978-1111823450 Solutions to Foreign Currency Translation Solution Manual Part 2

FORCUR-1 Web Site Solutions

An increase in the value of the foreign currency relative to the reporting

currency results in a credit change in other comprehensive income. The

parent company is better o# from having invested funds in a foreign

currency whose value increased relative to the reporting currency than

FORCUR 5.

A foreign exchange gain arises when (1) the foreign entity is in a net

monetary asset position and the foreign currency increases in value, or

(2) the foreign entity is in a net monetary liability position and the foreign

currency decreases in value, relative to the reporting currency. The gain

occurs in the .rst case because the net monetary asset position converts

A foreign exchange loss arises when (1) the foreign entity is in a net

monetary asset position and the foreign currency decreases in value, or

(2) the foreign entity is in a net monetary liability position and the foreign

FORCUR 6.

a. This statement is not correct. Cost of goods sold and depreciation

expense translate using the current exchange rate under the

all-current method and at the historical exchange rate under the

b. This statement is incorrect for reasons similar to those in Part a.

above. The all-current method translates nonmonetary assets and

liabilities using the current exchange rate, whereas the

monetary-nonmonetary method translates them using the historical

exchange rate. Furthermore, the cumulative foreign exchange

Web Site Solutions FORCUR-2

FORCUR 7.

The all-current translation method uses the net assets position (= assets

minus liabilities) as the basis when computing the foreign exchange

adjustment, whereas the monetary-nonmonetary translation method

uses the net monetary asset or net monetary liability position. The

FORCUR 8. (Selecting the exchange rate for foreign currency

translation.)

(1) (2)

All-Current

Monetary- Nonmonetary

Method Method

a. Cash C-E C-E

b. Accounts Receivable C-E C-E

FORCUR-3 Web Site Solutions

a The historical rate is technically correct; in these cases it is the average

exchange rate during the current period. Thus, we accept either C-A or H as

correct answers.

Web Site Solutions FORCUR-4

FORCUR 9. (Identifying the foreign currency translation method.)

a. M f. N

FORCUR 10.(Identifying the nature of a foreign exchange adjustment.)

a. Use of the all-current translation method results in a credit change in

the foreign exchange adjustment account. The parent company’s

investment in the net assets (= assets minus liabilities =

b. Use of the all-current translation method results in a debit change in

the foreign exchange adjustment account. The parent’s investment

in the net assets of the subsidiary decreases in value as a result of

FORCUR 11. (Interpreting translated .nancial statements.)

a. The British pound decreased in value relative to the euro. Indicators

(1) The translated euro amount for inventories using the

11. a. continued.

FORCUR-5 Web Site Solutions

(2) The translated euro amount for property, plant and equipment

(3) The net asset position of the foreign entity resulted in a negative

(4) The net monetary liability position of the foreign entity resulted

b. The subsidiary is in a net asset position. A decrease in the value of

c. The subsidiary is in a net monetary liability position. A decrease in

FORCUR 12. (U.S. Manufacturing; translating foreign currency .nancial

statements.)

a. All-Current Translation Method—2013

Exchange U.S.

Balance Sheet Euros Rate Dollars

Assets:

Cash……………………………. € 100 $1.00: €1

$ 100

Statement of Income and

Web Site Solutions FORCUR-6

Retained Earnings

Sales Revenue…………………. € 2,000 $1.50: €1 $ 3,000

Calculation of Foreign Exchange Adjustment for 2013

Exchange U.S.

Euros Rate Dollars

Net Asset Position, Jan-

uary 1, 2013…………………. € — $ —

Increase from Common

b. Monetary-Nonmonetary Translation Method—2013

Exchange U.S.

Balance Sheet Euros Rate Dollars

Assets:

Cash……………………………. € 100 $1.00: €1

$ 100

FORCUR-7 Web Site Solutions

FORCUR 12. b. continued.

Statement of Income and

Retained Earnings

Sales Revenue…………………. € 2,000 $1.50: €1 $ 3,000

Calculation of Foreign Exchange Gain for 2013

Exchange U.S.

Euros Rate Dollars

Net Monetary Position, Jan-

uary 1, 2013…………………. € — $ —

Increases:

c. The euro decreased in value relative to the U.S. dollar during 2013,

resulting in a negative foreign exchange adjustment on the

Web Site Solutions FORCUR-8

d. (1) €160/€2,000 = 8%.

FORCUR 13. (Casey Corporation; translating foreign currency .nancial

statements using the all-current method.)

a.

Translation of Financial Statements

of McCann Corporation—2013

All-Current Method

Exchange Japanese

Balance Sheet Euros Rate Yen

Cash……………………………….. € 40,000 145 ¥5,8oo,000

Accounts Receivable…………. 80,000 145 11,6oo,000

0

FORCUR-9 Web Site Solutions

Income Statement

Sales………………………………. € 500,000 148 ¥74,0oo,00

0

Web Site Solutions FORCUR-10