,000) (3,000,000) (3,975,000) (3,275,000) $ 275,000 Balance Sheet (Remeasured) SAR SAR 95,000,000 25,000,000 90,000,000 SAR 210,000,000 $/SAR 25 (4) 30 $ $ 23,750,000 6,975,000 27,000,000 $ 57,725,000 30 (5) $ 60,000,000 (2,275,000) $ 57,725,000 SAR 200,000,000 10,000,000 SAR 210,000,000 Advanced Accounting, 2nd Edition Find more at www.downloadslide.com Income Statement and Statement of Retained Earnings Year ended December 31, 2013 CHF $/CHF Sales CHF 500,000 52 Cost of sales (375,000) (2) Operating expenses: Depreciation (5,000) (3) Other (70,000) 52 Remeasurement loss _ see below Net income 50,000 Retained earnings, 1/1 80,000 49 Dividends (20,000) 55 Retained earnings, 12/31 CHF 110,000 (2) Beginning inventory Purchases Ending inventory Cost of sales (3) 3,000 x 49 = 2,000 x 50 = 60,000 x 49 = 370,000 x 52 = (55,000) x 54 = Solutions Manual, Chapter (2,470) (36,400) (5,700) 23,330 39,200 (11,000) $ 51,530 $ 29,400 192,400 (29,700) $192,100 $ 1,470 1,000 $ 2,470 Computation of Remeasurement Loss Year ended December 31, 2013 CHF Beginning exposed position (25,000 – 125,000) CHF(100,000) Sales 500,000 Purchases (370,000) Cash operating expenses (70,000) Dividends (20,000) Plant and equipment acquisition (30,000) Ending exposed position (30,000 – 120,000) Remeasurement loss (income) $ $ 260,000 (192,100) CHF (90,000) $/CHF $ 49 52 52 52 55 50 $ (49,000) 260,000 (192,400) (36,400) (11,000) (15,000) (43,800) 55 - (49,500) $ 5,700 ©Cambridge Business Publishers, 2013 27 Find more at www.downloadslide.com b Balance Sheet as of December 31, 2013 CHF Cash, receivables CHF 30,000 Inventories 55,000 Plant & equipment 175,000 CHF260,000 Accounts & notes payable CHF120,000 Common stock 30,000 Retained earnings 110,000 Accumulated other comprehensive income _ CHF260,000 $/CHF 55 55 55 55 49 see below see below $ $ 16,500 30,250 96,250 $143,000 $ 66,000 14,700 54,200 8,100 $143,000 Income Statement and Statement of Retained Earnings Year ended December 31, 2013 CHF $/CHF $ Sales CHF 500,000 52 $ 260,000 Cost of sales (375,000) 52 (195,000) Operating expenses (75,000) 52 (39,000) Net income 50,000 $ 26,000 Retained earnings, 1/1 80,000 49 39,200 Dividends (20,000) 55 (11,000) Retained earnings, 12/31 CHF 110,000 $ 54,200 Computation of Translation Adjustment Year ended December 31, 2013 CHF $/CHF Beginning exposed position (30,000 + 80,000) CHF110,000 49 Net income 50,000 52 Dividends (20,000) 55 Ending exposed position (30,000 + 110,000) Translation gain (OCI) ©Cambridge Business Publishers, 2013 28 CHF140,000 55 $ $ 53,900 26,000 (11,000) 68,900 - 77,000 $ (8,100) Advanced Accounting, 2nd Edition Find more at www.downloadslide.com P7.7 Converting the Cash Flow Statement (in millions) a Sears Canada Inc Statement of Cash Flows for the Year Ended January 29, 2011 Operating activities C$ Net income C$ 150 Depreciation expense 105 Increase in other current operating assets (99) Decrease in accounts payable and accruals (347) Decrease in income taxes payable (6) Cash used for operating activities (197) Investing activities Acquisition of plant assets Cash used in investing activities Financing activities Issuance of long-term debt Dividends paid Cash used in financing activities Effect of exchange rate changes on cash Decrease in cash $/C$ 97 97 97 97 97 $ $ 145.50 101.85 (96.03) (336.59) (5.82) (191.09) (67) (67) 97 (64.99) (64.99) 115 (807) (692) -C$ (956) 97 97 111.55 (782.79) (671.24) 62.76 $(864.56) (1) Schedule of Translation Effect on Cash C$ Cash balance, January 30, 2010 C$ 1,382 Cash used for operating activities (197) Cash used for investing activities (67) Cash used for financing activities (692) Cash balance, January 29, 2011 Effect of exchange rate changes on cash (gain) Solutions Manual, Chapter C$ 426 (1) $/C$ $ 94 $1,299.08 97 (191.09) 97 (64.99) 97 (671.24) 371.76 1.02 - 434.52 $ (62.76) ©Cambridge Business Publishers, 2013 29 Find more at www.downloadslide.com b Sears Canada Inc Analysis of Cumulative Translation Adjustment for the Year Ended January 29, 2011 C$ $/C$ Balance, January 30, 2010 C$ 2010 translation adjustment: Exposed position, January 30, 2010 1,658 94 Plus net income 150 97 Less dividends paid (807) 97 Exposed position, January 29, 2011 2010 translation gain Balance, January 29, 2011 C$1,001 1.02 $ $ (60.00) 1,558.52 145.50 (782.79) 921.23 - 1,021.02 (99.79) $(159.79) c The choice of remeasurement versus translation does not affect cash flow statement totals Current period cash flows are always converted at current period exchange rates, repetitive cash transactions at the weighted average rate, large discrete cash transactions at the rates in effect when the transactions occurred But in the operating section, if the indirect approach is used, remeasured depreciation and inventory adjustments will likely differ from the translated adjustments P7.8 Analysis of Translation Adjustment Disclosure a Appearance of the currency translation adjustment as a component of other comprehensive income in stockholders' equity indicates that the functional currency of Asiamart’s Hong Kong subsidiaries is the Hong Kong dollar Thus the translation adjustments relating to these subsidiaries are carried directly to AOCI in stockholders' equity, bypassing the income statement b The following analysis assumes Asiamart’s Hong Kong subsidiaries had positive local currency net assets (assets > liabilities) during this time period In 2006 and 2007, the translation adjustment is positive (gain), meaning that the dollar on average weakened against the Hong Kong dollar (direct exchange rates increased) and translated net assets also increased In 2008, the translation adjustment is negative (loss), so the dollar on average strengthened against the Hong Kong dollar c The net currency translation adjustment balance at January 1, 2006 is positive (gain), implying that the dollar on average weakened against the Hong Kong dollar (exchange rates increased) for periods prior to 2006 However, the cumulative translation gain at January 1, 2006 is small in relation to the gains reported in 2006 and 2007, indicating that in prior years the exchange rate either did not change as much or may have decreased in prior years ©Cambridge Business Publishers, 2013 30 Advanced Accounting, 2nd Edition Find more at www.downloadslide.com d In order to measure the earnings impact of remeasurement, we must make an assumption about the nature of the Hong Kong subsidiaries’ exposed position under remeasurement A reasonable assumption is that assets measured at fair value (current money prices) are less than liabilities, creating a negative (liability) exposure to exchange rate changes Since exchange rates decreased in 2008, there would be a remeasurement gain reported in income on the net liability exposure, since Asiamart’s net liability exposure is remeasured at lower current rates Depreciation and amortization are remeasured at historical rates In the years 2006 and 2007, rates increased The initial balance in the currency translation adjustment as of the beginning of 2006 is also positive, implying that rates have on average increased in the past, and historical rates were lower Although rates declined in 2008, this is unlikely to completely reverse the net impact on remeasured expenses Using lower historical rates to remeasure depreciation and amortization produces a positive effect on income Cost of goods sold is most likely dominated by purchases made in the current year, and therefore the remeasured amount is unlikely to differ significantly from the translated amount Liquidation of old LIFO layers could create significant differences In summary, then, historical rates are lower than current or average rates for Asiamart’s Hong Kong subsidiaries So expenses remeasured at historical rates, such as depreciation and amortization, are lower than expenses measured at average rates The table below shows the impact of remeasured expenses and the remeasurement gain on net income Expenses remeasured at historical rates Inclusion of remeasurement gain in income Impact on 2008 net income increase increase Asiamart’s remeasured 2008 net income therefore is likely to be higher than its translated income Asiamart’s operating income, excluding the remeasurement gain, is also higher Solutions Manual, Chapter ©Cambridge Business Publishers, 2013 31 Find more at www.downloadslide.com P7.9 Translated/Remeasured Trial Balances a and b Account Cash and receivables Inventory Plant assets Accumulated depreciation Accounts payable Long-term debt Equity Sales Cost of goods sold Depreciation expense Other operating expenses Remeasurement loss Other comprehensive income (a) (b) (c) NOTE: (d) £ Balance £ 2,660 2,500 1,800 (560) (2,200) (1,100) (2,100) (4,000) 2,000 160 840 $/£ 2.20 (a) (b) 1.80 2.20 2.20 (c) 2.10 2.12 1.80 2.10 (d) _ $ Remeasurement $ 5,852 4,575 3,310 (1,008) (4,840) (2,420) (3,520) (8,400) 4,240 288 1,764 159 _ $/£ 2.20 2.20 2.20 2.20 2.20 2.20 (c) 2.10 2.10 2.10 2.10 $ Translation $ 5,852 5,500 3,960 (1,232) (4,840) (2,420) (4,200) (8,400) 4,200 336 1,764 (e) (520) £ $ $ $4,575 = ($1.80 x 2,200) + ($2.05 x 300) $3,310 = ($1.80 x 1,600) + ($2.15 x 200) The remeasured (translated) balance of equity at January 1, 2013, is given as $3,520 ($4,200) Since no depreciation was taken on the plant assets purchased in 2013, both accumulated depreciation and depreciation expense relate only to the plant assets purchased when the exchange rate was $1.80/£ Calculation of Remeasurement Loss Exposed position, January 1, 2013 Plus sales Less purchase of plant assets Less purchase of LIFO layer Less purchase of goods sold Less other operating expenses Exposed position, December 31, 2013 Remeasurement loss (income) ©Cambridge Business Publishers, 2013 32 £ £ (1,300) 4,000 (200) (300) (2,000) (840) $/£ 2.00 2.10 2.15 2.05 2.12 2.10 £ 2.20 (640) $ $(2,600) 8,400 (430) (615) (4,240) (1,764) (1,249) - (1,408) $ 159 Advanced Accounting, 2nd Edition Find more at www.downloadslide.com (e) Calculation of Translation Gain Exposed position (net assets), January 1, 2013 Plus net income in 2013 (4,000-2,000-160-840) Exposed position (net assets), December 31, 2013 Translation gain (OCI) £ £2,100 1,000 $/£ 2.00 2.10 £3,100 2.20 $ $4,200 2,100 $6,300 - 6,820 $(520) P7.10 Translating and Remeasuring Financial Statements SA Company Financial Statements Year ended December 31, 2014 (a) Remeasurement Balance Sheet P $/P $ Cash P 310,000 15 $ 46,500 Inventory (purchased 1/5) 200,000 10 20,000 Inventory (purchased 6/30) 360,000 12 43,200 Office equipment, net 180,000 10 18,000 Total assets 1,050,000 127,700 Contributed capital 1,000,000 10 100,000 Retained earnings 50,000 27,700 Accumulated other comprehensive income _ Total Equities P1,050,000 $127,700 Income Statement Sales Cost of goods sold Rent expense Depreciation expense Remeasurement gain Net income Solutions Manual, Chapter P P 300,000 (200,000) (30,000) (20,000) -P 50,000 $/P 12 10 12 10 $ $ 36,000 (20,000) (3,600) (2,000) 17,300 $ 27,700 (b) Translation $/P $ 15 $ 46,500 15 30,000 15 54,000 15 27,000 157,500 10 100,000 6,000 51,500 $157,500 $/P 12 12 12 12 $ $ 36,000 (24,000) (3,600) (2,400) _ $ 6,000 ©Cambridge Business Publishers, 2013 33 Find more at www.downloadslide.com Computation of Translation and Remeasurement Gains Remeasurement Translation P $/P $ P $/P $ a a Exposed position, Jan 1, 2014 P1,000,000 10 $ 100,000 P1,000,000 10 $100,000 Plus: Sale of inventory 300,000 12 36,000 300,000 12 36,000 Less: Purchase of inventory (1/5) (400,000) 10 (40,000) Purchase of inventory (6/30) (360,000) 12 (43,200) Purchase of office equipment (200,000) 10 (20,000) Payment of rent (30,000) 12 (3,600) (30,000) 12 (3,600) Cost of goods sold (200,000) 12 (24,000) Depreciation expense _ _ (20,000) 12 (2,400) 29,200 106,000 Exposed position, Dec 31, 2014 P 310,000b 15 -46,500 P1,050,000c 15 -157,500 Remeasurement/translation gain $(17,300) $(51,500) Notes a 1,000,000 = cash (1,000,000) = net assets carried at current money prices = net assets b 310,000 = cash (310,000) = net assets carried at current money prices c 1,050,000 = cash (310,000) + inventory (200,000 + 360,000) + office equipment, net (180,000) = net assets = 1,000,000 + 50,000 (net income) P7.11 Consolidated Financial Statements with an International Subsidiary Step 1: Translation of Standard=s December 31, 2014 trial balance: £ $/£ Cash and receivables £ 3,000,000 2.30 Inventory 3,000,000 2.30 Property, plant & equipment, net 5,000,000 2.30 Current liabilities (4,000,000) 2.30 Long-term debt (1,000,000) 2.30 Capital stock (2,000,000) 2.00 Retained earnings, January (3,500,000) 2.00 Dividends 1,000,000 2.10 Accumulated other comprehensive income -(1) Sales (10,000,000) 2.15 Cost of goods sold 6,000,000 2.15 Depreciation expense 500,000 2.15 Other operating expenses 2,000,000 2.15 £ -0- ©Cambridge Business Publishers, 2013 34 $ $ 6,900,000 6,900,000 11,500,000 (9,200,000) (2,300,000) (4,000,000) (7,000,000) 2,100,000 (1,675,000) (21,500,000) 12,900,000 1,075,000 4,300,000 $ -0- Advanced Accounting, 2nd Edition Find more at www.downloadslide.com (1) Calculation of Translation Adjustment for 2014 £ $/£ $ Net assets, January 1, 2014 £ 5,500,000 2.00 $ 11,000,000 Net income 1,500,000 2.15 3,225,000 Dividends (1,000,000) 2.10 (2,100,000) 12,125,000 Net assets, December 31, 2014 £ 6,000,000 2.30 - 13,800,000 Translation gain (OCI) $ (1,675,000) Step 2: Adjust Investment for 2014 Equity in Net Income and Translation Gain Calculation of Revaluations Price paid Book value Excess of cost over book value Inventories revaluation Property, plant and equipment revaluation Goodwill £ £8,000,000 5,500,000 2,500,000 100,000 $/ £ 2.00 2.00 500,000 £1,900,000 2.00 1,000,000 $ 3,800,000 £ £1,500,000 $/ £ 2.15 U.S.$ $3,225,000 (100,000) (25,000) (200,000) £1,175,000 2.15 2.15 2.15 (215,000) (53,750) (430,000) $2,526,250 2.00 U.S.$ $16,000,000 11,000,000 5,000,000 200,000 Calculation of Equity in Net Income for 2014 Standard’s reported net income Revaluation write-offs: Cost of goods sold Depreciation expense [500,000/20] Goodwill impairment Equity in net income Phillips’ entry to update the investment for 2014 equity in net income and its share of Standard=s translation gain: Investment in Standard 4,201,250 Equity in net income of Standard Accumulated other comprehensive income Solutions Manual, Chapter 2,526,250 1,675,000 ©Cambridge Business Publishers, 2013 35 Find more at www.downloadslide.com Step 3: Consolidation working paper entries (C) Equity in net income of Standard 2,526,250 Dividends Investment in Standard To reverse equity method entries for 2014 (E) Capital Stock Retained earnings, beg Accumulated other comprehensive income 2,100,000 426,250 4,000,000 7,000,000 1,675,000 Investment in Standard To eliminate Standard’s stockholders= equity as of 1/1 (R) Inventory (100,000 x $2.30) PP&E, net (500,000 x $2.30) Goodwill (1,900,000 x $2.30) 12,675,000 230,000 1,150,000 4,370,000 Investment in Standard 5,000,000 Other comprehensive income 750,000 To record the beginning-of-year revaluations $750,000 = ($2.30 - $2.00) x (100,000 + 500,000 + 1,900,000) (O) Cost of goods sold Depreciation expense Goodwill impairment Other comprehensive income 215,000 53,750 430,000 48,750 Inventory Property, plant & equipment Goodwill To write off the revaluations for 2014 $215,000 = 100,000 x $2.15 $53,750 = (500,000/20) x $2.15 $430,000 = 200,000 x $2.15 $230,000 = 100,000 x $2.30 ©Cambridge Business Publishers, 2013 36 230,000 57,500 460,000 $57,500 = 25,000 x $2.30 $460,000 = 200,000 x $2.30 $48,750=($2.30-$2.15)x(100,000 + 25,000 +200,000) Advanced Accounting, 2nd Edition Find more at www.downloadslide.com The 2014 consolidation working paper appears below December 31, 2014 Consolidation Working Paper Cash and receivables Inventory Property, plant and equipment, net Investment in Standard Goodwill Current liabilities Long-term debt Capital stock Retained earnings, 1/1 Accumulated other comprehensive income Dividends Sales Equity in net income Cost of goods sold Depreciation expense Other operating expenses Goodwill impairment Solutions Manual, Chapter Consoli-dated Dr (Cr) Phillips Dr (Cr) $2,100,000 4,000,000 Standard Dr (Cr) $6,900,000 6,900,000 12,000,000 18,101,250 11,500,000 (R)1,150,000 (8,000,000) (4,000,000) (10,000,000) (8,000,000) (1,675,000) Dr Cr (R)230,000 57,500 (O) 426,250 (C) 12,675,000 (E) 5,000,000 (R) (R)4,370,000 460,000(O) (9,200,000) (2,300,000) (4,000,000) (E)4,000,000 (7,000,000) (E)7,000,000 (1,675,000) (E)1,675,000 (O) 48,750 2,000,000 2,100,000 (30,000,000) (21,500,000) (2,526,250) (C)2,526,250 20,000,000 12,900,000 (O)215,000 1,000,000 1,075,000 (O)53,750 5,000,000 _ $ -0- 230,000 (O) 750,000 (R) 2,100,000(C) 4,300,000 _ (O)430,000 _ $ -0- $21,698,750 $21,698,75 $ 9,000,000 10,900,000 24,592,500 -3,910,000 (17,200,000) (6,300,000) (10,000,000) (8,000,000) (2,376,250) 2,000,000 (51,500,000) -33,115,000 2,128,750 9,300,000 430,000 $ -0- ©Cambridge Business Publishers, 2013 37 Find more at www.downloadslide.com Phillips Company and Subsidiary Standard, Ltd Consolidated Statement of Income and Retained Earnings For the Year Ended December 31, 2014 Sales Cost of goods sold Depreciation expense Other operating expenses Goodwill impairment Total expenses Net income Retained earnings, January Dividends declared and paid Retained earnings, December 31 $51,500,000 $33,115,000 2,128,750 9,300,000 430,000 $44,973,750 $ 6,526,250 8,000,000 (2,000,000) $12,526,250 Phillips Company and Subsidiary Standard, Ltd Consolidated Balance Sheet December 31, 2014 Assets Cash and receivables Inventory Property, plant & equipment, net Goodwill Total assets Liabilities and stockholders’ equity Current liabilities Long-term debt Capital stock Retained earnings Accumulated other comprehensive income Total liabilities and stockholders’ equity ©Cambridge Business Publishers, 2013 38 $ 9,000,000 10,900,000 24,592,500 3,910,000 $48,402,500 $17,200,000 6,300,000 10,000,000 12,526,250 2,376,250 $48,402,500 Advanced Accounting, 2nd Edition Find more at www.downloadslide.com P7.12 Hyperinflationary Economy, U.S GAAP and IFRS a Because the local currency is highly inflationary, U.S GAAP requires remeasurement of the subsidiary’s LC accounts into the reporting currency, U.S dollars, even though the local currency is the subsidiary’s functional currency Remeasurement of the December 31, 2014 balance sheet is as follows: Account Cash Plant assets, net Liabilities Capital stock Sales revenue Out of pocket operating expenses Depreciation expense Remeasurement loss (income) Balance in LC Dr (Cr) 125,000 35,000 (50,000) (50,000) (200,000) 135,000 5,000 0- $/LC 0.10 0.65 0.10 0.65 0.15 0.15 0.65 See sch $ Dr (Cr) 12,500 22,750 (5,000) (32,500) (30,000) 20,250 3,250 8,750 -0- Schedule Calculation of Remeasurement Loss Beginning exposed position + Sales - Out of pocket operating expenses Ending exposed position Remeasurement loss (income) Cash Plant assets, net Total LC 10,000 200,000 (135,000) $/LC 0.65 0.15 0.15 75,000 0.10 Remeasured balance sheet December 31, 2014 $ 12,500 Liabilities 22,750 Capital stock Retained earnings $ 35,250 Total $ 6,500 30,000 (20,250) 16,250 - 7,500 8,750 $ 5,000 32,500 (2,250) $ 35,250 Remeasured income statement For the year 2014 Sales revenue Out of pocket operating expenses Depreciation expense Remeasurement loss Net loss Solutions Manual, Chapter $ 30,000 (20,250) (3,250) (8,750) $ (2,250) ©Cambridge Business Publishers, 2013 39 Find more at www.downloadslide.com b IFRS requires restatement of the LC accounts to the same price level, and then translation to the presentation currency, the U.S dollar Price-level adjusted (LC) Balance in LC Price-level Dr (Cr) Account Dr (Cr) adjustment $/LC Cash 125,000 -125,000 0.10 Plant assets, net 35,000 600/100 210,000 0.10 Liabilities (50,000) -(50,000) 0.10 Capital stock (50,000) 600/100 (300,000) 0.65 Sales revenue (200,000) 600/400 (300,000) 0.15 Out of pocket op expenses 135,000 600/400 202,500 0.15 Depr expense 5,000 600/100 30,000 0.15 Monetary loss (income) -See sch 82,500 0.15 AOCI (loss) See sch -0-0-0- $ Dr (Cr) 12,500 21,000 (5,000) (195,000) (45,000) 30,375 4,500 12,375 164,250 -0- Schedule Calculation of Monetary Loss Beginning monetary position + Sales - Out of pocket operating expenses Ending monetary position Monetary loss (income) LC 10,000 200,000 (135,000) Price-level adjustment 600/100 600/400 600/400 75,000 Price-level adjusted (LC) 60,000 300,000 (202,500) 157,500 - 75,000 82,500 Schedule Calculation of Translation Loss Beginning exposed position - Net loss (300,000 – 202,500 – 30,000 – 82,500) Ending exposed position Translation loss (OCI) ©Cambridge Business Publishers, 2013 40 Price-level adjusted (LC) 300,000 $/LC 0.65 $ 195,000 (15,000) 0.15 285,000 0.10 (2,250) 192,750 - 28,500 164,250 Advanced Accounting, 2nd Edition Find more at www.downloadslide.com Cash Plant assets, net Total Translated balance sheet December 31, 2014 $ 12,500 Liabilities 21,000 Capital stock Retained earnings AOCI $ 33,500 Total $ 5,000 195,000 (2,250) (164,250) $ 33,500 Translated income statement For the year 2014 Sales revenue Out of pocket operating expenses Depreciation expense Monetary loss Net loss Solutions Manual, Chapter $ 45,000 (30,375) (4,500) (12,375) $ (2,250) ©Cambridge Business Publishers, 2013 41 ... weighted average ©Cambridge Business Publishers, 2013 24 Advanced Accounting, 2nd Edition Find more at www.downloadslide.com Solutions Manual, Chapter ©Cambridge Business Publishers, 2013 25 Find... 494,000 Advanced Accounting, 2nd Edition Find more at www.downloadslide.com P7.4 Translation and Performance Evaluation a In euros, net income increased about 42% [= (595 - 420)/420], driven by the... to remeasurement generally produces similar results only by coincidence ©Cambridge Business Publishers, 2013 22 Advanced Accounting, 2nd Edition Find more at www.downloadslide.com P7.5 Translation