it could ask for a I/S, or a B/S in exam, look at q 6 practice problem

Fenwicke Company organized and began operating a subsidiary in a foreign country on Janua
This subsidiary immediately borrowed LC
130,000
on a five-year note with
The subsidiary then purchased for LCU
182,000 a building that had a
Also on January 1, the subsidiary rents the building for three years to a group of local doctors
By year-end, payments totaling LCU
55,000
had been received. On October 1, LC
DIV of LCU
4,500
back to Fenwicke on December 31, 2015. The functional currency
Currency exchange rates for 1 LCU follow:
1-Jan-15
October 1, 2015
Average for 2015
December 31, 2015

2.8
2.6
2.6
2.4

=
=
=
=

1
1
1
1

LCU

Prepare a statement of cash flows in LCU for Fenwickes foreign subsidiary and then translate
Fenwicke Company Subsidiary
Statement of Cash Flows
LCU
Operating activities:
Net income*
Add: depreciation expenses
Less: increase in accounts receivable^
Add: increase in interest payable
Cash flow from operations

31,800
18,200
-11,000
13,000

2.6
2.6
2.6
2.6

A
A
A
A

52,000

Investing activities:
Purchase of building

-182,000

2.8

Financing activities:
Sale of common stock
Borrowing on note
Dividends paid
Cash flow from financing activities

52,000
130,000
-4,500
177,500

2.8
2.6
2.4

H
H
H

Increase in cash

47,500

Effect of exchange rate change on cash

Cash, 1/1

Cash, 12/31

Rent revenue
Interest expense
Depreciation expense
Repair expense
Net income

47,500

66,000
-13,000
-18,200
-3,000
31,800

2.60 A
2.60 A
2.60 A
2.60*H

2.4

=
=
=
=

171,600
-33,800
-47,320
-7,800
82,680

q 6 practice problem
gn country on January 1, 2015, by investing LCU
52000
10
% interest payable annually beginning on Jan 1, 2016. interest =
10
year anticipated life and no salvage value and is to be depreciated using the S/
oup of local doctors for
5,500
per month.
d. On October 1, LCU
3,000
was paid for a repair made on that date. The subsidiary transferre
unctional currency for the subsidiary is the LCU.

y and then translate these amounts into U.S. dollars.

U.S. Dollars
82,680
47,320
-28,600
33,800

*SEE NOTEBOOK IF NEEDED

^2 months rent receivable

135,200

-509,600

145,600
364,000
-10,800
498,800
124,400
10,400
0

to balance: diff between cash 12/31

and increase in cash (G38-G44)

114,000

13000
reciated using the S/L method.
subsidiary transferred a cash

Watson Company has a subsidiary in the country of Alonza where the local currency unit is th
On December 31, 2014, the subsidiary has the following balance sheet (in KM):
Cash
Inventory
Land
Building
Accumulated depr'n

11,500
17,500
5,000
55,000
-27,500
61,500

Notes payable (due 2016)

Common stock
Retained earnings

The subsidiary acquired the inventory on August 1, 2014, and the land and buildings in 2000
It issued the common stock in 1998. During 2015, the following transactions took place:
2015
Feb. 1
May 1
June 1
Aug. 1
Sept.1
Oct. 1
Nov. 1
Dec. 1
Dec. 31

Paid 12,500 KM on the note payable.

Sold entire inventory for 22,000 KM on account.
Sold land for 6,000 KM cash.
Collected all accounts receivable.
Signed long-term note to receive 7,000 KM cash.
Bought inventory for 14,000 KM cash.
Bought land for 5,000 KM on account.
Declared and paid 2,600 KM cash dividend to parent.
Recorded depreciation for the entire year of 2,750 KM.

The exchange rates for 1 KM are as follows:

1998
2000
August 1, 2014
December 31, 2014
February 1, 2015
May 1, 2015
June 1, 2015
August 1, 2015
September 1, 2015
October 1, 2015
November 1, 2015
December 1, 2015
December 31, 2015
Average for 2015

1 KM
1
1
1
1
1
1
1
1
1
1
1
1
1

=
=
=
=
=
=
=
=
=
=
=
=
=
=

0.24
0.21
0.31
0.32
0.33
0.34
0.35
0.37
0.38
0.39
0.4
0.41
0.44
0.38

a) If this is a translation, what is the translation adjustment determined solely for 2015?

Translationonly changes in net assets have an impact on the computation of the translation

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
Net asset balance 12/31
Net asset balance 12/31
at current exchange rate
Translation adjustmentpositive

KM
37,500

0.32

4,500
1,000

0.34
0.35

-2,600
-2,750
37,650

0.41
0.38

37,650

0.44

b) If this is a remeasurement, what is the translation adjustment determined solely for 2015?
Remeasurementonly changes in net monetary assets and liabilities have an impact on the
Beginning net monetary liability
position
Increases in monetary assets:
Sold inventory 5/1
Sold land 6/1
Decreases in monetary assets:
Bought inventory 10/1
Bought land 11/1
Paid a dividend 12/1
Ending net monetary liability position
Ending net monetary liability position
at curren KM
Remeasurement gain

KM
-12,500

0.32

22,000
6,000

0.34
0.35

-14,000
-5,000
-2,600
-6,100

0.39
0.4
0.41

-6,100

0.44

ocal currency unit is the kamel (KM).

ue 2016)

24,000
25,000
12,500

61,500

and buildings in 2000.

tions took place:

-12,500

12,500 KM
22,000
6,000
22,000
7,000
14,000
5,000
2,600
2,750

solely for 2015?

ation of the translation adjustment.

=
=
=
=
=

Dollars
12,000
0
1,530
350
0
-1,066
-1,045
11,769

16,566
-4,797

Assets - curr. Liabilities

^include profit only: sales price - inv
'Sales price - cost

-ve, because the net asset bal. at curr exch rate

is greater than the net asset bal. at EOY

mined solely for 2015?

ave an impact on the computation of the remeasurement gain.

-4,000

=
=

7,480
2,100

=
=
=

-5,460
-2,000
-1,066
-2,946

-2,684
-262

Cash - Notes payable (B/S accts)

at curr exch rate

al. at EOY

Chapter 10
If functional currency = parent's currency, then foreign F/S are REMEASURED
If functional currency = Foreigner's currency, then foreign F/S are TRANSLATED

15) Houston Corporation operates a branch operation in a foreign country. Although this bran
Thus, a remeasurement is necessary to produce financial information for external reporting p
and no other assets or liabilities. However, they immediately used
that it sold on July 1 for
50,000
pesos cash. They transferred
and recorded depreciation on the equipment of
6,000 pesos for the year.
Currency exchange rates for 1 peso follow:
date
1-Jan
May 1
July 1
October 1
Dec. 31
Year Average

dollar
$0.16
0.18
0.2
0.21
0.22
0.19

peso
1
1
1
1
1
1

What is the remeasurement gain to be recognized in the consolidated income statement?

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

Pesos
100,000

$0.16

50,000

0.2

2-Jul

-60,000
-30,000
-10,000
50,000

$0.16
0.18
0.21

H
1-May
1-Oct

50,000

0.22

31-Dec

REMEASURED using the TEMPORAL method

are TRANSLATED using the CURRENT RATE method

ign country. Although this branch deals in pesos, the U.S. dollar is viewed as its functional currency.
rmation for external reporting purposes. The branch began the year with
100,000
60,000
pesos to get equipment. On May 1, it purchased inventory costing
10,000
pesos to the parent on October 1
pesos for the year.

olidated income statement?

-2,100

Dollars
16,000
10,000
-9,600
-5,400
-2,100
8,900

-11,000
-2,100

-ve, because the ending monetary assets at current rare

are greater in amount (11,000) than the ending monetary assets at EOY (8,900)

unctional currency.
pesos in cash
30,000
pesos for cash

y assets at EOY (8,900)

1) A U.S. companys foreign subsidiary had these amounts in foreign currency units (FCU) in
Cost of goods sold
Ending inventory
Beginning inventory

10,400,000
210,000
110,000

The average exchange rate during 2015 was

1
The beginning inventory was acquired when the exch. rate was
Ending inventory was acquired when the exchange rate was $0.95 = FCU 1.
The exchange rate at December 31, 2015, was
0.9

Assuming that the foreign country is highly inflationary, at what amount should the foreign s
10,432,500

Beginning inventory
Purchases*
Ending inventory
Cost of goods sold

FCU
110,000
10,500,000
-210,000
10,400,000

1.2
1
0.95

(acq. Date) =
(Avrg.) =
(EOY) =

*Ending inv. + COGS - Beg. Inv.

2-3)
Certain balance sheet accounts of a foreign subsidiary of Rose Company have been stated in

Accounts receivable, current

Accounts receivable, LT
Prepaid insurance
Goodwill

Curr. Rates
220,000
124,000
62,000
92,000
498,000

Stated at
Hist. Rates
240,000
131,000
67,000
97,000
535,000

2) This subsidiarys functional currency is a foreign currency. What total should Roses balanc
498,000

Because the foreign currency is the functional currency, a translation is required. All assets a

3) This subsidiarys functional currency is the U.S. dollar. What total should Roses balance sh
508,000

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

4-5 correspond to questions 8-9 of the practice quiz, they are on notebook

6) Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2012.
Selected account balances are available for the year ended December 31, 2013, and are sta
sales
inv (bought Feb 1, 2013)
Equipment (bought jan. 1 2012)
Dividends (paid Sep. 1, 2013)
Accum. Depr'n. - Equipment
Depr'n Expense - Equipment

400,000
20,000
90,000
20,000
45,000
9,000

Relevant exchange rates for 1 euro are given below:

1-Jan-12
2-Jan-13
1-Feb-13
1-Sep-13
31-Dec-13
4th quarter avrg 2012
4th quarter avrg 2013
avrg 2013

0.91
0.93
0.94
0.97
1.01
0.9
0.98
0.95

Assume the functional currency is the U.S. Dollar; compute the U.S. statement of retained ea
20,000 $.97 =

19400

Declaration date rate

7) SAME DATA FROM PROBLEM6

Assume the functional currency is the U.S. Dollar; compute the U.S. income statement amou
400,000 $.95

380000

Avrg. Rate

8) Under the current rate method, common stock would be translated at what rate?
Historical rate.

9) A subsidiary of Porter Inc., a U.S. company, was located in a foreign country. The functiona
the local currency where the subsidiary is located. The subsidiary acquired inventory on cred
120,000
that was sold on January 17, 2013 for
156,000
Currency exchange rates between the dollar and the Stickle were as follows:
1-Nov-12
31-Dec-12
1-Jan-13
31-Jan-13
avrg 2013

0.19
0.2
0.22
0.23
0.24

=
=
=
=
=

1
1
1
1
1

sicle
sicle
sicle
sicle
sicle

What amount would have been reported for this inventory in Porter's consolidated balance sh
120,000 $.20 = $24,000

24000

December 31 2012 rate

rrency units (FCU) in 2015:

equals
1.2
0.95
equals

1
equals
equals
1

FCU
1
1

FCU
FCU

FCU

t should the foreign subsidiarys cost of goods sold be reflected in the U.S. dollar income statement?

Dollars
132,000
10,500,000
-199,500
10,432,500

y have been stated in U.S. dollars as follows:

should Roses balance sheet include for the preceding items?

required. All assets accounts are translated at current rates.

uld Roses balance sheet include for the preceding items?

l, are remeasured at historical rates.

anuary 1, 2012.
31, 2013, and are stated in Euro, the local currency.

ement of retained earnings amount for dividends for 2013.

ome statement amount for sales for 2013.

t what rate?

ountry. The functional currency of this subsidiary was the Stickle (),
red inventory on credit on November 1, 2012, for
The subsidiary paid for the inventory on January 31, 2013.

nsolidated balance sheet at December 31, 2012?

income statement?

Prob 1
prob 2

Conc
Dandu Corp

Prob 3

using correct rates

Prob 4

On December 18, 2015, Stephanie Corporation acquired 100 percent of a Swiss company for
which is indicative of book and fair value. At the acquisition date, the exchange rate was
On December 18, 2015, the book and fair values of the subsidiarys assets and liabilities we
Cash
Inventory
Fixed assets
Notes payable

Stephanie prepares consolidated financial statements on December 31, 2015. By that date, t
Because of the year-end holidays, no transactions took place prior to consolidation.

a) Determine the translation adjustment to be reported on Stephanies December 31, 2015, c

assuming that the Swiss franc is the Swiss subsidiarys functional currency. What is the econo

b) Determine the remeasurement gain or loss to be reported in Stephanies 2015 consolidate

is the functional currency. What is the economic relevance of this remeasurement gain or los

The translation adjustment and remeasurement gain/loss can be determined as the plug figu

Cash
Inventory
Fixed assets
Total
Notes payable
Owners' equity
Translation adjustment (positive)
Retained earnings (remeasurement loss)

5) The Isle of Palms Company (IOP), a U.S.-based entity, has a wholly owned subsidiary in Isr
On October 1, 2014, the Israeli subsidiary borrowed
The note payable and accrued interest are payable at the date of maturity. On December 31

Interest expense
Interest payable
Note payable

Relevant exchange rates between the Israeli shekel (ILS) and Swiss franc (CHF), and between
the U.S. dollar (USD) and Israeli shekel (ILS) follow:

October 1, 2014
January 1, 2015
Average for 2015
December 31, 2015

a) Determine the Israeli shekel amounts at which the Swiss franc balances should be reporte
31-Dec-15
Interest expense
Interest payable
Note payable

CHF
25,000
31,250
500,000

b) Determine the U.S. dollar amounts at which the Swiss franc balances should be included in
31-Dec-15
Interest expense
Interest payable
Note payable

ILS
98,750
125,625
2,010,000

The following problems relate to HW problems, but adapted

6
7
8

9) Aerkion Company starts '15 with 2 assets: cash of

On May 1, 2015, Aerkion rendered services to a customer for
LCU operating expense that was immediately paid. No other transactions occurred during the
April 4, 2005
January 1, 2015
May 1, 2015
October 1, 2015
December 31, 2015

LCU 1
1
1
1
1

a) Assume that Aerkion is a foreign subsidiary of a U.S. multinational company that uses the
Assume also that the LCU is the subsidiarys functional currency. What is the translation adju

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)

LCU
90,000
45,000
-27,000
108,000

108,000

b) Assume that Aerkion is a foreign subsidiary of a U.S. multinational company that uses the
Assume also that the U.S. dollar is the subsidiarys functional currency. What is the remeasur

The remeasurement gain or loss is based on changes in the net monetary assets of the subs

Net monetary assets, 1/1

LCU
20,000

Changes in net monetary assets:

Rendered services
Incurred expenses
Net monetary assets, 12/31

45,000
-27,000
38,000

Net monetary assets, 12/31 at

current exchange rate

38,000

Remeasurement gain

c) Assume that Aerkion is a foreign subsidiary of a U.S. multinational company.

On the December 31, 2015, balance sheet, what is the translated value of the Land account?
On the December 31, 2015, balance sheet, what is the remeasured value of the Land accoun
Translated value of land
Remeasured value of land

Translated value of land

Remeasured value of land

$28,700
$23,800

LCU
70,000
70,000

Question 10 relates to which rate to use if the temporal or the current method are used

11) Board Company has a foreign subsidiary that began operations at the start of 2015 with
During this initial year of operation, the subsidiary reported a profit of
and the other on October 1.
Applicable exchange rates for 1 kite follow:
January 1, 2015 (start of business)
March 1, 2015
Weighted average rate for 2015
October 1, 2015
December 31, 2015

0.8
0.78
0.77
0.76
0.75

a) Assume that the kite is this subsidiarys functional currency. What translation adjustment w
Negative translation adjustment

Net assets, 1/1 (132,000 54,000)

Change in net assets:
Net income
Dividends, 3/1
Dividends, 10/1
Net assets, 12/31

78,000

Net assets at curr. exc. rate, 12/31

Translation adjustment (negative)

94,000

26,000
-5,000
-5,000
94,000

b) Assume that on October 1, 2015, Board entered into a forward exchange contract to hedg
On that date, Board agreed to sell
200,000
Prepare the journal entries required by this forward contract.
Date

General Journal

1-Oct

No journal entry required

31-Dec

Forward contract
Translation adjustment (positive)

31-Dec

Foreign currency (kites)

Cash

31-Dec

Cash
Foreign currency (kites)
Forward contract

c) Compute the net translation adjustment for Board to report in Accumulated Other Compre
Negative

net translation adjustment

The net negative translation adjustment (debit balance) to be reported in Accumulated Other
The net negative translation adjustment from part a) (4,220), and the translation adjustment
$2,220 ($4,220 $2,000).

Conc

ercent of a Swiss company for

ate, the exchange rate was
iarys assets and liabilities were:
800,000
1,300,000
4,000,000
-2,100,000

mber 31, 2015. By that date, the Swiss franc has appreciated to
rior to consolidation.

phanies December 31, 2015, consolidated balance sheet,

nal currency. What is the economic relevance of this translation adjustment?
Translation adjustment
$400,000 positive

n Stephanies 2015 consolidated net income, assuming that the U.S. dollar
his remeasurement gain or loss?
Remeasurement loss
-$130,000 positive

be determined as the plug figure that keeps the dollar balance sheet in balance:

CHF
800,000
1,300,000
4,000,000
6,100,000
2,100,000
4,000,000

Total

6,100,000

US$
1.1
1.1
1.1
1.1
1

Transl. Rate
880,000
1,430,000
4,400,000
6,710,000
2,310,000
4,000,000
400,000
6,710,000

wholly owned subsidiary in Israel that has been determined as having the Israeli shekel (ILS) as its fun
500,000 Swiss francs from a bank in Geneva
e of maturity. On December 31, 2015, the Israeli subsidiary has the following foreign currency balances
CHF (Swiss F)
25,000
31,250
500,000

Swiss franc (CHF), and between

ILS per CHF

3.86
3.91
3.95
4.02

USD per ILS

0.3
0.29
0.27
0.25

nc balances should be reported on the Israel subsidiarys December 31, 2015, trial balance.

x
x
x

Exchange Rate
3.95
4.02
4.02

A
C
C

=
=
=

ILS*
98,750
125,625
2,010,000

balances should be included in IOPs 2015 consolidated financial statements.

x
x
x

Exchange Rate
0.27
0.25
0.25

A
C
C

=
=
=

USD**
26,662.50
31,406.25
502,500.00

20,000

LCU (local currency units) and land that originally cost

45,000
an amount immediately paid in cash
ansactions occurred during the year. Currency exchange rates for 1 LCU follow:
=
=
=
=
=

$0.34
0.35
0.36
0.37
0.41

ational company that uses the U.S. dollar as its reporting currency.
cy. What is the translation adjustment for this subsidiary for the year 2015
Positive

translation adjustment

-$6,570

ets of the subsidiary.

$ rate
0.35

1-Jan

31,500

0.36
0.37

1-May
1-Oct

=
=

16,200
-9,990
37,710

0.41

44,280
-6,570

ational company that uses the U.S. dollar as its reporting currency.
urrency. What is the remeasurement gain or loss for 2015?
Gain

remeasureme

-$2,370

t monetary assets of the subsidiary.

$ rate
0.35

7,000

0.36
0.37

=
=

16,200
-9,990
13,210

0.41

15,580

-2,370 -ve, because the net monetary asse

is greater than the net monetary ass

ational company.
ted value of the Land account?
ured value of the Land account?

$ rate
0.41
$0.34

=
=

28,700
23,800

current method are used

tions at the start of 2015 with assets of

26,000

132,000
kites. It distributed two Divs. each for

What translation adjustment would Board report for the year 2015?
$4,220
dollar rate
0.8

kites
kites
kites
kites
kites
kites

kites

dollar amt
62,400

0.77
0.78
0.76

20,020
-3,900
-3,800
74,720

0.75

70,500
4,220

+ve number (-ve translation adjustment), becaus

are less than the net asset bal. at EOY

ard exchange contract to hedge the net investment in this subsidiary.

kites in three months at a forward exchange rate of
0.76

Debit

Credit

2000
2,000
150,000

on 31-Dec, the exchange rate (spot) was

(0.76-0.75)*200,000 = 2,000

To record the purchase of 200,000 kites at the spo

150,000

152,000
150,000
2,000

To record delivery of 200,000 kites, receipt of $15

and close the forward contract account.

in Accumulated Other Comprehensive Income for the year 2015 under this second set of circumstance
$2,220

reported in Accumulated Other Comprehensive income at 12/31 is

and the translation adjustment caused by the forward contract (2,000):

4,000,000 Swiss francs (CHF),

1.1 = CHF1

1.1 = CHF1

n balance:

US$
1.1
1
1
1.1
1

Remeas. Rate
880,000
1,300,000
4,000,000
6,180,000
2,310,000
4,000,000
-130,000
6,180,000

6,310,000 sum of NP and OE

the Israeli shekel (ILS) as its functional currency.

ss francs from a bank in Geneva for
2
owing foreign currency balances on its books:

1, 2015, trial balance.

years at

0.05

percent interest per yea

d land that originally cost

70,000
LCU when acquired on April 4, 2005.
amount immediately paid in cash. On Oct. 1, 2015, the company incurred a
27,000

-ve, because the net asset bal. at curr exch rate

is greater than the net asset bal. at EOY

because the net monetary assets at curr exch rate

reater than the net monetary asset bal. at EOY

kites (the local currency unit) and liabilities of

54,000
kites
d two Divs. each for
5,000
kites with one dividend declared on March 1

translation adjustment), because the net assets at curr exch rate

net asset bal. at EOY

per kite.

xchange rate (spot) was

000 = 2,000

0.75

chase of 200,000 kites at the spot rate of $0.75.

y of 200,000 kites, receipt of $152,000,

ward contract account.

this second set of circumstances.

2,220

cent interest per year