Hoyle 11e Chapter 10

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 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 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 use are the temporal temporal method and the current rate method. E. Translation adjustments can be either (1) reported as a gain or loss in in income or (2) deferred in the stockholders' equity section of the b alance sheet.

II. The primary objective objective of the temporal temporal method is to to maintain the underlying 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 liabilities carried at cost and stockholders' equity equity items are translated at a historical exchange rate. B. By translating some assets at the current exchange rate and others at historical historical rates the temporal method distorts financial ratios calculated in the foreign currency. C. Most income statement items items are translated at average-for-the-period rates. However, 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 defined as cash, marketable securities, and receivables minus total liabilities. A net liability exposure often exists. 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.

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III. With the current rate method, the net investment investment in a foreign operation is considered to be 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 which are carried at cost cost using the current 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 assets at the current rate rate does maintain underlying ratios and relationships that exist in the foreign currency statements. D. Revenues and expenses which which occur evenly throughout the period are translated translated at the average-for-the-period exchange rate. Income items, such 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 entity's net assets (stockholders' equity). 1. Appreciation in the foreign currency results in a positive translation translation adjustment (gain); depreciation results in a negative translation adjustment (loss). IV. FASB Accounting Standards Codification Topic 830, Foreign Currency Matters, (FASB ASC 830) 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 curr ency of the foreign entity.  A. The functional currency is the primary currency of the foreign entity's operating environment. It can be either either the U.S. dollar or a foreign currency. 1. U.S. GAAP lists six indicators that are to be used in determining an entity's functional currency. There are no guidelines as to how these 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 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 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 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 exposures of their foreign foreign entities so as to avoid adverse effects on income and/or stockholders' equity.  A. FASB Accounting Standards Codification Topic 815, Derivatives and Hedging (FASB  ASC 815) 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.

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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 value of the vilsek vilsek has now changed. Thus, 150,000 vilseks 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 into dollars. Instead, these three assets are are being held, each with a historical cost of 150,000 150,000 vilseks. Under the temporal method, these assets (except (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 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, indicates, though, $34,500 was was not the original cost expended by Southwestern. In addition, using the current rate means that 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 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 validity of reporting the $34,500 might again be questioned. In addition, even if the assets were 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 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 single best answer to these questions. questions. The purpose of this type of exercise is to encourage 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 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 providing one type of of information over 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 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, assets, and intangibles. The debate regarding the appropriate exchange rate for for translating assets exists exists only because some assets assets are reported at historical 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 translated at the current exchange exchange rate. The differences between between the temporal method and current rate method would disappear.

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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 issue relates to determining the appropriate exchange rate (historical, current, or average for the current period) for the translation of foreign foreign currency balances. Those items translated translated at the current exchange rate are exposed 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 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 result in cash inflows and outflows, 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 adverse (inflationary) impact on 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 satisfy the forward forward contract. By hedging balance sheet exposure, a company might incur a realized  foreign   foreign exchange loss to avoid an unrealized negative translation adjustment adj ustment or unrealized remeasurement loss. 4. The gains and losses arising from financial instruments 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 accumulated accumulated 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.

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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 actually been carried out using U.S. dollars. To achieve this objective, assets carried at historical cost and stockholders’ equity are translated at histori cal 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 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 exchange risk. Therefore all assets and liabilities are translated at the current exchange rate. rate. Balance sheet exposure exposure under this concept is equal to the net investment. 6. The Retained Earnings balance is created created by a multitude of 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  was applied, the ending balance calculated under Statement 8  was   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 relate to non-monetary assets assets carried at historical 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 f unctional unctional 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. FASB ASC 830   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.   does not provide any guidance as to how these factors are to be weighted FASB ASC 830  does (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. determined. Changes in net assets assets are determined to explain the net asset balance in foreign currency at the end of the period. period. The beginning net asset position 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. adjustment. It is positive positive if the actual dollar net asset asset position is less than the net asset position based based on the current current exchange exchange rate. The translation adjustment is negative if the actual dollar net asset position is greater than if translated at the current rate. Most companies include the cumulative translation adjustment on the U.S. dollar Balance Sheet in the Stockholders’ Equity Section under Accumulated Other Comprehensive Income.

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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 that either theory is considered more appropriate. 11. Translation is required when a foreign currency is the functional currency. 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. 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. 13. Differences exist between IFRS and U.S. GAAP with regard to (a) the hierarchy of factors used to determine the functional currency and (b) the method used to translate the financial statements of a subsidiary located in a hyperinflationary country. IAS 21  establishes primary factors and other factors to be considered in determining an entity’s functional currency. When the indicators are mixed and the functional currency is not obvious, the parent must give priority to the primary indicators in determining the foreign entity’s functional currency. U.S. GAAP does not have a similar hierarchy. In translating the foreign currency financial statements of a subsidiary located in a highly inflationary economy, IAS 21  requires financial statements to first be restated for local inflation and then translated into the parent’s currency using the current exchange rate for all financial statement items. In contrast, U.S. GAAP requires use of the temporal method with no adjustment for inflation in this situation.

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Answers to Problems 1. C (Definition of functional currency) 2. C (Comparison of current rate and temporal methods) 3. C (Translation process (current rate method)) 4. B (Determine appropriate translation method and resulting translation adjustment) 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 (Translation process (current rate method)  – asset and related expense) All asset accounts are translated  at current rates. 6. A (Translation process (current rate method)  – assets) Because the foreign currency is the functional currency, a translation is required. All assets accounts are translated  at current rates. 7. C (Remeasurement process (temporal method)  – assets) 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 (Translation process (current rate method)  – inventory) 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 (Translation process (current rate method)  – cost of goods sold) 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 = $18,000]. 10. D (Translation process (current rate method)  – marketable securities and inventory) The foreign currency is the functional currency, so a translation is appropriate. All assets are translated at the current exchange rate of $.19.

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11. C (Remeasurement process (temporal method) – marketable securities and inventory) 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 (Highly inflationary economy (temporal method)  – cost of goods sold) Beginning inventory Purchases Ending inventory Cost of goods sold

FCU

200,000 x $1.00 = $ 200,000 10,300,000 x $0.80 = 8,240,000 (500,000) x $0.75 = (375,000) FCU 10,000,000 $8,065,000

13. C (Calculation of translation adjustment) Beginning net assets, 1/1………….. Increase in net assets: Income......................................... Ending net assets, 12/31 ................. Ending net assets at current exchange rate ................ Translation Adjustment (positive) .

P20,000

x $.15 =

$ 3,000

10,000 P30,000

x $.19 =

1,900 $ 4,900

P30,000

x $.21 =

$ 6,300 $(1,400)

14. C (Concepts underlying current rate and temporal methods) 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 (Calculation of remeasurement gain/loss) Beginning net monetary assets, 1/1 Increases in net monetary assets: Sale of inventory ........................ Decreases in net monetary assets: Purchase of equipment.............. Purchase of inventory ............... Transfer to parent ...................... Ending net monetary assets, 12/31 Ending net monetary assets at the current exchange rate ......... Remeasurement gain ......................

P100,000

x $.16 =

$16,000

50,000

x $.20 =

10,000

(60,000) (30,000) (10,000) P 50,000

x $.16 = x $.18 = x $.21 =

(9,600) (5,400) (2,100) $ 8,900

P 50,000

x $.22 =

11,000 $(2,100)

16. C (Remeasurement process (temporal method)) Marketable equity securities are carried at market value and therefore translated at the current exchange rate under the temporal method.

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17. B (Determine appropriate translation method and treatment of translation adjustment) 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 (Translation process (current rate method)  – wages expense and wages payable) Wages expense is translated at the average exchange rate; wages payable are translated at the current exchange rate. 19. C (Treatment of gains and losses on hedges of net investments) 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 (Presentation of remeasurement gain/loss on income statement) Remeasurement gains are reported in the income statement as a part of income from continuing operations. 21. (10 minutes) (Specify appropriate exchange rates for the translation of foreign currency financial statements under the current rate method) R e n t e x p e n s e—   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.

E q u i p m e n t—   as an asset, use current rate at the balance sheet date. N o t e s p a y a b l e—   as a liability, use current rate at the balance sheet date. Sales  —use actual (historical) rate at time of recording.

Sales often occur evenly throughout the year so that an average rate is acceptable. However, if sales are more prevalent at a particular time during the year, historical rates should be used. D e p r ec i a t i o n e x p e n s e —   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.

A c c u m u l a t ed d e p r e c i at i o n —   as a contra-asset account, use the current ex-

change rate at the balance sheet date.

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the date of issuance. 22. (5 minutes) Determine Translated Values under the Current Rate Method 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 appropriate exchange rates under the current rate fethod [translation] and temporal method [remeasurement]) Translation

Accounts payable Accounts receivable Accumulated depreciation Advertising expense Amortization expense Buildings Cash Common stock Depreciation expense Dividends paid (10/1) Notes payable Patents (net) Salary expense Sales

$.16 C $.16 C $.16 C $.19 A $.19 A $.16 C $.16 C $.28 H $.19 A $.20 H $.16 C $.16 C $.19 A $.19 A

Remeasurement 

$.16 C $.16 C $.26 H $.19 A $.25 H $.26 H $.16 C $.28 H $.26 H $.20 H $.16 C $.25 H $.19 A $.19 A

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

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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 subsidiary’s balance sheet exposure: Translation 

Beginning net assets, 12/1 Ending net assets, 12/31 at current exchange rate Translation adjustment (positive)

CHF3,700,000

x $.70 = $2,590,000

CHF3,700,000

x $.75 = (2,775,000) $( 185,000)

CHF(300,000)

x $.70 = $(210,000)

CHF(300,000)

x $.75 =

Remeasurement 

Beginning net monetary liability position, 12/1 Ending net monetary liability position, 12/31 at current exchange rate Remeasurement loss

(225,000) $ 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 1 for $560,000 [CHF800,000 x $.70]. At December 31, it takes $600,000 to pay off the note [CHF800,000 x $.75].)  McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik,  Advanced Accounting, 11/e

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25. (30 minutes) (Prepare financial statements for a foreign subsidiary and then translate them into U.S. dollars) Fenwicke Company Subsidiary Income Statement L CU 

Rent revenue Interest expense Depreciation expense Repair expense Net income

60,000 (10,000) (14,000) (4,000) 32,000

U.S. Doll ars 

x $1.90 A x $1.90 A x $1.90 A x $1.85*H

= = = =

$114,000 (19,000) (26,600) (7,400) $ 61,000

* Repair expense is the only expense not incurred evenly throughout the year. Statement of Retained Earnings L CU 

Retained earnings, 1/1 Net income Dividends paid Retained earnings, 12/31

-032,000 (5,000) 27,000

U.S. Doll ars 

(above) x $1.80 H

=

-0$61,000 (9,000) $52,000

Balance Sheet L CU 

Cash Accounts receivable Building Accumulated depreciation Total assets Interest payable Note payable Common stock Retained earnings Translation adjustment Total liabilities and equities

41,000 10,000 140,000 (14,000) 177,000 10,000 100,000 40,000 27,000 177,000

U.S. Doll ars 

x x x x

$1.80 C $1.80 C $1.80 C $1.80 C

= = = =

x $1.80 C x $1.80 C x $2.00 H (above) (below)

= = =

$ 73,800 18,000 252,000 (25,200) $318,600 $ 18,000 180,000 80,000 52,000 (11,400) $318,600

C o m p u t a t io n o f T r an s l a t i o n A d j u s t m e n t  

Beginning net assets -0Increase in net assets: Issued common stock 40,000 Net income 32,000 Decrease in net assets: Dividends paid (5,000) Ending net assets 67,000 Ending net assets at current exchange rate 67,000 Translation adjustment (negative)

 McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik,  Advanced Accounting, 11/e

-0x $2.00 (above)

=

$ 80,000 61,000

x $1.80

=

(9,000) $132,000

x $1.80

=

120,600 $ 11,400

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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 L CU 

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 -0-0Cash, 12/31 41,000 x $1.80 C = $ 73,800

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27. (25 minutes) (Compute translation adjustment and remeasurement gain/loss) a. Translation—only changes in net assets have an impact on the computation of the translation adjustment. Net asset balance 1/1 Increases in net assets (income): Sold inventory at a profit 5/1 Sold land at a gain 6/1 Decreases in net assets: Paid a dividend 12/1 Depreciation recorded Net asset balance 12/31 Net asset balance 12/31 at current exchange rate Translation adjustment—positive

KM30,000

x $.32 =

$ 9,600

5,000 1,000

x $.34 = x $.35 =

1,700 350

(3,000) (2,000) KM31,000

x $.41 = x $.37 =

(1,230) ( 740) $ 9,680

KM31,000

x $.42 =

(13,020) $(3,340)

b. Remeasurement—only changes in net monetary assets and liabilities have an impact on the computation of the remeasurement gain. Beginning net monetary liability position KM (3,000) Increases in monetary assets: Sold inventory 5/1 15,000 Sold land 6/1 5,000 Decreases in monetary assets: Bought inventory 10/1 (12,000) Bought land 11/1 (4,000) Paid a dividend 12/1 (3,000) Ending net monetary liability position KM(2,000) Ending net monetary liability position at current exchange rate KM(2,000) Remeasurement gain

x $.32 =

$ ( 960)

x $.34 = x $.35 =

5,100 1,750

x $.39 = x $.40 = x $.41 =

(4,680) (1,600) (1,230) $(1,620)

x $.42 =

(840) $ (780)

Note: The purchase of land on account did not result in a decrease in monetary assets, rather an increase in monetary liabilities. Payment on the note payable and collection of accounts receivable do not affect the net monetary liability position.

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28. (20 minutes) (Compute translation adjustment and remeasurement gain/loss) a. The translation adjustment is based on changes in the net assets of the subsidiary. Net assets, 1/1 Changes in net assets Rendered services Incurred expense Net assets, 12/31 Net assets, 12/31 at current exchange rate Translation adjustment (positive)

82,000 LCU x $.24 =

$19,680

30,000 LCU x $.25 = (18,000) LCU x $.26 = 94,000 LCU

7,500 (4,680) 22,500

94,000 LCU x $.29 =

27,260 $(4,760)

b. The remeasurement gain or loss is based on changes in the net monetary assets of the subsidiary. Net monetary assets, 1/1 Changes in net monetary assets Rendered services Incurred expense Net monetary assets, 12/31 Net monetary assets, 12/31 at current exchange rate Remeasurement gain c. Translated value of land Remeasured value of land

22,000 LCU x $.24 =

$ 5,280

30,000 LCU x $.25 = (18,000) LCU x $.26 = 34,000 LCU

7,500 (4,680) $ 8,100

34,000 LCU x $.29 =

9,860 $(1,760)

60,000 LCU 60,000 LCU

x $.29 = x $.23 =

$17,400 $13,800

29. (10 minutes) (Determine the appropriate exchange rate under the current rate method [translation] and temporal method [remeasurement]) (a) Current Rate Method Account Translation Sales 20 A Inventory 22 C Equipment 22 C Rent expense 20 A Dividends 21 H Notes receivable 22 C Accumulated depreciation--equipment 22 C Salary payable 22 C Depreciation expense 20 A

(b) Temporal Method Remeasurement 20 A 19 H 13 H 20 A 21 H 22 C 13 H 22 C 13 H

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

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30. (30 minutes) (Determine translation adjustment; prepare journal entries for forward contract hedge of balance sheet exposure; determine amount to be reported in accumulated other comprehensive income) a. Net assets, 1/1 (132,000  –  54,000) Change in net assets: Net income Dividends, 3/1 Dividends, 10/1 Net assets, 12/31 Net assets at current exchange rate, 12/31 Translation adjustment (negative)

78,000 kites

x $0.80 =

$62,400

26,000 kites (5,000) kites (5,000) kites 94,000 kites

x $0.77 = x $0.78 = x $0.76 =

20,020 (3,900) (3,800) $74,720

94,000 kites

x $0.75 =

70,500 $ 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 Accumulated Other Comprehensive Income at 12/31 is $2,220 ($4,220  – $2,000).

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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 C a lc u l a t i o n o f T r a n s l a t io n A d j u s t m e n t

Net assets, 1/1………………………….. Increase in net assets: Common stock issued………………. Sales……………………………………. Decrease in net assets: Dividends paid……………………….. Salary expense……………………….. Depr eciation expense………………. Miscellaneous expense ……………. Net assets, 12/31………………………. Net assets, 12/31 at current exchange rate……………. Translation adjustment (negative)

-0-

-0-

10,000 KQ x 1.71 25,000 KQ x 1.64

$17,100 41,000

( 4,000) ( 5,000) ( 600) ( 9,000)

(6,640) (8,200) ( 984) (14,760)

KQ KQ KQ KQ

x 1.66 x 1.64 x 1.64 x 1.64

16,400* KQ

$27,516

16,400 KQ x 1.62

26,568 $ 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.

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31. ( c o n t i n u e d ) b. Remeasurement of Subsidiary Trial Balance Cash Accounts Receivable Equipment Accumulated Depreciation Land Accounts Payable Notes Payable Common Stock Dividends Paid Sales Salary Expense Depreciation Expense Miscellaneous Expense

8,000 9,000 3,000 600 5,000 3,000 5,000 10,000 4,000 25,000 5,000 600 9,000

KQ x 1.62 KQ x 1.62 KQ x 1.71 KQ x 1.71 KQ x 1.59 KQ x 1.62 KQ x 1.62 KQ x 1.71 KQ x 1.66 KQ x 1.64 KQ x 1.64 KQ x 1.71 KQ x 1.64

Remeasurement loss (debit) Calculation of Remeasurement Loss Net monetary assets, 1/1 -0Increase in net monetary assets: Common stock issued 10,000 Sales 25,000 Decrease in net monetary assets: Acquired equipment (3,000) Acquired land (5,000) Dividends paid (4,000) Salary expense (5,000) Miscellaneous expense (9,000) Net monetary assets, 12/31 Net monetary assets, 12/31 at current exchange rate Remeasurement loss (debit)

Debits $12,960 14,580 5,130 7,950

6,640 8,200 1,026 14,760 $71,246 840 $72,086

Credits

$ 1,026 4,860 8,100 17,100 41,000

$72,086

-0KQ x 1.71 $17,100 KQ x 1.64 41,000 KQ KQ KQ KQ KQ

x 1.71 (5,130) x 1.59 (7,950) x 1.66 (6,640) x 1.64 (8,200) x 1.64 (14,760)

9,000* KQ

$15,420

9,000 KQ x 1.62

14,580 $ 840

* This amount can be verified as ending assets (17,000 KQ) minus ending liabilities (8,000 KQ) – net assets, 12/31 = 9,000 KQ.

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32. (30 minutes) (Translate financial statements of a foreign subsidiary) LIVINGSTON COMPANY Income Statement For Year Ending December 31, 2013 Gog hs

Sales Cost of Goods Sold Gross Profit Operating Expenses Gain on Sale of Equipment Net Income

U.S. Dollars 

270,000 (155,000) 115,000 (54,000) 10,000 71,000

x 1/.63 = 428,571 x 1/.63 = (246,032) 182,539 x 1/.63 = (85,714) x 1/.58 = 17,241 114,066

Statement of Retained Earnings For Year Ending December 31, 2013 Gogh s

Retained Earnings, 1/1/13 Net Income Dividends Paid Retained Earnings, 12/31/13

U.S. Dollars 

216,000 given 71,000 above (26,000) x 1/.62 = 261,000

395,000 114,066 (41,935) 467,131

Balance Sheet December 31, 2013 Gog hs

U.S. Dollars 

Cash Receivables Inventory Fixed Assets (net) Total

44,000 116,000 58,000 339,000 557,000

Liabilities Common Stock Retained Earnings Translation Adjustment Total

176,000 x 1/.65 = 270,769 120,000 x 1/.48 = 250,000 261,000 above 467,131 (130,977) 557,000 856,923

T r an s l a t i o n A d j u s t m e n t

Net assets, 1/1/13 Net income, 2013 Dividends paid Net assets, 12/31/13 Net assets at current exchange rate, 12/31/13

x 1/.65 = 67,692 x 1/.65 = 178,462 x 1/.65 = 89,231 x 1/.65 = 521,538 856,923

Goghs

U .S . D o l l ar s  

336,000 x 1/.60 = 71,000 above (26,000) above 381,000

381,000 x 1/.65 = 586,154

Translation adjustment, 2013 (negative) Cumulative translation adjustment, 1/1/13 (negative) Cumulative translation adjustment, 12/31/13 (negative)

 McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik,  Advanced Accounting, 11/e

560,000 114,066 (41,935) 632,131

45,977 85,000 130,977

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33. (35 minutes) (Compute remeasurement gain/loss and translation adjustment) a. R e m e as u r e m e n t G a i n o r L o s s Net monetary assets, 1/1/13* Increases in net monetary assets: Issued Common Stock (4/1/13) Sold Building** (7/1/13) Sales (2013) Decreases in net monetary assets: Purchased Equipment (4/1/13) Paid Dividends (10/1/13) Rent Expense (2013) Salary Expense (2013) Utilities Expense (2013) Net monetary assets, 12/31/13 Net monetary assets, 12/31/13 at current exchange rate Remeasurement gain (credit)

2,000

KR x 2.50 = $ 5,000

10,000 22,000 80,000

KR x 2.60 = 26,000 KR x 2.80 = 61,600 KR x 2.70 = 216,000

(30,000) (32,000) (14,000) (20,000) ( 5,000) 13,000

KR x 2.60 = (78,000) KR x 2.90 = (92,800) KR x 2.70 = (37,800) KR x 2.70 = (54,000) KR x 2.70 = (13,500) KR $ 32,500

13,000

KR x 3.00 = 39,000 $ (6,500)

* Net monetary assets: (Cash + Accounts Receivable) - (Account Payable + Bonds Payable) ** To determine cash proceeds from the sale of the building, changes in the Accumulated Depreciation and Buildings accounts must be analyzed along with Depreciation Expense and Gain on Sale of Building. Depreciation expense is KR 15,000; KR 5,000 is attributable to equipment (Accumulated Depreciation—Equipment increases by KR 5,000), KR 10,000 is depreciation of buildings. Accumulated Depreciation — Buildings increases by only KR 5,000 during 2013, therefore, the accumulated depreciation related to the building sold during 2008 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.

 McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik,  Advanced Accounting, 11/e

© The McGraw-Hill Companies, Inc., 2013 10-20

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33. ( c o n t i n u e d ) b. T r an s l a t i o n A d j u s t m e n t   Net assets, 1/1/13* 100,000 Increases in net assets Issued Common Stock (4/1/13) 10,000 Gain on Sale of Building** (7/1/13) 6,000 Sales (2013) 80,000 Decreases in net assets Paid Dividends (10/1/13) (32,000) Depreciation Expense (2013) (15,000) Rent Expense (2013) (14,000) Salary Expense (2013) (20,000) Utilities Expense (2013) ( 5,000) Net assets, 12/31/13 110,000 Net monetary assets, 12/31/13 at current exchange rate 110,000 Translation adjustment (positive)

KR x 2.50 = $250,000 KR x 2.60 = KR x 2.80 = KR x 2.70 = KR x 2.90 KR x 2.70 KR x 2.70 KR x 2.70 KR x 2.70 KR

26,000 16,800 216,000

= = = = =

(92,800) (40,500) (37,800) (54,000) (13,500) $270,200

KR x 3.00 =

330,000 $(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, 2013 can be computed by translating the January 1 accounts and assuming that the translation adjustment is the balancing figure: Common Stock, 1/1/13 70,000 KR x 2.40 = $168,000 Retained Earnings, 1/1/13 30,000 KR given 62,319 Net assets, 1/1/13 100,000 KR $230,319 Net assets, 1/1/13 at current exchange rate 100,000 KR x 2.50 = 250,000 Cumulative translation adjustment (positive), 1/1/13 $ (19,681) Translation adjustment (positive), 2013 (59,800) Cumulative translation adjustment (positive), 12/31/13 $ (79,481)

 McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik,  Advanced Accounting, 11/e

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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. R e m e as u r e m e n t o f M e x i c a n O p e r a t i o n s   Canadian Dollars 

Debit

Pesos 

Accounts payable Accumulated depreciation Building and equipment Cash Depreciation expense Inventory (beginning —income statement) Inventory (ending —income statement) Inventory (ending—balance sheet) Purchases Receivables Salary expense Sales Main office

49,000 x .35 C 19,000 x .25 H 40,000 x .25 H 59,000 x .35 C 2,000 x .25 H 23,000

x .30 A (’12)

28,000 28,000 68,000 21,000 9,000 124,000 30,000

x .34 A(’13) x .34 A(’13) x .34 A(’13) x .35 C x .34 A x .34 A given

Remeasurement loss Total

Schedule One

S c h e d u l e O n e—   R e m e as u r e m e n t L o s s

Net monetary liabilities, 1/1/13* Increases in net monetary assets Sales Decreases in net monetary assets Purchases Salary Expense Net monetary assets, 12/31/13** Net monetary assets, 12/31/13 at current exchange rate Remeasurement loss

10,000 20,650 500

Pesos

Credit 17,150 4,750

6,900 9,520 23,120 7,350 3,060

10 81,110

9,520

42,160 7,530 81,110

C a n a d i an D o l l a rs

(16,000)

x .32

(5,120)

124,000

x .34

42,160

(68,000) ( 9,000) 31,000

x .34 x .34

(23,120) ( 3,060) 10,860

31,000

x .35

10,850 10

* Net monetary liabilities, 1/1/13, can be determined by first determining the net monetary assets at 12/31/13 and then backing out the changes in monetary assets and liabilities during 2013 —sales, purchases, and salary expense. ** Net monetary assets, 12/31/13: Cash + Receivables  – Accounts Payable

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34. ( c o n t i n u e d ) b. and c. 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 in to U.S. do llars  — For the Year Ended December 31, 2013 Current Rate Method  Sales Cost of goods sold Gross profit Depreciation expense Salary expense Utility expense Gain on sale of equipment Remeasurement loss Net income

C$

354,160 (223,500) 130,660 (8,500) (29,060) (9,000) 5,000 (10) C$ 89,090

x .67 A = x .67 A = x x x x x

.67 A .67 A .67 A .68 H .67 A

= = = = =

$ 237,287.20 (149,745.00) 87,542.20 (5,695.00) (19,470.20) (6,030.00) 3,400.00 (6.70) $ 59,740.30

Statement of Retained Earnings For the Year Ended December 31, 2013 Retained earnings, 1/1/13 Net income (above) Dividends paid Retained earnings, 12/31/13

C$ C$

 McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik,  Advanced Accounting, 11/e

135,530 89,090 ( 28,000) 196,620

Given Above x .69 H =

$ 70,421.00 59,740.30 (19,320.00) $110,841.30

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34. ( c o n t i n u e d ) b. and c. Balance Sheet December 31, 2013 Cash Receivables Inventory Buildings and equipment Accumulated depreciation Total

C$

C$

Accounts payable C$ Notes payable Common stock Retained earnings Cumulative translation adjustment Total C$

46,650 75,350 107,520 177,000 (31,750) 374,770 52,150 76,000 50,000 196,620 374,770

Schedule Two  —T r an s l a t i o n A d j u s t m e n t  

x x x x x

.65 C .65 C .65 C .65 C .65 C

x .65 C = $ 33,897.50 x .65 C = 49,400.00 x .45 H = 22,500.00 Above 110,841.30 Schedule Two 26,961.70 $ 243,600.50

Net assets, 1/1/13 C$ 185,530 x .70 = Changes in net assets Net income 89,090 Above Dividends (28,000) x .69 = Net assets, 12/31/13 C$ 246,620 Net assets, 12/31/13 at current exchange rate C$ 246,620 x .65 = Translation adjustment, 2013 (negative) Cumulative translation adjustment, 1/1/13 (positive) Cumulative translation adjustment, 12/31/13 (positive)

 McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik,  Advanced Accounting, 11/e

= $ 30,322.50 = 48,977.50 = 69,888.00 = 115,050.00 = (20,637.50) $243,600.50

$129,871.00 59,740.30 (19,320.00) $170,291.30 160,303.00 9,988.30 (36,950.00) $(26,961.70)

$

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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, 10/1/13 (30,000) 0.273 (8,190) Net income (241,000) (66,004) R/E, 1/1/13 Net income Dividends paid R/E,12/31/13 Cash and receivables Inventory Prepaid rent (adjusted) Fixed assets Total Accounts payable Notes payable Common stock Add’l paid-in capital Retained earnings, 12/31/13 Subtotal Cumulative translation adjustment (negative) Total

(133,000) (241,000) 50,000 (324,000)

Schedule 1 (38,244) Above (66,004) 0.275 13,750 (90,498)

146,000 297,000 10,000 455,000 908,000

0.270 0.270 0.270 0.270

39,420 80,190 2,700 122,850 245,160

(54,000) (140,000) (240,000) (150,000) (324,000)

0.270 0.270 0.300 0.300 Above

(14,580) (37,800) (72,000) (45,000) (90,498) (259,878)

Schedule 2

14,718 (245,160)

(908,000)

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35. ( c o n t i n u e d ) S c h e d u l e 1—   Translation of 1/1/13 Retained Earnin gs 

Retained earnings, 1/1/12 Net income, 2012 Dividends, 6/1/12 Retained earnings, 1/1/13

Pounds -0(163,000) 30,000 (133,000)

0.288 0.290

Dollars -0(46,944) 8,700 (38,244)

S c h e d u l e 2—   Calculation o f Cumu lative Translatio n Ad justm ent at 12/31/13

Pounds

Dollars

Net assets, 1/1/12 (390,000) 0.300 Net income, 2012 (163,000) 0.288 Dividends, 6/1/12 30,000 0.290 Net assets, 12/3/12 (523,000) Net assets, 12/31/12 at current exchange rate (523,000) 0.280 Translation adjustment, 2012 (negative) Net assets, 1/1/13 (523,000) 0.280 Net income, 2013 (241,000) Above Dividends, 6/1/13 50,000 0.275 Net assets, 12/31/13 (714,000) Net assets, 12/31/13 at current exchange rate (714,000) 0.270 Translation adjustment, 2013 (negative) Cumulative translation adjustment, 12/31/13 (negative)

 McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik,  Advanced Accounting, 11/e

(117,000) (46,944) 8,700 (155,244) (146,440) (8,804) (146,440) (66,004) 13,750 (198,694) (192,780) (5,914) (14,718)

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35. ( c o n t i n u e d ) Step Two

Cayce and Simbel's U.S. dollar accounts are then consolidated. Necessary adjustments and eliminations are made.

Account Sales Cost of goods sold Salary expense Rent expense Other expenses Dividend income Gain, 10/1/13 Net income

Consolidation Worksheet Adjustments and Consolidated Cayce Simbel Eliminations Balances Dollars Dollars Debit Credit Dollars (200,000) (219,200) (419,200) 93,800 115,080 208,880 19,000 20,276 39,276 7,000 9,864 16,864 21,000 16,166 37,166 (13,750) -0(I) 13,750 -0-0(8,190) (8,190) (72,950) (66,004) (125,204)

Ret earn, 1/1/13 Net income Dividends paid Ret earn, 12/31/13

(318,000) (72,950) 24,000 (366,950)

Cash and receivables Inventory Prepaid rent Investment Fixed assets Total Accounts payable Notes payable Common stock Additional PIC Ret earn, 12/31/13 Subtotal Cum trans adjust Total

110,750 98,000 30,000 126,000 398,000 762,750

(38,244) (66,004) 13,750 (90,498)

(S) 38,244 (*C) (38,244)

(356,244) (125,204) (I) (13,750) 24,000 (457,448)

39,420 80,190 2,700 -0- (*C) 38,244 (S)(164,244) 122,850 (S) 9,000 (E) (900) 245,160

(60,800) (132,000) (120,000) (83,000) (366,950)

(14,580) (37,800) (72,000) (S) 72,000 (45,000) (S) 45,000 (90,498) (259,878) 14,718 (E) 900 (762,750) (245,160) 217,138

 McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik,  Advanced Accounting, 11/e

217,138

150,170 178,190 32,700 -0528,950 890,010 (75,380) (169,800) (120,000) (83,000) (457,448) (905,628) 15,618 (890,010)

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35. (continued) E x p l a n a t i o n o f A d j u s t m e n t a n d E l i m i n a t i o n E n t r i es

Entry *C Investment in Simbel ................................................... 38,244 Retained earnings, 1/1/13 ....................................... 38,244 To accrue 2013 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, 1/1/13 (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 acquisition consideration over book value to land (fixed assets). The excess of acquisition consideration over book value is calculated as follows: Acquisition consideration ...................................................... $126,000 Book value, 1/1/13 ................................................................... Common stock ...................................................................... (72,000) Add’l paid-in capital .............................................................. (45,000) Excess of acquisition consideration over book value $ 9,000 The excess of acquisition consideration over book value is 30,000 pounds. The U.S. dollar equivalent at 1/1/13, the date of acquisition, is $9,000 (£E30,000 x $.30). Entry I Dividend income .......................................................... 13,750 Dividends paid......................................................... 13,750 To eliminate intra-entity dividend payments recorded by parent as income. Entry E Cumulative translation adjustment............................. 900 Fixed assets (revaluation) ..................................... 900 To revalue (write-down) the excess of acquisition consideration 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: E x c e s s o f a c q u i s i t i o n c o n s i d e r a t io n o v e r b o o k v a l u e

U.S. dollar equivalent at 12/31/13 U.S. dollar equivalent at 1/1/13 Cumulative translation adjustment related to excess, 12/31/13 (negative)

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£E30,000 x $.27 = $8,100 £E30,000 x $.30 = 9,000 $( 900)

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36. (90 minutes) Translate [remeasure] foreign currency financial statements using U.S. GAAP and explain sign of translation adjustment [remeasurement gain/loss]) Part I (a). Czech k oru na is the fun ction al currenc y  —c u r r e n t r a t e m e t h o d

Exchange KčS Rate US$ Sales 25,000,000 0.035 875,000 Cost of goods sold (12,000,000) 0.035 (420,000) Depreciation expense—equipment (2,500,000) 0.035 (87,500) Depreciation expense—building (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, 1/1/13 500,000 given 22,500 Dividends paid, 12/15/13 (1,500,000) 0.031 (46,500) Retained earnings, 12/31/13 5,500,000 203,500 Cash Accounts receivable Inventory Equipment Accum. deprec.—equipment Building Accum. deprec.—equipment Land Total assets

2,000,000 3,300,000 8,500,000 25,000,000 (8,500,000) 72,000,000 (30,300,000) 6,000,000 78,000,000

Accounts payable Long-term debt Common stock Additional paid-in capital Retained earnings, 12/31/13 Translation adjustment Total liabilities and equities

2,500,000 50,000,000 5,000,000 15,000,000 5,500,000 78,000,000

 McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik,  Advanced Accounting, 11/e

0.030 0.030 0.030 0.030 0.030 0.030 0.030 0.030

60,000 99,000 255,000 750,000 (255,000) 2,160,000 (909,000) 180,000 2,340,000

0.030 75,000 0.030 1,500,000 0.050 250,000 0.050 750,000 above 203,500 to balance  (438,500) 2,340,000

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36.

(continued) C a lc u l a t i o n o f T r a n s l a t io n A d j u s t m e n t

Translation adjustment, 2013 (negative) Net assets, 1/1/13 20,500,000 0.040 Net income, 2013 6,500,000 0.035 Dividends, 12/15/13 (1,500,000) 0.031 Net assets, 12/31/13 25,500,000 Net assets, 12/31/13 at current exchange rate 25,500,000 0.030 Translation adjustment, 2013 (negative) Cumulative translation adjustment, 12/31/13 (negative)

 McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik,  Advanced Accounting, 11/e

820,000 227,500 (46,500) 1,001,000 765,000

202,500

236,000 438,500

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36. ( c o n t i n u e d ) Part I (b). U.S. do llar is the fun ction al currency  —t e m p o r a l m e t h o d  

Exchange US$ 875,000 (493,500) (118,000) (85,200) (42,000) (35,000) 101,300 408,000 509,300 353,000 (46,500) 815,800

KčS Sales 25,000,000 Cost of goods sold (12,000,000) Depreciation expense—equipment (2,500,000) Depreciation expense—building (1,800,000) Research and development expense (1,200,000) Other expenses (1,000,000) Income before remeasurement gain 6,500,000 Remeasurement gain, 2013 Net income 6,500,000 Retained earnings, 1/1/13 500,000 Dividends paid, 12/15/13 (1,500,000) Retained earnings, 12/31/13 5,500,000

Rate 0.035 Sched.A Sched.B Sched.C 0.035 0.035

Cash Accounts receivable Inventory Equipment Accum. deprec.—equipment Building Accum. deprec.—equipment Land Total assets

2,000,000 3,300,000 8,500,000 25,000,000 (8,500,000) 72,000,000 (30,300,000) 6,000,000 78,000,000

0.030 60,000 0.030 99,000 0.032 272,000 Sched.B 1,180,000 Sched.B (418,000) Sched.C 3,408,000 Sched.C (1,510,200) 0.050 300,000 3,390,800

Accounts payable Long-term debt Common stock Additional paid-in capital Retained earnings, 12/31/13 Total liabilities and equities

2,500,000 50,000,000 5,000,000 15,000,000 5,500,000 78,000,000

0.030 0.030 0.050 0.050 above

KčS 6,000,000 14,500,000 (8,500,000) 12,000,000

ER 0.043 0.035 0.032

given 0.031

75,000 1,500,000 250,000 750,000 815,800 3,390,800

S c h e d u l e A —C o s t o f g o o d s s o l d

Beginning inventory Purchases Ending inventory Cost of goods sold

 McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik,  Advanced Accounting, 11/e

US$ 258,000 507,500 (272,000) 493,500

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36. ( c o n t i n u e d ) Schedule B  —E q u i p m e n t

KčS ER US$ Old Equipment—at 1/1/13 20,000,000 0.050 1,000,000 New Equipment—acquired 1/3/13 5,000,000 0.036 180,000 Total 25,000,000 1,180,000 Accum. Depr.—Old Equipment Accum. Depr.—New Equipment Total Deprec expense—Old Equipment Deprec expense—New Equipment Total S c h e d u l e C—   Building

Old Building—at 1/1/13 New Building—acquired 3/5/13 Total Accum. Depr.—Old Building Accum. Depr.—New Building Total Deprec. expense—Old Building Deprec. expense—New Building Total

8,000,000 500,000 8,500,000 2,000,000 500,000 2,500,000

0.050 0.036

KčS 60,000,000 12,000,000 72,000,000 30,000,000 300,000 30,300,000 1,500,000 300,000 1,800,000

ER 0.050 0.034

0.050 0.036

0.050 0.034 0.050 0.034

400,000 18,000 418,000 100,000 18,000 118,000 US$ 3,000,000 408,000 3,408,000 1,500,000 10,200 1,510,200 75,000 10,200 85,200

C a lc u l a t i o n o f R e m e as u r e m e n t G a in  

Net mon. liab., 1/1/13 Increase in mon. assets: Sales Decrease in mon. assets: Purchase of inventory Research and development Other expenses Dividends paid, 12/15/13 Purchase of equipment, 1/3/13 Purchase of buildings, 3/5/13 Net mon liab, 12/31/13 Net mon liab, 12/31/13 at current exchange rate Remeasurement gain—2013

 McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik,  Advanced Accounting, 11/e

KčS (37,000,000)

ER US$ 0.040 (1,480,000)

25,000,000

0.035

875,000

(14,500,000) (1,200,000) (1,000,000) (1,500,000) (5,000,000) (12,000,000) (47,200,000)

0.035 0.035 0.035 0.031 0.036 0.034

(507,500) (42,000) (35,000) (46,500) (180,000) (408,000) (1,824,000)

(47,200,000)

0.030 (1,416,000) (408,000)

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36. ( c o n t i n u e d ) Part I (c). U.S. do llar is the fun ction al currency  —t e m p o r a l m e t h o d (n o l o n g -   term debt) 

Exchange Rate 0.035 Sched.A Sched.B Sched.C 0.035 0.035

Sales Cost of goods sold Depreciation expense—equipment Depreciation expense—building Research and development expense Other expenses Income before remeasurement loss Remeasurement loss, 2013 Net income Retained earnings, 1/1/13 Dividends paid, 12/15/13 Retained earnings, 12/31/13

KčS 25,000,000 (12,000,000) (2,500,000) (1,800,000) (1,200,000) (1,000,000) 6,500,000 6,500,000 500,000 (1,500,000) 5,500,000

Cash Accounts receivable Inventory Equipment Accum. deprec.—equipment Building Accum. deprec.—equipment Land Total assets

2,000,000 3,300,000 8,500,000 25,000,000 (8,500,000) 72,000,000 (30,300,000) 6,000,000 78,000,000

0.030 60,000 0.030 99,000 0.032 272,000 Sched.B 1,180,000 Sched.B (418,000) Sched.C 3,408,000 Sched.C(1,510,200) 0.050 300,000 3,390,800

Accounts payable Long-term debt Common stock Additional paid in capital Retained earnings, 12/31/13 Total liabilities and equities

2,500,000 0 20,000,000 50,000,000 5,500,000 78,000,000

0.030 75,000 0.030 0 0.050 1,000,000 0.050 2,500,000 above (184,200) 3,390,800

given 0.031

US$ 875,000 (493,500) (118,000) (85,200) (42,000) (35,000) 101,300 (92,000) 9,300 (147,000) (46,500) (184,200)

S c h e d u l e A —C o s t o f g o o d s s o l d - same as in Part I (b) - same as in Part I (b) Schedule B  —E q u i p m e n t - same as in Part I (b) S c h e d u l e C—   Building

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36. ( c o n t i n u e d ) C a lc u l a t i o n o f R e m e as u r e m e n t L o s s  

Net monetary assets, 1/1/13 Increase in monetary assets: Sales Decrease in monetary assets: Purchase of inventory Research and development Other expenses Dividends paid, 12/15/13 Purchase of equipment, 1/3/13 Purchase of buildings, 3/5/13 Net monetary assets, 12/31/13 Net monetary assets, 12/31/13 at current exchange rate Remeasurement loss—2013

 McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik,  Advanced Accounting, 11/e

KčS 13,000,000

ER 0.040

US$ 520,000

25,000,000

0.035

875,000

(14,500,000) (1,200,000) (1,000,000) (1,500,000) (5,000,000) (12,000,000) 2,800,000

0.035 0.035 0.035 0.031 0.036 0.034

(507,500) (42,000) (35,000) (46,500) (180,000) (408,000) 176,000

2,800,000

0.030

84,000 92,000

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36. ( c o n t i n u e d ) Part II. Explan ation of the negative translation adjus tmen t in Part I (a), remeasurem ent gain in Part I (b), and remeasurem ent los s 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 2013 (from $.040 at 1/1/13 to $.030 at 12/31/13). 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 KčS 5,300,000). Accounts Payable and Long-term Debt are also translated at the current exchange rate (total K čS 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 2013. Cash and Accounts Receivable are the only assets translated at the current exchange rate (total KčS 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 K čS 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.

 McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik,  Advanced Accounting, 11/e

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Chapter 10 Develop Your Skills Research Case 1—Foreign 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 accumulated 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 2—Foreign Currency Translation Disclosures in the Computer Industry a. In 2010, in addition to providing information related to foreign currency translation and hedging activities in its Form 10-K under 1A. Risk Factors, p. 14, IBM also provided information in its Annual Report on these activities in the following locations: i. Management Discussion, under Currency Rate Fluctuations, p. 53. ii. Note A. Significant Accounting Policies, under Translation of Non-U.S Currency Amounts and Derivatives, p. 75. iii. Note L. Derivatives Financial Instruments, p. 96. In its Form 10-K for the year ended January 28, 2011 (Fiscal 2011), Dell provided information related to foreign currency translation and hedging activities in the following locations: i. Item 1A. Risk Factors, p. 17. ii. Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations, under Market Risk, p. 43. iii. Note 1. Description of Business and Summary of Significant Accounting Policies, under Foreign Currency Translation and Hedging Instruments, p. 63. iv. Note 6. Derivative Instruments and Hedging Activities, p. 81. b. IBM’s foreign operations do not have a predominant functional currency. The company indicates that it operates in multiple functional currencies (AR, p. 96). The majority of Dell’s foreign oper ations have the U.S. dollar as their functional currency (10-K, p. 63) . Most of IBM’s 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. Dell’s 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.  McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik,  Advanced Accounting, 11/e

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c. From the Consolidated Statement of Changes in Equity (AR, p. 65), it can be seen that IBM reported translation adjustments as follows over the period 2008-2010: 2008: negative $3,552 million 2009: positive $1,732 million 2010: positive $643 million The negative signs of the translation adjustments in 2008 and 2009 indicate that, on average, the foreign currency functional currencies of IBM’s foreign operations decreased in value against the U.S. dollar in those years. The positive sign of the translation adjustment in 2010 indicates that, on average, the foreign currency functional currencies of IBM’s foreign operations increased in value against the U.S. dollar in that year. Dell reported foreign currency translation adjustments in total comprehensive income (Consolidated Statements of Stockholders’ Equity) as follows: Fiscal 2009: positive $5 million Fiscal 2010: negative $29 million Fiscal 2011: positive $79 million On average, the foreign currency functional currencies of Dell’s foreign operations increased in value against the U.S. dollar in Fiscal 2009 and Fiscal 2011, and decreased in value in Fiscal 2010. 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. d. In Note L. Derivatives and Hedging Transactions, IBM indicates that a significant portion of the company’s foreign currency denominated debt is designated as a hedge of its foreign currency balance sheet exposures (p. 97). The company also uses foreign currency forward contracts and cross-currency swaps to hedge its net investments in foreign operations. Although Dell hedges forecasted transactions and firm commitments, 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.

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Accounting Standards Case 1 —More than One Functional Currency This case requires students to search the authoritative literature to determine how the functional currency should be determined for a foreign entity that has more than one distinct and separable operation. Source of guidance: FASB ASC 830-10-55-6 Foreign Currency Matters; Overall; Implementation Guidance and Illustrations: The Functional Currency ASC 830-10-55-6 states: ―In some instances, a foreign entity might have more than one distinct and separable operation. For example, a foreign entity might have one operation that sells parent-entity-produced products and another operation that manufactures and sells foreign-entity-produced products. If they are conducted in different economic environments, those two operations might have different functional currencies. Similarly, a single subsidiary of a financial institution might have relatively self-contained and integrated operations in each of several different countries. In those circumstances, each operation may be considered to be an entity as that term is used in this Subtopic, and, based on the facts and circumstances, each operation might have a different functional currency.‖ This guidance indicates that the functional currency should be determined separately for each distinct and separable operation of a single foreign entity. Within its Mexican subsidiary, Lynch should designate the Mexican peso as the functional currency for the Small Appliance division and the U.S. dollar as the functional currency for the Electronics division. Accounting Standards Case 2 —Change in Functional Currency This case requires students to search the authoritative literature to determine how an entity should handle a change in foreign currency from the foreign currency to the U.S. dollar. Specific questions are: Should the change in functional currency be treated as a change in accounting principle with retrospective restatement of the carrying values of nonmonetary assets? Should the cumulative translation adjustment be removed from equity and, if so, where should it go? 



Source of guidance: FASB ASC 830-10-45-10 Foreign Currency Matters; General; Other Presentation Matters; Functional Currency Changes from Foreign Currency to Reporting Currency ASC 830-10-45-10 states: ―If the functional currency changes from a foreign currency to the reporting currency, translation adjustments for prior periods shall not be removed from equity and the translated amounts for nonmonetary assets at the end of the prior period become the accounting basis for those assets in the period of the change and subsequent periods.‖  McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik,  Advanced Accounting, 11/e

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In essence, the authoritative guidance indicates that the change in functional currency from the Canadian dollar to the U.S. dollar should not be treated as a change in accounting principle with retrospective adjustments. Instead, the change should be handled prospectively with no adjustments made to the carrying amounts of nonmonetary assets or to the accumulated translation adjustment related to the Canadian subsidiary carried in AOCI.

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Excel Case—Translating Foreign Currency Financial Statements 1.2. Spreadsheet for the translation (current rate method) and remeasurement (temporal method) of the FC financial statements of Charles Edward Company’s foreign subsidiary. Current Rate Method December 31, 2013

FC

Rate

Sales Cost of goods sold Gross profit Selling expense Depreciation expense Remeasurement gain/loss Income before tax Income taxes Net income Retained earnings, 1/1/13 Ret. earnings, 12/31/13

5,000 (3,000) 2,000 (400) (600) 0 1,000 (300) 700 0 700

$0.45 $0.45 subtotal $0.45 $0.45 n/a subtotal $0.45 subtotal

Cash Inventory Fixed assets Less: accum/deprec Total assets

1,000 2,000 6,000 (600) 8,400

$0.38 $0.38 $0.38 $0.38 total

Current liabilities Long-term debt Contributed capital Cum. trans. adjust. Retained earnings Total liab and stock equity

1,500 3,000 3,200 0 700 8,400

Exchange Rates January 1-31, 2013 Average 2013 December 31, 2013 Inventory purchases Key: Average Exchange Rate Current Exchange Rate Historical Exchange Rate

total

USD A $2,250 A (1,350) 900 A (180) A (270) 0 450 A (135) 315 0 315 C C C C

$0.38 C $0.38 C $0.50 H to balance from I/S A=L+SE

380 760 2,280 (228) 3,192 570 1,140 1,600 (433)* 315 3,192

Temporal Method Rate $0.45 calculation subtotal $0.45 $0.50 to balance subtotal $0.45 subtotal

USD A

A H

A

from B/S $0.38 $0.43 $0.50 $0.50 total

$2,250 (1,360) 890 (180) (300) 355 765 (135) 630 0 630

C H H H

380 860 3,000 (300) 3,940

$0.38 C $0.38 C $0.50 H n/a to balance A=L+SE

570 1,140 1,600 0 630 3,940

Temporal method—COGS (on a FIFO basis) $0.50 BI 1,000 $0.50 H $500 $0.45 P 4,000 $0.43 H 1,720 $0.38 EI (2,000) $0.43 H (860) $0.43 COGS 3,000 $1,360 A C H

 McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik,  Advanced Accounting, 11/e

© The McGraw-Hill Companies, Inc., 2013 10-40

© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Excel Case (continued) *Computation of Translation Adjustment Net assets, 1/1/13 Net income, 2013 Net assets, 12/31/13 Net assets, 12/31/13 at current exchange rate Translation adjustment (negative)

FC 3,200 700 3,900

$0.50 $0.45

3,900

$0.38

USD 1,600 315 1,915 1,482 433

3. 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.

 McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik,  Advanced Accounting, 11/e

© The McGraw-Hill Companies, Inc., 2013 10-41

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Excel Case (continued) FC Current ratio CA CL

Debt to equity ratio Total liabilities Total stockholders’ equity

Profit margin NI Sales

Return on equity NI Average TSE

Inventory turnover COGS Average Inventory

Current Rate

Temporal

3,000 1,500 2.0

1,140 570 2.0

1,240 570 2.1754

4,500 3,900

1,710 1,482

1,710 2,230

1.15385

1.15385

0.76682

700 5,000 0.14

315 2,250 0.14

630 2,250 0.28

700 3,550 0.19718

315 1,541 0.20441

630 1,915 0.32898

3,000 1,000 3

1,350 380 3.55263

1,360 430 3.16279

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.  McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik,  Advanced Accounting, 11/e

© The McGraw-Hill Companies, Inc., 2013 10-42

© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Excel Case (continued) 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.

 McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik,  Advanced Accounting, 11/e

© The McGraw-Hill Companies, Inc., 2013 10-43

© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Excel and Analysis Case —Parker 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 1/1/12 to $1.68 at 12/31/13. Under the second set of assumptions, the exchange rate remains $1.60 from 1/1/12 to 12/31/13. Under the third set of assumptions, the British pound depreciates steadily from $1.60 at 1/1/12 to $1.52 at 12/31/13. Part I—Appreciating Foreign Currency Relevant exchange rates:

January 1, 2012 2012 Average December 31, 2012 January 30, 2013 2013 Average December 31, 2013

 McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik,  Advanced Accounting, 11/e

$1.60 $1.62 $1.64 $1.65 $1.66 $1.68

© The McGraw-Hill Companies, Inc., 2013 10-44

© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Excel and Analysis Case (continued) a. Translation of Suffolk’s December 31, 2013 trial balance from British pounds to U.S. dollars. Suffolk PLC Trial Balance December 31, 2013 Cash £ Accounts receivable Inventory Property, plant, & equipment (net) Accounts payable Long-term debt Common stock Retained earnings, 1/1/13 Sales Cost of goods sold Depreciation Other expenses Dividends paid (1/30/13) Cumulative translation adjustment—positive (credit balance)

Pounds 1,500,000 5,200,000 18,000,000 36,000,000 (1,450,000) (5,000,000) (44,000,000) (8,000,000) (28,000,000) 16,000,000 2,000,000 6,000,000 1,750,000

Exchange Rate Dollars $1.68 $ 2,520,000 $1.68 8,736,000 $1.68 30,240,000 $1.68 60,480,000 $1.68 (2,436,000) $1.68 (8,400,000) $1.60 (70,400,000) Schedule A (12,840,000) $1.66 (46,480,000) $1.66 26,560,000 $1.66 3,320,000 $1.66 9,960,000 $1.65 2,887,500 (4,147,500) $ 0

£ 0 Note: Amounts in parentheses are credit balances. Schedule A Retained earnings, 1/1/12 Net income, 2012 Retained earnings, 12/31/12

 McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik,  Advanced Accounting, 11/e

Pounds £(6,000,000) (2,000,000) £(8,000,000)

Exchange Rate $1.60 $1.62

Dollars $ (9,600,000) (3,240,000) $(12,840,000)

© The McGraw-Hill Companies, Inc., 2013 10-45

© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Excel and Analysis Case (continued) b. Schedule detailing the change in Suffolk’s cumulative translation adjustment for 2012 and 2013. Determination of Cumulative Exchange Exchange Translation Adjustment Pounds Rate Rate Dollars Net assets, 1/1/12 £50,000,000 $1.64 $1.60 $2,000,000 Net income, 2012 2,000,000 $1.64 $1.62 40,000 Translation adjustment, 2012 (positive) $2,040,000 Net assets, 1/1/13 £52,000,000 $1.68 $1.64 2,080,000 Net income, 2013 4,000,000 $1.68 $1.66 80,000 Dividends, 2013 (1,750,000) $1.68 $1.65 (52,500) Translation adjustment, 2013 (positive) 2,107,500 Net assets, 12/31/13 £ 54,250,000 Cumulative Translation Adjustment, 12/31/13 (positive) $4,147,500 Cost Allocation Schedule Cost Book value Excess of cost over book value Translation Adjustment Related to Excess of Cost Over Book Value Excess of cost over book value U.S. dollar value at 12/31/13 U.S. dollar value at 1/1/12 Translation adjustment related to excess, 12/31/13—positive

 McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik,  Advanced Accounting, 11/e

Pounds £52,000,000 50,000,000 £ 2,000,000 Pounds £2,000,000

Exchange Rate $1.60 $1.60 Exchange Rate $1.68 $1.60

Dollars $83,200,000 80,000,000 $ 3,200,000 Dollars $3,360,000 3,200,000 $ 160,000

© The McGraw-Hill Companies, Inc., 2013 10-46

© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Excel and Analysis Case (continued) c. Consolidation Worksheet —December 31, 2013 Parker

Suffolk

($70,000,000)

($46,480,000)

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)

Sales

($12,887,500)

($6,640,000)

Ret. earnings, 1/1/13

($48,000,000)

($12,840,000)

(12,887,500)

(6,640,000)

4,500,000

2,887,500

Dividends

Consolidated ($116,480,000)

2,887,500

Net income

Net income

Adjustments & Eliminations

0 ($16,640,000)

12,840,000

3,240,000

($51,240,000) (16,640,000)

2,887,500

4,500,000

($56,387,500)

($16,592,500)

($63,380,000)

Cash

$3,687,500

$2,520,000

$6,207,500

Accounts receivable

10,000,000

8,736,000

18,736,000

Inventory

30,000,000

30,240,000

60,240,000

Investment in Suffolk

83,200,000

Ret. earnings, 12/31/13

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)

(56,387,500)

(16,592,500)

Ret. earnings, 12/31/13

70,400,000

(63,380,000)

(4,147,500)

Cum. trans. adj. $0

 McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik,  Advanced Accounting, 11/e

$0

(100,000,000)

160,000 $92,727,500

$92,727,500

(4,307,500) $0

© The McGraw-Hill Companies, Inc., 2013 10-47

© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Excel and Analysis Case (continued) d. Consolidated income statement and balance sheet —2013. Parker, Inc. Consolidated Income Statement For the year ended December 31, 2013 Sales Cost of goods sold Depreciation Other expenses Net income

$ 116,480,000 (60,560,000) (23,320,000) (15,960,000) $ 16,640,000 Parker, Inc. Consolidated Balance Sheet December 31, 2013

Assets Cash Accounts receivable Inventory Property, plant & equipment (net) Total Liabilities and Shareholders' Equity Accounts payable Long-term debt Common stock Retained earnings Accum. other comp. income Total

$

6,207,500 18,736,000 60,240,000 168,840,000 $254,023,500

$ 27,936,000 58,400,000 100,000,000 63,380,000 4,307,500 $254,023,500

 McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik,  Advanced Accounting, 11/e

© The McGraw-Hill Companies, Inc., 2013 10-48

© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Excel and Analysis Case (continued) Part II—Stable Foreign Currency Relevant exchange rates:

January 1, 2012 2012 Average December 31, 2012 January 30, 2013 2013 Average December 31, 2013

$1.60 $1.60 $1.60 $1.60 $1.60 $1.60

a. Translation of Suffolk’s December 31, 2013 trial balance from British pounds to U.S. dollars. Suffolk PLC Trial Balance December 31, 2013 Cash £ Accounts receivable Inventory Property, plant, & equipment (net) Accounts payable Long-term debt Common stock Retained earnings, 1/1/13 Sales Cost of goods sold Depreciation Other expenses Dividends paid, 1/30/13 Cumulative translation adjustment

Pounds 1,500,000 5,200,000 18,000,000 36,000,000 (1,450,000) (5,000,000) (44,000,000) (8,000,000) (28,000,000) 16,000,000 2,000,000 6,000,000 1,750,000

Exchange Rate $1.60 $1.60 $1.60 $1.60 $1.60 $1.60 $1.60 Schedule A $1.60 $1.60 $1.60 $1.60 $1.60

£ 0 Note: Amounts in parentheses are credit balances. Schedule A Retained earnings, 1/1/12 Net income, 2012 Retained earnings, 12/31/12

 McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik,  Advanced Accounting, 11/e

Pounds £(6,000,000) (2,000,000) £(8,000,000)

Dollars $ 2,400,000 8,320,000 28,800,000 57,600,000 (2,320,000) (8,000,000) (70,400,000) (12,800,000) (44,800,000) 25,600,000 3,200,000 9,600,000 2,800,000 $

Exchange Rate $1.60 $1.60

0 0

Dollars $ (9,600,000) (3,200,000) $(12,800,000)

© The McGraw-Hill Companies, Inc., 2013 10-49

© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Excel and Analysis Case (continued) b. Schedule detailing the change in Suffolk’s cumulative translation adjustment for 2012 and 2013. Determination of Cumulative Translation Adjustment Net assets, 1/1/12 Net income, 2012 Translation adjustment, 2012 Net assets, 1/1/13 Net income, 2013 Dividends, 2013 Translation adjustment, 2013 Net assets, 12/31/13 Cumulative Translation Adjustment, 12/31/13

Pounds £50,000,000 2,000,000

Exchange Exchange Rate Rate $1.60 $1.60 $1.60 $1.60

Dollars $0 0 $0

£52,000,000 4,000,000 (1,750,000)

$1.60 $1.60 $1.60

$1.60 $1.60 $1.60

0 0 0 0

£ 54,250,000

Cost Allocation Schedule Cost Book value Excess of cost over book value Translation Adjustment Related to Excess of Cost Over Book Value Excess of cost over book value U.S. dollar value at 12/31/13 U.S. dollar value at 1/1/12 Translation adjustment related to excess, 12/31/13

 McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik,  Advanced Accounting, 11/e

$0

Pounds £52,000,000 50,000,000 £ 2,000,000 Pounds £2,000,000

Exchange Rate $1.60 $1.60 Exchange Rate $1.60 $1.60

Dollars $83,200,000 80,000,000 $ 3,200,000 Dollars $3,200,000 3,200,000 $0

© The McGraw-Hill Companies, Inc., 2013 10-50

© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Excel and Analysis Case (continued) c. Consolidation Worksheet —December 31, 2013 Parker

Suffolk

Adjustments & Eliminations

Consolidated

($70,000,000)

($44,800,000)

Cost of goods sold

34,000,000

25,600,000

59,600,000

Depreciation

20,000,000

3,200,000

23,200,000

Other expenses

6,000,000

9,600,000

15,600,000

Dividend income

(2,800,000)

Sales

2,800,000

Net income

($12,800,000)

($6,400,000)

Ret. earnings, 1/1/13

($48,000,000)

($12,800,000)

(12,800,000)

(6,400,000)

4,500,000

2,800,000

Net income Dividends

($114,800,000)

0 ($16,400,000)

12,800,000

3,200,000

($51,200,000) (16,400,000)

2,800,000

4,500,000

($56,300,000)

($16,400,000)

($63,100,000)

Cash

$3,600,000

$2,400,000

$6,000,000

Accounts receivable

10,000,000

8,320,000

18,320,000

Inventory

30,000,000

28,800,000

58,800,000

Investment in Suffolk

83,200,000

Ret. earnings, 12/31/13

3,200,000

83,200,000

0

3,200,000

Prop, plant & eq (net)

105,000,000

57,600,000

3,200,000

165,800,000

0

Accounts payable

(25,500,000)

(2,320,000)

(27,820,000)

Long-term debt

(50,000,000)

(8,000,000)

(58,000,000)

Common stock

(100,000,000)

(70,400,000)

(56,300,000)

(16,400,000)

Ret. earnings, 12/31/13

70,400,000

(63,100,000)

0

Cum. Trans. adj. $0

 McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik,  Advanced Accounting, 11/e

$0

(100,000,000)

$92,400,000

0

0

$92,400,000

$0

© The McGraw-Hill Companies, Inc., 2013 10-51

© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Excel and Analysis Case (continued) d. Consolidated income statement and balance sheet —2013. Parker, Inc. Consolidated Income Statement For the year ended December 31, 2013 Sales Cost of goods sold Depreciation Other expenses Net income

$114,800,000 (59,600,000) (23,200,000) (15,600,000) $ 16,400,000 Parker, Inc. Consolidated Balance Sheet December 31, 2013

Assets Cash Accounts receivable Inventory Property, plant & equipment (net) Total Liabilities and Shareholders' Equity Accounts payable Long-term debt Common stock Retained earnings Accum. other comp. income Total

$

6,000,000 18,320,000 58,800,000 165,800,000 $248,920,000

$ 27,820,000 58,000,000 100,000,000 63,100,000 0 $248,920,000

 McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik,  Advanced Accounting, 11/e

© The McGraw-Hill Companies, Inc., 2013 10-52

© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Excel and Analysis Case (continued) Part III—Depreciating Foreign Currency Relevant exchange rates:

January 1, 2012 2012 Average December 31, 2012 January 30, 2013 2013 Average December 31, 2013

$1.60 $1.58 $1.56 $1.55 $1.54 $1.52

a. Translation of Suffolk’s December 31, 2013 trial balance from British pounds to U.S. dollars. Suffolk PLC Trial Balance December 31, 2013 Cash £ Accounts receivable Inventory Property, plant, & equipment (net) Accounts payable Long-term debt Common stock Retained earnings, 1/1/13 Sales Cost of goods sold Depreciation Other expenses Dividends paid (1/30/13) Cumulative translation adjustment—negative (debit balance)

Pounds 1,500,000 5,200,000 18,000,000 36,000,000 (1,450,000) (5,000,000) (44,000,000) (8,000,000) (28,000,000) 16,000,000 2,000,000 6,000,000 1,750,000

Exchange Rate $1.52 $1.52 $1.52 $1.52 $1.52 $1.52 $1.60 Schedule A $1.54 $1.54 $1.54 $1.54 $1.55

£ 0 Note: Amounts in parentheses are credit balances. Schedule A Retained earnings, 1/1/12 Net income, 2012 Retained earnings, 12/31/12

 McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik,  Advanced Accounting, 11/e

Pounds £(6,000,000) (2,000,000) £(8,000,000)

Dollars $ 2,280,000 7,904,000 27,360,000 54,720,000 (2,204,000) (7,600,000) (70,400,000) (12,760,000) (43,120,000) 24,640,000 3,080,000 9,240,000 2,712,500 $

Exchange Rate $1.60 $1.58

4,147,500 0

Dollars $ (9,600,000) (3,160,000) $(12,760,000)

© The McGraw-Hill Companies, Inc., 2013 10-53

© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Excel and Analysis Case (continued) b. Schedule detailing the change in Suffolk’s cumulative translation adjustment for 2012 and 2013. Determination of Cumulative Exchange Exchange Translation Adjustment Pounds Rate Rate Dollars Net assets, 1/1/12 £50,000,000 $1.56 $1.60 $(2,000,000) Net income, 2012 2,000,000 $1.56 $1.58 (40,000) Translation adjustment, 2012 (negative) $(2,040,000) Net assets, 1/1/13 £52,000,000 $1.52 $1.56 (2,080,000) Net income, 2013 4,000,000 $1.52 $1.54 (80,000) Dividends, 2013 (1,750,000) $1.52 $1.55 52,500 Translation adjustment, 2013 (negative) (2,107,500) Net assets, 12/31/13 £ 54,250,000 Cumulative Translation Adjustment, 12/31/13 (negative) $(4,147,500)

Cost Allocation Schedule Cost Book value Excess of cost over book value Translation Adjustment Related to Excess of Cost Over Book Value Excess of cost over book value U.S. dollar value at 12/31/13 U.S. dollar value at 1/1/12 Translation adjustment related to excess, 12/31/13—negative

 McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik,  Advanced Accounting, 11/e

Pounds £52,000,000 50,000,000 £ 2,000,000 Pounds £2,000,000

Exchange Rate $1.60 $1.60 Exchange Rate $1.52 $1.60

Dollars $83,200,000 80,000,000 $ 3,200,000 Dollars $3,040,000 3,200,000 $(160,000)

© The McGraw-Hill Companies, Inc., 2013 10-54

© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Excel and Analysis Case (continued) c. Consolidation Worksheet —December 31, 2013 Parker

Suffolk

($70,000,000)

($43,120,000)

Cost of goods sold

34,000,000

24,640,000

58,640,000

Depreciation

20,000,000

3,080,000

23,080,000

Other expenses

6,000,000

9,240,000

15,240,000

Dividend income

(2,712,500)

Sales

Adjustments & Eliminations

($12,712,500)

($6,160,000)

Ret. earnings, 1/1/13

($48,000,000)

($12,760,000)

(12,712,500)

(6,160,000)

4,500,000

2,712,500

Net income Dividends

($113,120,000)

2,712,500

Net income

Consolidated

0 ($16,160,000)

12,760,000

3,160,000

($51,160,000) (16,160,000)

2,712,500

4,500,000

($56,212,500)

($16,207,500)

($62,820,000)

Cash

$3,512,500

$2,280,000

$5,792,500

Accounts receivable

10,000,000

7,904,000

17,904,000

Inventory

30,000,000

27,360,000

57,360,000

Investment in Suffolk

83,200,000

Ret. earnings, 12/31/13

3,160,000

83,160,000

0

3,200,000

Prop, plant & eq (net)

105,000,000

54,720,000

3,200,000

162,760,000 160,000

Accounts payable

(25,500,000)

(2,204,000)

(27,704,000)

Long-term debt

(50,000,000)

(7,600,000)

(57,600,000)

Common stock

(100,000,000)

(70,400,000)

(56,212,500)

(16,207,500)

Ret. earnings, 12/31/13 Cum. Trans. adj.

70,400,000

(62,820,000)

4,147,500

160,000

$0

$92,392,500

$0

 McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik,  Advanced Accounting, 11/e

(100,000,000)

4,307,500 $92,392,500

$0

© The McGraw-Hill Companies, Inc., 2013 10-55

© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Excel and Analysis Case (continued) d. Consolidated income statement and balance sheet —2013. Parker, Inc. Consolidated Income Statement For the year ended December 31, 2013 Sales Cost of goods sold Depreciation Other expenses Net income

$ 113,120,000 (58,640,000) (23,080,000) (15,240,000) $ 16,160,000 Parker, Inc. Consolidated Balance Sheet December 31, 2013

Assets Cash Accounts receivable Inventory Property, plant & equipment (net) Total Liabilities and Shareholders' Equity Accounts payable Long-term debt Common stock Retained earnings Accum. other comp. income Total

$

5,792,500 17,904,000 57,360,000 162,760,000 $243,816,500

$ 27,704,000 57,600,000 100,000,000 62,820,000 (4,307,500) $243,816,500

 McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik,  Advanced Accounting, 11/e

© The McGraw-Hill Companies, Inc., 2013 10-56

© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.