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CHAPTER 11
UNDERSTANDING THE ISSUES
1. If major cash inflows and/or outflows are
not denominated in the entity’s domestic
currency, this is a strong indicator that
another currency is the functional currency.
2. Because the French company’s functional
currency is the euro, it is not exposed to
risk associated with exchange rate changes
between the euro and the U.S. dollar (the
parent’s currency). Changes in the ex-
change rates will not have a current or
3. Because the euro is the subsidiary’s func-
tional currency, its financial statements will
4. In order for there to be a remeasurement
loss, the foreign currency (FC) would have
to weaken against the dollar (a strengthen-
ing dollar). The remeasurement loss would
be included in current-period earnings, and
the U.S. parent would want to hedge
remeasurement loss. Given a weakening
FC, an FC-denominated loan receivable
would not be an effective hedge of the net
investment in the subsidiary.
5. If a foreign entity’s functional currency is
highly inflationary, there is an assumption
order to overcome these unusual results,
two possible approaches have been
proposed. The first approach would adjust
tional currency (dollars).
Ch. 11—Exercises 11–2
EXERCISES
EXERCISE 11-1
(1) Debit Debit
(Credit) (Credit)
December 31, 1 FC = December 31,
2015 2015
Current Assets .............................................. 165,000 FC $1.92 $ 316,800
Long-Lived Assets (net) ................................ 420,000 1.92 806,400
Other Assets ................................................. 170,000 1.92 326,400
Cost of Sales ................................................. 525,000 1.96 1,029,000
Other Expenses ............................................ 205,000 1.96 401,800
Note A: Translation of Retained Earnings
In FC 1 FC = In U.S.$
December 31, 2014 balance .......... 140,000 Given $227,300
2015 income ................................... 180,000 $1.92 345,600
(2) Cumulative Translation Adjustment Traceable to Years Prior to 2015
Debit
(Credit)
11–3 Ch. 11—Exercises
Exercise 11-1, Concluded
Year 2015 Translation Adjustment
Debit
(Credit)
In U.S.$
Net assets at beginning of 2015 multiplied by change in exchange
rates during the period:
$12,800
(3) Debit Debit
(Credit) (Credit)
December 31, 1 FC = December 31,
2014 2014
Current Assets .............................................. 185,000 FC $1.95 $ 360,750
Long-Lived Assets (net) ................................ 400,000 1.95 780,000
Other Assets ................................................. 165,000 1.95 321,750
Cost of Sales ................................................. 425,000 1.92 816,000
(4) Reduction in 2015 Translation Adjustment Due to Hedge
Value of loan payable at December 31, 2015 (100,000 FC × $1.92) ..... $192,000
Value of loan payable at March 1, 2015 (100,000 FC × $2.02) ............. 202,000
Change in value of loan payable ............................................................ $ (10,000)
Debit
(Credit)
In U.S.$
EXERCISE 11-2
Remeasured no par common stock:
Exchange Remeasured
FC Value Rate Value
Common stock at January 1, 2014……………… 200,000 $1.61 $322,000
Remeasured retained earnings (Excluding Remeasurement Gain or Loss):
Exchange Remeasured
FC Value Rate Value
Retained earnings at January 1, 2014 ............. 150,000 $1.61 $241,500
2014 net income:
Net sales ................................................. 1,350,000 $1.63 2,200,500
Cost of sales:
Most recent purchase ......................... (500,000) $1.64 (820,000)
Next most recent purchase ................ (400,000) $1.62 (648,000)
Depreciation expense:
July 1, 2013 equipment ...................... (20,000) $1.61 (32,200)
September 30, 2014 equipment ......... (1,000) $1.65 (1,650)
2015 net income:
Net sales ................................................. 2,240,000 $1.70 $3,808,000
Cost of sales:
Most recent purchase ......................... (500,000) $1.68 (840,000)
Next most recent purchase ................ (300,000) $1.75 (525,000)
Next most recent purchase ................ (600,000) $1.73 (1,038,000)
EXERCISE 11-3
June 30 Investment in Fabinet .................................................. 3,120,000
Cash ...................................................................... 3,120,000
To record purchase of 40% interest in Fabinet.
Dec 31 Investment in Fabinet .................................................. 565,712
Subsidiary Income ................................................. 210,560
Translation Adjustment .......................................... 355,152
Schedule A—Calculation of Investor’s Share of Adjusted Equity Income
Price paid ($3,120,000/$0.60) .......................................................... 5,200,000 FC
Equity purchased ..................................................... 10,500,000 FC
40% Interest acquired .............................................. × 40% 4,200,000
Excess cost ...................................................................................... 1,000,000 FC
Allocation of excess cost:
Equipment ($240,000/$0.60) ...................................................... 400,000 FC
Schedule B—Recomputation of Annual Translation Adjustment
Net assets owned by the investee at the beginning of period multiplied by
the change in the exchange rates during the period [10,500,000 FC ×
($0.68 – $0.60)] ............................................................................................ $840,000
Increase in net assets (excluding capital transactions) multiplied by the
difference between the current rate and the average rate used to
EXERCISE 11-4
Translated net income: Exchange
Debit (Credit) In FC Rate In U.S.$
Sales Revenue .............................................. (1,022,000) FC $1.19 $(1,216,180)
Cost of Inventory Sold ................................... 480,000 Note A 564,100
Remeasurement gain (loss): In FC Rate In U.S.$
Net assets at December 31, 2016:
Monetary net assets ................................ 732,000 FC $1.23 $ 900,360
Inventory ................................................. 100,000 1.20 120,000
Depreciable assets (net) ......................... 870,000 1.15 1,000,500
Net investment under the sophisticated equity method:
Initial investment ............................................................................................... $700,000
Share of subsidiary net income (30% × $488,680) ........................................... 146,604
Share of remeasurement gain (30% × $37,180) ............................................... 11,154
Amortization of excess of cost over book value (Note B) .................................. (6,000)
Net investment as of December 31, 2016 ......................................................... $851,758
Note B
Cost ...................................................................................... $700,000
Book value:
11–7 Ch. 11—Exercises
EXERCISE 11-5
Calculation of cumulative translation as of yearend 2014:
December 31, 2014
In FC
Exchange
Rate In $
Cash and cash equivalents ......................................... 71,000 $1.35 $ 95,850
Accounts receivables .................................................. 148,000 $1.35 199,800
Inventory ..................................................................... 105,000 $1.35 141,750
Common stock ............................................................ (106,000) $1.25 (132,500)
Retained earnings - beginning .................................... (254,000) $1.25 (317,500)
Retained earnings - dividend ...................................... 50,000 $1.30 65,000
Net sales ..................................................................... (620,000) $1.32 (818,400)
Cost of sales ............................................................... 372,000 $1.32 491,040
Depreciation and amortization expense ...................... 28,000 $1.32 36,960
Ch. 11—Exercises 11–8
Calculation of cumulative translation as of yearend 2015:
December 31, 2015
In FC
Exchange
Rate In $
Cash and cash equivalents ......................................... 52,000 $1.21 $ 62,920
Accounts receivables .................................................. 120,000 $1.21 145,200
Inventory ..................................................................... 140,000 $1.21 169,400
Equipment ................................................................... 360,000 $1.21 435,600
Accumulated depreciation ........................................... (73,000) $1.21 (88,330)
Patents ........................................................................ 96,000 $1.21 116,160
Cumulative translation adjustment .............................. 23,250
Totals .......................................................................... 0 $ 0
Net income .................................................................. $103,000 $ 129,780
Note A: The beginning retained earnings balance is the translated value of beginning 2014
retained earnings, the 2014 net income, and the 2014 dividend.
Analysis of Excess of cost over book value at acquisition expressed in FC:
Company
Value
Parent 80%
Value
NCI 20%
Value
Fair value of subsidiary ( 400,000 FC / 80%) ...... 500,000 400,000 100,000
Less book value of interest acquired:
Common stock .............................................. 106,000
11–9 Ch. 11—Exercises
Allocation of income to NCI:
2014 2015
Internally generated net income ........................................................... $ 132,000 $129,780
Amortization of patent portion of excess:
EXERCISE 11-6
(1) Several factors that might explain why the U.S. dollar is the functional currency include:
• The subsidiary’s equity capital has been provided in U.S. dollars.
(2) (a) Remeasurement of Cost of Sales for Product A:
Exchange
Time of Number of FC Cost Total Rate Balance
Purchase Units per Unit FC Cost ($/FC) in Dollars
Third quarter 2014 400 53 21,200 $1.62 $ 34,344
Fourth quarter 2014 900 55 49,500 $1.65 81,675
(b) Remeasurement of Depreciation Expense:
Exchange
Time of Annual Rate Balance
Purchase FC Cost Depreciation ($/FC) in Dollars
Exercise 11-6, Concluded
(c) Remeasurement of Patent Amortization Expense:
Half-Year
Time of 20X6
Purchase $ Cost Amortization
March 1, 2013 $108,000 $4,500
Remeasurement of Impairment Loss on Patent:
Book value of patent at June 30, 2015:
Original cost. .......................................... $108,000
Less amortization:
2013 ....................................................... (7,500)
(d) Interest Expense and Transaction Exchange Gain/Loss on Borrowing:
Interest expense (10,000 FCA × 6% × ½ year).. 300 FCA
Transaction Exchange Gain/Loss on Borrowing:
In FCA 1 FCA = In FC 1 FC =
Principal balance:
At June 30, 2015 ............. 10,000 1.20 FC 12,000
11–11 Ch. 11—Exercises
EXERCISE 11-7
Composition of Techno’s Account “Investment in Prefabco:”
Exchange
Rate
In FC (Dollars/FC) In U.S.$ In U.S.$
March 31, 2013, initial investment ......... 400,000 $2.08 $ 832,000
Last 9 months of 2013:
Income × 70% ............................. 168,000 2.10 352,800
Dividends × 70% ......................... (50,400) 2.18 (109,872)
Entries to eliminate the investment account:
1. Subsidiary Income .............................................................. 687,960
Dividends Declared (subsidiary account) ..................... 211,680
2. Capital Stock (140,000 FC × $2.08 × 70%) ........................ 203,840
Retained Earnings .............................................................. 909,353
Investment in Subsidiary ............................................... 1,113,193
To eliminate beginning equity balances against
investment in subsidiary.
Translated Balance of Retained Earnings: In FC (Dollars/FC) In U.S.$
March 31, 2013, pre-closing balance ..... 134,000 $2.08 $ 278,720
First quarter 2013 net income:
Sales ................................................ 720,000 2.08 1,497,600
Cost of sales. ................................... (504,000) 2.08 (1,048,320)
Exercise 11-7, Concluded
3. Other Assets (206,429 × $2.40) ......................................... 495,429
Retained Earnings ........................................................ 128,811
Cumulative Translation Adjustment .............................. 66,057
Investment in Subsidiary ............................................... 300,560
To distribute the excess of cost over book
value—includes exchange rate adjustment.
Allocation of Excess:
To Parent To NCI Total in FC
Other assets .......................................... 144,500 61,929 206,429
11–13 Ch. 11—Problems
PROBLEMS
PROBLEM 11-1
(1) Entries to record transactions—Debit (Credit):
In FCA In FCB
Cash .......................................... 1,250,000 100,000
Common Stock ...................... 1,250,000 100,000
Land ........................................... 625,000 50,000
Inventory .................................... 625,000 50,000
Trial balance:
Trial Balance: In FCA In FCB
Receivable ................................... 400,000 FCA 40,000 FCB
Inventory ...................................... 312,500 25,000
Land ............................................ 625,000 50,000
Problem 11-1, Concluded
(2) Remeasurement and translation of trial balance:
Rate Rate
In FCA
FCB/FCA In FCB U.S.$/FCB In U.S.$
Trial Balance:
Receivable .................... 400,000 FCA 0.10 40,000 FCB $3.00 $ 120,000
Inventory ....................... 312,500 0.08 25,000 3.00 75,000
Land .............................. 625,000 0.08 50,000 3.00 150,000
(3) Translation adjustment traceable to the current year:
Net assets at beginning of year multiplied by the change in exchange rates
during the period:
100,000 FCB × ($3.00 – $2.50) ................................................................. $(50,000)
Increase in net assets (excluding capital transactions) multiplied by the
difference between the current rate and the average rates used to translate
(4) The remeasured FCB trial balance is the same as the trial balance that would have resulted
had the transactions been originally recorded in FCB. FCB is the functional currency in
which the company operates, and the remeasurement process should produce a trial bal-
PROBLEM 11-2
(1) Balance Exchange Remeasured
Debit (Credit) in FC Rate into U.S.$
Common Stock .............................................. (1,200,000) FC $1.41 $(1,692,000)
Contributed Capital in Excess of
Par Value .................................................. (1,800,000) 1.41 (2,538,000)
Retained Earnings as of
December 31, 2016 ................................... (1,000,000) given (1,390,000)
Sales .............................................................. (3,100,000) 1.35 (4,185,000)
Note A
Cost of inventory sold per FIFO: In FC Rate In U.S.$
Fourth quarter 2016 ............................. 300,000 FC $1.35 $ 405,000
First quarter 2017 ................................ 400,000 1.34 536,000
Second quarter 2017 ........................... 620,000 1.35 837,000
Note B
Depreciation expense:
January 1, 2015, acquisition: In FC Rate In U.S.$
900,000 ÷ 10 ................................. 90,000 FC $1.41 $126,900
160,000 ÷ 10 × 3/12 year .............. 4,000 1.41 5,640
Note C
Patent amortization:
June 30, 2016, acquisition: In FC Rate In U.S.$
Problem 11-2, Concluded
Note D
Loss on disposal of asset:
Disposition of January 1, 2015, acquisition: In FC Rate In U.S.$
Original cost ........................................ 160,000 FC $1.41 $225,600
Accumulated depreciation ................... (36,000) 1.41 (50,760)
Book value ........................................... 124,000 174,840
(2) Consolidated income traceable to noncontrolling interest:
Income as remeasured .............................................................................. $556,835
Note E
Distribution of excess of cost over book value:
Cost at date of acquisition ..................................................................... 3,600,000 FC
Book value at date of acquisition:
Book value .................................................... 3,800,000 FC
Interest acquired ........................................... × 80% 3,040,000
Annual depreciation of above equipment:
Allocated excess ................................................................................... 100,000 FC
Remaining useful life ............................................................................. ÷ 8 1/3 years
PROBLEM 11-3
Sorenson Company
Trial Balance Translation
December 31, 2018
Relevant
Balance Exchange Balance
Account in FC Rate in Dollars
Cash ...................................................................... 2,840,000 FC $1.31 $ 3,720,400
Accounts Receivable ............................................ 3,990,000 1.31 5,226,900
Inventory ............................................................... 5,800,000 1.31 7,598,000
Fixed Assets ......................................................... 15,000,000 1.31 19,650,000
Accumulated Depreciation .................................... (6,800,000) 1.31 (8,908,000)
Problem 11-3, Continued
Pueblo Corporation and Sorenson Company
Worksheet for Consolidated Financial Statements (in dollars)
For Year Ended December 31, 2018
Eliminations Consolidated Consolidated
Trial Balance
and Adjustments Income Balance
Pueblo
Sorenson Dr Cr Statement Sheet
Fixed Assets ......................................................... 21,000,000 19,650,000 (D) 655,000 ................. ................... 41,305,000
Accumulated Depreciation .................................... (12,560,000) (8,908,000) ................. (A) 196,500 ................... (21,664,500)
Additional Equipment ............................................ .................. ................... (D) 3,013,000 (A) 451,950 ................... 2,561,050
Accounts Payable ................................................. (3,450,000) (2,069,800) ................. ................. ................... (5,519,800)
Long-Term Debt .................................................... (10,000,000) (6,550,000) ................. ................. ................... (16,550,000)
Common Stock—Parent ....................................... (4,000,000) ................... ................. ................. ................... (4,000,000)
Common Stock—Subsidiary ................................. .................. (3,600,000) (EL) 3,600,000 ................. ................... ...................
11–19 Ch. 11—Problems
Problem 11-3, Concluded
Eliminations and Adjustments:
(CY1) Eliminate the subsidiary income account ($1,729,000) against the investment account.
(EL) Eliminate the subsidiary’s January 1, 2018, equity balances against the investment
account.
(D) Distribute the excess of cost over book value.
Cost to acquire subsidiary ................................................................ 12,000,000 FC
Book value of subsidiary .................................................................. 9,200,000
Excess of cost over book value ........................................................ 2,800,000 FC
(A) Record appropriate depreciation of excess.
Annual depreciation of excess:
Equipment (500,000 FC ÷ 10) .................................................... 50,000 FC
Additional equipment (2,300,000 FC ÷ 20) ................................. 115,000
Total ..................................................................................... 165,000 FC
Accumulated depreciation at December 31, 2018, in dollars:
Equipment (50,000 × 3 years × $1.31) ....................................... $196,500
