ISMChap010

Chapter 10 - Translation of Foreign Currency Financial Statements
KQCHAPTER 10
TRANSLATION OF FOREIGN
CURRENCY FINANCIAL STATEMENTS
Chapter Outline
I. In today's global economy, many companies have invested in operations in foreign

countries.
A. In preparing consolidated financial statements on a worldwide basis, the foreign
currency accounts prepared by foreign operations must be restated into the parent
company's reporting currency.
B. There are two major issues related to the translation of foreign currency financial
statements.
1. Which method should be used?
2. How should the resulting translation adjustment be reported on the consolidated
financial statements?
C. Translation methods differ on the basis of which accounts are translated at the current
exchange rate and which are translated at a historical exchange rate. Translating
accounts at the current exchange rate creates a translation adjustment.
D. Historically, accountants have experimented with a number of different translation
methods. The dominant methods currently in use are the temporal method and the
current rate method.
E. Translation adjustments can be either (1) reported as a gain or loss in income or (2)
deferred in the stockholders' equity section of the balance sheet.
II. The primary objective of the temporal method is to maintain the underlying valuation method
used by the foreign entity to account for its assets and liabilities.
A. Assets and liabilities carried at current or future value are translated at the current
exchange rate. Assets and liabilities carried at cost and stockholders' equity items are
translated at a historical exchange rate.
B. By translating some assets at the current exchange rate and others at historical rates the
temporal method distorts financial ratios calculated in the foreign currency.
C. Most income statement items are translated at average-for-the-period rates. However,
cost-of-goods-sold, depreciation, and amortization expense are translated at relevant
historical exchange rates.
D. Balance sheet exposure under the temporal method is defined as cash, marketable
securities, and receivables minus total liabilities. A net liability exposure often exists.
1. When a liability balance sheet exposure exists, depreciation of the foreign currency
results in a positive translation adjustment (gain) and appreciation of the foreign
currency results in a negative translation adjustment (loss).
2. Reporting a translation loss when the foreign currency appreciates is thought to be
inconsistent with economic reality.
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Education.
III. With the current rate method, the net investment in a foreign operation is considered to be
exposed to foreign exchange risk.
A. Assets and liabilities are translated at the current exchange rate; equity is translated at
historical rates.
B. Translating assets which are carried at cost using the current exchange rate results in a
translated value which is not readily interpretable; it is neither a current value nor a
historical cost.
C. However, translating all assets at the current rate does maintain underlying ratios and
relationships that exist in the foreign currency statements.
D. Revenues and expenses which occur evenly throughout the period are translated at the
average-for-the-period exchange rate. Income items, such as gains and losses, which
are the result of a discrete event, are translated at the actual exchange rate on the date
of occurrence.
E. Balance sheet exposure under the current rate method is equal to the foreign entity's net
assets (stockholders' equity).
1. Appreciation in the foreign currency results in a positive translation adjustment
(gain); depreciation results in a negative translation adjustment (loss).
IV. FASB Accounting Standards Codification Topic 830, Foreign Currency Matters, (FASB ASC
830) provides guidelines for the translation of foreign currency financial statements by U.S.-
based multinational corporations. The appropriate translation method and disposition of
translation adjustment depends upon the functional currency of the foreign entity.
A. The functional currency is the primary currency of the foreign entity's operating
environment. It can be either the U.S. dollar or a foreign currency.
1. U.S. GAAP lists six indicators that are to be used in determining an entity's functional
currency. There are no guidelines as to how these indicators are to be weighted.
B. If a foreign currency is the functional currency, the foreign entity's financial statements
are "translated" using the current rate method and the resulting translation adjustment is
reported as a separate component of equity. The average-for-the-period exchange rate
is used to translate the foreign entity's income statement.
1. Upon the sale or liquidation of a specific foreign entity, the cumulative translation
adjustment related to that entity is taken to income as an adjustment to the gain or
loss on sale or liquidation.
C. If the U.S. dollar is the functional currency, foreign currency financial statements are
"remeasured" using the temporal method with "remeasurement" gains and losses
reported in operating income.
D. If a foreign entity operates in a highly inflationary economy (cumulative three-year
inflation greater than 100%), its financial statements are remeasured into U.S. dollars
using the temporal method and remeasurement gains and losses are reported in
income.
V. Some companies hedge the balance sheet exposures of their foreign entities so as to avoid
adverse effects on income and/or stockholders' equity.
A. FASB Accounting Standards Codification Topic 815, Derivatives and Hedging (FASB
ASC 815) refers to this as a hedge of a net investment in a foreign operation and
stipulates that gains and losses on hedging instruments used in this manner should be
treated in the same fashion as the translation adjustment (remeasurement gain/loss)
being hedged.
B. The paradox of hedging balance sheet exposure is that by avoiding a translation
adjustment (remeasurement gain/loss), realized foreign exchange gains and losses can
arise.
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Answer to Discussion Question: How Do We Report This?

This case represents the ongoing debate as to the proper reporting of foreign currency
balances. Southwestern has invested the equivalent of $30,000 (150,000 vilseks) in each of
three assets. The relative value of the vilsek has now changed. Thus, 150,000 vilseks now can
be converted into $34,500. However, the subsidiary does not have vilseks--only land, inventory,
and investments. Although the current exchange rate is given, the company has no apparent
plans to convert its assets into dollars. Instead, these three assets are being held, each with a
historical cost of 150,000 vilseks. Under the temporal method, these assets (except for the
investments if carried at market value) would be reported in the parent's balance sheet at the
original cost of $30,000. Unfortunately, as the Finance Director points out, an old, outdated rate
is being utilized if the $30,000 figure is reported. (Of course, given that prices tend to change
over time, the same can be said for any asset reported at historical cost.)
Conversely, the current rate method requires that each of the three assets be reported at
$34,500 based on the current exchange rate. As the controller indicates, though, $34,500 was
not the original cost expended by Southwestern. In addition, using the current rate means that
each of the assets will constantly report a "floating" value, one that will change with each
exchange rate fluctuation. Finally, the $34,500 figure is based on the current value of the vilsek
($.23) and the historical cost in vilseks (150,000 vilseks) for the three assets. The current
exchange rate is only significant if the assets are sold with the proceeds being converted into
U.S. dollars. Since an imminent sale is not indicated, the validity of reporting the $34,500 might
again be questioned. In addition, even if the assets were sold, $34,500 does not accurately
reflect the proceeds in U.S. dollars because 150,000 vilseks is the historical cost and not the
current market value of each of these assets.
As a classroom exercise or written assignment, students could be required to select a reported

value for each of the three assets and then defend their position. What figure is actually the
fairest representation of each of the three assets? What figure is the best conveyor of
information to an outside party? There is no single best answer to these questions. The
purpose of this type of exercise is to encourage students to consider the objectives of financial
reporting. Students should not just assume that the current official pronouncement is correct.
One possible approach to the case is to assign several students to represent banks or
stockholders and discuss the types of information that is most needed by these users. Another
group of students can take the position of the company responsible for preparing the information
and discuss management's preference for providing one type of information over another. Yet
another group could take a purely theoretical approach and discuss the goals that accounting
has attempted to reach. Although a final resolution may not be achieved, some excellent class
discussion is possible.
The temporal and current rate methods of translation differ primarily with regard to the exchange
rate used to translate those assets that are reported at historical cost--inventories, prepaids,
fixed assets, and intangibles. The debate regarding the appropriate exchange rate for
translating assets exists only because some assets are reported at historical cost. If all assets
were reported at their current value, there would be no need to use the historical exchange rate
for translating assets in order to maintain the asset's historical cost in U.S. dollar terms. All
assets would be translated at the current exchange rate. The differences between the temporal
method and current rate method would disappear.
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Answers to Questions
1. The two major issues related to the translation of foreign currency financial statements are:
(a) which method should be used and (b) where should the resulting translation adjustment
be reported in the consolidated financial statements. The first issue relates to determining
the appropriate exchange rate (historical, current, or average for the current period) for the
translation of foreign currency balances. Those items translated at the current exchange
rate are exposed to translation adjustment. The second issue relates to whether the
translation adjustment should be treated as a gain or loss in income, or should be deferred
as a separate component of stockholders’ equity.
2. Balance sheet exposure arises when a foreign currency balance is translated at the current
exchange rate. By translating at the current exchange rate, the foreign currency item in
essence is being revalued in U.S. dollar terms on the consolidated financial statements.
There will be either a net asset balance sheet exposure or net liability balance sheet
exposure depending upon whether assets translated at the current rate are greater or less
than liabilities translated at the current rate. Balance sheet exposure generates a translation
adjustment which does not result in an inflow or outflow of cash. Transaction exposure,
which results from the receipt or payment of foreign currency, generates foreign exchange
gains and losses which are realized in cash.
3. Although balance sheet exposure does not result in cash inflows and outflows, it does
nevertheless affect amounts reported in consolidated financial statements. If the foreign
currency is the functional currency, translation adjustments will be reported in stockholders’
equity. If translation adjustments are negative and therefore reduce total stockholders’
equity, there is an adverse (inflationary) impact on the debt to equity ratio. Companies with
restrictive debt covenants requiring them to stay below a maximum debt to equity ratio, may
find it necessary to hedge their balance sheet exposure so as to avoid negative translation
adjustments being reported. If the U.S. dollar is the functional currency or an operation is
located in a high inflation country, remeasurement gains and losses are reported in income.
Companies might want to hedge their balance sheet exposure in this situation to avoid the
adverse impact remeasurement losses can have on consolidated income and earnings per
share.
The paradox in hedging balance sheet exposure is that, by agreeing to receive or deliver
foreign currency in the future under a forward contract, a transaction exposure is created.
This transaction exposure is speculative in nature, given that there is no underlying inflow or
outflow of foreign currency that can be used to satisfy the forward contract. By hedging
balance sheet exposure, a company might incur a realized foreign exchange loss to avoid
an unrealized negative translation adjustment or unrealized remeasurement loss.
4. The gains and losses arising from financial instruments used to hedge balance sheet
exposure are treated in a similar manner as the item the hedge is intended to cover. If the
foreign currency is the functional currency, gains and losses on hedging instruments will be
taken to accumulated other comprehensive income. If the U.S. dollar is the functional
currency, gains and losses on the hedging instruments will be offset against the related
remeasurement gains and losses.
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5. The major concept underlying the temporal method is that the translation process should
result in a set of translated U.S. dollar financial statements as if the foreign subsidiary’s
transactions had actually been carried out using U.S. dollars. To achieve this objective,
assets carried at historical cost and stockholders’ equity are translated at historical
exchange rates; assets carried at current value and liabilities (carried at current value) are
translated at the current exchange rate. Under this concept, the foreign subsidiary’s
monetary assets and liabilities are considered to be foreign currency cash, receivables, and
payables of the parent which are exposed to transaction risk. For example, if the foreign
currency appreciates, then the foreign currency receivables increase in U.S. dollar value
and a gain is recognized. Balance sheet exposure under the temporal method is analogous
to the net transaction exposure which exists from having both receivables and payables in a
particular foreign currency.
The major concept underlying the current rate method is that the entire foreign investment is
exposed to foreign exchange risk. Therefore all assets and liabilities are translated at the
current exchange rate. Balance sheet exposure under this concept is equal to the net
investment.
6. The Retained Earnings balance is created by a multitude of transactions: all revenues,

expenses, gains, losses, and dividends since the company’s inception. Identifying each
component of this account (so that a separate translation can be made) would be virtually
impossible. Therefore, in the initial year that Statement 52 was applied, the ending balance
calculated under Statement 8 was merely brought forward. Thereafter, the ending balance
translated each year for retained earnings becomes the beginning figure to be reported for
the following year.
7. The major differences relate to non-monetary assets carried at historical cost and related
expenses, i.e., inventory and cost of goods sold; property, plant, and equipment and
depreciation expense; and intangible assets and amortization expense. Under the temporal
method, these items are all translated at historical exchange rates. Under the current rate
method, the assets are translated at the current exchange rate and the related expenses are
translated at the average exchange rate for the current period.
8. The functional currency is the currency of the subsidiary’s primary economic environment. It
is usually identified as the currency in which the company generates and expends cash.
FASB ASC 830 recommends that several factors such as the location of primary sales
markets, sources of materials and labor, the source of financing, and the amount of
intercompany transactions should be evaluated in identifying an entity’s functional currency.
FASB ASC 830 does not provide any guidance as to how these factors are to be weighted
(equally or otherwise) when identifying an entity’s functional currency.
9. The foreign subsidiary's net asset position in foreign currency at the beginning of the period
is first determined. Changes in net assets are determined to explain the net asset balance
in foreign currency at the end of the period. The beginning net asset position and changes
in net assets are translated at appropriate exchange rates and the ending net asset position
in dollars is determined.
The ending net asset balance in foreign currency is then translated at the current rate and
this result is subtracted from the ending net asset position in dollars (already calculated).
The difference is the translation adjustment. It is positive if the actual dollar net asset
position is less than the net asset position based on the current exchange rate. The
translation adjustment is negative if the actual dollar net asset position is greater than if
translated at the current rate.
The cumulative translation adjustment is reported on the U.S. dollar Balance Sheet in the
Stockholders’ Equity Section as a part of Accumulated Other Comprehensive Income.
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10. One theory mentioned by the FASB identifies the translation adjustment as a measure of
unrealized increases and decreases that have occurred in the value of the foreign subsidiary
because of exchange rate changes. A second theory argues that this adjustment is no more
than a mechanically derived number that must be included to keep the balance sheet in
equilibrium although the figure has no intrinsic meaning. The FASB did not indicate that
either theory is considered more appropriate.
11. Translation is required when a foreign currency is the functional currency. Remeasurement
is required in two situations:
a. The U.S. dollar is the functional currency.

b. The foreign subsidiary operates in a highly inflationary country.
Remeasurement is carried out using the temporal method, with remeasurement gains and
losses reported in consolidated income. Translation is done using the current rate method
and the resulting translation adjustment is carried as a separate component of stockholders’
equity.
12. The temporal method must be used to remeasure the financial statements of operations in
highly inflationary countries. One reason for mandating the use of the temporal method is
that it avoids the disappearing plant problem that exists when the current rate method is
used. Under the current rate method, fixed assets are translated at current exchange rates.
With high rates of inflation, the foreign currency will depreciate significantly. When the
historical cost of fixed assets is translated at a significantly lower current exchange rate, the
dollar value of fixed assets “disappears.” This problem is avoided by translating at the
historical exchange rate as is done under the temporal method.
13. Differences exist between IFRS and U.S. GAAP with regard to (a) the hierarchy of factors
used to determine the functional currency and (b) the method used to translate the financial
statements of a subsidiary located in a hyperinflationary country.
IAS 21 establishes primary factors and other factors to be considered in determining an
entity’s functional currency. When the indicators are mixed and the functional currency is
not obvious, the parent must give priority to the primary indicators in determining the foreign
entity’s functional currency. U.S. GAAP does not have a similar hierarchy.
In translating the foreign currency financial statements of a subsidiary located in a highly
inflationary economy, IAS 21 requires financial statements to first be restated for local
inflation and then translated into the parent’s currency using the current exchange rate for all
financial statement items. In contrast, U.S. GAAP requires use of the temporal method with
no adjustment for inflation in this situation.
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Answers to Problems
1. C (Definition of functional currency)
2. C (Comparison of current rate and temporal methods)
3. C (Translation process (current rate method))
4. B (Determine appropriate translation method and resulting translation

adjustment)
Because the peso is the functional currency, the financial statements must
be translated using the current rate method. Therefore, answers a and d
can be eliminated. Because the subsidiary has a net asset position and the
peso has appreciated from $.16 to $.19, a positive translation adjustment
will result.
5. A (Translation process (current rate method) – asset and related expense)
All asset accounts are translated at current rates.
6. A (Translation process (current rate method) – assets)
Because the foreign currency is the functional currency, a translation is

required. All assets accounts are translated at current rates.
7. C (Remeasurement process (temporal method) – assets)
Because the U.S. dollar is the functional currency, a remeasurement is

required. All receivables are remeasured at current rates. Assets carried at
historical cost, such as prepaid insurance and goodwill, are remeasured at
historical rates.
8. A (Remeasurement process (temporal method) – inventory)
The U.S. dollar is the foreign subsidiary’s functional currency, so a

remeasurement is appropriate. Inventory is translated at the historical
exchange rate [100,000 x $.16 = $16,000].
9. A (Remeasurement process (temporal method) – cost of goods sold)
The U.S. dollar is the foreign subsidiary’s functional currency, so a

remeasurement is appropriate. Cost of goods sold is translated at the
historical rate in effect when the inventory was acquired [100,000 x $.16 =
$16,000].
10. D (Translation process (current rate method) – marketable securities and

inventory)
The foreign currency is the functional currency, so a translation is

appropriate. All assets are translated at the current exchange rate of $.19.
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11. C (Remeasurement process (temporal method) – marketable securities and

inventory)
The U.S. dollar is the functional currency, so a remeasurement is

appropriate. Inventory (carried at cost) is remeasured at the historical
exchange rate of $.16. Marketable equity securities (carried at market
value) are remeasured at the current exchange rate of $.19.
12. C (Highly inflationary economy (temporal method) – cost of goods sold)
Beginning inventory FCU 200,000 x $1.00 = $ 200,000

Purchases 10,300,000 x $0.80 = 8,240,000
Ending inventory (500,000) x $0.75 = (375,000)
Cost of goods sold FCU 10,000,000 $8,065,000
13. C (Calculation of translation adjustment)
Beginning net assets, 1/1………….. P20,000 x $.15 = $ 3,000

Increase in net assets:
Net income.................................. 10,000 x $.19 = 1,900
Ending net assets, 12/31................. P30,000 $ 4,900
Ending net assets at
current exchange rate................ P30,000 x $.21 = $ 6,300
Translation adjustment (positive) . $(1,400)
14. C (Concepts underlying current rate and temporal methods)
By translating items carried at historical cost by the historical exchange

rate, the temporal method maintains the underlying valuation method used
by the foreign subsidiary.
15. A (Calculation of remeasurement gain/loss)
Beginning net monetary assets, 1/1 P100,000 x $.16 = $16,000

Increases in net monetary assets:
Sale of inventory........................ 50,000 x $.20 = 10,000
Decreases in net monetary assets:
Purchase of equipment.............. (60,000) x $.16 = (9,600)
Purchase of inventory................ (30,000) x $.18 = (5,400)
Transfer to parent....................... (10,000) x $.21 = (2,100)
Ending net monetary assets, 12/31 P 50,000 $ 8,900
Ending net monetary assets at
the current exchange rate......... P 50,000 x $.22 = (11,000)
Remeasurement gain...................... $(2,100)
16. C (Remeasurement process (temporal method))
Marketable equity securities are carried at market value and therefore

translated at the current exchange rate under the temporal method.
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17. B (Determine appropriate translation method and treatment of translation

adjustment)
When the U.S. dollar is the functional currency, U.S. GAAP requires
remeasurement using the temporal method with remeasurement gains and
losses reported in income.
18. B (Translation process (current rate method) – wages expense and wages
payable)
Wages expense is translated at the average exchange rate; wages payable

are translated at the current exchange rate.
19. C (Treatment of gains and losses on hedges of net investments)
Gains and losses on hedges of net investments (whether through a forward

contract, borrowing, or other technique) are offset against the translation
adjustment being hedged.
20. D (Presentation of remeasurement gain/loss on income statement)
Remeasurement gains are reported in the income statement as a part of

income from continuing operations.
21. (10 minutes) (Specify appropriate exchange rates for the translation of
foreign currency financial statements under the current rate method)
Rent expense—use actual (historical) rate at time of recording. Rent

expense would often be recorded evenly throughout the year so that an
average rate for the period is acceptable.
Dividends—use historical rate at time of recording, the date of declaration.
Equipment—as an asset, use current rate at the balance sheet date.
Notes payable—as a liability, use current rate at the balance sheet date.
Sales—use actual (historical) rate at time of recording. Sales often occur

evenly throughout the year so that an average rate is acceptable. However, if
sales are more prevalent at a particular time during the year, historical rates
should be used.
Depreciation expense—use historic rate at time of recording. In most cases,

average rate for the year is acceptable, because depreciation occurs evenly
throughout the year. Depreciation is recorded at year-end only as a matter of
convenience.
Cash—as an asset, use the current rate at the balance sheet date.
Accumulated depreciation—as a contra-asset account, use the current ex-

change rate at the balance sheet date.
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21. (continued)
Common stock—as an equity account, use historic rate at time of recording,

the date of issuance.
22. (5 minutes) Determine Translated Values under the Current Rate Method
As a translation, both the asset (inventory) and the liability (accounts

payable) utilize the current exchange rate at the balance sheet date
(December 31). Thus, the translated values are as follows:
Inventory LCU120,000 x 25% left = LCU30,000

LCU 30,000 x $0.35 = $10,500
Accounts payable LCU120,000 x 40% unpaid = LCU48,000

LCU 48,000 x $0.35 = $16,800
23. (10 minutes) (Determine appropriate exchange rates under the current rate
method [translation] and temporal method [remeasurement])
Translation Remeasurement
Accounts payable $.16 C $.16 C
Accounts receivable $.16 C $.16 C
Accumulated depreciation $.16 C $.26 H
Advertising expense $.19 A $.19 A
Amortization expense $.19 A $.25 H
Buildings $.16 C $.26 H
Cash $.16 C $.16 C
Common stock $.28 H $.28 H
Depreciation expense $.19 A $.26 H
Dividends (10/1) $.20 H $.20 H
Notes payable $.16 C $.16 C
Patents (net) $.16 C $.25 H
Salary expense $.19 A $.19 A
Sales $.19 A $.19 A
* C = current rate, H = historical rate, A = average rate
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24. (20 minutes) (Calculate translation adjustment and remeasurement gain/loss

and explain their economic relevance)
The translation adjustment and remeasurement gain/loss can be determined
as the plug figure that keeps the dollar balance sheet in balance:
Translation Remeasure-
CHF Rate US$ ment Rate US$
Cash 800,000 $ 1.10 880,000 $ 1.10 880,000
Inventory 1,300,000 $ 1.10 1,430,000 $ 1.00 1,300,000
Fixed assets 4,000,000 $ 1.10 4,400,000 $ 1.00 4,000,000
Total 6,100,000 6,710,000 6,180,000
Notes payable 2,100,000 $ 1.10 2,310,000 $ 1.10 2,310,000
Owners' equity 4,000,000 $ 1.00 4,000,000 $ 1.00 4,000,000
Translation adjustment 400,000
Retained earnings
(remeasurement loss) (130,000)
Total 6,100,000 6,710,000 6,180,000
Translation CHF US$
Alternatively, the translation
Beginning net assets, 12/18 adjustment and remeasurement loss can be
4,000,000 $ 1.00 H $ 4,000,000
calculated by analyzing the subsidiary’s balance sheet exposure:
Ending net assets, 12/31 at current exchange rate 4,000,000 $ 1.10 C 4,400,000
Translation adjustment (positive) $ (400,000)
Remeasurement CHF US$

Beginning net monetary liabilities, 12/18 (1,300,000) $ 1.00 H $ (1,300,000)
Ending net monetary liabilities, 12/31
(at current exchange rate) (1,300,000) $ 1.10 C (1,430,000)
Remeasurement loss $ 130,000
Economic Relevance of Translation Adjustment
The translation adjustment increases stockholders’ equity by $400,000. The

positive translation adjustment arises because the Swiss subsidiary has a
net asset position of CHF4,000,000 and the Swiss franc appreciates by $.10
[CHF4,000,000 x $.10 = $400,000]. The positive translation adjustment is not
realized in terms of dollar cash flow. It would be a realized gain only if
Stephanie sold this operation on December 31 for exactly CHF4,000,000 and
converted the sales proceeds into dollars at the current exchange rate of
$1.10 per Swiss franc.
24. (continued)
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Economic Relevance of Remeasurement Loss
The remeasurement loss arises because the Swiss subsidiary has a net
monetary liability position of CHF1,300,000 (Cash of CHF800,000 less Notes
payable of CHF2,100,000) and the Swiss franc has appreciated by $.10
[CHF1,300,000 x $.10 = $130,000]. The loss is unrealized. It would be
realized only if the Swiss subsidiary converted its Swiss franc cash into
dollars at December 31, thereby realizing a transaction gain of $80,000
[CHF800,000 x ($1.10-$1.00)], and the parent paid off the Swiss franc note
payable using U.S. dollars, thereby realizing a transaction loss of $210,000
[CHF2,100,000 x ($1.10-$1.00)]. (The note could have been paid at December
1 for $2,100,000 [CHF2,100,000 x $1.00]. At December 31, it takes $2,310,000
to pay off the note [CHF2,100,000 x $1.10].)
25. (15 minutes) (Determine the amounts at which foreign currency balances are
reported on a foreign subsidiary’s trial balance and in the parent’s
consolidated financial statements)
a. Remeasurement of Swiss franc (CHF) balances into Israeli shekels (ILS)

to report on the Israeli subsidary’s trial balance.
December 31, 2015 CHF Exchange Rate ILS*

Interest expense 25,000 x 3.95 A = 98,750
Interest payable 31,250 x 4.02 C = 125,625
Note payable 500,000 x 4.02 C = 2,010,000
* Amounts at which the CHF balances are carried on the ILS trial balance
b. Translation of remeasured Swiss franc (CHF) balances into U.S. dollars

(USD) to report in the U.S. parent’s consolidated financial statements.
December 31, 2015 ILS Exchange Rate USD**

Interest expense 98,750 x 0.27 A = 26,662.50
Interest payable 125,625 x 0.25 C = 31,406.25
Note payable 2,010,000 x 0.25 C = 502,500.00
** Amounts at which the CHF balances are reported in the USD financial
statements
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26. (30 minutes) (Prepare financial statements for a foreign subsidiary and then
translate them into U.S. dollars)
Fenwicke Company Subsidiary

Income Statement
LCU U.S. Dollars
Rent revenue 60,000 x $1.90 A = $114,000
Interest expense (10,000) x $1.90 A = (19,000)
Depreciation expense (14,000) x $1.90 A = (26,600)
Repair expense (4,000) x $1.85*H = (7,400)
Net income 32,000 $ 61,000
* Repair expense is the only expense not incurred evenly throughout the
year.
Statement of Retained Earnings

LCU U.S. Dollars
Retained earnings, 1/1 -0- -0-

Net income 32,000 (above) $61,000
Dividends, 12/31 (5,000) x $1.80 H = (9,000)
Retained earnings, 12/31 27,000 $52,000
Balance Sheet
LCU U.S. Dollars
Cash 41,000 x $1.80 C = $ 73,800

Accounts receivable 10,000 x $1.80 C = 18,000
Building 140,000 x $1.80 C = 252,000
Accumulated depreciation (14,000) x $1.80 C = (25,200)

Total assets 177,000 $318,600
Interest payable 10,000 x $1.80 C = $ 18,000
Note payable 100,000 x $1.80 C = 180,000
Common stock 40,000 x $2.00 H = 80,000
Retained earnings 27,000 (above) 52,000
Translation adjustment (below) (11,400)
Total liabilities and equities 177,000 $318,600
Computation of Translation Adjustment

Beginning net assets -0- -0-
Issued common stock 40,000 x $2.00 = $ 80,000
Net income 32,000 (above) 61,000
Decrease in net assets:
Dividends (5,000) x $1.80 = (9,000)
Ending net assets 67,000 $132,000
Ending net assets at current
exchange rate 67,000 x $1.80 = 120,600
Translation adjustment (negative) $ 11,400
10-13
Education.
27. (30 minutes) (Prepare a statement of cash flows for a foreign subsidiary and
then translate it into U.S. dollars)
Fenwicke Company Subsidiary

Statement of Cash Flows
LCU U.S. Dollars
Operating Activities:
Net income 32,000 (from prob 26) $ 61,000
plus: depreciation 14,000 x $1.90 A = 26,600
less: increase in accounts receivable (10,000) x $1.90 A = (19,000)
plus: increase in interest payable 10,000 x $1.90 A = 19,000
Cash flow from operations 46,000 87,600
Investing Activities:
Purchase of building (140,000) x $2.00 H = (280,000)
Financing Activities:
Sale of common stock 40,000 x $2.00 H = 80,000
Borrowing on note 100,000 x $2.00 H = 200,000
Dividends (5,000) x $1.80 H = (9,000)
135,000 271,000
Increase in cash 41,000 78,600
Effect of exchange rate change on cash (4,800)
Cash, 1/1 -0- -0-
Cash, 12/31 41,000 x $1.80 C = $ 73,800
10-14
Education.
28. (25 minutes) (Compute translation adjustment and remeasurement gain/loss)
a. Translation—only changes in net assets have an impact on the computation

of the translation adjustment.
Net asset balance 1/1 KM30,000 x $.32 = $ 9,600

Increases in net assets (income):
Sold inventory at a profit 5/1 5,000 x $.34 = 1,700
Sold land at a gain 6/1 1,000 x $.35 = 350
Decreases in net assets:
Paid a dividend 12/1 (3,000) x $.41 = (1,230)
Depreciation recorded (2,000) x $.37 = ( 740)
Net asset balance 12/31 KM31,000 $ 9,680
Net asset balance 12/31
at current exchange rate KM31,000 x $.42 = (13,020)
Translation adjustment—positive $(3,340)
b. Remeasurement—only changes in net monetary assets and liabilities have an
impact on the computation of the remeasurement gain.
Beginning net monetary

liability position KM (3,000) x $.32 = $ ( 960)
Increases in monetary assets:
Sold inventory 5/1 15,000 x $.34 = 5,100
Sold land 6/1 5,000 x $.35 = 1,750
Decreases in monetary assets:
Bought inventory 10/1 (12,000) x $.39 = (4,680)
Bought land 11/1 (4,000) x $.40 = (1,600)
Paid a dividend 12/1 (3,000) x $.41 = (1,230)
Ending net monetary liability
position KM(2,000) $(1,620)
Ending net monetary liability position
at current exchange rate KM(2,000) x $.42 = (840)
Remeasurement gain $ (780)
Note: The purchase of land on account did not result in a decrease in

monetary assets, rather an increase in monetary liabilities. Payment on the
note payable and collection of accounts receivable do not affect the net
monetary liability position.
10-15
Education.
29. (20 minutes) (Compute translation adjustment and remeasurement gain/loss)
a. The translation adjustment is based on changes in the net assets of the

subsidiary.
Net assets, 1/1 90,000 LCU x $0.35 = $31,500

Changes in net assets:
Rendered services 45,000 LCU x $0.36 = 16,200
Incurred expenses (27,000) LCU x $0.37 = (9,990)
Net assets, 12/31 108,000 LCU $37,710
Net assets, 12/31 at
current exchange rate 108,000 LCU x $0.41 = 44,280
Translation adjustment (positive) $(6,570)
b. The remeasurement gain or loss is based on changes in the net monetary

assets of the subsidiary.
Net monetary assets, 1/1 20,000 LCU x $0.35 = $7,000

Changes in net monetary assets:
Rendered services 45,000 LCU x $0.36 = 16,200
Incurred expenses (27,000) LCU x $0.37 = (9,990)
Net monetary assets, 12/31 38,000 LCU $13,210
Net monetary assets, 12/31 at
current exchange rate 38,000 LCU x $0.41 = 15,580
Remeasurement gain $(2,370)
c. Translated value of land 70,000 LCU x $.41 = $28,700

Remeasured value of land 70,000 LCU x $.34 = $23,800
30. (10 minutes) (Determine the appropriate exchange rate under the current rate
method [translation] and temporal method [remeasurement])
(a) Current Rate Method (b) Temporal Method

Account Translation Remeasurement
Sales $0.20 A $0.20 A
Inventory $0.22 C $0.19 H
Equipment $0.22 C $0.13 H

Rent expense $0.20 A $0.20 A
Dividends $0.21 H $0.21 H
Notes receivable $0.22 C $0.22 C
Accumulated depreciation--equipment $0.22 C $0.13 H
Salary payable $0.22 C $0.22 C
Depreciation expense $0.20 A $0.13 H
C = current exchange rate, A = average exchange rate, H = Historical

exchange rate
10-16
Education.
31. (30 minutes) (Determine translation adjustment; prepare journal entries for
forward contract hedge of balance sheet exposure; determine amount to be
reported in accumulated other comprehensive income)
a. Net assets, 1/1 (132,000 – 54,000) 78,000 kites x $0.80 = $62,400

Change in net assets:
Net income 26,000 kites x $0.77 = 20,020
Dividends, 3/1 (5,000) kites x $0.78 = (3,900)
Dividends, 10/1 (5,000) kites x $0.76 = (3,800)
Net assets, 12/31 94,000 kites $74,720
Net assets at current
exchange rate, 12/31 94,000 kites x $0.75 = 70,500
Translation adjustment (negative) $ 4,220
b. Forward contract journal entries

10/1 No entry
12/31 Forward Contract.................................. 2,000

Translation Adjustment (positive). . 2,000
(To record the change in the value of the forward contract as
an adjustment to the translation adjustment)
Foreign Currency (kites)....................... 150,000

Cash.................................................. 150,000
(To record the purchase of 200,000 kites at the spot rate of
$.75)
Cash ..................................................... 152,000
Foreign Currency (kites).................. 150,000

Forward Contract............................. 2,000
(To record delivery of 200,000 kites, receipt of $152,000, and
close the forward contract account.)
c. The net negative translation adjustment (debit balance) to be reported in
Accumulated Other Comprehensive Income at 12/31 is $2,220 ($4,220 –
$2,000).
10-17
Education.
32. (45 minutes) (Translation and remeasurement of foreign subsidiary trial

balance)
a. Translation of Subsidiary Trial Balance

Debits Credits
Cash…………………………………. 8,000 KQ x 1.62 $12,960
Accounts Receivable…………….. 9,000 KQ x 1.62 14,580
Equipment………………………….. 3,000 KQ x 1.62 4,860
Accumulated Depreciation……… 600 KQ x 1.62 $ 972
Land………………………………… 5,000 KQ x 1.62 8,100
Accounts Payable………………… 3,000 KQ x 1.62 4,860
Notes Payable…………………….. 5,000 KQ x 1.62 8,100
Common Stock…………………… 10,000 KQ x 1.71 17,100
Dividends……….…………………. 4,000 KQ x 1.66 6,640
Sales………………………………… 25,000 KQ x 1.64 41,000
Salary Expense…………………… 5,000 KQ x 1.64 8,200
Depreciation Expense…………… 600 KQ x 1.64 984
Miscellaneous Expense…………. 9,000 KQ x 1.64 14,760
$71,084
Translation Adjustment (negative) 948
$72,032 $72,032
Calculation of Translation Adjustment
Net assets, 1/1………………………….. -0- -0-
Common stock issued………………. 10,000 KQ x 1.71 $17,100
Sales……………………………………. 25,000 KQ x 1.64 41,000
Dividends……..……………………….. ( 4,000) KQ x 1.66 (6,640)
Salary expense……………………….. ( 5,000) KQ x 1.64 (8,200)
Depreciation expense………………. ( 600) KQ x 1.64 ( 984)
Miscellaneous expense ……………. ( 9,000) KQ x 1.64 (14,760)
Net assets, 12/31………………………. 16,400* KQ $27,516
Net assets, 12/31 at
current exchange rate……………. 16,400 KQ x 1.62 26,568
Translation adjustment (negative) $ 948
* This amount can be verified as ending assets (24,400 KQ) minus ending
liabilities (8,000 KQ) – net assets, 12/31 = 16,400 KQ.
10-18
Education.
32. (continued)
b. Remeasurement of Subsidiary Trial Balance
Debits Credits
Cash 8,000 KQ x 1.62 $12,960
Accounts Receivable 9,000 KQ x 1.62 14,580
Equipment 3,000 KQ x 1.71 5,130
Accumulated Depreciation 600 KQ x 1.71 $ 1,026
Land 5,000 KQ x 1.59 7,950
Accounts Payable 3,000 KQ x 1.62 4,860
Notes Payable 5,000 KQ x 1.62 8,100
Common Stock 10,000 KQ x 1.71 17,100
Dividends 4,000 KQ x 1.66 6,640
Sales 25,000 KQ x 1.64 41,000
Salary Expense 5,000 KQ x 1.64 8,200
Depreciation Expense 600 KQ x 1.71 1,026
Miscellaneous Expense 9,000 KQ x 1.64 14,760
$71,246
Remeasurement loss (debit) 840
$72,086 $72,086
Calculation of Remeasurement Loss
Net monetary assets, 1/1 -0- -0-
Increase in net monetary assets:
Common stock issued 10,000 KQ x 1.71 $17,100
Sales 25,000 KQ x 1.64 41,000
Decrease in net monetary assets:
Acquired equipment (3,000) KQ x 1.71 (5,130)
Acquired land (5,000) KQ x 1.59 (7,950)
Dividends (4,000) KQ x 1.66 (6,640)
Salary expense (5,000) KQ x 1.64 (8,200)
Miscellaneous expense (9,000) KQ x 1.64 (14,760)
Net monetary assets, 12/31 9,000* KQ $15,420
Net monetary assets, 12/31
at current exchange rate 9,000 KQ x 1.62 14,580
Remeasurement loss (debit) $ 840
* This amount can be verified as ending assets (17,000 KQ) minus ending
liabilities (8,000 KQ) – net assets, 12/31 = 9,000 KQ.
10-19
Education.
33. (30 minutes) (Translate financial statements of a foreign subsidiary)
LIVINGSTON COMPANY
Income Statement
For the Year Ending December 31, 2015
Cod
Goghs Ex Rate e U.S. Dollars
Sales 270,000 1.59 A 429,300
Cost of goods sold (155,000) 1.59 A (246,450)
Gross profit 115,000 182,850
Less: Operating expenses (54,000) 1.59 A (85,860)
Gain on sale of equipment 10,000 1.72 H 17,200
Net income 71,000 114,190

For the Year Ending December 31, 2015
Cod
Retained earnings, 1/1 216,000 given 395,000
Net income 71,000 above 114,190
Less: Dividends (26,000) 1.61 H (41,860)
Retained earnings, 12/31 261,000 467,330
Balance Sheet
December 31, 2015
Cod
Assets
Cash 44,000 1.54 C 67,760
Receivables 116,000 1.54 C 178,640
Inventory 58,000 1.54 C 89,320
Fixed assets (net) 339,000 1.54 C 522,060
Total assets 557,000 857,780
Liabilities and Equities
Liabilities 176,000 1.54 C 271,040
Common stock 120,000 2.08 H 249,600
abov
Retained earnings, 12/31 261,000 e 467,330
Translation adjustment (131,710)
Total liabilities and equities 557,000 856,260
10-20
Education.
33. (continued)
Calculation of Translation Adjustment:

Cod
Net assets, 1/1 336,000 1.67 BOY 561,120
Net income 71,000 above 114,190
Dividends (26,000) above (41,860)
Net assets, 12/31 381,000 633,450
Net assets at current exchange rate 381,000 1.54 C 586,740
Translation adjustment, 2015 (negative) 46,710
Cumulative translation adjustment, 1/1 (negative) given 85,000
Cumulative translation adjustment, 12/31 (negative) 131,710
Code: A = average; C = current; H = historical; BOY = beginning of year
10-21
Education.
34. (35 minutes) (Compute remeasurement gain/loss and translation adjustment)
a. Remeasurement Gain or Loss
Exchange
KR Rate US$
Net monetary assets, 1/1/15* 35,000 x $3.00 = $105,000
Issued Common Stock (4/1/15) 13,000 x $3.10 = 40,300
Sold Building** (7/1/15) 10,000 x $3.30 = 33,000
Sales (2015) 162,000 x $3.20 = 518,400
Purchased Equipment (4/1/15) (64,000) x $3.10 = (198,400)
Paid Dividends (10/1/15) (57,000) x $3.40 = (193,800)
Rent Expense (2015) (21,500) x $3.20 = (68,800)
Salary Expense (2015) (45,000) x $3.20 = (144,000)
Utilities Expense (2015) (7,000) x $3.20 = (22,400)
Net monetary assets, 12/31/15 25,500 $69,300
Net monetary assets, 12/31/15 at
current exchange rate 25,500 x $3.50 = 89,250
Remeasurement gain (credit) $(19,950)
* Net monetary assets: (Cash + Accounts Receivable) - (Account Payable +

Bonds Payable)
** Cash proceeds from the sale of the building of KR10,000 is determined by

adding the Book value of the building sold of KR1,500 and the Gain on
sale of building of KR 8,500.
b. Translation Adjustment
Exchange
KR Rate US$
Net assets, 1/1/15* 124,000 x $3.00 = $372,000
Issued Common Stock (4/1/15) 13,000 x $3.10 = 40,300
Gain on Sale of Building** (7/1/15) 8,500 x $3.30 = 28,050
Sales (2015) 162,000 x $3.20 = 518,400
Paid Dividends (10/1/15) (57,000) x $3.40 = (193,800)
Depreciation expense (2015) (40,000) x $3.20 = (128,000)
Rent Expense (2015) (21,500) x $3.20 = (68,800)
Salary Expense (2015) (45,000) x $3.20 = (144,000)
Utilities Expense (2015) (7,000) x $3.20 = (22,400)
Net monetary assets, 12/31/15 137,000 $401,750
current exchange rate 137,000 x $3.50 = 479,500
Translation adjustment (credit) $ (77,750)
* Net assets: Common stock + Retained earnings

** Selling a building at a gain of KR 8,500 increases net assets by that
amount.
10-22
Education.
35. (90 minutes) (Remeasure non-functional currency accounts into foreign

functional currency and then translate foreign functional currency financial
statements into U.S. dollars)
a. Remeasurement of Mexican Operations
Canadian Dollars
Pesos Debit Credit
Accounts payable 49,000 x .35 C 17,150
Accumulated depreciation 19,000 x .25 H 4,750
Building and equipment 40,000 x .25 H 10,000
Cash 59,000 x .35 C 20,650
Depreciation expense 2,000 x .25 H 500
Inventory (beginning
—income statement) 23,000 x .30 A (’14) 6,900
Inventory (ending
—income statement) 28,000 x .34 A (’15) 9,520
Inventory (ending—balance sheet) 28,000 x .34 A (’15) 9,520
Purchases 68,000 x .34 A (’15) 23,120
Receivables 21,000 x .35 C 7,350
Salary expense 9,000 x .34 A 3,060
Sales 124,000 x .34 A 42,160
Main office 30,000 given 7,530
Remeasurement loss Schedule One 10
Total 81,110 81,110
Schedule One—Remeasurement Loss Pesos Canadian Dollars

Net monetary liabilities, 1/1/15* (16,000) x .32 (5,120)
Increases in net monetary assets
Sales 124,000 x .34 42,160
Decreases in net monetary assets
Purchases (68,000) x .34 (23,120)
Salary Expense ( 9,000) x .34 ( 3,060)
Net monetary assets, 12/31/15** 31,000 10,860
current exchange rate 31,000 x .35 10,850
Remeasurement loss 10
* Net monetary liabilities, 1/1/15, can be determined by first determining the

net monetary assets at 12/31/15 and then backing out the changes in
monetary assets and liabilities during 2015—sales, purchases, and salary
expense.
** Net monetary assets, 12/31/15: Cash + Receivables – Accounts Payable
10-23
Education.
35. (continued)
b. and c.
The following C$ financial statements are produced by combining the figures

from the main operation with the remeasured figures from the branch
operation. The Branch Operation and Main Office accounts offset each
other. Cost of goods sold for the Mexican branch is determined by
combining beginning inventory, purchases, and ending inventory as
remeasured in C$.
Income Statement c. Translation into U.S. dollars—
For the Year Ended December 31, 2015 Current Rate Method
Sales C$ 354,160 x .67 A = $ 237,287.20

Cost of goods sold (223,500) x .67 A = (149,745.00)
Gross profit 130,660 87,542.20
Depreciation expense (8,500) x .67 A = (5,695.00)
Salary expense (29,060) x .67 A = (19,470.20)
Utility expense (9,000) x .67 A = (6,030.00)
Gain on sale of equipment 5,000 x .68 H = 3,400.00
Remeasurement loss (10) x .67 A = (6 .70)
Net income C$ 89,090 $ 59,740.30

For the Year Ended December 31, 2015
Retained earnings, 1/1/15 C$ 135,530 Given $ 70,421.00

Net income (above) 89,090 Above 59,740.30
Dividends ( 28,000) x .69 H = (19,320.00)
Retained earnings, 12/31/15 C$ 196,620 $110,841.30
10-24
Education.
35. (continued)
b. and c.
Balance Sheet
December 31, 2015
Cash C$ 46,650 x .65 C = $ 30,322.50

Receivables 75,350 x .65 C = 48,977.50
Inventory 107,520 x .65 C = 69,888.00
Buildings and equipment 177,000 x .65 C = 115,050.00
Accumulated depreciation (31,750) x .65 C = (20,637.50)
Total C$ 374,770 $243,600.50
Accounts payable C$ 52,150 x .65 C = $ 33,897.50

Notes payable 76,000 x .65 C = 49,400.00
Common stock 50,000 x .45 H = 22,500.00
Retained earnings 196,620 Above 110,841.30
Cumulative translation adjustment Schedule Two 26,961.70
Total C$ 374,770 $ 243,600.50
Schedule Two—Translation Adjustment

Net assets, 1/1/15 C$ 185,530 x .70 = $129,871.00
Changes in net assets
Net income 89,090 Above 59,740.30
Dividends (28,000) x .69 = (19,320.00)
Net assets, 12/31/15 C$ 246,620 $170,291.30
Net assets, 12/31/15 at
current exchange rate C$ 246,620 x .65 = 160,303.00
Translation adjustment, 2015 (negative) $ 9,988.30
Cumulative translation adjustment, 1/1/15 (positive) (36,950.00)
Cumulative translation adjustment, 12/31/15 (positive) $(26,961.70)
10-25
Education.
36. (90 minutes) (Translate foreign currency financial statements and prepare
consolidation worksheet)
Step One
Simbel's financial statements are first translated into U.S. dollars after
reclassification of the 10,000 pound expenditure for rent from rent expense
to prepaid rent. Credit balances are in parentheses.
Translation Worksheet
Exchange
Account Pounds Rate Dollars
Sales (800,000) 0.274 (219,200)
Cost of goods sold 420,000 0.274 115,080
Salary expense 74,000 0.274 20,276
Rent expense (adjusted) 36,000 0.274 9,864
Other expenses 59,000 0.274 16,166
Gain on sale of fixed
assets, 10/1/15 (30,000) 0.273 (8,190)
Net income (241,000) (66,004)
R/E, 1/1/15 (133,000) Schedule 1 (38,244)

Net income (241,000) Above (66,004)
Dividends 50,000 0.275 13,750
R/E,12/31/15 (324,000) (90,498)
Cash and receivables 146,000 0.270 39,420

Inventory 297,000 0.270 80,190
Prepaid rent (adjusted) 10,000 0.270 2,700
Fixed assets 455,000 0.270 122,850
Total 908,000 245,160
Accounts payable (54,000) 0.270 (14,580)

Notes payable (140,000) 0.270 (37,800)
Common stock (240,000) 0.300 (72,000)
Add’l paid-in capital (150,000) 0.300 (45,000)
Retained earnings, 12/31/15 (324,000) Above (90,498)
Subtotal (259,878)
Cumulative translation
adjustment (negative) Schedule 2 14,718
Total (908,000) (245,160)
10-26
Education.
36. (continued)
Schedule 1—Translation of 1/1/15 Retained Earnings
Pounds Dollars
Retained earnings, 1/1/14 -0- -0-
Net income, 2014 (163,000) 0.288 (46,944)
Dividends, 6/1/14 30,000 0.290 8,700
Retained earnings, 1/1/15 (133,000) (38,244)
Schedule 2—Calculation of Cumulative Translation Adjustment at 12/31/15
Pounds Dollars
Net assets, 1/1/14 (390,000) 0.300 (117,000)

Net income, 2014 (163,000) 0.288 (46,944)
Dividends, 6/1/14 30,000 0.290 8,700
Net assets, 12/3/14 (523,000) (155,244)
current exchange rate (523,000) 0.280 (146,440)
Translation adjustment, 2014 (negative) (8,804)
Net assets, 1/1/15 (523,000) 0.280 (146,440)
Net income, 2015 (241,000) Above (66,004)
Dividends, 6/1/15 50,000 0.275 13,750
Net assets, 12/31/15 (714,000) (198,694)
current exchange rate (714,000) 0.270 (192,780)
Translation adjustment, 2015 (negative) (5,914)
Cumulative translation adjustment, 12/31/15 (negative) (14,718)
10-27
Education.
36. (continued)
Step Two
Cayce and Simbel's U.S. dollar accounts are then consolidated. Necessary
adjustments and eliminations are made.
Consolidation Worksheet
Adjustments and Consolidated
Cayce Simbel Eliminations Balances
Account Dollars Dollars Debit Credit Dollars
Sales (200,000) (219,200) (419,200)
Cost of goods sold 93,800 115,080 208,880
Salary expense 19,000 20,276 39,276
Rent expense 7,000 9,864 16,864
Other expenses 21,000 16,166 37,166
Dividend income (13,750) -0- (I) 13,750 -0-
Gain, 10/1/15 -0- (8,190) (8,190)
Net income (72,950) (66,004) (125,204)
Ret earn, 1/1/15 (318,000) (38,244) (S) 38,244 (*C) 38,244 (356,244)
Net income (72,950) (66,004) (125,204)
Dividends 24,000 13,750 (I) 13,750 24,000
Ret earn, 12/31/15 (366,950) (90,498) (457,448)
Cash and receivables 110,750 39,420 150,170

Inventory 98,000 80,190 178,190
Prepaid rent 30,000 2,700 32,700
Investment 126,000 -0- (*C) 38,244 (S)164,244 -0-
Fixed assets 398,000 122,850 (S) 9,000 (E) 900 528,950
Total 762,750 245,160 890,010
Accounts payable (60,800) (14,580) (75,380)

Notes payable (132,000) (37,800) (169,800)
Common stock (120,000) (72,000) (S) 72,000 (120,000)
Additional PIC (83,000) (45,000) (S) 45,000 (83,000)
Ret earn, 12/31/15 (366,950) (90,498) (457,448)
Subtotal (259,878) (905,628)
Cum trans adjust 14,718 (E) 900 15,618
Total (762,750) (245,160) 217,138 217,138 (890,010)
10-28
Education.
36. (continued)
Explanation of Adjustment and Elimination Entries
Entry *C
Investment in Simbel.................................................... 38,244
Retained earnings, 1/1/15........................................ 38,244
To accrue 2015 increase in subsidiary book value (see Schedule 1). Entry is
needed because parent is using the cost method.
Entry S
Common stock (Simbel) .......................................... 72,000
Add'l paid-in-capital (Simbel)....................................... 45,000
Retained earnings, 1/1/15 (Simbel).............................. 38,244
Fixed assets (revaluation) .......................................... 9,000
Investment in Simbel .......................................... 164,244
To eliminate subsidiary's stockholders' equity accounts and allocate the
excess of acquisition consideration over book value to land (fixed assets).
The excess of acquisition consideration over book value is calculated as
follows:
Acquisition consideration....................................................... $126,000
Book value, 1/1/15....................................................................
Common stock..................................................................... (72,000)

Add’l paid-in capital............................................................... (45,000)
Excess of acquisition consideration over book value $ 9,000
The excess of acquisition consideration over book value is 30,000 pounds.
The U.S. dollar equivalent at 1/1/15, the date of acquisition, is $9,000
(£E30,000 x $.30).
Entry I
Dividend income........................................................... 13,750
Dividends.................................................................. 13,750
To eliminate intra-entity dividend payments recorded by parent as income.
Entry E
Cumulative translation adjustment............................. 900
Fixed assets (revaluation) ...................................... 900
To revalue (write-down) the excess of acquisition consideration over book
value for the change in exchange rate since the date of acquisition with the
counterpart recognized in the consolidated cumulative translation
adjustment.
The revaluation of "excess" is calculated as follows:
Excess of acquisition consideration over book value
U.S. dollar equivalent at 12/31/15 £E30,000 x $.27 = $8,100
U.S. dollar equivalent at 1/1/15 £E30,000 x $.30 = 9,000
Cumulative translation adjustment
related to excess, 12/31/15 (negative) $( 900)
10-29
Education.
37. (90 minutes) Translate [remeasure] foreign currency financial statements

using U.S. GAAP and explain sign of translation adjustment [remeasurement
gain/loss])
Part I (a). Czech koruna is the functional currency—current rate method
Exchange
KčS Rate US$
Sales 25,000,000 0.035 875,000
Cost of goods sold (12,000,000) 0.035 (420,000)
Depreciation expense—equipment (2,500,000) 0.035 (87,500)
Depreciation expense—building (1,800,000) 0.035 (63,000)
Research and development expense (1,200,000) 0.035 (42,000)
Other expenses (1,000,000) 0.035 (35,000)
Net income 6,500,000 227,500
Retained earnings, 1/1/15 500,000 given 22,500
Dividends, 12/15/15 (1,500,000) 0.031 (46,500)
Retained earnings, 12/31/15 5,500,000 203,500
Cash 2,000,000 0.030 60,000

Accounts receivable 3,300,000 0.030 99,000
Inventory 8,500,000 0.030 255,000
Equipment 25,000,000 0.030 750,000
Accum. deprec.—equipment (8,500,000) 0.030 (255,000)
Building 72,000,000 0.030 2,160,000
Accum. deprec.—equipment (30,300,000) 0.030 (909,000)
Land 6,000,000 0.030 180,000
Total assets 78,000,000 2,340,000
Accounts payable 2,500,000 0.030 75,000

Long-term debt 50,000,000 0.030 1,500,000
Common stock 5,000,000 0.050 250,000
Additional paid-in capital 15,000,000 0.050 750,000
Retained earnings, 12/31/15 5,500,000 above 203,500
Translation adjustment - to balance (438,500)
Total liabilities and equities 78,000,000 2,340,000
10-30
Education.
37. (continued)
Calculation of Translation Adjustment

Net assets, 1/1/15 20,500,000 0.040 820,000
Net income, 2015 6,500,000 0.035 227,500
Dividends, 12/15/15 (1,500,000) 0.031 (46,500)
Net assets, 12/31/15 25,500,000 1,001,000
Net assets, 12/31/15 at current
exchange rate 25,500,000 0.030 765,000
Cumulative translation adjustment, 12/31/15 (negative) 438,500
10-31
Education.
37. (continued)
Part I (b). U.S. dollar is the functional currency—temporal method
Exchange
KčS Rate US$
Sales 25,000,000 0.035 875,000
Cost of goods sold (12,000,000) Sched. A (493,500)
Depreciation expense—equipment (2,500,000) Sched. B (118,000)
Depreciation expense—building (1,800,000) Sched. C (85,200)
Other expenses (1,000,000) 0.035 (35,000)
Income before remeasurement gain 6,500,000 101,300
Remeasurement gain, 2015 - 408,000
Net income 6,500,000 509,300
Retained earnings, 1/1/15 500,000 given 353,000
Dividends, 12/15/15 (1,500,000) 0.031 (46,500)
Retained earnings, 12/31/15 5,500,000 815,800
Cash 2,000,000 0.030 60,000

Inventory 8,500,000 0.032 272,000
Equipment 25,000,000 Sched.B 1,180,000
Accum. deprec.—equipment (8,500,000) Sched.B (418,000)
Building 72,000,000 Sched.C 3,408,000
Accum. deprec.—equipment (30,300,000) Sched.C (1,510,200)
Land 6,000,000 0.050 300,000
Total assets 78,000,000 3,390,800

Long-term debt 50,000,000 0.030 1,500,000
Common stock 5,000,000 0.050 250,000
Additional paid-in capital 15,000,000 0.050 750,000
Retained earnings, 12/31/15 5,500,000 above 815,800
Schedule A—Cost of goods sold
KčS ER US$
Beginning inventory 6,000,000 0.043 258,000
Purchases 14,500,000 0.035 507,500
Ending inventory (8,500,000) 0.032 (272,000)
Cost of goods sold 12,000,000 493,500
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Education.
37. (continued)
Schedule B—Equipment
KčS ER US$
Old Equipment—at 1/1/14 20,000,000 0.050 1,000,000
New Equipment—acquired 1/3/15 5,000,000 0.036 180,000
Total 25,000,000 1,180,000
Accum. Depr.—Old Equipment 8,000,000 0.050 400,000

Accum. Depr.—New Equipment 500,000 0.036 18,000
Total 8,500,000 418,000
Deprec expense—Old Equipment 2,000,000 0.050 100,000
Deprec expense—New Equipment 500,000 0.036 18,000
Total 2,500,000 118,000
Schedule C—Building
KčS ER US$
Old Building—at 1/1/14 60,000,000 0.050 3,000,000
New Building—acquired 3/5/15 12,000,000 0.034 408,000
Total 72,000,000 3,408,000
Accum. Depr.—Old Building 30,000,000 0.050 1,500,000
Accum. Depr.—New Building 300,000 0.034 10,200
Total 30,300,000 1,510,200
Deprec. expense—Old Building 1,500,000 0.050 75,000
Deprec. expense—New Building 300,000 0.034 10,200
Total 1,800,000 85,200
Calculation of Remeasurement Gain

KčS ER US$
Net mon. liab., 1/1/15 (37,000,000) 0.040 (1,480,000)
Increase in mon. assets:
Sales 25,000,000 0.035 875,000
Decrease in mon. assets:
Purchase of inventory (14,500,000) 0.035 (507,500)
Research and development (1,200,000) 0.035 (42,000)
Other expenses (1,000,000) 0.035 (35,000)
Dividends, 12/15/15 (1,500,000) 0.031 (46,500)
Purchase of equipment, 1/3/15 (5,000,000) 0.036 (180,000)
Purchase of buildings, 3/5/15 (12,000,000) 0.034 (408,000)
Net mon liab, 12/31/15 (47,200,000) (1,824,000)
Net mon liab, 12/31/15 at
current exchange rate (47,200,000) 0.030 (1,416,000)
Remeasurement gain—2015 (408,000)
10-33
Education.
37. (continued)
Part I (c). U.S. dollar is the functional currency—temporal method (no long-
term debt)
Exchange
KčS Rate US$
Sales 25,000,000 0.035 875,000
Cost of goods sold (12,000,000) Sched. A (493,500)
Depreciation expense—equipment (2,500,000) Sched. B (118,000)
Depreciation expense—building (1,800,000) Sched. C (85,200)
Other expenses (1,000,000) 0.035 (35,000)
Income before remeasurement loss 6,500,000 101,300
Remeasurement loss, 2015 - (92,000)
Net income 6,500,000 9,300
Retained earnings, 1/1/15 500,000 given (147,000)
Dividends, 12/15/15 (1,500,000) 0.031 (46,500)
Retained earnings, 12/31/15 5,500,000 (184,200)
Cash 2,000,000 0.030 60,000

Inventory 8,500,000 0.032 272,000
Equipment 25,000,000 Sched. B 1,180,000
Accum. deprec.—equipment (8,500,000) Sched. B (418,000)
Building 72,000,000 Sched. C 3,408,000
Accum. deprec.—equipment (30,300,000) Sched .C (1,510,200)
Land 6,000,000 0.050 300,000
Total assets 78,000,000 3,390,800

Long-term debt 0 0.030 0
Common stock 20,000,000 0.050 1,000,000
Additional paid in capital 50,000,000 0.050 2,500,000
Retained earnings, 12/31/15 5,500,000 above (184,200)
Schedule A—Cost of goods sold - same as in Part I (b)

Schedule B—Equipment - same as in Part I (b)
Schedule C—Building - same as in Part I (b)
10-34
Education.
37. (continued)
Calculation of Remeasurement Loss
KčS ER US$
Net monetary assets, 1/1/15 13,000,000 0.040 520,000
Increase in monetary assets:
Sales 25,000,000 0.035 875,000
Decrease in monetary assets:
Purchase of inventory (14,500,000) 0.035 (507,500)
Research and development (1,200,000) 0.035 (42,000)
Other expenses (1,000,000) 0.035 (35,000)
Dividends, 12/15/15 (1,500,000) 0.031 (46,500)
Purchase of equipment, 1/3/15 (5,000,000) 0.036 (180,000)
Purchase of buildings, 3/5/15 (12,000,000) 0.034 (408,000)
Net monetary assets, 12/31/15 2,800,000 176,000
Net monetary assets, 12/31/15
at current exchange rate 2,800,000 0.030 84,000
Remeasurement loss—2015 92,000
10-35
Education.
37. (continued)
Part II. Explanation of the negative translation adjustment in Part I (a),

remeasurement gain in Part I (b), and remeasurement loss in Part I (c).
The negative translation adjustment in Part I (a) arises because of two
factors: (1) there is a net asset balance sheet exposure and (2) the Czech
koruna has depreciated against the U.S. dollar during 2015 (from $.040 at
1/1/15 to $.030 at 12/31/15). A net asset balance sheet exposure exists
because all assets are translated at the current exchange rate and exceed
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 monetary liability balance sheet exposure and (2) the Czech koruna
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 KčS 5,300,000). Accounts Payable and Long-term Debt
are also translated at the current exchange rate (total KčS 52,500,000).
Because the Czech koruna amount of liabilities translated at the current rate
exceeds the Czech koruna amount of assets translated at the current rate, a
net monetary liability balance sheet exposure exists.
The remeasurement loss in Part I (c) arises because of two factors: (1) there
is a net monetary asset balance sheet exposure and (2) the Czech koruna has
depreciated against the U.S. dollar during 2015. Cash and Accounts
Receivable are the only assets translated at the current exchange rate (total
KčS 5,300,000). Because there is no Long-term Debt in part 1(c), Accounts
Payable is the only liability translated at the current exchange rate (total KčS
2,500,000). Because the Czech koruna amount of assets translated at the
current rate exceeds the Czech koruna amount of liabilities translated at the
current rate, a net monetary asset balance sheet exposure exists.
10-36
Education.
38. (90 minutes) Remeasure the foreign currency transactions of a foreign

subsidiary into the subsidiary’s functional currency and then translate the
subsidiary’s trial balance into the parent’s reporting currency
a.
Remeasurement of BRL Trial Balance into Mexican Pesos MXN

BRL MXN
Debit Credit Rate Debit Credit
Cash 5,500 6.30 C 34,650
Accounts Receivable 28,000 6.30 C 176,400
Notes Payable 5,000 6.30 C 31,500
Sales 35,000 6.20 A 217,000
Rent Expense 6,000 6.20 A 37,200
Interest Expense 500 6.20 A 3,100
40,000 40,000 251,350 248,500
Remeasurement Gain 2,850
Total 251,350 251,350
Calculation of Remeasurement Gain

BRL Rate MXN
Net monetary asset balance, 1/1/15 0
Increase in net monetary items:
Income (sales less rent and interest) 28,500 6.20 A 176,700
Decrease in net monetary items:
Not applicable
Net monetary assets, 12/31/15 28,500 176,700
Net monetary assets, 12/31/15, at
current exchange rate 28,500 6.30 C 179,550
Remeasurement loss (gain) (2,850)
10-37
Education.
38. (continued)
b.
Translation of Mexican Peso (MXN) Balances into U.S. Dollars (USD)

Unadjusted Adjusted
MXN MXN Adjustments MXN MXN USD USD
Debit Credit Debit Credit Debit Credit Rate Debit Credit
Cash 1,000,000 34,650 1,034,650 0.072 74,494.80
Accounts Receivable 3,000,000 176,400 3,176,400 0.072 228,700.80
Inventory 5,000,000 5,000,000 0.072 360,000.00
Land 2,000,000 2,000,000 0.072 144,000.00
Depreciable Assets 15,000,000 15,000,000 0.072 1,080,000.00
Accumulated Depreciation 6,000,000 6,000,000 0.072 432,000.00
Accounts Payable 1,500,000 1,500,000 0.072 108,000.00
Notes Payable 4,000,000 31,500 4,031,500 0.072 290,268.00
Common Stock 12,000,000 12,000,000 Given 1,000,000.00
Retained Earnings, 1/1/15 2,500,000 2,500,000 Given 200,000.00
Sales 34,000,000 217,000 34,217,000 0.075 2,566,275.00
Cost of Goods Sold 28,000,000 28,000,000 0.075 2,100,000.00
Depreciation Expense 600,000 600,000 0.075 45,000.00
Rent Expense 3,000,000 37,200 3,037,200 0.075 227,790.00
Interest Expense 400,000 3,100 403,100 0.075 30,232.50
Remeasurement Gain/Loss 2,850 2,850 0.075 213.75
Dividends Paid, 7/1/15 2,000,000 2,000,000 0.073 146,000.00
Total 60,000,000 60,000,000 251,350 251,350 60,251,350 60,251,350 4,436,431.85 4,596,543.00
Cumulative Translation Adjustment 160,111.15
Total 4,596,543.00 4,596,543.00
10-38
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
38. (continued)
Calculation of Cumulative Translation Adjustment
MXN Rate USD

Net asset balance, 1/1/15 14,500,000 0.080 H 1,160,000.00

Income, 2015 2,179,550 0.075 A 163,466.25
Dividends, 12/1/2015 (2,000,000) 0.073 H
(146,000.00)
Net assets, 12/31/15 14,679,550 1,177,466.25
Net assets, 12/31/15, at

current exchange rate 14,679,550 0.072 C 1,056,927.60
Translation adjustment, 2015 (debit) 120,538.65
Cumulative translation adjustment, 1/1/2015 (debit) Given 39,572.50
Cumulative translation adjustment, 12/31/2015 (debit) 160,111.15
10-39
Education.
Chapter 10 Develop Your Skills
Research Case 1—Foreign Currency Translation and Hedging Activities
The responses to this assignment will depend upon the company selected
by the student for analysis. It is unlikely that the company selected will
disclose the amount of any remeasurement gains and losses. The amount of
translation adjustment reported in accumulated other comprehensive
income usually can be found in a statement of stockholders’ equity. A
positive translation adjustment indicates that the foreign currency in which
the company operates, on average, increased in dollar value during the year.
A negative translation adjustment indicates the opposite.
Research Case 2—Foreign Currency Translation Disclosures in the Computer

Industry
The responses to requirements in this case will depend upon the annual
reports used by students to complete the case. The solution provided here
is based upon 2011 annual reports.
a. In 2011, in addition to providing information related to foreign currency

translation and hedging activities in its Form 10-K under 1A. Risk Factors,
p. 14, IBM also provided information in its Annual Report on these
activities in the following locations:
i. Management Discussion, under Currency Rate Fluctuations, p. 61.
ii. Note A. Significant Accounting Policies, under Translation of Non-U.S
Currency Amounts and Derivatives and Derivative Financial
Instruments, p. 83.
iii. Note D. Financial Instruments, under Derivatives Financial Instruments
and Foreign Exchange Risk, pp. 96-98.
In its Form 10-K for the year ended February 3, 2012 (Fiscal 2012), Dell
provided information related to foreign currency translation and hedging
activities in the following locations:
i. Item 1A. Risk Factors, p. 16, 17, 19.
ii. Item 7A. Quantitative and Qualitative Disclosures about Market Risk,
p. 56.
iii. Note 1. Description of Business and Summary of Significant
Accounting Policies, under Foreign Currency Translation and Hedging
Instruments, p. 65, and Derivative Instruments, p. 71.
iv. Note 6. Derivative Instruments and Hedging Activities, p. 80.
10-40
Education.
Research Case 2 (continued)
b. IBM’s foreign operations do not have a predominant functional currency.

The company indicates that it operates in multiple functional currencies
(AR, p. 96). The majority of Dell’s foreign operations have the U.S. dollar
as their functional currency (10-K, p. 65). Most of IBM’s foreign
operations probably have the foreign currency as functional currency and
therefore are translated into dollars using the current rate method with
translation adjustments reflected in stockholders’ equity.
Dell’s foreign operations, on the other hand, are remeasured into dollars
using the temporal method with remeasurement gains and losses
reflected in net income. These differences in translation method and
disposition of the translation adjustment reduces the comparability of
information provided by the two companies.
c. From the Consolidated Statement of Comprehensive Income (AR, p. 71), it

can be seen that IBM reported translation adjustments as follows over the
period 2009-2011:
2009: positive $1,675 million
2010: positive $712 million
2011: negative $693 million
The negative sign of the translation adjustment in 2011 indicates that, on

average, the foreign currency functional currencies of IBM’s foreign
operations decreased in value against the U.S. dollar in that year. The
positive sign of the translation adjustment in 2009 and 2010 indicates
that, on average, the foreign currency functional currencies of IBM’s
foreign operations increased in value against the U.S. dollar in those
years.
Dell reported foreign currency translation adjustments in Consolidated

Statements of Stockholders’ Equity as follows:
Fiscal 2010: negative $29 million
Fiscal 2011: positive $79 million
Fiscal 2012: negative $74 million
On average, the foreign currency functional currencies of Dell’s foreign
operations decreased in value against the U.S. dollar in Fiscal 2010 and
Fiscal 2012, and increased in value against the dollar in Fiscal 2011.
The magnitude of the translation adjustments reported in stockholders’

equity is much larger for IBM than for Dell. This undoubtedly occurs
because Dell has a much smaller balance sheet exposure related to
foreign currency functional currency operations.
10-41
Education.
Research Case 2 (continued)
d. In Note D. Financial Instruments, under Foreign Exchange Risk, IBM

indicates that a significant portion of the company’s foreign currency
denominated debt is designated as a hedge of its foreign currency
balance sheet exposures (p. 97). The company also uses foreign currency
forward contracts and cross-currency swaps to hedge its net investments
in foreign operations.
Although Dell reports that it hedges forecasted transactions and foreign

currency payables and receivables (p. 80), the company makes no
mention of hedging its balance sheet exposures.
e. The response to this requirement will vary from student to student. Much
of the information provided in requirements a. – d. above can be included
in a formal report to satisfy this requirement.
10-42
Education.
Accounting Standards Case 1—More than One Functional Currency
This case requires students to search the authoritative literature to determine

how the functional currency should be determined for a foreign entity that
has more than one distinct and separable operation.
Source of guidance: FASB ASC 830-10-55-6 Foreign Currency Matters;

Overall; Implementation Guidance and Illustrations: The Functional Currency
ASC 830-10-55-6 states: “In some instances, a foreign entity might have more
than one distinct and separable operation. For example, a foreign entity might
have one operation that sells parent-entity-produced products and another
operation that manufactures and sells foreign-entity-produced products. If
they are conducted in different economic environments, those two operations
might have different functional currencies. Similarly, a single subsidiary of a
financial institution might have relatively self-contained and integrated
operations in each of several different countries. In those circumstances,
each operation may be considered to be an entity as that term is used in this
Subtopic, and, based on the facts and circumstances, each operation might
have a different functional currency.”
This guidance indicates that the functional currency should be determined

separately for each distinct and separable operation of a single foreign entity.
Within its Mexican subsidiary, Lynch should designate the Mexican peso as
the functional currency for the Small Appliance division and the U.S. dollar as
the functional currency for the Electronics division.
10-43
Education.
Accounting Standards Case 2—Change in Functional Currency
This case requires students to search the authoritative literature to determine

how an entity should handle a change in foreign currency from the foreign
currency to the U.S. dollar. Specific questions are:
 Should the change in functional currency be treated as a change in
accounting principle with retrospective restatement of the carrying
values of nonmonetary assets?
 Should the cumulative translation adjustment be removed from equity
and, if so, where should it go?
Source of guidance: FASB ASC 830-10-45-10 Foreign Currency Matters;

General; Other Presentation Matters; Functional Currency Changes from
Foreign Currency to Reporting Currency
ASC 830-10-45-10 states: “If the functional currency changes from a foreign
currency to the reporting currency, translation adjustments for prior periods
shall not be removed from equity and the translated amounts for
nonmonetary assets at the end of the prior period become the accounting
basis for those assets in the period of the change and subsequent periods.”
In essence, the authoritative guidance indicates that the change in functional

currency from the Canadian dollar to the U.S. dollar should not be treated as
a change in accounting principle with retrospective adjustments. Instead, the
change should be handled prospectively with no adjustments made to the
carrying amounts of nonmonetary assets or to the accumulated translation
adjustment related to the Canadian subsidiary carried in AOCI.
10-44
Education.
Excel Case—Translating Foreign Currency Financial Statements

a.b. Spreadsheet for the translation (current rate method) and remeasurement
(temporal method) of the FC financial statements of Charles Edward
Company’s foreign subsidiary.
Current Rate Method Temporal Method
December 31, 2015 FC Rate USD Rate USD
Sales 5,000 $0.45 A $2,250 $0.45 A $2,250
Cost of goods sold (3,000) $0.45 A (1,350) calculation (1,360)
Gross profit 2,000 subtotal 900 subtotal 890
Selling expense (400) $0.45 A (180) $0.45 A (180)
Depreciation expense (600) $0.45 A (270) $0.50 H (300)
Remeasurement gain/loss 0 n/a 0 to balance 355
Income before tax 1,000 subtotal 450 subtotal 765
Income taxes (300) $0.45 A (135) $0.45 A (135)
Net income 700 subtotal 315 subtotal 630
Retained earnings, 1/1/15 0 0 0
Ret. earnings, 12/31/15 700 total 315 from B/S 630
Cash 1,000 $0.38 C 380 $0.38 C 380

Inventory 2,000 $0.38 C 760 $0.43 H 860
Fixed assets 6,000 $0.38 C 2,280 $0.50 H 3,000
Less: accum/deprec (600) $0.38 C (228) $0.50 H (300)
Total assets 8,400 total 3,192 total 3,940
Current liabilities 1,500 $0.38 C 570 $0.38 C 570

Long-term debt 3,000 $0.38 C 1,140 $0.38 C 1,140
Contributed capital 3,200 $0.50 H 1,600 $0.50 H 1,600
Cum. trans. adjust. 0 to balance (433)* n/a 0
Retained earnings 700 from I/S 315 to balance 630
Total liab and stock equity 8,400 A=L+SE 3,192 A=L+SE 3,940
Exchange Rates Temporal method—COGS (on a FIFO basis)

January 1-31, 2015 $0.50 BI 1,000 $0.50 H $500
Average 2015 $0.45 P 4,000 $0.43 H 1,720
December 31, 2015 $0.38 EI (2,000) $0.43 H (860)
Inventory purchases $0.43 COGS 3,000 $1,360
Key:
Average Exchange Rate A
Current Exchange Rate C
Historical Exchange Rate H
10-45
Education.
Excel Case (continued)
*Computation of Translation Adjustment

FC USD
Net assets, 1/1/15 3,200 $0.50 1,600
Net income, 2015 700 $0.45 315
Net assets, 12/31/15 3,900 1,915
Net assets, 12/31/15
at current exchange rate 3,900 $0.38 1,482
Translation adjustment (negative) 433
c. With the FC as functional currency, the U.S. dollar net income reflected in the
consolidated income statement is $315. If the U.S. dollar were the functional
currency, the amount would be twice as much—$630. The amount of total
assets reported on the consolidated balance sheet is 23.4% smaller than if the
U.S. dollar were functional currency [($3,940 – $3,192)/$3,192].
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.
10-46
Education.
FC Current Rate Temporal

Current ratio
CA 3,000 1,140 1,240
CL 1,500 570 570
2.0 2.0 2.1754
Debt to equity ratio

Total liabilities 4,500 1,710 1,710
Total stockholders’ 3,900 1,482 2,230
equity
1.15385 1.15385 0.76682
Profit margin
NI 700 315 630
Sales 5,000 2,250 2,250
0.14 0.14 0.28
Return on equity
NI 700 315 630
Average TSE 3,550 1,541 1,915
0.19718 0.20441 0.32898
Inventory turnover
COGS 3,000 1,350 1,360
Average Inventory 1,000 380 430
3 3.55263 3.16279
These results show that the temporal method distorts all ratios as calculated
from the original foreign currency financial statements. The current rate
method maintains all ratios that use numbers in the numerator and
denominator from the balance sheet only (current ratio, debt-to-equity ratio)
or the income statement only (profit margin). For ratios that combine
numbers from the income statement and balance sheet (return on equity,
inventory turnover), even the current rate method creates distortions.
The U.S. dollar amounts reported under the temporal method for inventory
and fixed assets reflect the equivalent U.S. dollar cost of those assets as if
the parent had sent dollars to the subsidiary to purchase the assets. For
example, to purchase FC 6,000 worth of fixed assets when the exchange rate
was $.50/FC, the parent would have had to provide the subsidiary with
$3,000.
10-47
Education.
The U.S. dollar amounts reported under the current rate method for inventory
and fixed assets reflect neither the equivalent U.S. dollar cost of those
assets nor their U.S. dollar current value. By multiplying the FC historical
cost by the current exchange rate, these assets are reported at what they
would have cost in U.S. dollars if the current exchange rate had been in
effect when they were purchased. This is a hypothetical number with little, if
any, meaning.
10-48
Education.
Excel and Analysis Case—Parker Inc. and Suffolk PLC
This assignment requires translation of foreign currency financial

statements under three different sets of assumptions regarding changes in
the U.S. dollar value of the British pound. Under the first set of
assumptions, the British pound appreciates steadily from $1.60 at 1/1/14 to
$1.68 at 12/31/15. Under the second set of assumptions, the exchange rate
remains $1.60 from 1/1/14 to 12/31/15. Under the third set of assumptions, the
British pound depreciates steadily from $1.60 at 1/1/14 to $1.52 at 12/31/15.
Part I—Appreciating Foreign Currency
Relevant exchange rates: January 1, 2014 $1.60

2014 Average $1.62
December 31, 2014 $1.64
January 30, 2015 $1.65
2015 Average $1.66
December 31, 2015 $1.68
10-49
Education.
Excel and Analysis Case (continued)
a. Translation of Suffolk’s December 31, 2015 trial balance from British pounds
to U.S. dollars.
Suffolk PLC
Trial Balance
December 31, 2015
Exchange
Pounds Rate Dollars
Cash £ 1,500,000 $1.68 $ 2,520,000
Accounts receivable 5,200,000 $1.68 8,736,000
Inventory 18,000,000 $1.68 30,240,000
Property, plant, & equipment (net) 36,000,000 $1.68 60,480,000
Accounts payable (1,450,000) $1.68 (2,436,000)
Long-term debt (5,000,000) $1.68 (8,400,000)
Common stock (44,000,000) $1.60 (70,400,000)
Retained earnings, 1/1/15 (8,000,000) Schedule A (12,840,000)
Sales (28,000,000) $1.66 (46,480,000)
Cost of goods sold 16,000,000 $1.66 26,560,000
Depreciation 2,000,000 $1.66 3,320,000
Other expenses 6,000,000 $1.66 9,960,000
Dividends, 1/30/15 1,750,000 $1.65 2,887,500
adjustment—positive (credit balance) (4,147,500)
£ 0 $ 0
Note: Amounts in parentheses are credit balances.
Exchange
Schedule A Pounds Rate Dollars
Retained earnings, 1/1/14 £(6,000,000) $1.60 $ (9,600,000)
Net income, 2014 (2,000,000) $1.62 (3,240,000)
Retained earnings, 12/31/14 £(8,000,000) $(12,840,000)
10-50
Education.
b. Schedule detailing the change in Suffolk’s cumulative translation adjustment

for 2014 and 2015.
Determination of Cumulative Exchange Exchange

Translation Adjustment Pounds Rate Rate Dollars
Net assets, 1/1/14 £50,000,000 $1.64 $1.60 $2,000,000
Net income, 2014 2,000,000 $1.64 $1.62 40,000
Translation adjustment, 2014
(positive) $2,040,000
Net assets, 1/1/15 £52,000,000 $1.68 $1.64 2,080,000
Net income, 2015 4,000,000 $1.68 $1.66 80,000
Dividends, 2015 (1,750,000) $1.68 $1.65 (52,500)
(positive) 2,107,500
Net assets, 12/31/15 £ 54,250,000
Cumulative Translation
Adjustment, 12/31/15 (positive) $4,147,500
Exchange
Cost Allocation Schedule Pounds Rate Dollars
Cost £52,000,000 $1.60 $83,200,000
Book value 50,000,000 $1.60 80,000,000
Excess of cost over book value £ 2,000,000 $ 3,200,000
Translation Adjustment Related to Exchange

Excess of Cost Over Book Value Pounds Rate Dollars
Excess of cost over book value £2,000,000
U.S. dollar value at 12/31/15 $1.68 $3,360,000
U.S. dollar value at 1/1/14 $1.60 3,200,000
Translation adjustment related
to excess, 12/31/15—positive $ 160,000
10-51
Education.
c. Consolidation Worksheet—December 31, 2015
Parker Suffolk Adjustments & Eliminations Consolidated
Sales ($70,000,000) ($46,480,000) ($116,480,000)
Cost of goods sold 34,000,000 26,560,000 60,560,000
Depreciation 20,000,000 3,320,000 23,320,000
Other expenses 6,000,000 9,960,000 15,960,000
Dividend income (2,887,500) 2,887,500 0
Net income ($12,887,500) ($6,640,000) ($16,640,000)
Ret. earnings, 1/1/15 ($48,000,000) ($12,840,000) 12,840,000 3,240,000 ($51,240,000)
Net income (12,887,500) (6,640,000) (16,640,000)
Dividends 4,500,000 2,887,500 2,887,500 4,500,000
Ret. earnings, ($56,387,500) ($16,592,500) ($63,380,000)

12/31/15
Cash $3,687,500 $2,520,000 $6,207,500
Accounts receivable 10,000,000 8,736,000 18,736,000
Inventory 30,000,000 30,240,000 60,240,000
Investment in Suffolk 83,200,000 3,240,000 83,240,000 0
3,200,000
Prop, plant & eq (net) 105,000,000 60,480,000 3,200,000 168,840,000
160,000
Accounts payable (25,500,000) (2,436,000) (27,936,000)
Long-term debt (50,000,000) (8,400,000) (58,400,000)
Common stock (100,000,000) (70,400,000) 70,400,000 (100,000,000)
Ret. earnings, (56,387,500) (16,592,500) (63,380,000)

12/31/15
Cum. trans. adj. (4,147,500) 160,000 (4,307,500)
$0 $0 $92,727,500 $92,727,500 $0
10-52
Education.
d. Consolidated income statement and balance sheet—2015.
Parker, Inc.
Consolidated Income Statement
For the year ended December 31, 2015
Sales $ 116,480,000
Cost of goods sold (60,560,000)
Depreciation (23,320,000)
Other expenses (15,960,000)
Net income $ 16,640,000
Parker, Inc.
Consolidated Balance Sheet
December 31, 2015
Assets
Cash $ 6,207,500
Accounts receivable 18,736,000
Inventory 60,240,000
Property, plant & equipment (net) 168,840,000
Total $254,023,500
Liabilities and Shareholders' Equity

Accounts payable $ 27,936,000
Long-term debt 58,400,000
Common stock 100,000,000
Retained earnings 63,380,000
Accum. other comp. income 4,307,500
Total $254,023,500
10-53
Education.
Part II—Stable Foreign Currency

2014 Average $1.60
December 31, 2014 $1.60
January 30, 2015 $1.60
2015 Average $1.60
December 31, 2015 $1.60
a. Translation of Suffolk’s December 31, 2015 trial balance from British pounds
to U.S. dollars.
Suffolk PLC
Trial Balance
December 31, 2015
Exchange
Pounds Rate Dollars
Cash £ 1,500,000 $1.60 $ 2,400,000
Inventory 18,000,000 $1.60 28,800,000
Long-term debt (5,000,000) $1.60 (8,000,000)
Common stock (44,000,000) $1.60 (70,400,000)
Sales (28,000,000) $1.60 (44,800,000)
Depreciation 2,000,000 $1.60 3,200,000
Other expenses 6,000,000 $1.60 9,600,000
Dividends, 1/30/15 1,750,000 $1.60 2,800,000
adjustment 0
£ 0 $ 0
Exchange
Net income, 2014 (2,000,000) $1.60 (3,200,000)
10-54
Education.

for 2014 and 2015.

Net assets, 1/1/14 £50,000,000 $1.60 $1.60 $0
Net income, 2014 2,000,000 $1.60 $1.60 0
Translation adjustment, 2014 $0
Net assets, 1/1/15 £52,000,000 $1.60 $1.60 0
Net income, 2015 4,000,000 $1.60 $1.60 0
Dividends, 2015 (1,750,000) $1.60 $1.60 0
Translation adjustment, 2015 0
Net assets, 12/31/15 £ 54,250,000
Adjustment, 12/31/15 $0
Exchange
Cost £52,000,000 $1.60 $83,200,000
Book value 50,000,000 $1.60 80,000,000

to excess, 12/31/15 $0
10-55
Education.
Sales ($70,000,000) ($44,800,000) ($114,800,000)
Depreciation 20,000,000 3,200,000 23,200,000
Other expenses 6,000,000 9,600,000 15,600,000
Dividend income (2,800,000) 2,800,000 0
Net income ($12,800,000) ($6,400,000) ($16,400,000)
Ret. earnings, 1/1/15 ($48,000,000) ($12,800,000) 12,800,000 3,200,000 ($51,200,000)
Net income (12,800,000) (6,400,000) (16,400,000)
Dividends 4,500,000 2,800,000 2,800,000 4,500,000
Ret. earnings, ($56,300,000) ($16,400,000) ($63,100,000)

12/31/15
Cash $3,600,000 $2,400,000 $6,000,000
Inventory 30,000,000 28,800,000 58,800,000
3,200,000
Prop, plant & eq (net) 105,000,000 57,600,000 3,200,000 165,800,000
Long-term debt (50,000,000) (8,000,000) (58,000,000)
Common stock (100,000,000) (70,400,000) 70,400,000 (100,000,000)
Ret. earnings, (56,300,000) (16,400,000) (63,100,000)

12/31/15
Cum. Trans. adj. 0 0 0
$0 $0 $92,400,000 $92,400,000 $0
10-56
Education.
Parker, Inc.
Sales $114,800,000
Net income $ 16,400,000
Parker, Inc.
December 31, 2015
Assets
Cash $ 6,000,000
Total $248,920,000

Accum. other comp. income 0
Total $248,920,000
10-57
Education.
Part III—Depreciating Foreign Currency

2014 Average $1.58
December 31, 2014 $1.56
January 30, 2015 $1.55
2015 Average $1.54
December 31, 2015 $1.52
a. Translation of Suffolk’s December 31, 2015 trial balance from British pounds to
U.S. dollars.
Suffolk PLC
Trial Balance
December 31, 2015
Exchange
Pounds Rate Dollars
Cash £ 1,500,000 $1.52 $ 2,280,000
Inventory 18,000,000 $1.52 27,360,000
Long-term debt (5,000,000) $1.52 (7,600,000)
Common stock (44,000,000) $1.60 (70,400,000)
Sales (28,000,000) $1.54 (43,120,000)
Depreciation 2,000,000 $1.54 3,080,000
Other expenses 6,000,000 $1.54 9,240,000
Dividends, 1/30/15 1,750,000 $1.55 2,712,500
adjustment—negative (debit balance) 4,147,500
£ 0 $ 0
Exchange
Net income, 2014 (2,000,000) $1.58 (3,160,000)
10-58
Education.

for 2014 and 2015.

Net assets, 1/1/14 £50,000,000 $1.56 $1.60 $(2,000,000)
Net income, 2014 2,000,000 $1.56 $1.58 (40,000)
(negative)
$(2,040,000)
Net assets, 1/1/15 £52,000,000 $1.52 $1.56 (2,080,000)
Net income, 2015 4,000,000 $1.52 $1.54 (80,000)
Dividends, 2015 (1,750,000) $1.52 $1.55 52,500
(negative) (2,107,500)
Net assets, 12/31/15 £ 54,250,000
Adjustment, 12/31/15 (negative)
$(4,147,500)
Exchange
Cost £52,000,000 $1.60 $83,200,000
Book value 50,000,000 $1.60 80,000,000

to excess, 12/31/15—negative $(160,000)
10-59
Education.
Sales ($70,000,000) ($43,120,000) ($113,120,000)
Depreciation 20,000,000 3,080,000 23,080,000
Other expenses 6,000,000 9,240,000 15,240,000
Dividend income (2,712,500) 2,712,500 0
Net income ($12,712,500) ($6,160,000) ($16,160,000)
Ret. earnings, 1/1/15 ($48,000,000) ($12,760,000) 12,760,000 3,160,000 ($51,160,000)
Net income (12,712,500) (6,160,000) (16,160,000)
Dividends 4,500,000 2,712,500 2,712,500 4,500,000
Ret. earnings, ($56,212,500) ($16,207,500) ($62,820,000)

12/31/15
Cash $3,512,500 $2,280,000 $5,792,500
Inventory 30,000,000 27,360,000 57,360,000
3,200,000
Prop, plant & eq (net) 105,000,000 54,720,000 3,200,000 162,760,000
160,000
Long-term debt (50,000,000) (7,600,000) (57,600,000)
Common stock (100,000,000) (70,400,000) 70,400,000 (100,000,000)
Ret. earnings, (56,212,500) (16,207,500) (62,820,000)

12/31/15
Cum. Trans. adj. 4,147,500 160,000 4,307,500
$0 $0 $92,392,500 $92,392,500 $0
10-60
Education.
Parker, Inc.
Sales $ 113,120,000
Net income $ 16,160,000
Parker, Inc.
December 31, 2015
Assets
Cash $ 5,792,500
Total $243,816,500

Accum. other comp. income (4,307,500)
Total $243,816,500
10-61
Education.
Part IV—Risk Assessment Report and Financial Management Recommendations
December 31, 2015 Exchange Rate

$1.68 $1.60 $1.52
Consolidated net income $16,640,000 $16,400,000 $16,160,000
Percentage difference 101.5% 100% 98.5%
+ 1.5% -- - 1.5%
Cash flow from dividends $2,887,500 $2,800,000 $2,712,500

Percentage difference 103% 100% 97%
+ 3% -- - 3%
Total Liabilities $86,336,000 $85,820,000 $85,304,000

Total Stockholders’ equity $167,687,500 $163,100,000 $158,512,500
Debt-to-equity ratio 51.5% 52.6% 53.8%
Percentage difference 98% 100% 102%
- 2% -- + 2%
Appreciation of the British pound from $1.60 to $1.68 results in consolidated

net income being 1.5% higher, cash flow from dividends being 3% higher, and
the debt-to-equity ratio being 2% lower than if there had been no change in
exchange rates.
Depreciation of the British pound from $1.60 to $1.52 would have resulted in
income being 1.5% lower, cash flow from dividends being 3% lower, and the
debt-to-equity ratio being 2% higher than if there had been no change in
exchange rates.
An increase in the dollar value of the British pound results in higher

profitability, greater cash inflow, and an improved debt-to-equity ratio. The
opposite is true for a decrease in the dollar value of the British pound.
If the British pound is expected to appreciate, Parker should not hedge its
British pound exposure associated with its investment in Suffolk. However, if
the British pound is expected to depreciate, Parker may wish to hedge its
British pound net asset and cash flow exposure in some way. The decline in
dollar value of future British pound dividend payments could be hedged by
selling British pounds forward or by purchasing a British pound put option.
The negative translation adjustment reported in accumulated other
comprehensive income could be avoided using an option or forward contract,
or by taking out a loan in British pounds.
10-62
Education.
10-63
Education.

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Chapter 10 - Translation of Foreign Currency Financial Statements

I. In today's global economy, many companies have invested in operations in foreign

Answer to Discussion Question: How Do We Report This?

As a classroom exercise or written assignment, students could be required to select a reported

6. The Retained Earnings balance is created by a multitude of transactions: all revenues,

a. The U.S. dollar is the functional currency.

1. C (Definition of functional currency)

2. C (Comparison of current rate and temporal methods)

3. C (Translation process (current rate method))

4. B (Determine appropriate translation method and resulting translation

5. A (Translation process (current rate method) – asset and related expense)

All asset accounts are translated at current rates.

6. A (Translation process (current rate method) – assets)

Because the foreign currency is the functional currency, a translation is

7. C (Remeasurement process (temporal method) – assets)

Because the U.S. dollar is the functional currency, a remeasurement is

8. A (Remeasurement process (temporal method) – inventory)

The U.S. dollar is the foreign subsidiary’s functional currency, so a

9. A (Remeasurement process (temporal method) – cost of goods sold)

The U.S. dollar is the foreign subsidiary’s functional currency, so a

10. D (Translation process (current rate method) – marketable securities and

The foreign currency is the functional currency, so a translation is

11. C (Remeasurement process (temporal method) – marketable securities and

The U.S. dollar is the functional currency, so a remeasurement is

12. C (Highly inflationary economy (temporal method) – cost of goods sold)

Beginning inventory FCU 200,000 x $1.00 = $ 200,000

13. C (Calculation of translation adjustment)

Beginning net assets, 1/1………….. P20,000 x $.15 = $ 3,000

14. C (Concepts underlying current rate and temporal methods)

By translating items carried at historical cost by the historical exchange

15. A (Calculation of remeasurement gain/loss)

Beginning net monetary assets, 1/1 P100,000 x $.16 = $16,000

16. C (Remeasurement process (temporal method))

Marketable equity securities are carried at market value and therefore

17. B (Determine appropriate translation method and treatment of translation

Wages expense is translated at the average exchange rate; wages payable

19. C (Treatment of gains and losses on hedges of net investments)

Gains and losses on hedges of net investments (whether through a forward

20. D (Presentation of remeasurement gain/loss on income statement)

Remeasurement gains are reported in the income statement as a part of

Rent expense—use actual (historical) rate at time of recording. Rent

Dividends—use historical rate at time of recording, the date of declaration.

Equipment—as an asset, use current rate at the balance sheet date.

Sales—use actual (historical) rate at time of recording. Sales often occur

Depreciation expense—use historic rate at time of recording. In most cases,

Accumulated depreciation—as a contra-asset account, use the current ex-

Common stock—as an equity account, use historic rate at time of recording,

As a translation, both the asset (inventory) and the liability (accounts

Inventory LCU120,000 x 25% left = LCU30,000

Accounts payable LCU120,000 x 40% unpaid = LCU48,000

* C = current rate, H = historical rate, A = average rate

24. (20 minutes) (Calculate translation adjustment and remeasurement gain/loss

Remeasurement CHF US$

Economic Relevance of Translation Adjustment

The translation adjustment increases stockholders’ equity by $400,000. The

Economic Relevance of Remeasurement Loss

a. Remeasurement of Swiss franc (CHF) balances into Israeli shekels (ILS)

December 31, 2015 CHF Exchange Rate ILS*

b. Translation of remeasured Swiss franc (CHF) balances into U.S. dollars

December 31, 2015 ILS Exchange Rate USD**