Translation of Foreign Currency Financial Statements: Chapter Outline

Chapter 10 - Translation of Foreign Currency Financial Statements
CHAPTER 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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Education.
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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Education.
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 subsidiarys
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 subsidiarys
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 companys 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 subsidiarys 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 entitys 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 entitys 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
entitys 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
entitys 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 parents 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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Education.
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 subsidiarys 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 subsidiarys 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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Education.
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
Purchases
Ending inventory
Cost of goods sold
FCU
200,000 x $1.00 = $ 200,000

10,300,000 x $0.80 = 8,240,000
(500,000) x $0.75 =
(375,000)
FCU 10,000,000
$8,065,000
13. C (Calculation of translation adjustment)

Beginning net assets, 1/1..
Increase in net assets:
Net income ..................................
Ending net assets, 12/31 .................
Ending net assets at
current exchange rate ................
Translation adjustment (positive) .
P20,000
x $.15 =
$ 3,000
10,000
P30,000
x $.19 =
1,900
$ 4,900
P30,000
x $.21 =
$ 6,300
$(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
Increases in net monetary assets:
Sale of inventory ........................
Decreases in net monetary assets:
Purchase of equipment..............
Purchase of inventory ...............
Transfer to parent ......................
Ending net monetary assets, 12/31
Ending net monetary assets at
the current exchange rate .........
Remeasurement gain ......................
P100,000
x $.16 =
$16,000
50,000
x $.20 =
10,000
(60,000)
(30,000)
(10,000)
P 50,000
x $.16 =
x $.18 =
x $.21 =
(9,600)
(5,400)
(2,100)
$ 8,900
P 50,000
x $.22 =
(11,000)
$(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 expenseuse 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.
Dividendsuse historical rate at time of recording, the date of declaration.
Equipmentas an asset, use current rate at the balance sheet date.
Notes payableas a liability, use current rate at the balance sheet date.
Salesuse 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 expenseuse 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.
Cashas an asset, use the current rate at the balance sheet date.
Accumulated depreciationas a contra-asset account, use the current exchange rate at the balance sheet date.
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Education.
21. (continued)
Common stockas 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
Accounts payable
$.16 C
Accounts receivable
$.16 C
Accumulated depreciation
$.16 C
Advertising expense
$.19 A
Amortization expense
$.19 A
Buildings
$.16 C
Cash
$.16 C
Common stock
$.28 H
Depreciation expense
$.19 A
Dividends (10/1)
$.20 H
Notes payable
$.16 C
Patents (net)
$.16 C
Salary expense
$.19 A
Sales
$.19 A
Remeasurement
$.16 C
$.16 C
$.26 H
$.19 A
$.25 H
$.26 H
$.16 C
$.28 H
$.26 H
$.20 H
$.16 C
$.25 H
$.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:
Cash
Inventory
Fixed assets
Total
Notes payable
Owners' equity
Translation adjustment
Retained earnings
(remeasurement loss)
Total
Translation
CHF
Rate
800,000 $ 1.10
1,300,000 $ 1.10
4,000,000 $ 1.10
6,100,000
2,100,000 $ 1.10
4,000,000 $ 1.00
6,100,000
RemeasureUS$
ment Rate
880,000 $ 1.10
1,430,000 $ 1.00
4,400,000 $ 1.00
6,710,000
2,310,000 $ 1.10
4,000,000 $ 1.00
400,000
US$
880,000
1,300,000
4,000,000
6,180,000
2,310,000
4,000,000
(130,000)
6,180,000
6,710,000
Alternatively, the translation adjustment and remeasurement loss can be

calculated by analyzing the subsidiarys balance sheet exposure:
Translation
Beginning net assets, 12/18
Ending net assets, 12/31 at current exchange rate
Translation adjustment (positive)
Remeasurement
Beginning net monetary liabilities, 12/18
Ending net monetary liabilities, 12/31
(at current exchange rate)
Remeasurement loss
CHF
4,000,000
4,000,000
$
$
US$
1.00 H $ 4,000,000
1.10 C
4,400,000
$ (400,000)
CHF
(1,300,000) $
US$
1.00 H $ (1,300,000)
(1,300,000) $
1.10 C
$
(1,430,000)
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.
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24. (continued)
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 subsidiarys trial balance and in the parents
consolidated financial statements)
a. Remeasurement of Swiss franc (CHF) balances into Israeli shekels (ILS)
to report on the Israeli subsidarys trial balance.
December 31, 2015
Interest expense
Interest payable
Note payable
CHF
25,000 x
31,250 x
500,000 x
Exchange Rate
3.95 A
=
4.02 C
=
4.02 C
=
ILS*
98,750
125,625
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. parents consolidated financial statements.
December 31, 2015
Interest expense
Interest payable
Note payable
ILS
98,750 x
125,625 x
2,010,000 x
Exchange Rate
USD**
0.27 A
= 26,662.50
0.25 C
= 31,406.25
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
Rent revenue
60,000
x $1.90 A
Interest expense
(10,000)
x $1.90 A
(14,000)
x $1.90 A
Repair expense
(4,000)
x $1.85*H
Net income
32,000
=
=
=
=
U.S. Dollars
$114,000
(19,000)
(26,600)
(7,400)
$ 61,000
* Repair expense is the only expense not incurred evenly throughout the
year.
Statement of Retained Earnings
LCU
Retained earnings, 1/1
-0Net income
32,000
(above)
Dividends, 12/31
(5,000)
x $1.80 H
27,000
Cash
Accounts receivable
Building
Total assets
Interest payable
Note payable
Common stock
Retained earnings
Total liabilities and equities
Balance Sheet
LCU
41,000
x
10,000
x
140,000
x
(14,000)
x
177,000
10,000
x
100,000
x
40,000
x
27,000
$1.80 C
$1.80 C
$1.80 C
$1.80 C
$1.80 C
$1.80 C
$2.00 H
(above)
(below)
177,000
Computation of Translation Adjustment

Beginning net assets
-0Increase in net assets:
Issued common stock
40,000
Net income
32,000
Decrease in net assets:
Dividends
(5,000)
Ending net assets
67,000
Ending net assets at current
exchange rate
67,000
Translation adjustment (negative)
U.S. Dollars
-0$61,000
=
(9,000)
$52,000
U.S. Dollars
$ 73,800
18,000
252,000
(25,200)
$318,600
=
$ 18,000
=
180,000
=
80,000
52,000
(11,400)
$318,600
=
=
=
=
-0x $2.00
(above)
$ 80,000
61,000
x $1.80
(9,000)
$132,000
x $1.80
120,600
$ 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
-0-0Cash, 12/31
41,000
x $1.80 C = $ 73,800
10-14
Education.
28. (25 minutes) (Compute translation adjustment and remeasurement gain/loss)

a. Translationonly changes in net assets have an impact on the computation
of the translation adjustment.
Net asset balance 1/1
Increases in net assets (income):
Sold inventory at a profit 5/1
Sold land at a gain 6/1
Decreases in net assets:
Paid a dividend 12/1
Depreciation recorded
at current exchange rate
Translation adjustmentpositive
KM30,000
x $.32 =
$ 9,600
5,000
1,000
x $.34 =
x $.35 =
1,700
350
(3,000)
(2,000)
KM31,000
x $.41 =
x $.37 =
(1,230)
( 740)
$ 9,680
KM31,000
x $.42 =
(13,020)
$(3,340)
b. Remeasurementonly 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)
Increases in monetary assets:
Sold inventory 5/1
15,000
Sold land 6/1
5,000
Decreases in monetary assets:
Bought inventory 10/1
(12,000)
Bought land 11/1
(4,000)
Paid a dividend 12/1
(3,000)
Ending net monetary liability
position
KM(2,000)
Ending net monetary liability position
KM(2,000)
Remeasurement gain
x $.32 =
$ ( 960)
x $.34 =
x $.35 =
5,100
1,750
x $.39 =
x $.40 =
x $.41 =
(4,680)
(1,600)
(1,230)
$(1,620)
x $.42 =
(840)
$ (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
Changes in net assets:
Rendered services
Incurred expenses
Net assets, 12/31
Net assets, 12/31 at
current exchange rate
Translation adjustment (positive)
90,000 LCU x
$0.35 =
$31,500
45,000 LCU x
(27,000) LCU x
108,000 LCU
$0.36 =
$0.37 =
16,200
(9,990)
$37,710
108,000 LCU x
$0.41 =
44,280
$(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
Changes in net monetary assets:
Rendered services
Incurred expenses
Net monetary assets, 12/31 at
Remeasurement gain
c. Translated value of land
Remeasured value of land
20,000 LCU x
$0.35 =
$7,000
45,000 LCU x
(27,000) LCU x
38,000 LCU
$0.36 =
$0.37 =
16,200
(9,990)
$13,210
38,000 LCU x
$0.41 =
15,580
$(2,370)
70,000 LCU
70,000 LCU
x $.41 =
x $.34 =
$28,700
$23,800
30. (10 minutes) (Determine the appropriate exchange rate under the current rate
method [translation] and temporal method [remeasurement])
(a) Current Rate Method
Account
Translation
Sales
$0.20 A
Inventory
$0.22 C
Equipment
$0.22 C
Rent expense
$0.20 A
Dividends
$0.21 H
Notes receivable
$0.22 C
Accumulated depreciation--equipment $0.22 C
Salary payable
$0.22 C
$0.20 A
(b) Temporal Method

Remeasurement
$0.20 A
$0.19 H
$0.13 H
$0.20 A
$0.21 H
$0.22 C
$0.13 H
$0.22 C
$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)
Change in net assets:
Net income
Dividends, 3/1
Dividends, 10/1
Net assets, 12/31
Net assets at current
exchange rate, 12/31
78,000 kites
x $0.80 =
$62,400
26,000 kites
(5,000) kites
(5,000) kites
94,000 kites
x $0.77 =
x $0.78 =
x $0.76 =
20,020
(3,900)
(3,800)
$74,720
94,000 kites
x $0.75 =
70,500
$ 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
8,000 KQ x 1.62 $12,960
9,000 KQ x 1.62 14,580
3,000 KQ x 1.62
4,860
600 KQ x 1.62
$ 972
5,000 KQ x 1.62
8,100
3,000 KQ x 1.62
4,860
5,000 KQ x 1.62
8,100
10,000 KQ x 1.71
17,100
4,000 KQ x 1.66
6,640
25,000 KQ x 1.64
41,000
5,000 KQ x 1.64
8,200
600 KQ x 1.64
984
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..
-0-0Increase in net assets:
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)
Cash.
Accounts Receivable..
Equipment..
Accumulated Depreciation
Land
Accounts Payable
Notes Payable..
Common Stock
Dividends..
Sales
Salary Expense
Depreciation Expense
Miscellaneous Expense.
Net assets, 12/31.

Net assets, 12/31 at
current exchange rate.
16,400* KQ
$27,516
16,400 KQ x 1.62
26,568
$ 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
Cash
Accounts Receivable
Equipment
Land
Accounts Payable
Notes Payable
Common Stock
Dividends
Sales
Salary Expense
Miscellaneous Expense
8,000
9,000
3,000
600
5,000
3,000
5,000
10,000
4,000
25,000
5,000
600
9,000
KQ x 1.62
KQ x 1.62
KQ x 1.71
KQ x 1.71
KQ x 1.59
KQ x 1.62
KQ x 1.62
KQ x 1.71
KQ x 1.66
KQ x 1.64
KQ x 1.64
KQ x 1.71
KQ x 1.64
Remeasurement loss (debit)

Calculation of Remeasurement Loss
-0Increase in net monetary assets:
Common stock issued
10,000
Sales
25,000
Decrease in net monetary assets:
Acquired equipment
(3,000)
Acquired land
(5,000)
Dividends
(4,000)
Salary expense
(5,000)
Miscellaneous expense
(9,000)
Remeasurement loss (debit)
Debits
$12,960
14,580
5,130
Credits
$ 1,026
7,950
4,860
8,100
17,100
6,640
41,000
8,200
1,026
14,760
$71,246
840
$72,086
$72,086
-0KQ x 1.71 $17,100

KQ x 1.64 41,000
KQ
KQ
KQ
KQ
KQ
x 1.71
x 1.59
x 1.66
x 1.64
x 1.64
(5,130)
(7,950)
(6,640)
(8,200)
(14,760)
9,000* KQ
$15,420
9,000 KQ x 1.62
14,580
$ 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
Sales
Cost of goods sold
Gross profit
Less: Operating expenses
Gain on sale of equipment
Net income
Goghs
270,000
(155,000)
115,000
(54,000)
10,000
71,000
Ex Rate
1.59
1.59
1.59
1.72
Code
A
A
A
H
U.S. Dollars
429,300
(246,450)
182,850
(85,860)
17,200
114,190

For the Year Ending December 31, 2015

Net income
Less: Dividends
Goghs
216,000
71,000
(26,000)
261,000
Ex Rate
given
above
1.61
Code
U.S. Dollars
395,000
114,190
(41,860)
467,330
Balance Sheet
December 31, 2015
Goghs
Assets
Cash
Receivables
Inventory
Fixed assets (net)
Total assets
Liabilities and Equities
Liabilities
Common stock
Ex Rate
Code
U.S. Dollars
44,000
116,000
58,000
339,000
557,000
1.54
1.54
1.54
1.54
C
C
C
C
67,760
178,640
89,320
522,060
857,780
176,000
120,000
1.54
2.08
C
H
271,040
249,600
above
467,330
(131,710)
856,260
261,000
557,000
10-20
Education.
33. (continued)
Calculation of Translation Adjustment:
Goghs
336,000
71,000
(26,000)
381,000
381,000
Net assets, 1/1

Net income
Dividends
Net assets, 12/31
Net assets at current exchange rate
Translation adjustment, 2015 (negative)
Cumulative translation adjustment, 1/1 (negative)
Cumulative translation adjustment, 12/31 (negative)
Ex Rate Code
1.67
BOY
above
above
1.54
given
U.S. Dollars
561,120
114,190
(41,860)
633,450
586,740
46,710
85,000
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
Net monetary assets, 1/1/15*

Issued Common Stock (4/1/15)
Sold Building** (7/1/15)
Sales (2015)
Purchased Equipment (4/1/15)
Paid Dividends (10/1/15)
Rent Expense (2015)
Salary Expense (2015)
Utilities Expense (2015)
Net monetary assets, 12/31/15
Net monetary assets, 12/31/15 at
Remeasurement gain (credit)
KR
35,000
Exchange
Rate
x $3.00
=
US$
$105,000
13,000
10,000
162,000
x
x
x
$3.10
$3.30
$3.20
=
=
=
40,300
33,000
518,400
(64,000)
(57,000)
(21,500)
(45,000)
(7,000)
25,500
x
x
x
x
x
$3.10
$3.40
$3.20
$3.20
$3.20
=
=
=
=
=
(198,400)
(193,800)
(68,800)
(144,000)
(22,400)
$69,300
25,500
$3.50
89,250
$(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
Net assets, 1/1/15*

Issued Common Stock (4/1/15)
Gain on Sale of Building** (7/1/15)
Sales (2015)
Paid Dividends (10/1/15)
Depreciation expense (2015)
Rent Expense (2015)
Salary Expense (2015)
Utilities Expense (2015)
Translation adjustment (credit)
KR
124,000
Exchange
Rate
x $3.00
=
13,000
8,500
162,000
x
x
x
$3.10
$3.30
$3.20
=
=
=
40,300
28,050
518,400
(57,000)
(40,000)
(21,500)
(45,000)
(7,000)
137,000
x
x
x
x
x
$3.40
$3.20
$3.20
$3.20
$3.20
=
=
=
=
=
(193,800)
(128,000)
(68,800)
(144,000)
(22,400)
$401,750
137,000
$3.50
479,500
$ (77,750)
US$
$372,000
* 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
Accounts payable
Building and equipment
Cash
Inventory (beginning
income statement)
Inventory (ending
income statement)
Inventory (endingbalance sheet)
Purchases
Receivables
Salary expense
Sales
Main office
Canadian Dollars
Debit
Credit
17,150
4,750
10,000
20,650
500
Pesos
49,000
19,000
40,000
59,000
2,000
x .35 C
x .25 H
x .25 H
x .35 C
x .25 H
23,000
x .30 A (14)
28,000
28,000
68,000
21,000
9,000
124,000
30,000
Remeasurement loss
Total
6,900
x .34 A (15)
x .34 A (15) 9,520
x .34 A (15) 23,120
x .35 C
7,350
x .34 A
3,060
x .34 A
given
Schedule One
Schedule OneRemeasurement Loss

Pesos
Net monetary liabilities, 1/1/15*
(16,000)
x
Increases in net monetary assets
Sales
124,000
x
Decreases in net monetary assets
Purchases
(68,000)
x
Salary Expense
( 9,000)
x
Net monetary assets, 12/31/15**
31,000
31,000
x
Remeasurement loss
.32
10
81,110
9,520
42,160
7,530
81,110
Canadian Dollars
(5,120)
.34
42,160
.34
.34
(23,120)
( 3,060)
10,860
.35
10,850
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 2015sales, 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$.
Income Statement
c. Translation into U.S. dollars
For the Year Ended December 31, 2015
Current Rate Method
Sales
Cost of goods sold
Gross profit
Salary expense
Utility expense
Gain on sale of equipment
Remeasurement loss
Net income
C$
354,160
(223,500)
130,660
(8,500)
(29,060)
(9,000)
5,000
(10)
C$
89,090
x .67 A =
x .67 A =
x
x
x
x
x
.67 A
.67 A
.67 A
.68 H
.67 A
=
=
=
=
=
$ 237,287.20
(149,745.00)
87,542.20
(5,695.00)
(19,470.20)
(6,030.00)
3,400.00
(6.70)
$ 59,740.30

For the Year Ended December 31, 2015
Retained earnings, 1/1/15
Net income (above)
Dividends
C$
C$
135,530
89,090
( 28,000)
196,620
Given
Above
x .69 H =
$ 70,421.00
59,740.30
(19,320.00)
$110,841.30
10-24
Education.
35. (continued)
b. and c.
Balance Sheet
December 31, 2015
Cash
Receivables
Inventory
Buildings and equipment
Total
C$
C$
Accounts payable
C$
Notes payable
Common stock
Retained earnings
Cumulative translation adjustment
Total
C$
46,650
75,350
107,520
177,000
(31,750)
374,770
52,150
76,000
50,000
196,620
374,770
x
x
x
x
x
.65 C
.65 C
.65 C
.65 C
.65 C
= $ 30,322.50
=
48,977.50
=
69,888.00
= 115,050.00
= (20,637.50)
$243,600.50
x .65 C = $ 33,897.50
x .65 C =
49,400.00
x .45 H =
22,500.00
Above
110,841.30
Schedule Two 26,961.70
$ 243,600.50
Schedule TwoTranslation Adjustment

Net assets, 1/1/15
C$ 185,530
x .70 =
Changes in net assets
Net income
89,090
Above
Dividends
(28,000)
x .69 =
Net assets, 12/31/15
C$ 246,620
Net assets, 12/31/15 at
C$ 246,620
x .65 =
Cumulative translation adjustment, 1/1/15 (positive)
Cumulative translation adjustment, 12/31/15 (positive)
$129,871.00
59,740.30
(19,320.00)
$170,291.30
160,303.00
9,988.30
(36,950.00)
$(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
Net income
Dividends
R/E,12/31/15
Cash and receivables
Inventory
Prepaid rent (adjusted)
Fixed assets
Total
Accounts payable
Notes payable
Common stock
Addl paid-in capital
Subtotal
Cumulative translation
adjustment (negative)
Total
(133,000)
(241,000)
50,000
(324,000)
Schedule 1 (38,244)
Above
(66,004)
0.275
13,750
(90,498)
146,000
297,000
10,000
455,000
908,000
0.270
0.270
0.270
0.270
39,420
80,190
2,700
122,850
245,160
(54,000)
(140,000)
(240,000)
(150,000)
(324,000)
0.270
0.270
0.300
0.300
Above
(14,580)
(37,800)
(72,000)
(45,000)
(90,498)
(259,878)
Schedule 2
14,718
(245,160)
(908,000)
10-26
Education.
36. (continued)
Schedule 1Translation of 1/1/15 Retained Earnings
Net income, 2014
Dividends, 6/1/14
Pounds
-0(163,000)
30,000
(133,000)
0.288
0.290
Dollars
-0(46,944)
8,700
(38,244)
Schedule 2Calculation of Cumulative Translation Adjustment at 12/31/15

Pounds
Net assets, 1/1/14
(390,000)
0.300
Net income, 2014
(163,000)
0.288
Dividends, 6/1/14
30,000
0.290
Net assets, 12/3/14
(523,000)
(523,000)
0.280
Net assets, 1/1/15
(523,000)
0.280
Net income, 2015
(241,000)
Above
Dividends, 6/1/15
50,000
0.275
(714,000)
(714,000)
0.270
Cumulative translation adjustment, 12/31/15 (negative)
Dollars
(117,000)
(46,944)
8,700
(155,244)
(146,440)
(8,804)
(146,440)
(66,004)
13,750
(198,694)
(192,780)
(5,914)
(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.
Account
Sales
Cost of goods sold
Salary expense
Rent expense
Other expenses
Dividend income
Gain, 10/1/15
Net income
Consolidation Worksheet
Adjustments and Consolidated
Cayce
Simbel
Eliminations
Balances
Dollars Dollars
Debit
Credit
Dollars
(200,000) (219,200)
(419,200)
93,800 115,080
208,880
19,000
20,276
39,276
7,000
9,864
16,864
21,000
16,166
37,166
(13,750)
-0(I) 13,750
-0-0(8,190)
(8,190)
(72,950) (66,004)
(125,204)
Ret earn, 1/1/15

Net income
Dividends
Ret earn, 12/31/15
(318,000)
(72,950)
24,000
(366,950)
Cash and receivables

Inventory
Prepaid rent
Investment
Fixed assets
Total
Accounts payable
Notes payable
Common stock
Additional PIC
Ret earn, 12/31/15
Subtotal
Cum trans adjust
Total
110,750
98,000
30,000
126,000
398,000
762,750
(38,244) (S) 38,244 (*C) 38,244

(66,004)
13,750
(I) 13,750
(90,498)
39,420
80,190
2,700
-0- (*C) 38,244
122,850 (S) 9,000
245,160
(14,580)
(37,800)
(72,000) (S) 72,000
(45,000) (S) 45,000
(90,498)
(259,878)
14,718 (E)
900
(762,750) (245,160)
217,138
(S)164,244
(E)
900
(60,800)
(132,000)
(120,000)
(83,000)
(366,950)
217,138
(356,244)
(125,204)
24,000
(457,448)
150,170
178,190
32,700
-0528,950
890,010
(75,380)
(169,800)
(120,000)
(83,000)
(457,448)
(905,628)
15,618
(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)
Addl 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 currencycurrent rate method
KS
Sales
25,000,000
Cost of goods sold
(12,000,000)
Depreciation expenseequipment
(2,500,000)
Depreciation expensebuilding
(1,800,000)
Research and development expense (1,200,000)
Other expenses
(1,000,000)
Net income
6,500,000
500,000
Dividends, 12/15/15
(1,500,000)
5,500,000
Cash
Accounts receivable
Inventory
Equipment
Accum. deprec.equipment
Building
Land
Total assets
2,000,000
3,300,000
8,500,000
25,000,000
(8,500,000)
72,000,000
(30,300,000)
6,000,000
78,000,000
Accounts payable
Long-term debt
Common stock
Additional paid-in capital
2,500,000
50,000,000
5,000,000
15,000,000
5,500,000
78,000,000
Exchange
Rate
US$
0.035
875,000
0.035
(420,000)
0.035
(87,500)
0.035
(63,000)
0.035
(42,000)
0.035
(35,000)
227,500
given
22,500
0.031
(46,500)
203,500
0.030
0.030
0.030
0.030
0.030
0.030
0.030
0.030
60,000
99,000
255,000
750,000
(255,000)
2,160,000
(909,000)
180,000
2,340,000
0.030
75,000
0.030 1,500,000
0.050
250,000
0.050
750,000
above
203,500
to balance (438,500)
2,340,000
10-30
Education.
37.
(continued)
Calculation of Translation Adjustment
Net assets, 1/1/15
20,500,000
0.040
Net income, 2015
6,500,000
0.035
Dividends, 12/15/15
(1,500,000) 0.031
25,500,000
Net assets, 12/31/15 at current
exchange rate
25,500,000
0.030
Cumulative translation adjustment, 12/31/15 (negative)
202,500
820,000
227,500
(46,500)
1,001,000
765,000
236,000
438,500
10-31
Education.
37. (continued)
Part I (b). U.S. dollar is the functional currencytemporal method
KS
Rate
Sales
25,000,000
0.035
Cost of goods sold
(12,000,000) Sched. A
(2,500,000) Sched. B
(1,800,000) Sched. C
Research and development expense (1,200,000)
0.035
Other expenses
(1,000,000)
0.035
Income before remeasurement gain
6,500,000
Remeasurement gain, 2015
Net income
6,500,000
500,000
given
Dividends, 12/15/15
(1,500,000)
0.031
5,500,000
Cash
Accounts receivable
Inventory
Equipment
Building
Land
Total assets
2,000,000
3,300,000
8,500,000
25,000,000
(8,500,000)
72,000,000
(30,300,000)
6,000,000
78,000,000
Accounts payable
Long-term debt
Common stock
Additional paid-in capital
Exchange
US$
875,000
(493,500)
(118,000)
(85,200)
(42,000)
(35,000)
101,300
408,000
509,300
353,000
(46,500)
815,800
0.030
60,000
0.030
99,000
0.032
272,000
Sched.B 1,180,000
Sched.B (418,000)
Sched.C 3,408,000
Sched.C (1,510,200)
0.050
300,000
3,390,800
2,500,000
50,000,000
5,000,000
15,000,000
5,500,000
78,000,000
0.030
0.030
0.050
0.050
above
KS
6,000,000
14,500,000
(8,500,000)
12,000,000
ER
0.043
0.035
0.032
75,000
1,500,000
250,000
750,000
815,800
3,390,800
Schedule ACost of goods sold

Beginning inventory
Purchases
Ending inventory
Cost of goods sold
US$
258,000
507,500
(272,000)
493,500
10-32
Education.
37. (continued)
Schedule BEquipment
Old Equipmentat 1/1/14
New Equipmentacquired 1/3/15
Total
KS
20,000,000
5,000,000
25,000,000
ER
0.050
0.036
US$
1,000,000
180,000
1,180,000
Accum. Depr.Old Equipment

Accum. Depr.New Equipment
Total
Deprec expenseOld Equipment
Deprec expenseNew Equipment
Total
8,000,000
500,000
8,500,000
2,000,000
500,000
2,500,000
0.050
0.036
400,000
18,000
418,000
100,000
18,000
118,000
KS
60,000,000
12,000,000
72,000,000
30,000,000
300,000
30,300,000
1,500,000
300,000
1,800,000
ER
0.050
0.034
KS
(37,000,000)
ER
0.040
25,000,000
0.035
(14,500,000)
(1,200,000)
(1,000,000)
(1,500,000)
(5,000,000)
(12,000,000)
(47,200,000)
0.035
0.035
0.035
0.031
0.036
0.034
(507,500)
(42,000)
(35,000)
(46,500)
(180,000)
(408,000)
(1,824,000)
(47,200,000)
0.030
(1,416,000)
(408,000)
0.050
0.036
Schedule CBuilding
Old Buildingat 1/1/14
New Buildingacquired 3/5/15
Total
Accum. Depr.Old Building
Accum. Depr.New Building
Total
Deprec. expenseOld Building
Deprec. expenseNew Building
Total
0.050
0.034
0.050
0.034
US$
3,000,000
408,000
3,408,000
1,500,000
10,200
1,510,200
75,000
10,200
85,200
Calculation of Remeasurement Gain

Net mon. liab., 1/1/15
Increase in mon. assets:
Sales
Decrease in mon. assets:
Purchase of inventory
Research and development
Other expenses
Dividends, 12/15/15
Purchase of equipment, 1/3/15
Purchase of buildings, 3/5/15
Net mon liab, 12/31/15
Net mon liab, 12/31/15 at
Remeasurement gain2015
US$
(1,480,000)
875,000
10-33
Education.
37. (continued)
Part I (c). U.S. dollar is the functional currencytemporal method (no longterm debt)
Exchange
KS
Rate
US$
Sales
25,000,000
0.035
875,000
Cost of goods sold
(12,000,000) Sched. A
(493,500)
(2,500,000) Sched. B
(118,000)
(1,800,000) Sched. C
(85,200)
Research and development expense
(1,200,000)
0.035
(42,000)
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
500,000
given
(147,000)
Dividends, 12/15/15
(1,500,000)
0.031
(46,500)
5,500,000
(184,200)
Cash
Accounts receivable
Inventory
Equipment
Building
Land
Total assets
2,000,000
3,300,000
8,500,000
25,000,000
(8,500,000)
72,000,000
(30,300,000)
6,000,000
78,000,000
Accounts payable
Long-term debt
Common stock
Additional paid in capital
2,500,000
0
20,000,000
50,000,000
5,500,000
78,000,000
0.030
60,000
0.030
99,000
0.032
272,000
Sched. B 1,180,000
Sched. B
(418,000)
Sched. C 3,408,000
Sched .C (1,510,200)
0.050
300,000
3,390,800
0.030
0.030
0.050
0.050
above
75,000
0
1,000,000
2,500,000
(184,200)
3,390,800
Schedule ACost of goods sold - same as in Part I (b)

Schedule BEquipment
- same as in Part I (b)
Schedule CBuilding
- same as in Part I (b)
10-34
Education.
37. (continued)
Calculation of Remeasurement Loss
Increase in monetary assets:
Sales
Decrease in monetary assets:
Purchase of inventory
Research and development
Other expenses
Dividends, 12/15/15
Purchase of equipment, 1/3/15
Purchase of buildings, 3/5/15
Remeasurement loss2015
KS
13,000,000
ER
0.040
US$
520,000
25,000,000
0.035
875,000
(14,500,000)
(1,200,000)
(1,000,000)
(1,500,000)
(5,000,000)
(12,000,000)
2,800,000
0.035
0.035
0.035
0.031
0.036
0.034
(507,500)
(42,000)
(35,000)
(46,500)
(180,000)
(408,000)
176,000
2,800,000
0.030
84,000
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 KS 5,300,000). Accounts Payable and Long-term Debt
are also translated at the current exchange rate (total KS 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
KS 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 KS
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 subsidiarys functional currency and then translate the
subsidiarys trial balance into the parents 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
Net monetary asset balance, 1/1/15
Increase in net monetary items:
Income (sales less rent and interest)
Decrease in net monetary items:
Not applicable
Net monetary assets, 12/31/15, at
Remeasurement loss (gain)
BRL
0
Rate
MXN
28,500
6.20 A
176,700
28,500
28,500
176,700
6.30 C
179,550
(2,850)
10-37
Education.
38. (continued)
b.
Translation of Mexican Peso (MXN) Balances into U.S. Dollars (USD)
Unadjusted
MXN
MXN
Adjustments
Debit
Credit
Debit
Credit
Cash
1,000,000
34,650
Accounts Receivable
3,000,000
176,400
Inventory
5,000,000
Land
2,000,000
Depreciable Assets
15,000,000
6,000,000
Accounts Payable
1,500,000
Notes Payable
4,000,000
31,500
Common Stock
12,000,000
Retained Earnings, 1/1/15
2,500,000
Sales
34,000,000
217,000
Cost of Goods Sold
28,000,000
600,000
Rent Expense
3,000,000
37,200
Interest Expense
400,000
3,100
Remeasurement Gain/Loss
2,850
Dividends Paid, 7/1/15
2,000,000
Total
60,000,000 60,000,000
251,350
251,350
Cumulative Translation Adjustment
Total
Adjusted
MXN
MXN
Debit
Credit
1,034,650
3,176,400
5,000,000
2,000,000
15,000,000
6,000,000
1,500,000
4,031,500
12,000,000
2,500,000
34,217,000
28,000,000
600,000
3,037,200
403,100
2,850
2,000,000
60,251,350 60,251,350
Rate
0.072
0.072
0.072
0.072
0.072
0.072
0.072
0.072
Given
Given
0.075
0.075
0.075
0.075
0.075
0.075
0.073
USD
Debit
74,494.80
228,700.80
360,000.00
144,000.00
1,080,000.00
USD
Credit
432,000.00
108,000.00
290,268.00
1,000,000.00
200,000.00
2,566,275.00
2,100,000.00
45,000.00
227,790.00
30,232.50
213.75
146,000.00
4,436,431.85
4,596,543.00
160,111.15
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
Net asset balance, 1/1/15
14,500,000
Increase in net assets:
Income, 2015
2,179,550
Dividends, 12/1/2015
(2,000,000)
14,679,550
Net assets, 12/31/15, at
14,679,550
Translation adjustment, 2015 (debit)
Cumulative translation adjustment, 1/1/2015 (debit)
Cumulative translation adjustment, 12/31/2015 (debit)
Rate
0.080 H
USD
1,160,000.00
0.075 A
163,466.25
0.073 H
(146,000.00)
1,177,466.25
0.072 C
1,056,927.60
120,538.65
39,572.50
160,111.15
Given
10-39
Education.
Chapter 10 Develop Your Skills

Research Case 1Foreign 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 2Foreign 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. IBMs 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 Dells foreign operations have the U.S. dollar
as their functional currency (10-K, p. 65). Most of IBMs 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.
Dells 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 IBMs 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 IBMs
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 Dells 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 companys 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 1More 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 2Change 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 CaseTranslating 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
Companys foreign subsidiary.
Current Rate Method
December 31, 2015
Sales
Cost of goods sold
Gross profit
Selling expense
Remeasurement gain/loss
Income before tax
Income taxes
Net income
Ret. earnings, 12/31/15
FC
Rate
5,000
(3,000)
2,000
(400)
(600)
0
1,000
(300)
700
0
700
$0.45
$0.45
subtotal
$0.45
$0.45
n/a
subtotal
$0.45
subtotal
Cash
Inventory
Fixed assets
Less: accum/deprec
Total assets
1,000
2,000
6,000
(600)
8,400
$0.38
$0.38
$0.38
$0.38
total
Current liabilities
Long-term debt
Contributed capital
Cum. trans. adjust.
Retained earnings
Total liab and stock equity
1,500
3,000
3,200
0
700
8,400
Exchange Rates
January 1-31, 2015
Average 2015
December 31, 2015
Inventory purchases
Key:
Average Exchange Rate
Current Exchange Rate
Historical Exchange Rate
total
USD
A $2,250
A (1,350)
900
A
(180)
A
(270)
0
450
A
(135)
315
0
315
C
C
C
C
$0.38
C
$0.38
C
$0.50
H
to balance
from I/S
A=L+SE
380
760
2,280
(228)
3,192
570
1,140
1,600
(433)*
315
3,192
Temporal Method
Rate
$0.45
calculation
subtotal
$0.45
$0.50
to balance
subtotal
$0.45
subtotal
USD
A
A
H
from B/S
$0.38
$0.43
$0.50
$0.50
total
C
H
H
H
$0.38
C
$0.38
C
$0.50
H
n/a
to balance
A=L+SE
$2,250
(1,360)
890
(180)
(300)
355
765
(135)
630
0
630
380
860
3,000
(300)
3,940
570
1,140
1,600
0
630
3,940
Temporal methodCOGS (on a FIFO basis)

$0.50
BI
1,000
$0.50 H
$500
$0.45
P
4,000
$0.43 H
1,720
$0.38
EI
(2,000)
$0.43 H
(860)
$0.43
COGS
3,000
$1,360
A
C
H
10-45
Education.
Excel Case (continued)

*Computation of Translation Adjustment
Net assets, 1/1/15
Net income, 2015
FC
3,200
700
3,900
$0.50
$0.45
3,900
$0.38
USD
1,600
315
1,915
1,482
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 ratio
CA
CL
Debt to equity ratio

Total liabilities
Total stockholders
equity
Profit margin
NI
Sales
Return on equity
NI
Average TSE
Inventory turnover
COGS
Average Inventory
Current Rate
Temporal
3,000
1,500
2.0
1,140
570
2.0
1,240
570
2.1754
4,500
3,900
1,710
1,482
1,710
2,230
1.15385
1.15385
0.76682
700
5,000
0.14
315
2,250
0.14
630
2,250
0.28
700
3,550
0.19718
315
1,541
0.20441
630
1,915
0.32898
3,000
1,000
3
1,350
380
3.55263
1,360
430
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 CaseParker 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 IAppreciating Foreign Currency
Relevant exchange rates:
January 1, 2014
2014 Average
December 31, 2014
January 30, 2015
2015 Average
December 31, 2015
$1.60
$1.62
$1.64
$1.65
$1.66
$1.68
10-49
Education.
Excel and Analysis Case (continued)

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

b. Schedule detailing the change in Suffolks 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
54,250,000
Cumulative Translation
Adjustment, 12/31/15 (positive)
$4,147,500
Cost Allocation Schedule

Cost
Book value
Excess of cost over book value
Translation Adjustment Related to
Excess of Cost Over Book Value
U.S. dollar value at 12/31/15
Translation adjustment related
to excess, 12/31/15positive
Pounds
52,000,000
50,000,000
2,000,000
Pounds
2,000,000
Exchange
Rate
$1.60
$1.60
Exchange
Rate
$1.68
$1.60
Dollars
$83,200,000
80,000,000
$ 3,200,000
Dollars
$3,360,000
3,200,000
$ 160,000
10-51
Education.

c. Consolidation WorksheetDecember 31, 2015
Parker
Suffolk
($70,000,000)
($46,480,000)
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)
Sales
($12,887,500)
($6,640,000)
($48,000,000)
($12,840,000)
(12,887,500)
(6,640,000)
4,500,000
2,887,500
Dividends
Consolidated
($116,480,000)
2,887,500
Net income
Net income
Adjustments & Eliminations
0
($16,640,000)
12,840,000
3,240,000
($51,240,000)
(16,640,000)
2,887,500
4,500,000
($56,387,500)
($16,592,500)
($63,380,000)
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
Ret. earnings,
12/31/15
3,240,000
83,240,000
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)
(56,387,500)
(16,592,500)
Ret. earnings,
12/31/15
70,400,000
(63,380,000)
(4,147,500)
Cum. trans. adj.

$0
$0
(100,000,000)
160,000
$92,727,500
$92,727,500
(4,307,500)
$0
10-52
Education.

d. Consolidated income statement and balance sheet2015.
Parker, Inc.
Consolidated Income Statement
For the year ended December 31, 2015
Sales
Cost of goods sold
Depreciation
Other expenses
Net income
$ 116,480,000
(60,560,000)
(23,320,000)
(15,960,000)
$ 16,640,000
Parker, Inc.
Consolidated Balance Sheet
December 31, 2015
Assets
Cash
Accounts receivable
Inventory
Property, plant & equipment (net)
Total
6,207,500
18,736,000
60,240,000
168,840,000
$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 IIStable Foreign Currency
January 1, 2014
2014 Average
December 31, 2014
January 30, 2015
2015 Average
December 31, 2015
$1.60
$1.60
$1.60
$1.60
$1.60
$1.60
a. Translation of Suffolks December 31, 2015 trial balance from British pounds
to U.S. dollars.
Suffolk PLC
Trial Balance
December 31, 2015
Cash
Accounts receivable
Inventory
Accounts payable
Long-term debt
Common stock
Sales
Cost of goods sold
Depreciation
Other expenses
Dividends, 1/30/15
adjustment
Pounds
1,500,000
5,200,000
18,000,000
36,000,000
(1,450,000)
(5,000,000)
(44,000,000)
(8,000,000)
(28,000,000)
16,000,000
2,000,000
6,000,000
1,750,000
Exchange
Rate
$1.60
$1.60
$1.60
$1.60
$1.60
$1.60
$1.60
Schedule A
$1.60
$1.60
$1.60
$1.60
$1.60
0
Schedule A
Net income, 2014
Pounds
(6,000,000)
(2,000,000)
(8,000,000)
Dollars
$ 2,400,000
8,320,000
28,800,000
57,600,000
(2,320,000)
(8,000,000)
(70,400,000)
(12,800,000)
(44,800,000)
25,600,000
3,200,000
9,600,000
2,800,000
Exchange
Rate
$1.60
$1.60
0
0
Dollars
$ (9,600,000)
(3,200,000)
$(12,800,000)
10-54
Education.

for 2014 and 2015.
Net assets, 1/1/14
Net income, 2014
Net assets, 1/1/15
Net income, 2015
Dividends, 2015
Adjustment, 12/31/15
Pounds
50,000,000
2,000,000
Exchange Exchange
Rate
Rate
$1.60
$1.60
$1.60
$1.60
Dollars
$0
0
$0
52,000,000
4,000,000
(1,750,000)
$1.60
$1.60
$1.60
$1.60
$1.60
$1.60
0
0
0
0
54,250,000

Cost
Book value
to excess, 12/31/15
$0
Pounds
52,000,000
50,000,000
2,000,000
Pounds
2,000,000
Exchange
Rate
$1.60
$1.60
Exchange
Rate
$1.60
$1.60
Dollars
$83,200,000
80,000,000
$ 3,200,000
Dollars
$3,200,000
3,200,000
$0
10-55
Education.

Parker
Suffolk
Consolidated
($70,000,000)
($44,800,000)
Cost of goods sold
34,000,000
25,600,000
59,600,000
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)
Sales
2,800,000
Net income
($12,800,000)
($6,400,000)
($48,000,000)
($12,800,000)
(12,800,000)
(6,400,000)
4,500,000
2,800,000
Net income
Dividends
($114,800,000)
0
($16,400,000)
12,800,000
3,200,000
($51,200,000)
(16,400,000)
2,800,000
4,500,000
($56,300,000)
($16,400,000)
($63,100,000)
Cash
$3,600,000
$2,400,000
$6,000,000
Accounts receivable
10,000,000
8,320,000
18,320,000
Inventory
30,000,000
28,800,000
58,800,000
83,200,000
Ret. earnings,
12/31/15
3,200,000
83,200,000
3,200,000
105,000,000
57,600,000
3,200,000
165,800,000
Accounts payable
(25,500,000)
(2,320,000)
(27,820,000)
Long-term debt
(50,000,000)
(8,000,000)
(58,000,000)
Common stock
(100,000,000)
(70,400,000)
(56,300,000)
(16,400,000)
Ret. earnings,
12/31/15
70,400,000
(63,100,000)
Cum. Trans. adj.

$0
$0
(100,000,000)
$92,400,000
$92,400,000
$0
10-56
Education.

Parker, Inc.
Sales
Cost of goods sold
Depreciation
Other expenses
Net income
$114,800,000
(59,600,000)
(23,200,000)
(15,600,000)
$ 16,400,000
Parker, Inc.
December 31, 2015
Assets
Cash
Accounts receivable
Inventory
Total
6,000,000
18,320,000
58,800,000
165,800,000
$248,920,000

Accounts payable
$ 27,820,000
Long-term debt
58,000,000
Common stock
100,000,000
Retained earnings
63,100,000
0
Total
$248,920,000
10-57
Education.

Part IIIDepreciating Foreign Currency
January 1, 2014
2014 Average
December 31, 2014
January 30, 2015
2015 Average
December 31, 2015
$1.60
$1.58
$1.56
$1.55
$1.54
$1.52
a. Translation of Suffolks December 31, 2015 trial balance from British pounds to
U.S. dollars.
Suffolk PLC
Trial Balance
December 31, 2015
Cash
Accounts receivable
Inventory
Accounts payable
Long-term debt
Common stock
Sales
Cost of goods sold
Depreciation
Other expenses
Dividends, 1/30/15
adjustmentnegative (debit balance)
Pounds
1,500,000
5,200,000
18,000,000
36,000,000
(1,450,000)
(5,000,000)
(44,000,000)
(8,000,000)
(28,000,000)
16,000,000
2,000,000
6,000,000
1,750,000
Exchange
Rate
$1.52
$1.52
$1.52
$1.52
$1.52
$1.52
$1.60
Schedule A
$1.54
$1.54
$1.54
$1.54
$1.55
0
Schedule A
Net income, 2014
Pounds
(6,000,000)
(2,000,000)
(8,000,000)
Dollars
$ 2,280,000
7,904,000
27,360,000
54,720,000
(2,204,000)
(7,600,000)
(70,400,000)
(12,760,000)
(43,120,000)
24,640,000
3,080,000
9,240,000
2,712,500
Exchange
Rate
$1.60
$1.58
4,147,500
0
Dollars
$ (9,600,000)
(3,160,000)
$(12,760,000)
10-58
Education.

for 2014 and 2015.
Exchange Exchange
Pounds
Rate
Rate
Dollars
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)
54,250,000
Adjustment, 12/31/15 (negative)
$(4,147,500)

Cost
Book value
to excess, 12/31/15negative
Pounds
52,000,000
50,000,000
2,000,000
Pounds
2,000,000
Exchange
Rate
$1.60
$1.60
Exchange
Rate
$1.52
$1.60
Dollars
$83,200,000
80,000,000
$ 3,200,000
Dollars
$3,040,000
3,200,000
$(160,000)
10-59
Education.

Parker
Suffolk
($70,000,000)
($43,120,000)
Cost of goods sold
34,000,000
24,640,000
58,640,000
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)
Sales
($12,712,500)
($6,160,000)
($48,000,000)
($12,760,000)
(12,712,500)
(6,160,000)
4,500,000
2,712,500
Dividends
Consolidated
($113,120,000)
2,712,500
Net income
Net income
0
($16,160,000)
12,760,000
3,160,000
($51,160,000)
(16,160,000)
2,712,500
4,500,000
($56,212,500)
($16,207,500)
($62,820,000)
Cash
$3,512,500
$2,280,000
$5,792,500
Accounts receivable
10,000,000
7,904,000
17,904,000
Inventory
30,000,000
27,360,000
57,360,000
83,200,000
Ret. earnings,
12/31/15
3,160,000
83,160,000
3,200,000
105,000,000
54,720,000
3,200,000
162,760,000
160,000
Accounts payable
(25,500,000)
(2,204,000)
(27,704,000)
Long-term debt
(50,000,000)
(7,600,000)
(57,600,000)
Common stock
(100,000,000)
(70,400,000)
(56,212,500)
(16,207,500)
Ret. earnings,
12/31/15
Cum. Trans. adj.
$0
70,400,000
(100,000,000)
(62,820,000)
4,147,500
160,000
$0
$92,392,500
4,307,500
$92,392,500
$0
10-60
Education.

Parker, Inc.
Sales
Cost of goods sold
Depreciation
Other expenses
Net income
$ 113,120,000
(58,640,000)
(23,080,000)
(15,240,000)
$ 16,160,000
Parker, Inc.
December 31, 2015
Assets
Cash
Accounts receivable
Inventory
Total
5,792,500
17,904,000
57,360,000
162,760,000
$243,816,500

Accounts payable
$ 27,704,000
Long-term debt
57,600,000
Common stock
100,000,000
Retained earnings
62,820,000
(4,307,500)
Total
$243,816,500
10-61
Education.

Part IVRisk Assessment Report and Financial Management Recommendations
Consolidated net income

Percentage difference
Cash flow from dividends

Total Liabilities
Total Stockholders equity
Debt-to-equity ratio
December 31, 2015 Exchange Rate

$1.68
$1.60
$1.52
$16,640,000
$16,400,000
$16,160,000
101.5%
100%
98.5%
+ 1.5%
-- 1.5%
$2,887,500
103%
+ 3%
$2,800,000
100%
--
$2,712,500
97%
- 3%
$86,336,000
$167,687,500
51.5%
98%
- 2%
$85,820,000
$163,100,000
52.6%
100%
--
$85,304,000
$158,512,500
53.8%
102%
+ 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.

Translation of Foreign Currency Financial Statements: Chapter Outline

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Translation of Foreign Currency Financial Statements: Chapter Outline

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Chapter 10 - Translation of Foreign Currency Financial Statements

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

Chapter 10 - Translation of Foreign Currency Financial Statements

Chapter 10 - Translation of Foreign Currency Financial Statements

Answer to Discussion Question: How Do We Report This?

Chapter 10 - Translation of Foreign Currency Financial Statements

Chapter 10 - Translation of Foreign Currency Financial Statements

Chapter 10 - Translation of Foreign Currency Financial Statements

Chapter 10 - Translation of Foreign Currency Financial Statements

Chapter 10 - Translation of Foreign Currency Financial Statements

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

200,000 x $1.00 = $ 200,000

13. C (Calculation of translation adjustment)

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

16. C (Remeasurement process (temporal method))

Chapter 10 - Translation of Foreign Currency Financial Statements

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

Chapter 10 - Translation of Foreign Currency Financial Statements

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

Chapter 10 - Translation of Foreign Currency Financial Statements

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

Alternatively, the translation adjustment and remeasurement loss can be

Economic Relevance of Translation Adjustment

Chapter 10 - Translation of Foreign Currency Financial Statements

Chapter 10 - Translation of Foreign Currency Financial Statements

Computation of Translation Adjustment

Chapter 10 - Translation of Foreign Currency Financial Statements

Chapter 10 - Translation of Foreign Currency Financial Statements

28. (25 minutes) (Compute translation adjustment and remeasurement gain/loss)

b. Remeasurementonly changes in net monetary assets and liabilities have an

Note: The purchase of land on account did not result in a decrease in

Chapter 10 - Translation of Foreign Currency Financial Statements

29. (20 minutes) (Compute translation adjustment and remeasurement gain/loss)

b. The remeasurement gain or loss is based on changes in the net monetary

(b) Temporal Method

C = current exchange rate, A = average exchange rate, H = Historical

Chapter 10 - Translation of Foreign Currency Financial Statements

b. Forward contract journal entries

Forward Contract .................................

c. The net negative translation adjustment (debit balance) to be reported in

Chapter 10 - Translation of Foreign Currency Financial Statements

32. (45 minutes) (Translation and remeasurement of foreign subsidiary trial

Net assets, 12/31.

Chapter 10 - Translation of Foreign Currency Financial Statements

Remeasurement loss (debit)

-0KQ x 1.71 $17,100

Chapter 10 - Translation of Foreign Currency Financial Statements

33. (30 minutes) (Translate financial statements of a foreign subsidiary)

Statement of Retained Earnings

Retained earnings, 1/1

Chapter 10 - Translation of Foreign Currency Financial Statements

Net assets, 1/1

Code: A = average; C = current; H = historical; BOY = beginning of year

Chapter 10 - Translation of Foreign Currency Financial Statements

34. (35 minutes) (Compute remeasurement gain/loss and translation adjustment)

Net monetary assets, 1/1/15*

* Net monetary assets: (Cash + Accounts Receivable) - (Account Payable +

Net assets, 1/1/15*

* Net assets: Common stock + Retained earnings

Chapter 10 - Translation of Foreign Currency Financial Statements