58. Green Corporation, a wholly owned British subsidiary of a U.S. firm began the year with 1,300,000 British
pounds in net assets. The subsidiary incurred a 65,000 British pound net loss for 20X1. The subsidiary issued
common stock for 100,000 British pounds on November 15, 20X1. Assume the following exchange rates for
20X1:
Date
1 British pound equal to
January 1, 20X1
$1.10
November 15, 20X1
$1.15
December 31, 20X1
$1.13
20X1 average
$1.14
Required:
Compute the translation adjustment for 20X1 using the direct method.
Beginning-of-year net assets ´ change in exchange rate during the year:
1,300,000 ´ (1.13 – 1.10)
$39,000
Net loss ´ (current rate – average rate):
65,000 ´ (1.13 – 1.14)
650
Increase in net assets from stock issue ´ (current rate – historical rate)
100,000 ´ (1.13 – 1.15)
(2,000)
$37,650
59. A U.S.-owned foreign subsidiary has the following beginning and ending stockholders’ equity for 20X1:
January 1
December 31
Common stock
120,000
FC
FC
Paid-in capital in excess of par
30,000
Retained earnings
60,000
210,000
FC
FC
The change in common stock resulted from a sale of stock to the parent firm on May 15. The change in retained earnings resulted from a July 1
dividend of 10,000 FC and net income for 20X1. Various exchange rates were as follows:
Date
1 FC equal to
January 1, 20X1
$1.10
May 15, 20X1
$1.12
July 1, 20X1
$1.13
December 31, 20X1
$1.15
20X1 average
$1.125
Required:
Beginning-of-year net assets ´ change in exchange rate during the year:
210,000 ´ (1.15 1.10)
Net income for 20X1 ´ (current rate average rate):
50,000 ´ (1.15 1.125)
Increase in net assets from stock issue ´ (current rate – historical rate):
30,000 ´ (1.15 1.12)
Decrease in assets from dividends (current rate dividend date rate):
(10,000) ´ (1.15 1.13)
$12,450
60. A U.S. firm purchased 100% of a foreign firm on January 1, 20X1, when the foreign firm had the following
equity accounts:
Common stock
150,000
FC
Paid-in excess of par value
50,000
FC
Retained earnings
200,000
FC
400,000
FC
The U.S. firm paid 420,000 FCs for the foreign firm. The payment in excess of book value is traceable to undervalued land owned by the foreign
firm. The foreign firm had a net income of 25,000 FCs during 20X1. Assume that the following exchange rates are relevant:
Date
1 FC equal to
January 1, 20X1
$2.00
December 31, 20X1
$1.80
20X1 average
$1.95
Required:
Prepare all the journal entries to record and update the investment account of the U.S. firm and the necessary eliminating and adjusting entries for the
20X1 consolidated statement. Assume that the U.S. firm used the simple equity method.
Jan. 1
Investment in Foreign Company (FC 420,000 x $2.00)
840,000
Cash
840,000
Dec. 31
Investment in Foreign Company (FC 25,000 x $1.95)
48,750
Subsidiary Income
48,750
Eliminating entries:
Dec. 31
Subsidiary Income
48,750
Investment in Foreign Company
48,750
Dec. 31
Beginning Retained Earnings (FC 200,000 x $2.00)
400,000
Common Stock (FC 150,000 x $2.00)
300,000
Paid-in Excess of Par Value (FC 50,000 x $2.00)
100,000
Investment in Foreign Company
840,000
Dec. 31
Land (20,000 ´ 1.80)
36,000
Cumulative Translation Adjustment
4,000
Excess of Cost Over Book Value
40,000
61. On January 1, 20X1, Rapid Corporation purchased 25% of a foreign firm when its stockholders’ equity
section totaled 240,000 FCs. Rapid Corporation paid 75,000 FCs, with the excess over book value being
attributed to equipment with a 5-year useful life. The foreign firm reported net income of 80,000 FCs for 20X1.
Relevant exchange rates were as follows:
Date
1 FC equal to
January 1, 20X1
$0.30
December 31, 20X1
$0.35
Average 20X1
$0.33
Required:
Prepare the journal entries necessary to record the events concerning Rapid’s investment in the foreign firm.
Jan. 1
Investment in Foreign Firm (FC 75,000 x .30)
22,500
Cash
22,500
Dec. 31
Investment in Foreign Firm
9,010
Subsidiary Income
Cumulative Translation Adjustment
62. On January 1, 20X2, U.S.A. Inc. created an Algerian subsidiary, Niko, Inc. The books are kept in Algerian
dinars, but the functional currency is the U.S. dollar. Dividends are paid on December 31, and income is earned
evenly throughout the year. The earnings and dividends of Niko in dinars are as follows:
Net Income
Dividends
20X2
100,000
50,000
20X3
200,000
80,000
20X4
325,000
105,000
Exchange rates are given below.
Yearly Average
Dec. 31 Spot
20X2
.0175
.0185
20X3
.0188
.022
20X4
.019
.025
Required:
Calculate the balance in retained earnings for Niko in dollars as of December 31, 20X4.
Net Income
Dividends
100,000 ´ .0175 =
$ 1,750
50,000 ´ .0185 =
$ 925
200,000 ´ .0188 =
3,760
80,000 ´ .022 =
1,760
325,000 ´ .019 =
6,175
105,000 ´ .025 =
2,625
Total
$11,685
Total
$5,310
63. Renta USA, Inc. formed a foreign subsidiary on January 1, 20X3; the subsidiary issued 15,000 of its no-par
10FC stock to Renta. The subsidiary’s books are kept in their functional currency. Income earned in 20X3 and
20X4 totaled 100,000 FC and 120,000 FC, respectively. Dividends of 40,000 FC have been paid on December
31 of each year. In addition, 1,000 shares of common stock (no par) were issued on July 1, 20X4 for 20 FC
each.
Exchange rates relating this foreign currency to U.S. dollars are as follows:
January 1, 20X3
1.00
December 31, 20X3
1.04
Average 20X3
1.02
July 1, 20X4
1.05
December 31, 20X4
1.10
Average 20X4
1.08
Required:
Calculate the owners’ equity of the subsidiary on December 31, 20X4.
Common Stock:
150,000 ´ 1.00
20,000 ´ 1.05
Total
$171,000
Net Income
Dividends
100,000 ´ 1.02 =
102,000
40,000 ´ 1.04 =
$41,600
120,000 ´ 1.08 =
129,600
40,000 ´ 1.10 =
44,000
Total
$231,600
Total
$85,600
Common Stock
$171,000
Retained Earnings
146,000
Total Owner’s Equity
$317,000
64. On January 1, 20X8, Cayane Inc. purchased 90% of an German firm, Brosch Manufacturing when Brosch’s
equity consisted of the following:
Common stock
500,000
euros
Paid-in capital in excess of par
100,000
Retained earnings
150,000
750,000
euros
Cayane paid 810,000 euros for its 90% interest in Brosch. The excess over book value was attributed to a building with a 20-year useful life. Brosch
reported net income for 20X8 of 150,000 euros. The year-end cumulative translation adjustment is $10,000 credit. Relevant exchange rates are as
follows:
January 1, 20X8
1 euro = $.65
December 31, 20X8
1 euro = .68
20X8 average
1 euro = .66
Required:
Prepare all the journal entries related to Cayane’s investment in Brosch and all the necessary eliminating and adjusting entries for consolidation of
Brosch, assuming the use of the simple equity method.
90%
10%
Price paid for investment
900,000
810,000
90,000
Book value of underlying net assets:
Paid-in capital
600,000
Retained Earnings
150,000
Total
750,000
675,000
75,000
Excess of cost over book value
150,000
135,000
15,000
Excess attributable to:
20 year building
150,000
7,500
amort
Jan. 1
Investment in Brosch
520,000
Cash (800,000 ´ $.65)
520,000
Dec. 31
Investment in Brosch
89,100
Subsidiary Income (150,000 ´ $0.66 ´ 90%)
89,100
65. Hylie, a U.S. corporation, owns 100% of Frosan, a French firm. Assume that the dollar is the functional
currency, although the books are kept in euros.
Required:
What currency exchange rate would be used to remeasure Frosan’s balance sheet into U.S. dollars? Choose from
current, simple average, weighted average, or historical.
a.
Cash
_____________________
b.
Accounts Receivable
_____________________
c.
Inventory, carried at cost
_____________________
d.
Equipment
_____________________
e.
Accumulated Depreciation
_____________________
f.
Bonds Payable
_____________________
g.
Common Stock
_____________________
h.
Sales
_____________________
Cash
Current
b.
Accounts Receivable
Current
Inventory, carried at cost
Historical
d.
Equipment
Historical
Accumulated Depreciation
Historical
Bonds Payable
Current
g.
Common Stock
Historical
h.
Sales
Weighted Average
date alignment
Subsidiary Income
89,100
Investment in Brosch
89,100
eliminate Parent portion of sub equity
Common Stock-Sub (500,000 x .65 x 90%)
292,500
Paid-in Capital in Excess of Par-Sub (100,000 x .65 x 90%)
58,500
Retained Earnings-Sub (150,000 x .65 x 90%
87,750
allocate cumulative translation adjustment (CTA)
CTA-Sub (10,000 x 90%)
9,000
CTA-Par
9,000
distribute excess per D&D schedule
Building (150,000 ´ $0.68)
102,000
Investment in Brosch (150,000 ´ 90% ´ $0.65)
87,750
Retained Earnings-Sub(150,000 ´ 10% ´ $0.65)
9,750
CTA-Par (150,000 ´ [0.68-0.65]) ´ 90%
4,050
CTA-Sub (150,000 ´ [0.68-0.65]) ´ 10%
450
amortize excess
Depreciation Expense (7,500 ´ $0.66)
4,950
CTA-Par (7,500 ´ [0.68-0.66]) ´ 90%
135
CTA-Sub (7,500 ´ [0.68-0.66]) ´ 10%
15
Accumulated Depreciation (7,500 ´ $0.68)
5,100
66. A Kuwaiti subsidiary of Hiawatha Corp. (a U.S. firm) has certain balance sheet accounts on December 31,
20X4. The functional currency is the U.S. dollar and currency of record is the dinar and the parents books are
kept in U.S. dollars.
Information relating to these account in U.S. dollars is as follows:
Translated at
Current Rate
Historical Rate
Cash
$150,000
$150,000
Accounts Receivable
115,000
110,000
Inventories
285,000
255,000
Prepaid Insurance
12,000
10,000
Land
90,000
180,000
Buildings
500,000
800,000
Required:
From the above information, prepare the asset portion of the subsidiary’s trial balance.
67. A French subsidiary of a U.S. firm keeps accounting records in euros. The U.S. dollar is considered the
subsidiary’s functional currency. Assume the following exchange rates:
Date
1 euro equal to
January 1, 20X5
$1.05
July 1, 20X5
$1.07
Dec. 31, 20X5
$1.09
Average 20X5
$1.08
January 1, 20X6
$1.09
July 1, 20X6
$1.07
Dec. 31, 20X6
$1.06
Average 20X6
$1.08
Required:
Remeasure the following items from the December 31, 20X6 trial balance of the subsidiary:
a.
Sales made evenly
throughout 20X6 = 100,000
euros
b.
Cost of goods sold = 30,000
euros
5,000 euros purchased July 1, 20X5
25,000 euros purchased July 1, 20X6
Cash
$ 150,000
Accounts Receivable
115,000
Inventories
255,000
Prepaid Insurance
10,000
Land
180,000
Building
800,000
Total Assets
$1,510,000
c.
Salary expense for 20X6 =
40,000 euros
d.
Land = 1,000,000 euros
200,000 euros purchased January 1, 20X5
800,000 euros purchased July 1, 20X6
Sales: (100,000 ´ 1.08)
$108,000
b.
Cost of goods sold:
(5,000 ´ 1.07)
$ 5,350
(25,000 ´ 1.07)
26,750
$32,100
Salary expense: (40,000 ´ 1.08)
$43,200
d.
Land:
(200,000 ´ 1.05)
$ 210,000
(800,000 ´ 1.07)
856,000
$1,066,000
68. An American firm owns 100% of a German firm that had the following transactions occur relative to their
equipment account:
January 1, 20X5
Purchased equipment for 50,000 euros
July 1, 20X5
Purchased equipment for 30,000 euros
January 1, 20X6
Purchased equipment for 75,000 euros
July 1, 20X6
Sold equipment purchased on January 1, 20X5 for 48,000 euros
The following exchange rates could be relevant:
Date
euro/$
Date
euro/$
January 1, 20X5
$0.50
January 1, 20X6
$0.53
July 1, 20X5
$0.52
July 1, 20X6
$0.50
December 31, 20X5
$0.53
December 31, 20X6
$0.49
Average 20X5
$0.515
Average 20X6
$0.51
Required:
Assuming that the U.S. dollar is the functional currency and that the German firm uses straight-line depreciation over a 5-year period with a 10%
salvage value, determine the following for remeasurement purposes:
a.
The value of the equipment account on December 31, 20X6.
b.
The value of the depreciation expense for 20X6.
c.
The amount of the gain or loss resulting from the July 1, 20X6, sale.
Equipment:
July 1, 20X5 (30,000 .52)
January 1, 20X6 (75,000 .53)
Total equipment
$55,350
b.
Depreciation expense
Total depreciation
$12,213
Cash (48,000 ´ .50)
24,000
Accumulated depreciation (1)
6,750
Equipment
25,000
Gain on sale of equipment
5,750
69. Kerry Manufacturing Company is a German subsidiary of a U.S. company. Kerry records its operations and
prepares financial statements in euros. However, its functional currency is the British pound. Kerry was
organized and acquired by the U.S. company on June 1, 20X4. The cumulative translation adjustment as of
December 31, 20X6, was $79,860. The value of the subsidiary’s retained earnings expressed in British pounds
and U.S. dollars as of December 31, 20X7, was 365,000 pounds and $618,000, respectively. On March 1, 20X7,
Kerry declared a dividend of 120,000 euros. The trial balance of Kerry in euros as of December 31, 20X7, is as
follows:
Debit
Credit
Cash
240,000
Accounts Receivable (net)
2,760,000
Inventory (at cost)
3,720,000
Marketable Securities (at cost)
2,040,000
Prepaid Insurance
210,000
Depreciable Assets
8,730,000
Accumulated Depreciation
1,417,000
Cost of Goods Sold
17,697,000
Selling, General, and
Administrative Expense
4,762,000
Sales Revenue
26,430,000
Investment Income
180,000
Accounts Payable
2,120,000
Unearned Sales Revenue
960,000
Loans and Mortgage Payable
5,872,000
Common Stock
1,500,000
Paid-in Capital in Excess of Par
210,000
Retained Earnings
1,470,000
Total
40,159,000
40,159,000
The marketable securities were acquired on November 1, 20X6, and the prepaid insurance was acquired on December 1, 20X7. The cost of goods
sold and the ending inventory are calculated by the weighted-average method. The underlying costs have been incurred uniformly throughout the
year. On June 1, 20X4, 60% of the depreciable assets existed, and the balance was acquired on March 1, 20X6. The depreciable assets are amortized
over a 10-year period by the straight-line method. Of the total depreciation expense, 80% is traceable to the cost of goods sold and the balance is in
general expenses. On November 1, 20X6, Kerry received a customer prepayment valued at 3,000,000 euros. On February 1, 20X7, 2,040,000 euros
of the prepayment was earned. The balance remains unearned as of December 31, 20X7.
Relevant exchange rates are as follows:
Pounds/Euro
$/Pound
June 1, 20X4
0.310
$1.600
March 1, 20X6
0.300
$1.640
November 1, 20X6
0.305
$1.650
December 31, 20X6
0.310
$1.680
February 1, 20X7
0.302
$1.670
March 1, 20X7
0.300
$1.660
December 1, 20X7
0.290
$1.640
December 31, 20X7
0.288
$1.640
20X7 average
0.297
$1.660
Required:
Prepare a remeasured and translated trial balance of the Kerry Manufacturing Company as of December 31, 20X7. Provide supporting schedules.
For the Trial Balance Translation, please refer to Answer 11-16.
70. A foreign subsidiary operates in a highly inflationary economy. The company’s December 31, 20X2, trial
balance includes the following:
Equipment:
Acquired on June 1, 20X1
800,000
FC
Acquired on October 1, 20X2
600,000
FC
Inventory:
Valued at lower cost or market
Market Value
182,000
FC
A cost of 184,000 FC represents 84,000 FC acquired
on December 1, 20X2, and 100,000 FC acquired on
October 1, 20X2.
Gain on sale of land:
This represents a gain from selling land that was
acquired on June 1, 20X1, at a cost of 50,000 FC,
on October 1, 20X2
100,000
FC
Relevant exchange rates are as follows:
Date
Rate
June 1, 20X1
$0.69
July 1, 20X1
$0.68
October 1, 20X2
$0.71
December 1, 20X2
$0.72
December 31, 20X2
$0.74
20X2 average
$0.70
Required:
a.
Discuss the criteria that must be satisfied in order to qualify as a highly inflationary economy.
b.
Discuss how the remeasurement of statements of companies operating in such economies affects net income.
c.
Calculate the dollar value of the trial balance accounts as of December 31, 20X2.
owners’ equity.
71. For each of the following account balances, identify the exchange rate used to translate or remeasure. The
choices are current exchange rate, historical rate, weighted average, other (specify).
Current Method
Remeasurement Method
Accounts Receivable
Prepaid Assets
Accounts Payable
Common Stock
Land
Goodwill
Sales Revenue
Depreciation Expense
Current Method
Remeasurement Method
Accounts Receivable
Current
Current
Prepaid Assets
Current
Historical
Accounts Payable
Current
Current
Common Stock
Historical
Historical
Land
Current
Historical
Goodwill
Current
Historical
Sales Revenue
Weighted Average
Weighted Average
Depreciation Expense
Weighted Average
Historical
Inventory at lower of cost or market:
Market Value:
182,000 FC ´ $0.74
$134,680
Cost:
84,000 FC ´ $0.72
$ 60,480
100,000 FC ´ $0.71
71,000
$131,480
Cost will be used for reporting purposes.
Gain on sale of land:
Cash (150,000 ´ $0.71)
106,500
Land (50,000 ´ $0.69)
34,500
Gain on Sale (inferred)
72,000
72. Complete the following table:
Remeasurement
Translation
Investee’s books of record remeasured into functional
currency
TEMPORAL METHOD
Functional currency translated into parent/investor’s
currency
FUNCTIONAL METHOD
Assets and Liabilities
Monetary items
Not monetary items
Revenues and Expenses
Representing amortization of historical
amounts
Not representing amortization of
historical amounts
Equity accounts, (excluding retained
earnings)
Recognition of:
Measurement gain/loss
Translation adjustment
Remeasurement
Translation
Assets and Liabilities
Monetary items
Remeasure using the current exchange rate
Translate using the current exchange rate
Not monetary items
Remeasure using the historical exchange rate
Translate using the current exchange rate
Revenues and Expenses
Representing amortization of historical
amounts
Remeasure using the historical exchange rate
Translate using the weighted average exchange rate
Not representing amortization of
historical amounts
Remeasure using the weighted average exchange rate
Translate using the weighted average exchange rate
Equity accounts, (excluding retained
earnings)
Remeasure using the historical exchange rate
Translate using the historical exchange rate
Recognition of:
Measurement gain/loss
As a component of net income
As a component of net income translated at the
weighted average rate for the period
Translation adjustment
Not applicable
Recognize as a component of other comprehensive
income
73. Discuss the factors that may be considered in determining if a Mexican subsidiary of a U.S. firm has the
peso or the dollar as its functional currency. The subsidiary only manufactures component parts that are shipped
to the U.S. firm’s final production plant in Detroit.
Factors that should be considered include the following:
74. List the two primary objectives of translating foreign financial statements according to the FASB #52,
which emphasizes the concept of the functional currency.
75. Assume Champ Company will be translating the accounts of its foreign subsidiary, Collier, Ltd. for
inclusion in the consolidated financial statements.
1) What are the steps to be taken?
2) Assuming the functional currency is the currency of the country in which Collier is located, what rates should
be used/
3) Where should the adjustment resulting from the translation process be recognized?
76. Company A, an American company, owns Company B, a Canadian subsidiary. Company A borrowed
1,000,000 Canadian dollars as a hedge on its net investment in Company B. For 20X3, Company A recorded an
exchange gain of $40,000 due to exchange rate changes. The 20X3 translation adjustment for Company B was a
debit of $42,000.
Required:
Describe the accounting treatment required for the hedge on Company A’s books.
77. Foreign firms operating in highly inflationary economies received special treatment under generally
accepted accounting principles (GAAP) relative to translating their financial statements.
Required:
a.
How does the FASB define a highly inflationary economy?
b.
Why is the method typically used for translating foreign entities not permitted for these firms?
c.
What method is used for remeasuring or translating the statements of these firms?
Since the domestic currency is viewed as the functional currency, the proper method for remeasurement is the temporal method.