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TEST BANKCHAPTER 7

Consolidating Foreign Currency Financial Statements

MULTIPLE CHOICE

Use the following information to answer questions 1 – 10 below:

A U.S. company acquired a French subsidiary on January 1, 2014. The subsidiary’s trial balances for January 1 and December 31, 2014 are presented below, in euros.

January 1, 2014 balancesDr (Cr)

December 31, 2014 balancesDr (Cr)

Cash, receivables € 37,000 € 20,000Plant & equipment, net 400,000 435,000Liabilities (172,000) (165,000)Capital stock (115,000) (115,000)Retained earnings, January 1 (150,000) (150,000)Dividends 10,000Sales revenue (800,000)Operating expenses _______ 765,000 Total -0- -0-

New plant & equipment of €85,000 was acquired in 2014. Operating expenses include €50,000 of depreciation on plant & equipment, of which €5,000 is related to plant & equipment purchased in 2014.

Exchange rates ($U.S./€) are as follows:

January 1, 2014 $1.45Plant & equipment acquired 1.40Average for 2014 1.30Dividends declared 1.26December 31, 2014 1.25

© Cambridge Business Publishers, 2013Test Bank, Chapter 7 7-1

For questions 1 – 5, assume that the subsidiary’s functional currency is the euro.

1. Topic: Translation gains and losses, acquisition of existing subsidiaryLO 1What is the translation gain or loss for 2014?

a. $59,500 gainb. $54,650 lossc. $67,250 gaind. $67,350 loss

ANS: b

€ rate $Beginning exposed position (€115,000 + €150,000) €265,000 $1.45 $384,250+ Net income (€800,000 - €765,000) 35,000 1.30 45,500 - Dividends (10,000 ) 1.26 (12,600 )

417,150Ending exposed position (€115,000 + €150,000 + €800,000 - €765,000 - €10,000) €290,000

1.25 - 362,500

Translation loss $ 54,650

2. Topic: Translated balance sheet, acquisition of existing subsidiaryLO 1What are translated total assets for the subsidiary at December 31, 2014?

a. $659,750b. $591,500c. $651,750d. $568,750

ANS: d

3. Topic: Translated income statement, acquisition of existing subsidiaryLO 1What are translated 2014 operating expenses for the subsidiary?

a. $1,001,750b. $ 994,500c. $1,109,250d. $ 987,750

ANS: b

© Cambridge Business Publishers, 20137-2 Advanced Accounting, 2nd Edition

4. Topic: Translated income statement, acquisition of existing subsidiaryLO 1What is translated 2014 net income for the subsidiary?

a. $38,250b. $ (9,150)c. $45,500d. $42,650

ANS: c

5. Topic: Translated balance sheet, acquisition of existing subsidiaryLO 1What is the subsidiary’s translated December 31, 2014 retained earnings balance?

a. $250,400b. $217,500c. $243,150d. $263,000

ANS: a

Notes for questions 2 – 5:

Translated financial statements:Balance sheet, 12/31/14 € rate $Cash, receivables € 20,000 1.25 $ 25,000Plant & equipment, net 435,000 1.25 543,750 Total assets €455,000 $ 568,750

Liabilities €165,000 1.25 $ 206,250Capital stock 115,000 1.45 166,750Retained earnings 175,000 see below 250,400Accumulated other comprehensive loss -- (54,650 ) Total liabilities and equity €455,000 $ 568,750

Income statement, 2014Sales €800,000 1.30 $1,040,000Operating expenses (765,000 ) 1.30 (994,500 ) Net income € 35,000 $ 45,500

Retained earnings, December 31, 2014Retained earnings, January 1 €150,000 1.45 $ 217,500Net income 35,000 1.30 45,500Dividends (10,000 ) 1.26 (12,600 ) Retained earnings, December 31 €175,000 $ 250,400


For questions 6 – 10, assume that the subsidiary’s functional currency is the U.S. dollar.

6. Topic: Remeasurement gains and losses, acquisition of existing subsidiaryLO 1What is the remeasurement gain or loss for 2014?

a. $35,600 gainb. $24,600 lossc. $37,250 gaind. $25,650 loss

ANS: a

€ rate $Beginning exposed position (€37,000 - €172,000) €(135,000) $1.45 $ (195,750)+ Sales revenue 800,000 1.30 1,040,000- Out of pocket expenses (€765,000 – €50,000) (715,000) 1.30 (929,500)- Dividends (10,000) 1.26 (12,600)- Plant & equipment purchase (85,000 ) 1.40 (119,000 )

(216,850)Ending exposed position (€20,000 - €165,000) €(145,000) 1.25 - (181,250 ) Remeasurement gain $ (35,600)

7. Topic: Remeasured balance sheet, acquisition of existing subsidiaryLO 1What are remeasured total assets for the subsidiary at December 31, 2014?

a. $568,750b. $651,750c. $634,000d. $672,750

ANS: b

8. Topic: Remeasured income statement, acquisition of existing subsidiaryLO 1What are remeasured 2014 operating expenses for the subsidiary?

a. $ 994,500b. $ 999,500c. $1,001,750d. $1,002,000

ANS: c


9. Topic: Remeasured income statementLO 1What is remeasured 2014 net income for the subsidiary?

a. $38,250b. $68,750c. $45,500d. $73,850

ANS: d

10. Topic: Remeasured balance sheet, acquisition of existing subsidiaryLO 1What is the subsidiary’s remeasured December 31, 2014 retained earnings balance?

a. $218,750b. $243,150c. $278,750d. $291,350

ANS: c


Remeasured financial statements:Balance sheet, 12/31/14 € rate $Cash, receivables € 20,000 1.25 $ 25,000Plant & equipment, net 435,000 see below 626,750 Total assets € 455,000 $ 651,750

Liabilities €165,000 1.25 $206,250Capital stock 115,000 1.45 166,750Retained earnings 175,000 see below 278,750 Total liabilities and equity € 455,000 $ 651,750

Income statement, 2014Sales €800,000 1.30 $1,040,000Out of pocket operating expenses (715,000) 1.30 (929,500)Depreciation expense (50,000) see below (72,250)Remeasurement gain -- 35,600 Net income € 35,000 $ 73,850


Retained earnings, December 31, 2014Retained earnings, January 1 €150,000 1.45 $ 217,500Net income 35,000 see above 73,850Dividends (10,000 ) 1.26 (12,600 ) Retained earnings, December 31 €175,000 $ 278,750

Remeasurement of 2014 depreciation expenseDepreciation on plant and equipment on hand at the date of acquisition € 45,000 1.45 $ 65,250Depreciation on plant and equipment acquired during 2014 5,000 1.40 7,000 Total $ 72,250

Remeasurement of 12/31/14 plant & equipmentPlant & equipment on hand at the date of acquisition (€400,000 - €45,000) €355,000 1.45 $ 514,750Plant & equipment acquired during 2014 (€85,000 - €5,000) 80,000 1.40 112,000 Total $ 626,750

Use the following information to answer questions 11 – 16 below.

On January 1, 2014, a U.S. company established a subsidiary in Canada, having the following balance sheet (shown in Canadian dollars, or C$):

Cash C$ 100,000 Liabilities C$ 200,000Fixed assets, net 300,000 Capital stock 200,000Total C$ 400,000 Total C$ 400,000

At December 31, 2014, the subsidiary reported the following trial balance:

Dr (Cr)Cash C$ 210,000Fixed assets, net 250,000Liabilities (220,000)Capital stock (200,000)Sales (500,000)Depreciation expense 50,000Other expenses 410,000

C$ 0

Exchange rates are as follows:

January 1, 2014 $1.02Average for 2014 0.99December 31, 2014 0.95


11. Topic: Translated and remeasured expensesLO 1What is the subsidiary’s translated and remeasured depreciation expense for 2014?

a. Translated: $49,500; Remeasured: $51,000b. Translated: $51,000; Remeasured: $49,500c. Translated: $47,500; Remeasured: $49,500d. Translated: $49,500; Remeasured: $47,500

ANS: a

Translated: C$50,000 x $0.99 = $49,500Remeasured: C$50,000 x $1.02 = $51,000

12. Topic: Translated income statementLO 1What is translated 2014 net income for the subsidiary?

a. $38,000b. $39,600c. $38,100d. $38,400

ANS: b

(C$500,000 – C$50,000 – C$410,000) = C$40,000 x $0.99 = $39,600

13. Topic: Translation gains and lossesLO 1What is the translation gain or loss for 2014?

a. $18,400 lossb. $15,600 lossc. $15,600 gaind. $18,400 gain

ANS: b

Beginning net assets C$200,000 x 1.02 = $204,000Net income 40,000 x .99 = 39,600

243,600Ending net assets C$240,000 x .95 = - 228,000Translation loss $ 15,600


14. Topic: Remeasurement gains and lossesLO 1What is the remeasurement gain or loss for 2014?

a. $3,400 lossb. $2,900 lossc. $2,900 gaind. $3,400 gain

ANS: d

Beginning exposure (C$100,000 – C$200,000) C$(100,000) x 1.02 = $(102,000)Sales C$500,000 x .99 495,000Other expenses C$410,000 x .99 (405,900 )

$ (12,900)Ending exposure(C$210,000 – C$220,000) C$(10,000) x .95 =

- (9,500 )

Remeasurement gain $ 3,400

15. Topic: Translated balance sheetLO 1What are translated total assets at December 31, 2014?

a. $469,200b. $454,500c. $437,000d. $316,400

ANS: c

(C$210,000 + C$250,000) x $0.95 = $437,000

16. Topic: Remeasured balance sheetLO 1What are remeasured total assets at December 31, 2014?

a. $469,200b. $454,500c. $437,000d. $316,400

ANS: b

(C$210,000 x 0.95) + (C$250,000 x $1.02 = $454,500


Use the following information to answer questions 17 – 19 below.

Georgia Atlantic, a U.S. company, acquired a wholly-owned subsidiary in the U.K. on January 1, 2014 for $232,000,000. The subsidiary’s functional currency is the pound. The balance sheet of the subsidiary at the date of acquisition was as follows:

AssetsCash & receivables £ 15,000,000Inventories 40,000,000Noncurrent assets, net 100,000,000 Total assets £155,000,000

Liabilities and stockholders' equityLiabilities £ 30,000,000Capital stock 80,000,000Retained earnings 45,000,000 Total liabilities and stockholders' equity £155,000,000

The fair value of the subsidiary's inventories, reported using FIFO, was £60,000,000, and the fair value of the subsidiary's noncurrent assets, with a 10-year remaining life, straight-line, was £85,000,000. All other assets and liabilities were reported at approximate fair value. During 2014 there was no goodwill impairment. The exchange rate on January 1, 2014 was $1.45/£. The average rate for 2014 was $1.40/£, and the rate at the end of 2014 was $1.38/£.

17. Topic: Consolidation of international subsidiaryLO 3The excess of acquisition cost over book value for this acquisition, in U.S. dollars, is

a. $ 24,138,000b. $ 35,000,000c. $ 50,750,000d. $107,000,000

ANS: c

18. Topic: Consolidation of international subsidiaryLO 3The entries required to consolidate the balance sheets of Georgia Atlantic and its U.K. subsidiary at the date of acquisition include recognition of goodwill of

a. $0b. $30,000,000c. $43,500,000d. $65,250,000

ANS: c


19. Topic: Consolidation of international subsidiaryLO 3The entries required to consolidate the balance sheets of Georgia Atlantic and its U.K. subsidiary at the date of acquisition include a decrease in the subsidiary's noncurrent assets in the amount of

a. $0b. $15,000,000c. $21,750,000d. $36,250,000

ANS: c

Calculations for questions 17 - 19:

£ $/£ $Acquisition cost £160,000,000 1.45 $232,000,000Book value 125,000,000 1.45 181,250,000 Excess of acquisition cost over book value 35,000,000 50,750,000Allocated to:Inventories 20,000,000 1.45 29,000,000Noncurrent assets (15,000,000 ) 1.45 (21,750,000 ) Goodwill £ 30,000,000 1.45 $ 43,500,000

Use the following information to answer questions 20 – 29 below:

During the year ended December 31, 2015, a German subsidiary of a U.S. parent experienced the following events:

Sales revenue, €15,000,000 Cash collections from customers, €14,600,000 Purchases of inventories, on credit, €10,000,000 Cash payment for inventory purchases, €9,800,000 Cost of sales, €9,500,000 Selling and administrative expenses, €4,200,000, paid in cash Borrowed €25,000,000 from a German bank Purchased plant and equipment costing €22,000,000, for cash Depreciation on plant assets, €1,000,000


The subsidiary’s January 1, 2015 balance sheet appears below:

Cash € 400,000 Accounts payable € 600,000Accounts receivable 1,300,000 Loans payable 20,000,000Inventories, FIFO 3,000,000 Capital stock 4,000,000Plant assets, net 30,000,000 Retained earnings 13,500,000

Intangible assets 2,000,000Accumulated other comprehensive income (1,400,000 )

Total € 36,700,000 Total € 36,700,000

Exchange rates ($/€) are:January 1, 2015 $1.50Average for 2015 1.53December 31, 2015 1.55

Sales, cash collections, purchases, cash payments for inventories, and selling and administrative expenses occurred evenly during the year. The loan and the plant asset purchase occurred when the exchange rate was $1.52. Depreciation consists of €800,000 on plant assets acquired when the rate was $1.45, and €200,000 on plant assets acquired when the rate was $1.52. The ending inventory was purchased at the end of the year, and the beginning inventory was purchased at the end of the previous year.

20. Topic: Translation gain or lossLO 1If the subsidiary’s functional currency is the euro, what is its exposure to translation gains and losses, as of January 1, 2015?

a. € 4,000,000b. € (200,000)c. €17,500,000d. €16,100,000

ANS: d

21. Topic: Translation gain or lossLO 1If the subsidiary’s functional currency is the euro, what is its exposure to translation gains and losses, as of December 31, 2015?

a. € 4,300,000b. € 500,000c. €15,900,000d. €16,400,000

ANS: d


22. Topic: Translation gain or lossLO 1If the subsidiary’s functional currency is the euro, what is the translation gain or loss for 2015?

a. $ 628,000 gainb. $ 811,000 gainc. $ 791,000 lossd. $1,589,000 loss

ANS: b

23. Topic: Income statement translationLO 1If the subsidiary’s functional currency is the euro, what is translated depreciation expense for 2015?

a. $1,464,000b. $1,500,000c. $1,530,000d. $1,550,000

ANS: c

24. Topic: Income statement translationLO 1If the subsidiary’s functional currency is the euro, what is translated cost of sales for 2015?

a. $14,375,000b. $14,535,000c. $14,725,000d. $15,500,000

ANS: b


25. Topic: Remeasurement gain or lossLO 1If the subsidiary’s functional currency is the U.S. dollar, what is its exposure to remeasurement gains and losses, as of January 1, 2015?

a. € (200,000)b. €(18,900,000)c. € 17,500,000d. € 16,100,000

ANS: b

26. Topic: Remeasurement gain or lossLO 1If the subsidiary’s functional currency is the U.S. dollar, what is its exposure to remeasurement gains and losses, as of December 31, 2015?

a. € 673,000b. € 1,340,000c. €(37,400,000)d. €(40,100,000)

ANS: d

27. Topic: Remeasurement gain or lossLO 1If the subsidiary’s functional currency is the U.S. dollar, what is the remeasurement gain or loss for 2015?

a. $ 628,000 gainb. $ 811,000 gainc. $ 791,000 lossd. $1,589,000 loss

ANS: d


28. Topic: Income statement remeasurementLO 1If the subsidiary’s functional currency is the U.S. dollar, what is remeasured depreciation expense for 2015?

a. $1,464,000b. $1,500,000c. $1,530,000d. $1,550,000

ANS: a

29. Topic: Income statement remeasurementLO 1If the subsidiary’s functional currency is the U.S. dollar, what is remeasured cost of sales for 2015?

a. $14,375,000b. $14,535,000c. $14,725,000d. $15,500,000

ANS: a


Translation

Translation gain or loss:Beginning net assets €16,100,000 x 1.50 = $ 24,150,000+ Net income 300,000 x 1.53 = 459,000

24,609,000Ending net assets €16,400,000 x 1.55 = - 25,420,000Translation gain $ (811,000 )

Income statement: Sales revenue €15,000,000 x 1.53 = $ 22,950,000- Cost of sales 9,500,000 x 1.53 = 14,535,000Gross margin 5,500,000 8,415,000- Selling and administrative expenses 4,200,000 x 1.53 =

6,426,000

- Depreciation expense 1,000,000 x 1.53 = 1,530,000 Net income € 300,000 $ 459,000


Remeasurement

Remeasurement gain or loss:Beginning exposure €(18,900,000) x 1.50 = $(28,350,000)+ Sales 15,000,000 x 1.53 = 22,950,000- Purchases (10,000,000) x 1.53 = (15,300,000)- Selling and administrative expenses (4,200,000) x 1.53 = (6,426,000)- Plant asset purchase (22,000,000) x 1.52 = (33,440,000 )

_________ (60,566,000)Ending exposure €(40,100,000) x 1.55 = -(62,155,000 ) Remeasurement loss $ 1,589,000

Income statement: Sales revenue €15,000,000 x 1.53 = $ 22,950,000Cost of sales 9,500,000 (1) 14,375,000Gross margin 5,500,000 8,575,000Selling and administrative expenses 4,200,000 x 1.53 =

6,426,000

Depreciation expense 1,000,000 (2) 1,464,000Remeasurement loss _______ 1,589,000 Net income (loss) € 300,000 $ (904,000 )

(1) Beginning inventory € 3,000,000 x 1.50 = $ 4,500,000+ Purchases 10,000,000 x 1.53 = 15,300,000- Ending inventory (3,500,000) x 1.55 = (5,425,000 ) Cost of sales € 9,500,000 $ 14,375,000

(2) Depreciation #1 € 800,000 x 1.45 = $ 1,160,000Depreciation #2 200,000 x 1.52 = 304,000Total € 1,000,000 $ 1,464,000


30. Topic: Hyperinflation, IFRS and U.S. GAAPLO 1, 4An Italian parent company consolidates a Brazilian subsidiary, whose functional currency is the real. During 2015, the real is considered to be a hyperinflationary currency. The subsidiary owns land costing R10,000,000, acquired when the real was worth €0.90. At the end of 2015, when the subsidiary’s accounts are translated into euros for consolidation, the real is worth €0.20. The general price index was 100 at the date the land was acquired, and is 400 at the end of 2015. What is the land balance at the end of 2015, in euros, following IFRS and U.S. GAAP?

IFRS U.S. GAAPa. € 8,000,000 € 9,000,000b. € 9,000,000 € 8,000,000c. €36,000,000 €40,000,000d. €40,000,000 €36,000,000

ANS: a

IFRS: R10,000,000 x 400/100 x €0.20 = €8,000,000U.S. GAAP: R10,000,000 x €0.90 = €9,000,000

31. Topic: Translation and remeasurement choicesLO 1A U.S. parent has a subsidiary located in Brazil. In which situation will the U.S. parent remeasure the financial statements of the subsidiary from real to U.S. dollars?

a. The subsidiary’s customers are mostly located in Brazil.b. The subsidiary borrows money from Brazilian banks.c. The subsidiary buys most of its merchandise from Brazilian suppliers.d. The level of inflation in Brazil is extremely high.

ANS: d

32. Topic: IFRS translation requirementsLO 4IFRS for converting the account balances of an international subsidiary in a hyperinflationary country to the parent’s presentation currency requires

a. remeasurement of the subsidiary’s accounts to the parent’s presentation currency.b. translation of the subsidiary’s accounts to the parent’s presentation currency.c. price-level adjustment of the subsidiary’s accounts, and then remeasurement of

the accounts to the parent’s presentation currency.d. price-level adjustment of the subsidiary’s accounts, and then translation of the

accounts to the parent’s presentation currency.

ANS: d


33. Topic: Exposure to translation gains and lossesLO 1Which of the following affects exposure to translation gains and losses?

a. investment in AFS securitiesb. borrowing money from the bankc. purchases of inventoryd. depreciation expense

ANS: d

34. Topic: Exposure to translation gains and lossesLO 1Which of the following affects exposure to remeasurement gains and losses?

a. investment in AFS securitiesb. borrowing money from the bankc. purchases of inventoryd. depreciation expense

ANS: c

35. Topic: Exposure to translation gains and lossesLO 1A subsidiary’s functional currency is its local currency. Which of the subsidiary’s transactions below will affect exposure to translation gains and losses?

a. Refinancing existing notes payable by issuing more notes payable.b. Recording amortization expense on intangible assets.c. Borrowing money to invest in plant and equipment.d. Paying cash to invest in held-for-trading securities.

ANS: b

36. Topic: Translation and financial analysisLO 2Which financial ratio is the same whether computed using local currency balances or translated balances?

a. Receivables turnover (credit sales/average receivables)b. Total assets turnover (sales/average assets)c. Return on assets (profit/assets)d. Leverage (total liabilities/total assets)

ANS: d


37. Topic: Remeasurement gain and lossLO 1Remeasurement gains and losses are

a. reported on the income statement.b. reported as a direct adjustment to retained earnings.c. reported in other comprehensive income.d. not reported.

ANS: a

38. Topic: Consolidation of an international subsidiaryLO 3A U.S. company consolidates a subsidiary whose accounts are reported in euros. The subsidiary’s functional currency is the euro. During the consolidation elimination entries, consolidated other comprehensive income changes because

a. revaluation and subsequent write-off of the subsidiary’s assets and liabilities change its exposure to translation gains and losses.

b. the subsidiary now has additional available-for-sale securities which change in value.

c. elimination of the investment account on the parent’s books reduces the subsidiary’s assets.

d. the noncontrolling interest in the subsidiary must share in the subsidiary’s equity.

ANS: a

39. Topic: Translation and financial analysisLO 2When analyzing year-to-year changes in an international subsidiary’s financial performance,

a. translation overstates the percentage change in local currency income.b. remeasurement understates the percentage change in local currency income.c. if the same exchange rate is used in both years, both remeasurement and

translation accurately report the percentage change in local currency income.d. if the same exchange rate is used in both years, translation accurately reports the

percentage change in local currency income, but remeasurement does not.

ANS: d


40. Topic: Interpreting translation gains and lossesLO 2A U.S. company has a subsidiary in Mexico. If the company’s statement of stockholders’ equity reports a credit to other comprehensive income for translation adjustments, it means that

a. the peso has strengthened against the U.S. dollar and the subsidiary’s functional currency is the peso.

b. the peso has weakened against the U.S. dollar and the subsidiary’s functional currency is the U.S. dollar.

c. the peso has strengthened against the U.S. dollar and the subsidiary’s functional currency is the U.S. dollar.

d. the peso has weakened against the U.S. dollar and the subsidiary’s functional currency is the peso.

ANS: a

41. Topic: Analysis of translation and remeasurement gain or lossLO 2Which statement is most likely to be true concerning translation and remeasurement of the accounts of a U.S. parent’s subsidiary in Portugal? Assume the U.S. dollar has been steadily strengthening against the euro, and operating profit excludes remeasurement gains and losses.

a. Remeasured operating profit as a percent of assets will be the same as local currency operating profit as a percent of assets.

b. Remeasured operating expenses will be higher than translated operating expenses.c. Translated total assets will be higher than remeasured total assets.d. Remeasured operating profit as a percent of assets will be higher than translated

operating profit as a percent of assets.

ANS: b


42. Topic: Analysis of translated and remeasured financial statementsLO 2Several years ago, a U.S. company acquired a subsidiary located in Singapore. The U.S. dollar has been steadily weakening with respect to the Singapore dollar. Which statement is most likely to be true concerning the translated and remeasured accounts of the subsidiary?

a. The translation loss reported in other comprehensive income has been steadily growing.

b. Remeasured cost of goods sold is lower than translated cost of goods sold.c. Remeasured sales revenue is higher than translated sales revenue.d. Remeasured depreciation expense is higher than translated depreciation expense.

ANS: b

43. Topic: Financial analysisLO 2Assume the U.S. dollar has been steadily weakening with respect to the Australian dollar. Your client, a U.S. company with a subsidiary in Australia, wants to know the effect of the weakening U.S. dollar on its consolidated financial statements. The subsidiary’s functional currency is the Australian dollar. Which statement below is true?

a. Sales revenue will be higher.b. Translated net income will be lower.c. Translated assets will be lower.d. Losses will be reported in other comprehensive income.

ANS: a

44. Topic: Translation and remeasurement proceduresLO 1

A U.S. parent has a wholly-owned subsidiary in Switzerland. The subsidiary’s accounts are reported in Swiss francs. Under what circumstances will the U.S. parent translate the subsidiary’s accounts from Swiss francs to U.S. dollars?

a. The subsidiary’s functional currency is a currency other than the Swiss franc or the U.S. dollar.

b. The subsidiary’s functional currency is the U.S. dollar.c. Switzerland has a highly inflationary economy.d. The subsidiary’s functional currency is the Swiss franc.

ANS: d


45. Topic: Hyperinflation, U.S. GAAP and IFRSLO 1, 4A U.K. parent has a wholly owned subsidiary in Mexico, whose functional currency is the Mexican peso. The subsidiary reports plant and equipment of 10,000,000 pesos at the end of 2014. The Mexican economy is determined to be hyperinflationary at the beginning of 2014. The peso is worth £0.01 at the end of 2014. The plant and equipment was acquired when the exchange rate was £0.05. The general price-level index for Mexico rose from 100 to 400 during the time the subsidiary held the plant and equipment. The reported value of the plant and equipment in pounds, following IFRS and U.S. GAAP, is

a. £500,000 under IFRS and £500,000 under U.S. GAAP.b. £400,000 under IFRS and £500,000 under U.S. GAAP.c. £500,000 under IFRS and £100,000 under U.S. GAAP.d. £400,000 under IFRS and £100,000 under U.S. GAAP.

ANS: b

IFRS: 10,000,000 x 400/100 = 40,000,000 x .01 = £400,000U.S. GAAP: 10,000 x .05 = £500,000

46. Topic: Choice of conversion methodLO 1According to U.S. GAAP, how should a U.S. company with an international subsidiary decide whether to use remeasurement or translation to convert the financial statements of the subsidiary to U.S. dollars?

a. Translate if the subsidiary does most of its business in its own country, but remeasure if the country has hyperinflation.

b. Remeasure if the subsidiary does most of its business in U.S. dollars, but translate if the country has hyperinflation.

c. Translate if the subsidiary does most of its business in U.S. dollars, but remeasure if the country has hyperinflation.

d. Remeasure if the subsidiary does most of its business in its own country, but translate if the country has hyperinflation.

ANS: a


47. Topic: Financial analysis, translation and remeasurementLO 2A U.S. company has a Canadian subsidiary. The U.S. dollar has been steadily weakening against the Canadian dollar. If the subsidiary’s functional currency is the U.S. dollar, which statement below is most likely to be true?

a. A remeasurement gain would be reported.b. Total assets would be higher than if the subsidiary’s functional currency is the

Canadian dollar.c. Remeasured operating income (sales less depreciation and out of pocket

expenses) would be higher than if the subsidiary’s functional currency is the Canadian dollar.

d. Remeasured liabilities would be lower than if liabilities are translated.

ANS: c

48. Topic: U.S. GAAP translation and remeasurement, hyperinflationLO 1IFRS conversion of an international subsidiary’s accounts to the parent’s presentation currency is the same as U.S. GAAP for non-hyperinflationary functional currencies,

a. with the exception that remeasurement gains and losses are reported in OCI.b. with the exception that translation gains and losses are reported in income.c. with the exception that translation is the only option; remeasurement is not

allowed.d. with no differences.

ANS: d

49. Topic: Consolidation of international subsidiariesLO 3A U.S. company has a subsidiary in the U.K., acquired at a cost in excess of the subsidiary’s book value. The U.S. dollar has been steadily weakening with respect to the British pound. The subsidiary’s functional currency is the pound. Which statement is true concerning the effects of consolidation eliminations R and O, recognizing beginning-of-year revaluations and write-offs for the current year?

a. Additional net translation losses will be reported in net income.b. Additional net translation losses will be reported in other comprehensive income.c. Additional net translation gains will be reported in net income.d. Additional net translation gains will be reported in other comprehensive income

ANS: d


50. Topic: IFRS for foreign currency translationLO 4What is “presentation currency,” as used in IFRS?

a. The subsidiary’s functional currency.b. The parent company’s reporting currency.c. The currency in which the subsidiary reports its accounts.d. The currency into which the subsidiary’s accounts are remeasured, prior to

translation.

ANS: b


PROBLEMS

1. Topic: Financial statement translationLO 1A U.S. parent acquired a U.K. subsidiary on January 1, 2014. The subsidiary’s functional currency is the pound, and its December 31, 2014 trial balance is as follows:

£ Dr (Cr)

Cash, receivables £ 180,000Inventories, at cost 330,000Plant & equipment, net 1,050,000Liabilities (720,000)Capital stock (180,000)Retained earnings, beginning (480,000)Accumulated other comprehensive income

--

Revenues (3,000,000)Expenses 2,700,000Dividends 120,000

£ 0

Exchange rates ($/£) are:January 1, 2014……………………. $1.36Average for 2014………………….. 1.34Rate when dividends paid…………. 1.31December 31, 2014………………… 1.30

Requireda. Calculate the translation gain or loss for 2014.b. Translate the subsidiary’s December 31, 2014 trial balance.

ANS:

a.£ Rate U.S. $

Beginning exposure £ 660,000 1.36 $ 897,600Changes in exposure:+ Net income 300,000 1.34 402,000- Dividends (120,000 ) 1.31 (157,200 )

1,142,400Ending exposure £ 840,000 1.30 - 1,092,000 Translation loss $ 50,400


b.£

Dr (Cr) RateU.S. $

Dr (Cr)Cash, receivables £ 180,000 1.30 $ 234,000Inventories, at cost 330,000 1.30 429,000Plant & equipment, net 1,050,000 1.30 1,365,000Liabilities (720,000) 1.30 (936,000)Capital stock (180,000) 1.36 (244,800)Retained earnings, beginning (480,000) 1.36 (652,800)Accumulated other comprehensive income -- see a. 50,400Revenues (3,000,000) 1.34 (4,020,000)Expenses 2,700,000 1.34 3,618,000Dividends 120,000 1.31 157,200

£ 0 $ 0

2. Topic: Translation and remeasurement gains and lossesLO 1Below are the 2014 beginning and ending trial balances of Fissler, a German subsidiary of a U.S. company. The subsidiary was acquired on January 1, 2014. All numbers are in thousands.

Dr (Cr)January 1 December 31

Cash and receivables € 40,000 € 50,000Inventories, at cost 100,000 110,000Plant and equipment, net 500,000 560,000Liabilities (400,000) (440,000)Capital stock (50,000) (50,000)Retained earnings, January 1 (190,000) (190,000)Sales (1,400,000)Cost of goods sold 950,000Operating expenses 350,000Dividends ______ 60,000 Total -0- -0-

Exchange rates ($/€) are:January 1, 2014 $1.28Average for 2014 1.35December 31, 2014 1.40


Additional information:

1. Dividends were declared on November 1, 2014, when the exchange rate was $1.38.

2. Revenues, inventory purchases, and out of pocket operating expenses were incurred evenly during the year.

3. Plant and equipment of €80,000 was acquired during 2014, when the rate was £1.32.

4. Depreciation of €20,000 is included in operating expenses. Of that amount, €4,000 relates to plant and equipment acquired during 2014.

Requireda. Assume the subsidiary’s functional currency is the U.S. dollar. Compute the

remeasurement gain or loss for 2014.b. Assume the subsidiary’s functional currency is the euro. Compute the translation

gain or loss for 2014.

ANS:

a. Remeasurement gain or loss€ $/€ $

Beginning exposed position (€40,000 - €400,000) € (360,000) 1.28 $ (460,800)Sales 1,400,000 1.35 1,890,000Purchases (€950,000 + €10,000) (960,000) 1.35 (1,296,000)Out of pocket expenses (€350,000 – €20,000) (330,000) 1.35 (445,500)Plant and equipment purchase (80,000) 1.32 (105,600)Dividends (60,000 ) 1.38 (82,800 )

(500,700)Ending exposed position € (390,000) 1.40 - (546,000 ) Remeasurement loss $ 45,300

b. Translation gain or loss€ $/€ $

Beginning exposed position (€50,000 + €190,000) € 240,000 1.28 $ 307,200Net income 100,000 1.35 135,000Dividends (60,000 ) 1.38 (82,800 )

359,400Ending exposed position € 280,000 1.40 - 392,000Translation gain $ 32,600


3. Topic: Translation gain or loss, translated balance sheetLO 1A U.S. company formed a Spanish subsidiary on January 1, 2015. The subsidiary’s balance sheets for January 1 and December 31, 2015 are presented below, in euros.

January 1, 2015 December 31, 2015Cash, receivables € 15,000 € 20,000Inventories, at cost 250,000 350,000Long-term assets, at cost, net _750,000 1,050,000Total assets € 1,015,000 € 1,420,000

Liabilities € 715,000 € 1,070,000Capital stock 300,000 300,000Retained earnings 0 50,000Total liabilities and equity € 1,015,000 € 1,420,000

During 2015, the subsidiary reported €50,000 in net income and paid no dividends.

Exchange rates (U.S. $/€) are:January 1, 2015 $1.452015 average 1.35December 31, 2015 1.30

It is now December 31, 2015. The subsidiary’s functional currency is the euro.

Requireda. Calculate the 2015 translation gain or loss for the subsidiary.b. Prepare the subsidiary’s translated December 31, 2015 balance sheet.

ANS:

a.

€ rate U.S. $Beginning exposed position €300,000 1.45 $435,000Changes in exposed position:+ Net income 50,000 1.35 67,500

502,500Ending exposed position €350,000 1.30 - 455,000Translation loss $ 47,500


b.

€ rate U.S. $AssetsCash, receivables € 20,000 1.30 $ 26,000Inventories, at cost 350,000 1.30 455,000Long-term assets, net 1,050,000 1.30 1,365,000 Total assets € 1,420,000 $1,846,000 Liabilities & equityLiabilities €1,070,000 1.30 $1,391,000Capital stock 300,000 1.45 435,000Retained earnings 50,000 1.35 67,500Accumulated other comprehensive income _______ (47,500 ) Total liabilities & equity € 1,420,000 $1,846,000

4. Topic: Translation and consolidation of an international subsidiaryLO 1, 3Scientific Inc. is a Singapore subsidiary of Preston Company, U.S. company. On January 1, 2014, Preston acquired all of the voting stock of Scientific for S$25,000,000. Scientific’s stockholders’ equity totaled S$5,000,000 at the date of acquisition. The S$20,000,000 excess of acquisition cost over book value was allocated as follows:

S$(10,000,000) to plant & equipment with a 10-year remaining life, straight-line S$8,000,000 to previously unrecorded intangibles with a 4-year life, straight-line S$22,000,000 to goodwill; there was no impairment in 2014

It is now December 31, 2014. Scientific’s functional currency is the Singapore dollar.


January 1, 2014 $0.90/S$Average for 2014 0.85/S$December 31, 2014 0.80/S$Date of dividend declaration 0.82/S$


Scientific’s trial balances at January 1 and December 31, 2014, are below.

January 1, 2014Dr (Cr)

December 31, 2014Dr (Cr)

Current assets S$ 5,000,000 S$ 8,000,000Plant & equipment 50,000,000 55,000,000Liabilities (51,000,000) (54,000,000)Capital stock (1,000,000) (1,000,000)Retained earnings, 1/1 (3,000,000) (3,000,000)Accumulated other comprehensive income -- -- Dividends 2,000,000Sales revenue (70,000,000)Cost of goods sold 51,000,000Operating expenses ________ 12,000,000

S$ 0 S$ 0

Requireda. Calculate Scientific’s translation gain or loss for the year.b. Translate Scientific’s December 31, 2014 trial balance into U.S. dollars.c. When Preston consolidates Scientific at December 31, 2014, there will be an

additional translation gain or loss due to increased exposure from the consolidation process. Calculate the additional translation gain or loss that will be reported due to the consolidation process.

ANS:

a. S$ rate $

Beginning exposure S$ 4,000,000 0.90 $ 3,600,000Change in exposure + Net income 7,000,000 0.85 5,950,000 - Dividends (2,000,000 ) 0.82 (1,640,000 )

7,910,000Ending exposure S$ 9,000,000 0.80 - 7,200,000Translation loss $ 710,000


b.S$

Dr (Cr) rate$

Dr (Cr)Current assets S$ 8,000,000 0.80 $ 6,400,000Plant & equipment 55,000,000 0.80 44,000,000Liabilities (54,000,000) 0.80 (43,200,000)Capital stock (1,000,000) 0.90 (900,000)Retained earnings, 1/1 (3,000,000) 0.90 (2,700,000)Accumulated other comprehensive income --

see schedule 710,000

Dividends 2,000,000 0.82 1,640,000Sales revenue (70,000,000) 0.85 (59,500,000)Cost of goods sold 51,000,000 0.85 43,350,000Operating expenses 12,000,000 0.85 10,200,000

S$ 0 $ 0

c. S$ rate $

Beginning additional exposure S$20,000,000 0.90 $ 18,000,000Change in additional exposure P&E write-off 1,000,000 0.85 850,000 Intangibles write-off (2,000,000 ) 0.85 (1,700,000 )

17,150,000Ending additional exposure S$19,000,000 0.80 - 15,200,000Translation loss $ 1,950,000


5. Topic: Translation of financial statementsLO 1A subsidiary of a U.S. parent starts business on January 1, 2014. Its functional currency is the euro. The subsidiary’s balance sheets for January 1 and December 31, 2014 are presented below, in euros.

January 1, 2014 December 31, 2014Cash, receivables € 10,000 € 20,000Inventories, at cost 40,000 90,000Long-term assets, at cost 700,000 530,000Total assets € 750,000 € 640,000

Liabilities € 550,000 € 420,000Capital stock 200,000 200,000Retained earnings 0 20,000Total liabilities and equity € 750,000 € 640,000

During 2014, the subsidiary reports the following events:

1. Sales revenue was €2,000,000 (evenly through the year).2. Inventory purchases were €1,200,000 (evenly through the year).3. Cost of goods sold was €1,150,000.4. Ending inventory was purchased on December 31, 2014.5. Out of pocket operating expenses were €650,000 (evenly through the year).6. Depreciation and amortization expenses were €170,000.7. Dividends of €10,000 were declared and paid when the exchange rate was $1.55/€.

Exchange rates (U.S. $/€) are:

January 1, 2014 $1.452014 average 1.50December 31, 2014 1.60

Requireda. Calculate the translation gain or loss for 2014.b. Translate the subsidiary’s 2014 income statement into U.S. dollars.c. Translate the subsidiary’s December 31, 2014 balance sheet into U.S. dollars.


ANS:

a.€ rate $

Beginning exposure €200,000 1.45 $290,000Changes in exposure: + Net income (see b. below) 30,000 1.50 45,000 - Dividends (10,000 ) 1.55 (15,500 )

319,500Ending exposure €220,000 1.60 - 352,000Translation gain $(32,500 )

b. € rate $

Sales revenue € 2,000,000 1.50 $3,000,000Cost of goods sold (1,150,000) 1.50 (1,725,000)Out of pocket operating expenses (650,000) 1.50 (975,000)Depreciation and amortization expenses (170,000 ) 1.50 (255,000 ) Net income € 30,000 $ 45,000

c. € rate $

Cash, receivables € 20,000 1.60 $ 32,000Inventories, at cost 90,000 1.60 144,000Long-term assets, at cost 530,000 1.60 848,000 Total assets € 640,000 $1,024,000

Liabilities € 420,000 1.60 $ 672,000Capital stock 200,000 1.45 290,000Retained earnings 20,000 (1) 29,500Accumulated other comprehensive income ______ 32,500 Total liabilities and equity € 640,000 $1,024,000

(1) $45,000 - $15,500 = $29,500


6. Topic: Remeasurement of financial statementsLO 1A subsidiary of a U.S. parent starts business on January 1, 2014. Its functional currency is the U.S. dollar. The subsidiary’s balance sheets for January 1 and December 31, 2014 are presented below, in euros.

January 1, 2014 December 31, 2014Cash, receivables € 10,000 € 20,000Inventories, at cost 40,000 90,000Long-term assets, at cost 700,000 530,000Total assets € 750,000 € 640,000

Liabilities € 550,000 € 420,000Capital stock 200,000 200,000Retained earnings 0 20,000Total liabilities and equity € 750,000 € 640,000

During 2014, the subsidiary reports the following events:

1. Sales revenue was €2,000,000 (evenly through the year).2. Inventory purchases were €1,200,000 (evenly through the year).3. Cost of goods sold was €1,150,000.4. Ending inventory was purchased on December 31, 2014.5. Out of pocket operating expenses were €650,000 (evenly through the year).6. Depreciation and amortization expenses were €170,000.7. Dividends of €10,000 were declared and paid when the exchange rate was $1.55/€.

Exchange rates (U.S. $/€) are:

January 1, 2014 $1.452014 average 1.50December 31, 2014 1.60

Requireda. Calculate the remeasurement gain or loss for 2014.b. Remeasure the subsidiary’s 2014 income statement into U.S. dollars.c. Remeasure the subsidiary’s December 31, 2014 balance sheet into U.S. dollars.


ANS:

a.€ rate $

Beginning exposure €(540,000) 1.45 $(783,000)Changes in exposure: + Sales revenue 2,000,000 1.50 3,000,000 - Inventory purchases (1,200,000) 1.50 (1,800,000) - Out of pocket expenses (650,000) 1.50 (975,000) - Dividends (10,000 ) 1.55 (15,500 )

(573,500)Ending exposure €(400,000) 1.60 - (640,000 ) Remeasurement loss $ 66,500

b. € rate $

Sales revenue € 2,000,000 1.50 $3,000,000Cost of goods sold (1,150,000) (1) (1,714,000)Out of pocket operating expenses (650,000) 1.50 (975,000)Depreciation and amortization expenses (170,000) 1.45 (246,500)

Remeasurement loss -- see

schedule (66,500 ) Net income (loss) € 30,000 $ (2,000 )

(1) € rate $

Beginning inventory € 40,000 1.45 $ 58,000Purchases 1,200,000 1.50 1,800,000Ending inventory (90,000 ) 1.60 (144,000 ) Cost of goods sold € 1,150,000 $1,714,000

c. € rate $

Cash, receivables € 20,000 1.60 $ 32,000Inventories, at cost 90,000 1.60 144,000Long-term assets, at cost 530,000 1.45 768,500 Total assets € 640,000 $944,500

Liabilities € 420,000 1.60 $672,000Capital stock 200,000 1.45 290,000Retained earnings 20,000 (1) (17,500 ) Total liabilities and equity € 640,000 $944,500

(1) $(2,000) – $15,500 = $17,500


7. Topic: Consolidation of an international subsidiary subsequent to acquisitionLO 3Swire Ltd., located in Hong Kong, is a wholly-owned subsidiary of Plato Company, a U.S. company. On January 1, 2015, Plato acquired all of the voting stock of Swire for HK$100,000,000. Swire’s stockholders’ equity totaled HK$30,000,000 at the date of acquisition. The HK$70,000,000 excess of acquisition cost over book value was allocated entirely to goodwill. Plato Company uses the complete equity method to account for its investment in the subsidiary, on its own books.

It is now December 31, 2015. Swire’s trial balance is shown below. Goodwill impairment during 2015 was HK$5,000,000.


January 1, 2015 $0.16/HK$ Average for 2015 $0.20/HK$December 31, 2015 $0.25/HK$

Swire’s functional currency is the Hong Kong dollar. Its trial balances at January 1 and December 31, 2015 are below.



Current assets HK$ 14,000,000 HK$15,000,000Plant & equipment, net 466,000,000 500,000,000Liabilities (450,000,000) (476,000,000)Capital stock (10,000,000) (10,000,000)Retained earnings, January 1 (20,000,000) (20,000,000)Accumulated other comprehensive income -- -- Sales revenue (250,000,000)Cost of goods sold 120,000,000Operating expenses ________ 121,000,000

HK$ 0 HK$ 0

Requireda. Calculate Swire’s translation gain or loss for 2015.b. Translate Swire’s December 31, 2015 trial balance into U.S. dollars.c. Prepare the journal entries Plato makes on its own books to (1) record the initial

investment, (2) recognize Swire’s 2015 net income and (3) recognize the 2015 change in Swire’s accumulated other comprehensive income.

d. Present, in journal entry form, the eliminating entries necessary to consolidate the December 31, 2015 financial statements of Plato and Swire. Clearly show your calculations.

e. Independently calculate the net amount of the adjustments to other comprehensive income in eliminating entries R and O.


ANS:

a. HK$ rate $

Beginning exposure HK$30,000,000 0.16 $ 4,800,000Change in exposure + Net income 9,000,000 0.20 1,800,000

6,600,000Ending exposure HK$39,000,000 0.25 - 9,750,000Translation gain $ (3,150,000)

b.HK$

Dr (Cr) rate$

Dr (Cr)Current assets HK$15,000,000 0.25 $ 3,750,000Plant & equipment, net 500,000,000 0.25 125,000,000Liabilities (476,000,000) 0.25 (119,000,000)Capital stock (10,000,000) 0.16 (1,600,000)Retained earnings, January 1 (20,000,000) 0.16 (3,200,000)Acc. other comprehensive income -- see sch. (3,150,000)Sales revenue (250,000,000) 0.20 (50,000,000)Cost of goods sold 120,000,000 0.20 24,000,000Operating expenses 121,000,000 0.20 24,200,000

HK$ 0 $ 0

c. (1)Investment in Swire 16,000,000

Cash 16,000,000

(2) Equity in NI of Swire= [(9,000,000 – 5,000,000) x 0.20] = $800,000Investment in Swire 800,000

Equity in NI of Swire 800,000

(3)Investment in Swire 3,150,000

Other comprehensive income 3,150,000

The December 31, 2015 investment balance is $16,000,000 + $800,000 + $3,150,000 = $19,950,000.


d.

(C) Equity in NI of Swire 800,000

Investment in Swire 800,000

(E) Capital stock 1,600,000Retained earnings, Jan. 1 3,200,000Accumulated other comprehensive income 3,150,000

Investment in Swire 7,950,000

(R) Goodwill (1) 17,500,000

Investment in Swire (2) 11,200,000Other comprehensive income 6,300,000

(1) Goodwill = 70,000,000 x $0.25(2) $11,200,000 = $19,950,000 - $800,000 - $7,950,000

(O)Operating expenses (3) 1,000,000Other comprehensive income 250,000

Goodwill (4) 1,250,000(3) Operating expenses = goodwill impairment loss = €5,000,000 x 0.20(4) Goodwill reduction = €5,000,000 x 0.25

e. HK$ rate $

Beginning additional exposure HK$70,000,000 0.16 $11,200,000Change in additional exposure: Goodwill impairment (5,000,000 ) 0.20

(1,000,000) 10,200,000

Ending additional exposure €65,000,000 0.25 -16,250,000Translation gain caused by additional exposure $(6,050,000

)


8. Topic: Remeasurement of financial statementsLO 1A U.S. parent acquired a subsidiary in New Zealand on July 1, 2014, the beginning of its fiscal year. The subsidiary’s functional currency is the U.S. dollar. Its July 1, 2014 and June 30, 2015 trial balances are as follows, in New Zealand dollars (NZ$):

July 1, 2014 Dr (Cr)

June 30, 2015 Dr (Cr)

Cash, receivables NZ$ 300,000 NZ$ 250,000Inventories, at cost 550,000 620,000Plant & equipment, net 1,800,000 1,950,000Liabilities (1,500,000) (1,300,000)Capital stock (300,000) (300,000)Retained earnings, beginning (850,000) (850,000)Dividends 180,000Sales revenue (5,500,000)Expenses _______ 4,950,000

NZ$ 0 NZ$ 0

Exchange rates ($/NZ$) are:

July 1, 2014……………………. $0.80Average for fiscal 2015………... 0.83Rate when dividends declared…. 0.88June 30, 2015…………………… 0.90


1. Expenses include cost of goods sold of NZ$3,000,000 and depreciation of NZ$60,000.

2. Sales revenue, merchandise purchases, and out of pocket expenses were incurred evenly throughout the year.

3. Plant and equipment of NZ$210,000 was purchased when the exchange rate was NZ$0.81. Depreciation of NZ$20,000 was taken on the new plant and equipment for fiscal 2015.

4. The ending inventory was purchased on June 30, 2015.

Requireda. Calculate the remeasurement gain or loss for fiscal 2015.b. Calculate the subsidiary’s remeasured total operating expenses for fiscal 2015.

Operating expenses consist of cost of goods sold, out of pocket expenses, and depreciation expense.

c. Calculate the subsidiary’s remeasured net income for fiscal 2015.


ANS:

a. NZ$ rate $

Beginning exposure (NZ$300,000 – NZ$1,500,000) NZ$ (1,200,000) 0.80 $ (960,000)Changes in exposure:Sales revenue 5,500,000 0.83 4,565,000Merchandise purchases (3,070,000) 0.83 (2,548,100)Out of pocket expenses (1,890,000) 0.83 (1,568,700)P&E purchases (210,000) 0.81 (170,100)Dividends (180,000 ) 0.88 (158,400 )

(840,300)Ending exposure (NZ$250,000 – NZ$1,300,000) NZ$ (1,050,000) 0.90 - (945,000 ) Remeasurement loss $ (104,700 )

b. Beginning inventory 550,000 x $0.80 $ 440,000Purchases 3,070,000 x $0.83 2,548,100Ending inventory (620,000) x $0.90 (558,000 ) Cost of goods sold 3,000,000 $ 2,430,100Out of pocket expenses 1,890,000 x $0.83 1,568,700Depreciation expense: 20,000 x $0.81 16,200 40,000 x $0.80 32,000 48,200 Total operating expenses 4,950,000 $4,047,000

c.Sales revenue $ 4,565,000Operating expenses (4,047,000)Remeasurement loss (104,700 ) Net income $ 413,300


9. Topic: Consolidation of an international subsidiaryLO 3A U.S. parent acquired a U.K. subsidiary on January 1, 2014, for an acquisition cost of £800,000. The excess paid over book value was attributed to goodwill. There is no goodwill impairment for 2014. The subsidiary’s functional currency is the pound. Its January 1 and December 31, 2014 trial balances are as follows, in pounds:

January 1, 2014 Dr (Cr)

December 31, 2014 Dr (Cr)

Cash, receivables £ 100,000 £ 110,000Inventories, at cost 175,000 200,000Plant & equipment, net 600,000 650,000Liabilities (485,000) (430,000)Capital stock (100,000) (100,000)Retained earnings, beginning (290,000) (290,000)Dividends 60,000Sales revenue (1,800,000)Expenses _______ 1,600,000

£ 0 £ 0

Exchange rates ($/£) are:

January 1, 2014……………………. $1.45Average for 2014………………….. 1.40Rate when dividends paid…………. 1.36December 31, 2014………………… 1.35


1. Expenses include cost of goods sold of £1,000,000 and depreciation of £20,000.2. Sales revenue, merchandise purchases, and out of pocket expenses were incurred

evenly throughout the year.3. Plant and equipment of £70,000 was purchased when the exchange rate was

$1.42. Depreciation of £5,000 was taken on the new plant and equipment for 2014.

4. The ending inventory was purchased on December 31, 2014.

RequiredThe consolidation working paper, in dollars, is below. Fill in the elimination entries C, E and R necessary to consolidate the parent and subsidiary’s trial balances.


ParentDr (Cr)

SubsidiaryDr (Cr)

Dr Cr Consol

Cash, receivables $ 300,000 $ 148,500

Inventories, at cost 650,000 270,000

Plant & equipment, net

2,300,000 877,500

Goodwill

Investment in subsidiary 1,310,000

Liabilities (3,278,400) (580,500)

Capital stock (200,000) (145,000)

Retained earnings, beginning (600,000) (420,500)Accumulated other comprehensive income 48,400 48,400

Dividends -- 81,600

Sales revenue (3,400,000) (2,520,000)

Equity in net income of subsidiary

(280,000)

Expenses 3,150,000 2,240,000

Totals -0- -0-


ANS:

ParentDr (Cr)

SubsidiaryDr (Cr)

Dr Cr Consol

Cash, receivables $ 300,000 $ 148,500 448,500

Inventories, at cost 650,000 270,000 920,000

Plant & equipment, net

2,300,000 877,500 3,177,500

Goodwill (R) 553,500 553,500

Investment in subsidiary

1,310,000198,400(C)517,100(E)594,500(R)

--

Liabilities (3,278,400) (580,500) (3,858,900)

Capital stock (200,000) (145,000) (E) 145,000 (200,000)

Retained earnings, beg.

(600,000) (420,500) (E) 420,500 (600,000)

Accumulated other comprehensive income

48,400 48,400 (R) 41,000 48,400(E) 89,400

Dividends -- 81,600 81,600(C) --

Sales revenue (3,400,000) (2,520,000) (5,920,000)

Equity in net income of subsidiary

(280,000) (C)280,000 --

Expenses 3,150,000 2,240,000 _______ _______ 5,390,000

Totals -0- -0- 1,440,000 1,440,000 -0-


10. Topic: IFRS and U.S. GAAP for highly inflationary countryLO 1, 4A Venezuelan subsidiary owns land acquired for 100,000,000 bolivares fuertes (BsF) when the exchange rate was $0.50/BsF. The rate at the end of the current year is $0.05, and the price level index has increased from 100 at the date the land was acquired to 1200 at the end of the current year. The subsidiary’s functional currency is the BsF. The parent’s reporting (presentation) currency is the U.S. dollar.

Requireda. At what value will the land be reported in the consolidated balance sheet, if the

subsidiary’s parent follows U.S. GAAP and Venezuela is not considered to be a highly inflationary country? At what value will the land be reported in the consolidated balance sheet, if the subsidiary’s parent follows IFRS and Venezuela is not considered to be a highly inflationary country?

b. At what value will the land be reported in the consolidated balance sheet, if the subsidiary’s parent follows U.S. GAAP and Venezuela has been declared a highly inflationary country?

c. At what value will the land be reported in the consolidated balance sheet, if the subsidiary’s parent follows IFRS and Venezuela has been declared a highly inflationary country?

d. If you answered questions b. and c. correctly, when hyperinflation exists the land is reported at different amounts depending on if the parent follows U.S. GAAP or IFRS. Under what circumstances will the U.S. GAAP and IFRS amounts be the same?

ANS:

a. Using both U.S. GAAP and IFRS, the land is translated into U.S. dollars using the current rate:100,000,000 x 0.05 = $5,000,000.

b. The land is remeasured into U.S. dollars even though the subsidiary’s functional currency is the BsF.100,000,000 x $0.50 = $50,000,000.

c. The land is price-level adjusted to BsF of current purchasing power, and then translated into U.S. dollars.100,000,000 x (1200/100) = 1,200,000,000 x $0.05 = $60,000,000.

d. The IFRS and U.S. GAAP amounts will be the same only if the change in the price level and the change in the exchange rate mirror each other. For example, the exchange rate changes from $0.50 to $0.05, one-tenth of the original rate. If the price-level index similarly changed from 100 to 1000, IFRS and U.S. GAAP would produce the same land value, in U.S. dollars:

U.S. GAAP: 100,000,000 x $0.50 = $50,000,000IFRS: 100,000,000 x 1000/100 = 1,000,000,000 x $0.05 = $50,000,000


11. Topic: Translation and remeasurementLO 1A U.S. company with a June 30 fiscal year-end established a subsidiary in Singapore on July 1, 2014. Following is information on the activities of the subsidiary during fiscal 2015, all in thousands of Singapore dollars (S$):

Subsidiary Balance SheetJuly 1, 2014 and June 30, 2015

July 1, 2014

June 30, 2015

July 1, 2014

June 30, 2015

Cash S$10,000 S$17,000 Liabilities S$100,000 S$95,000

Accounts receivable 0 8,000 Capital stock 250,000 250,000

Inventories (cost) 40,000 50,000 Retained earnings -- 10,000

Plant assets, net 300,000 280,000 _____ _____

Total S$350,000 S$355,000 Total S$350,000 S$355,000

The following events occurred during fiscal 2015:

1. Sales (evenly through the year) S$800,0002. Inventory purchases (all for cash, evenly through the year) 400,0003. Cost of goods sold 390,0004. Purchase of plant assets for cash (on November 1, 2014) 50,0005. Depreciation expense (S$60,000 on the plant assets acquired

July 1, 2014, S$10,000 on the plant assets purchased November 1, 2014) 70,0006. Other operating expenses (all for cash, evenly through the year) 330,000

Exchange rates are as follows ($/S$):

July 1, 2014 $0.59November 1, 2014 0.60March 15, 2015 0.62June 30, 2015 0.64Average for fiscal 2015 0.61

Requireda. Calculate the remeasurement gain or loss for fiscal 2015.b. Calculate the translation gain or loss for fiscal 2015.c. Present the translated balance sheet as of June 30, 2015.d. What is the remeasured balance for June 30, 2015 plant assets, net?


ANS:

a.

S$ rate $

Beginning exposed position S$(90,000) .59 $ (53,100)

+ Sales 800,000 .61 488,000

- Inventory purchases (400,000) .61 (244,000)

- Plant asset purchases (50,000) .60 (30,000)

- Out of pocket expenses (330,000 ) .61 (201,300 )

(40,400)

Ending exposed position S$(70,000) .64 - (44,800 )

Remeasurement loss $ 4,400

b.

S$ rate $

Beginning exposed position S$250,000 .59 $147,500

+ Net income 10,000 .61 6,100

153,600

Ending exposed position S$260,000 .64 - 166,400

Translation gain $(12,800 )

c.

S$ rate $ S$ rate $

Cash 17,000 .64 10,880 Liabilities 95,000 .64 60,800

Accts receivable 8,000 .64 5,120 Cap. stock 250,000 .59 147,500

Inventories 50,000 .64 32,000 RE 10,000 6,100

Plant assets, net 280,000 .64 179,200 AOCI ______ 12,800

Total 355,000 227,200 Total 355,000 227,200

d. (300,000 - 60,000) x .59 = $141,600(50,000 - 10,000) x .60 = 24,000

$165,600


12. Topic: Translated financial statements, acquisition of an existing companyLO 1The December 31, 2015 trial balance of ALDO, a British subsidiary of Walton Corporation, appears below, expressed in pounds. The pound is ALDO’s functional currency.

Additional information:1. The balance in the cumulative translation adjustment account at December 31,

2014 was $4,000,000 (credit).2. The dollar balance of translated retained earnings at December 31, 2014 was

$1,400,000.3. When ALDO was acquired by Walton, the exchange rate was $1.30/£. No capital

stock changes have occurred since then.4. Exchange rates ($/£) were as follows:

January 1, 2015 $1.60Average for 2015 $1.54December 31, 2015 $1.50

5. Sales, purchases, and expenses other than depreciation occurred evenly throughout the year. The ending inventories were purchased when the exchange rate was $1.52.

6. ALDO acquired its plant and equipment prior to its acquisition by Walton, when the exchange rate was $1.25.

7. ALDO’s trial balance at December 31, 2015 is as follows, in pounds:

ALDOTrial balance, December 31, 2015

Dr (Cr)Cash, receivables £ 2,500,000Inventories, at cost 3,000,000Plant & equipment 12,900,000Liabilities (12,500,000)Capital stock (2,000,000)Retained earnings, 1/1 (3,000,000)Sales (40,000,000)Cost of sales 32,000,000Depreciation expense 800,000Other expenses 6,300,000

£ 0

Requireda. Prepare a schedule calculating the translation gain or loss for 2015.b. Prepare a translated income statement for 2015.c. Prepare a translated balance sheet at December 31, 2015.


ANS:

a.Beginning net assets £ 5,000,000 x 1.60 = $ 8,000,000Net income 900,000 x 1.54 = 1,386,000

$9,386,000Ending net assets £ 5,900,000 x 1.50 = - 8,850,000Translation loss $ 536,000

b.Sales £40,000,000 x 1.54 $ 61,600,000Cost of sales 32,000,000 x 1.54 (49,280,000)Depreciation expense 800,000 x 1.54 (1,232,000)Other expenses 6,300,000 x 1.54 (9,702,000 ) Net income £ 900,000 $ 1,386,000

c. Cash, receivables £ 2,500,000 x 1.5 $ 3,750,000Inventories 3,000,000 x 1.5 4,500,000Plant & equipment 12,900,000 x 1.5 19,350,000Total £ 18,400,000 $ 27,600,000

Liabilities £ 12,500,000 x 1.5 $ 18,750,000Capital stock 2,000,000 x 1.3 2,600,000Retained earnings 3,900,000 (1) 2,786,000Accumulated other comprehensive income

_________(2) 3,464,000

Total £ 18,400,000 $27,600,000

(1) Ending retained earnings, in pounds, = £3,000,000 + £900,000 = £3,900,000Translated ending retained earnings = $1,400,000 + $1,386,000 = $2,786,000

(2) Translated ending AOCI = $4,000,000 credit + $536,000 debit = $3,464,000 credit


13. Topic: Consolidation of an international subsidiary, date of acquisitionLO 4Penn Corporation, a U.S. company, acquired all of the outstanding stock of Stockard Company, a Malaysian company, on January 1, 2014. The currency of Malaysia is the ringgit (§). Penn paid $26,000 for Stockard’s stock. On that date the exchange rate was $0.325/§. Stockard's functional currency is the ringgit. The condensed balance sheets of Penn and Stockard as of January 1, 2014 are shown below. All numbers in the problem are in thousands.

Assets Penn Corp. Stockard Co.Cash and receivables $ 1,200 § 500Inventories 2,800 1,000Property, plant and equipment, net 25,000 12,000Investment in Stockard 26,000 ________ Total assets $55,000 § 13,500

Liabilities and stockholders' equityLiabilities $40,000 § 12,000Capital stock 10,000 200Retained earnings 5,000 1,300 Total liabilities and stockholders' equity $55,000 § 13,500

Stockard's assets and liabilities are reported at amounts approximating fair value, except that it has previously unreported identifiable intangible assets, appropriately capitalized per ASC Topic 805, with a fair value of §2,000 on January 1, 2014.

Requireda. Prepare a schedule calculating the excess of acquisition cost over Stockard’s book

value at the acquisition date, and its allocation to Stockard’s net assets and goodwill.

b. Prepare a working paper to consolidate the balance sheets of Penn and Stockard at January 1, 2014.

ANS:(all numbers in thousands)a.

§ $/§ U.S. $Acquisition cost 80,000 .325 $ 26,000Book value (1,500 ) .325 (487.5)Excess 78,500 25,512.5Revaluation:Identifiable intangibles (2,000 ) .325 (650)Goodwill 76,500 .325 $24,862.5


b.Penn

Dr (Cr)StockardDr (Cr)

Dr Cr Consol.Dr (Cr)

Cash & receivables $ 1,200 $ 162.5 $ 1,362.5Inventories 2,800 325.0 3,125Property, plant and equipment 25,000 3,900.0 28,900Intangibles (R) 650.0 650Investment in Stockard 26,000

487.5 (E)25,512.5 (R)

--

Goodwill (R) 24,862.5 24,862.5Liabilities (40,000) (3,900.0) (43,900)Capital stock (10,000) (65.0) (E) 65.0 (10,000)Retained earnings (5,000 ) (422 .5) (E) 422.5 (5,000 ) Total -0- -0- -0-

14. Topic: Consolidation of an international subsidiary, one year after acquisitionLO 4Use the information in problem 13 for Penn Corporation and its subsidiary Stockard Co. It is now December 31, 2014 (one year after the acquisition). The trial balances of Penn and Stockard at December 31, 2014, in U.S. dollars and ringgits, respectively, are as follows:

PennDr (Cr)

StockardDr (Cr)

Cash & receivables $ 1,400 § 600Inventories 3,100 2,400Property, plant and equipment, net 29,500 16,500Investment in Stockard 26,940.5Liabilities (41,000) (15,000)Capital stock (10,000) (200)Retained earnings, January 1 (5,000) (1,300)Accumulated other comprehensive income (16.5) --Equity in net income of Stockard (924) --Sales revenue (125,000) (52,000)Expenses 121,000 49,000 Total -0- -0-

Additional information:1. The revaluation of intangibles is to be straight-line amortized over 10 years.

There is no impairment of goodwill for 2014.2. The average exchange rate for 2014 is $0.33/§, and the December 31, 2014

exchange rate is $0.332/§.


Requireda. Translate Stockard’s December 31, 2014 trial balance into U.S. dollars.b. Verify Penn’s December 31, 2014 balances for Investment in Stockard,

accumulated other comprehensive income, and equity in net income of Stockard. Penn’s other comprehensive income is comprised only of its interest in Stockard.

c. Prepare a working paper to consolidate the December 31, 2014 trial balances of Penn and Stockard.

ANS:

a. Translation of Stockard’s December 31, 2014 trial balance:§

Dr (Cr) $/§U.S. $

Dr (Cr)Cash & receivables 600 .332 199.2Inventories 2,400 .332 796.8Property, plant and equipment, net 16,500 .332 5,478Liabilities (15,000) .332 (4,980)Capital stock (200) .325 (65)Retained earnings, January 1 (1,300) .325 (422.5)Acc. other comp. income -- (1) (16.5)Sales revenue (52,000) .33 (17,160)Expenses 49,000 .33 16,170 Total -0- -0-

(1) § $/§ U.S. $

Exposed position, January 1, 2014 1,500 .325 487.5Net income 3,000 .33 990 .0

1,477.5Exposed position, December 31, 2014 4,500 .332 -1,494 .0 Translation gain (16.5)

b. Equity in net income of Stockard:Stockard’s net income (3,000 x .33) $990Revaluation write-off (2,000/10 x .33) (66 ) Equity in net income of Stockard $924

Accumulated other comprehensive income: Penn recognizes Stockard’s translation gain, as calculated above.

Investment in Stockard, December 31, 2014:Investment, January 1, 2014 $26,000.0+ Equity in net income of Stockard 924.0+ Stockard’s translation adjustment 16.5Investment, December 31, 2014 $26,940.5


c. Consolidation working paperPenn

Dr (Cr)StockardDr (Cr)

Dr Cr ConsolDr (Cr)

Cash & receivables 1,400 199.2 1,599.2Inventories 3,100 796.8 3,896.8PP&E, net 29,500 5,478 34,978Intangibles -- -- (R) 664 66.4 (O) 597.6Investment in Stockard

26,940.5 -- 924 (C)504 (E)

25,512.5 (R)

--

Goodwill -- -- (R) 25,398 25,398Liabilities (41,000) (4,980) (45,980)Capital stock (10,000) (65) (E) 65 (10,000)Retained earnings, beginning

(5,000) (422.5) (E) 422.5 (5,000)

Accumulated other comprehensive income

(16.5) (16.5) (E) 16.5 (O) 0.4

549.5 (R) (565.6)

Equity in net income of Stockard

(924) (C) 924 --

Sales revenue (125,000) (17,160) (142,160)Expenses 121,000 16,170 (O) 66 137,236 Total -0- -0- -0-

Use the following information to answer questions 15 and 16 below:

A U.S. company has a subsidiary in Brazil. The subsidiary’s beginning and ending trial balances for 2015 are as follows:



Cash R 400,000 R 410,000Fixed assets, net 1,800,000 2,100,000Liabilities (2,000,000) (2,210,000)Capital stock (230,000) (230,000)Retained earnings, beginning 30,000 30,000Sales (3,100,000)Depreciation expense 300,000Other expenses _______ 2,700,000

R 0 R 0

Exchange rates are as follows ($/R):January 1, 2015 $0.52Average for 2015 0.56December 31, 2015 0.60


15. Topic: Translation gain or lossLO 1Assume the subsidiary’s functional currency is the real.

RequiredCalculate the translation gain or loss, appearing as a component of 2015 translated other comprehensive income.

ANS:

Beginning net assets €200,000 x 0.52 = $104,000Net income 100,000 x 0.56 = 56,000

160,000Ending net assets €300,000 x 0.60 = - 180,000Translation gain $ 20,000

16. Topic: Remeasurement gain or lossLO 1Assume the subsidiary’s functional currency is the U.S. dollar. Sales and out-of-pocket expenses were incurred evenly throughout the year. Fixed asset purchases for the year occurred when the exchange rate was $0.58.

RequiredCalculate the remeasurement gain or loss, appearing as a component of 2015 remeasured net income.

ANS:

Beginning exposure R(1,600,000) x 0.52 $ (832,000)Sales 3,100,000 x 0.56 1,736,000Out of pocket expenses (2,700,000) x 0.56 (1,512,000)Fixed asset purchases (600,000) x 0.58 (348,000 )

(956,000)Ending exposure R(1,800,000) x 0.60 -(1,080,000 ) Remeasurement loss $ 124,000



On January 2, 2014, Carney Corporation, headquartered in the U.S., opened a branch in Paris. An initial investment of $500,000 was made on that date; the exchange rate was $1.40/€. During 2014, the following cash transactions occurred at the Paris branch:

Jan.2 Organization costs incurred (5-yr.life, straight-line) = € 50,000Apr.1 Purchase of equipment (10-yr. life, straight-line) = €120,000

Throughout the year, cash sales of €1,300,000 were made and cash operating costs of €1,240,000 were incurred. A full year of depreciation is taken on the equipment.

The exchange rate was $1.45 on April 1 and $1.48 on Dec. 31. Sales and cash operating costs are assumed to be made at the average exchange rate of $1.46.

17. Topic: Remeasurement gain or loss, remeasured financial statementsLO 1

RequiredPrepare a balance sheet as of December 31, 2014, and a 2014 income statement for the Paris branch, in U.S. dollars, assuming the functional currency of the Paris branch is the U.S. dollar. Include a separate schedule for the calculation of the remeasurement gain or loss for 2014.

ANS:

December 31, 2014 balance sheet€ rate US$

Cash €390,000 1.48 $577,200Organization costs, net 40,000 1.40 56,000Equipment, net 108,000 1.45 156,600Total €538,000 $789,800

Capital stock €500,000 1.40 $700,000Retained earnings 38,000 (1) 89,800Total €538,000 $789,800

(1) 2014 income statement€ rate US$

Sales € 1,300,000 1.46 $ 1,898,000Cash operating expenses (1,240,000) 1.46 (1,810,400)Depreciation expense (12,000) 1.45 (17,400)Amortization expense (10,000) 1.40 (14,000)Remeasurement gain ________ (2) 33,600Net income € 38,000 $ 89,800


(2) Schedule of 2014 remeasurement gain€ rate US$

Beginning exposed position € 500,000 1.40 $ 700,000Organization costs (50,000) 1.40 (70,000)Equipment (120,000) 1.45 (174,000)Sales 1,300,000 1.46 1,898,000Cash operating costs (1,240,000) 1.46 (1,810,400 )

________ 543,600Ending exposed position € 390,000 1.48 - 577,200Remeasurement gain $ (33,600 )

18. Topic: Translation gain or loss, translated financial statementsLO 1

RequiredRepeat the requirements of question 17, assuming the functional currency of the Paris branch is the euro.

ANS:

December 31, 2014 balance sheet€ rate US$

Cash €390,000 1.48 $577,200Organization costs, net 40,000 1.48 59,200Equipment, net 108,000 1.48 159,840Total €538,000 $796,240

Capital stock €500,000 1.40 $700,000Retained earnings 38,000 (1) 55,480Accumulated other comprehensive income _______ (2) 40,760Total €538,000 $796,240

(1) 2014 income statement€ rate US$

Sales € 1,300,000 1.46 $ 1,898,000Operating expenses (1,262,000) 1.46 (1,842,520)Net income € 38,000 $ 55,480

(2) Schedule of 2014 translation gain

€ rate US$Beginning exposed position € 500,000 1.40 $700,000Net income 38,000 1.46 55,480

755,480Ending exposed position € 538,000 1.48 - 796,480Translation gain $(40,760)



Seaco, Inc. is a Canadian subsidiary of a U.S. company. The subsidiary began operations on January 1, 2014 with assets consisting of a cash balance of C$411,200, acquired by issuing stock. You are required to convert Seaco's financial statements to U.S. dollars as a first step in the consolidation process. Financial statements of Seaco as of December 31, 2014 are as follows, in Canadian dollars:

December 31, 2014Balance Sheet

(C$)2014 Income Statement

(C$)Cash 30,000 Sales 404,000Receivables 23,500 Cost of sales (333,000)Inventories 42,500 Depreciation exp. (27,500)Land 22,000 Other expense (18,700 ) Equipment (net) 320,000 Net income 24,800Total 438,000

Payables 2,000Capital stock 411,200Retained earnings 24,800Total 438,000

U.S.$/C$ exchange rates are:January 1, 2014 $1.022014 average 0.95December 31, 2014 0.90

The land and equipment were acquired when the exchange rate was $1.02. Merchandise purchases, sales and other expenses occurred evenly over the year. The ending inventory was purchased when the exchange rate was $0.92.


19. Topic: Translation and financial analysisLO 1, 2Assume the functional currency of Seaco is the Canadian dollar.

Requireda. Prepare a translated 2014 income statement and the December 31, 2014 balance

sheet for Seaco, in U.S. dollars. Show a separate schedule calculating the translation gain or loss for 2014.

b. Compute the following ratios, for both the local currency financial statements and the translated financial statements:

(1) Current ratio(2) Debt to assets ratio(3) Gross profit percentage

Comment on similarities and differences between the local currency and translated ratios.

ANS:

a. December 31, 2014 balance sheetCash 30,000 x .90 $ 27,000Receivables 23,500 x .90 21,150Inventories 42,500 x .90 38,250Land 22,000 x .90 19,800Equipment 320,000 x .90 288,000Total $394,200

Payables 2,000 x .90 $ 1,800Capital stock 411,200 x 1.02 419,424Retained earnings (1) 23,560Accumulated other comprehensive income (2) (50,584 ) Total $394,200

2014 income statement and statement of retained earningsSales 404,000 x .95 $383,800Cost of sales 333,000 x .95 316,350Depreciation expense 27,500 x .95 26,125Other expense 18,700 x .95 17,765Net income 24,800 23,560Beginning retained earnings

0Ending retained earnings (1) $ 23,560


Translation adjustment for 2014Beginning net assets 411,200 x 1.02 $419,424Net income 24,800 x .95 23,560

442,984Ending net assets 436,000 x .90 - 392,400Translation loss (2) $ 50,584

b. Local currency ratios:

Current ratio (30,000 + 23,500 + $42,500)/2,000 = 48 to 1Debt to assets 2,000/438,000 = 0.5%Gross profit % (404,000 - 333,000)/404,000 = 17.6%

Translated ratios are the same as above, because when translating from Canadian dollars to U.S. dollars, the numerator and denominator of each ratio are multiplied by the same exchange rate.

20. Topic: Remeasurement and financial analysisLO 1, 2Assume the functional currency of Seaco is the U.S. dollar.

RequiredRepeat the requirements of question 19 above.

ANS:

a. December 31, 2014 Balance SheetCash 30,000 x .90 $ 27,000Receivables 23,500 x .90 21,150Inventories 42,500 x .92 39,100Land 22,000 x 1.02 22,440Equipment 320,000 x 1.02 326,400Total $436,090

Payables 2,000 x .90 $ 1,800Capital stock 411,200 x 1.02 419,424Retained earnings (3) 14,866Total $436,090


2014 Income Statement and Statement of Retained EarningsSales 404,000 x .95 $ 383,800Cost of sales (1) (317,625)Depreciation expense 27,500 x 1.02 (28,050)Other expense 18,700 x .95 (17,765) Remeasurement loss (2) (5,494 ) Net income $ 14,866Beginning retained earnings 0Ending retained earnings (3) $ 14,866

(1) Schedule of cost of salesPurchases 375,500 x .95 $ 356,725Ending inventory (42,500) x .92 (39,100 ) Cost of sales 333,000 $ 317,625

(2) Remeasurement loss for 2014Beginning exposed position 411,200 x 1.02 $ 419,424Land (22,000) x 1.02 (22,440)Equipment (347,500) x 1.02 (354,450)Sales 404,000 x .95 383,800Purchases (375,500) x .95 (356,725)Other expenses (18,700) x .95 (17,765 )

51,844Ending exposed position 51,500 x .90 - 46,350Remeasurement loss $ 5,494

b. Local currency ratios:

Current ratio (30,000 + 23,500 + 42,500)/2,000 = 48 to 1Debt to assets 2,000/438,000 = 0.5%Gross profit % (404,000 - 333,000)/404,000 = 17.6%

Remeasured ratios:

Current ratio ($27,000 + $21,150 + $39,100)/$1,800 = 48.47 to 1Debt to assets $1,800/$436,090 = 0.4%Gross profit % ($383,800 - $317,625)/$383,800 = 17.24%

Remeasured ratios are not the same as local currency ratios. In this case, the U.S. dollar is strengthening, so historical rates are higher than current rates. Since inventories are remeasured at historical rates, the remeasured current ratio is higher and the remeasured gross profit percentage is lower. Remeasured total assets are higher so remeasured debt to assets is lower.


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