Chapter 08 – Translation of Foreign Currency Financial Statements
Part I (a). Polish zloty is the functional currency – Current rate method
Exchange
PLN Rate U.S. $
Sales 12,500,000 0.175 2,187,500
Case 8-1 Columbia Corporation (continued)
Calculation of Cumulative Translation Adjustment
Exchange
PLN Rate U.S. $
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Chapter 08 – Translation of Foreign Currency Financial Statements
Case 8-1 Columbia Corporation (continued)
Part I (b). U.S. dollar is the functional currency – Temporal method
Exchange
PLN Rate U.S. $
Case 8-1 Columbia Corporation (continued)
Schedule A – Cost of goods
sold
Exchange
PLN Rate U.S. $
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Chapter 08 – Translation of Foreign Currency Financial Statements
Schedule B – Equipment
Exchange
PLN Rate U.S. $
Schedule C – Building
Exchange
PLN Rate U.S. $
7,500,00
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Chapter 08 – Translation of Foreign Currency Financial Statements
Case 8-1 Columbia Corporation (continued)
Calculation of Remeasurement Gain
Exchange
PLN Rate U.S. $
Case 8-1 Columbia Corporation (continued)
Part I (c). U.S. dollar is the functional currency – Temporal method (no long-term debt)
Exchange
PLN Rate U.S. $
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Chapter 08 – Translation of Foreign Currency Financial Statements
Case 8-1 Columbia Corporation (continued)
Calculation of Remeasurement Loss
Exchange
PLN Rate U.S. $
Net monetary assets, 1/1/Y2 6,500,000 0.200 1,300,000
Increase in monetary assets:
Part II. Explain the negative translation adjustment in Part I (a) and remeasurement gain
or loss in Parts 1(b) and 1(c).
The negative translation adjustment in part 1(a) arises because of two factors: (1) there is a net
asset balance sheet exposure and (2) the Polish zloty has depreciated against the U.S. dollar
during Year 2 (from $.020 at 1/1/Y2 to $.0150 at 12/31/Y2). A net asset balance sheet exposure
exists because all assets are translated at the current exchange rate and exceeds 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 liability
balance sheet exposure and (2) the Polish zloty 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 PLN 2,650,000). Accounts Payable and Long-Term Debt also are
translated at the current exchange rate (total PLN 26,250,000). Because the Polish zloty
amount of liabilities translated at the current rate exceeds the Polish zloty amount of assets
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Chapter 08 – Translation of Foreign Currency Financial Statements
translated at the current rate, a net liability balance sheet exposure exists.
The remeasurement loss in part I(c) arises because of two factors: (1) there is a net asset
balance sheet exposure and (2) the Polish zloty has depreciated against the U.S. dollar during
Year 2.
Cash and Accounts Receivable are the only assets translated at the current exchange rate (total
PLN 2,650,000). Because there is no Long-term Debt in part 1(c), Accounts Payable is the only
liability translated at the current exchange rate (total PLN 1,250,000). Because the Polish zloty
amount of the assets translated at the current rate exceeds the Polish zloty amount of liabilities
translated at the current rate, a net asset balance sheet exposure exists.
Case 8-2 Palmerstown Company
Exchange Rates $/pound
1. Pound is the functional currency – Current rate method
Exchange
Pounds Rate U.S. $
Case 8-2 Palmerstown Company (continued)
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Chapter 08 – Translation of Foreign Currency Financial Statements
Calculation of Cumulative Translation Adjustment
Exchange
Pounds Rate U.S. $
2. U.S. dollar is the functional currency – Temporal method
Exchange
Pounds Rate U.S. $
Case 8-2 Palmerstown Company (continued)
Schedule A – Cost of goods sold
Exchange
Pounds Rate U.S. $
Purchase, January 10 1,000 1.000 1,000
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Chapter 08 – Translation of Foreign Currency Financial Statements
Calculation of Remeasurement Gain
Exchange
Pounds Rate U.S. $
Net monetary assets, 1/1/Y1 8,000 1.000 8,000
Increase in monetary assets:
3. With the pound as functional currency, the U.S. dollar net income reflected in the
consolidated income statement is $1,260. If the U.S. dollar were the functional currency, the
amount reflected in consolidated net income would be $1,560, 24% higher. The amount of
total assets reported on the consolidated balance sheet is 17% smaller than if the U.S.
dollar were functional currency [($14,360 – $12,320)/$12,320].
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. Case 8-2 Palmerstown Company (continued)
U.S. $ U.S $
Pounds Current Rate Temporal
Current ratio:
Profit margin:
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Chapter 08 – Translation of Foreign Currency Financial Statements
Net income 1,400 1,260 1,440
Sales 15,000 13,500 13,500
0.093 0.093 0.107
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