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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements
C12-8 Changes in the Cumulative Translation Adjustment Account
a. Foreign transactions.
b. Johnson & Johnson Company applies the concepts presented in the chapter
1. The foreign subsidiaries could be increasing their local liabilities, i.e.,
2. The foreign subsidiaries could be decreasing their local assets, i.e.,
3. The direct exchange rate of the dollar versus the local currency units
of the countries in which the company has foreign subsidiaries has
been decreasing over time (i.e., the dollar had strengthened versus
the local currency units).
d. This footnote demonstrates these factors. Remember that it is assumed that
20X1 Translated Balance Sheets of All Foreign Subsidiaries
Net assets
$634
Stockholders’ equity:
Other than AOCI
AOCI Translation
Adjustment
$ 500
134
20X2 Translated Balance Sheets of All Foreign Subsidiaries
Net assets
$354
Stockholders’ equity:
Other than AOCI
AOCI Translation
Adjustment
$ 500
(146)
20X3 Translated Balance Sheets of All Foreign Subsidiaries
Net assets
$162
Stockholders’ equity:
Other than AOCI
AOCI Translation
Adjustment
$ 500
(338)
Copyright © 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized
for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted
on a website in whole or part.
C12-10 Determining an Entity’s Functional Currency
MEMO
To: Garry Parise, CFO, Maxima Corporation
From: _______________ ____________________, CPA, Controller’s Department
Re: Functional Currency of Luz Maxima
According to ASC 830, the functional currency for a company is the primary currency
evaluating the functional currency of Luz Maxima are sales, expense, and financing
indicators.
• Sales market indicators – Luz Maxima now sells a significant amount of product in
Mexico and South America. These transactions are denominated in the peso.
• Expense indicators – Luz Maxima obtains a significant amount of materials from
most appropriate and relevant functional currency for this subsidiary. If a decision is
made to change the functional currency from the U. S. dollar to the Mexican peso, Luz
Maxima’s current financial statements should be converted to U.S. dollars using the
current rate translation method. Any adjustment that occurs as a result of translating
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements
Copyright © 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized
for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted
on a website in whole or part.
nonmonetary assets using the current rate method should be reported as a component
of other comprehensive income.
Authoritative support for the above memo can be found in ASC 830.
C12-11 Accounting for the Translation Adjustment
MEMO
To: Renee Voll, Controller
From: ___________ _______________, CPA
Re: Translation Adjustment for Valencia subsidiary
Since Sonoma has sold 30% of the investment in our Spanish subsidiary, the balance of
Copyright © 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized
for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted
on a website in whole or part.
E12-1 Multiple-Choice Translation and Remeasurement [AICPA Adapted]
Foreign Currency
U.S. Dollar
is Functional Currency
is Functional Currency
1.
a –
$215,000
b –
$225,000
($100,000 + $50,000 + $30,000
+ $45,000)
2.
c –
400,000 LCU x $0.44 = $176,000
d –
120,000 LCU x
$0.50
= $ 60,000
80,000 LCU x
$0.44
= 35,200
200,000 LCU x
$0.44
= 88,000
$183,200
3.
a –
Indirect rates used
c –
170,000 LCU / 1.5 LCU
= $113,333
90,000 LCU / 1.6 LCU
=
56,250
260,000 LCU / 1.8 LCU = $144,444
$169,583
4.
d –
25,000 LCU / 2 LCU = $12,500
b –
25,000 LCU / 2.2 LCU
= $
11,364
5.
a
d
6.
a
c
7.
a –
$755,000
c –
$870,000
(All assets are translated
($75,000 + $700,000 + $25,000
at current rate)
+ $70,000)
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements
E12-4 Multiple-Choice Questions on Translation and Remeasurement
1.
b –
Investment cost
$160,000
Less:
Book and fair values of sub's net assets
680,000 ringitts x $0.21 x 0.90 =
128,520
Goodwill
$ 31,480
2.
c –
Dollars
Ringitts
Goodwill
$10,500
RM 50,000
($10,500 / $.21)
Impairment
1,100
(RM 5,000 x $0.22)
5,000
(RM 50,000 / 10)
3.
a –
Impairment loss = $10,500 / 10 = $1,050
4.
b –
Sub’s Net Income (€25,000 x $1.24)
$31,000
Less:
Goodwill Impairment Loss
(€35,000 x 1.24 x 0.1)
4,340
Income from Sub
$ 26,660
Goodwill of €35,000 calculated as follows:
Amount paid for Common Stock
($402,000 / $1.2)
€335,000
Less: Fair value of identifiable assets
€300,000
Goodwill
€ 35,000
5.
d –
€ 5,000 x $1.30 = $6,500
6.
c –
Investment cost on January 1, 20X5
$402,000
Less:
Book and fair values of sub’s net assets:
€ 300,000 x $1.20
360,000
Goodwill
$ 42,000
Dollars
Euros
Goodwill
$42,000
€ 35,000
($ 42,000 / $1.20)
Impairment
4,340
(€ 3,500 x $1.24)
3,500
(€ 35,000 / 10)
Balance
$37,660
€ 31,500
Translated
balance
$41,580
(€ 31,500 x $1.32)
Translation adjustment: $41,580 minus $37,660 = $3,920 – use for
question 7.
7.
b –
Translation adjustment from
translating the trial balance
$12,000cr
Translation adjustment from
translating goodwill
3,920cr
Total translation adjustment
$15,920cr
