Exam 8: Translation of Foreign Currency Financial Statements

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 stated in Euro, the local currency. Sales 400,000 Inventory (bought on February 1, 2013) 20,000 Equipment (bought on January 1, 2012) 90,000 Dividends (paid on September 1, 2013) 20,000 Accumulated depreciation - Equipment 12/31/13 45,000 Depreciation expense - Equipment, 2013 9,000 $\text { Relevant exchange rates for } 1 \text { Euro are given below: }$ January 1, 2012 \ .91 January 1, 2013 .93 February 1, 2013 .94 September 1, 2013 .97 December 31, 2013 1.01 4 th quarter average, 2012 .90 4 th quarter average, 2013 .98 Average, 2013 .95 Assume the functional currency is the U.S. Dollar; compute the U.S. balance sheet amount for accumulated depreciation for 2013.

According to U.S. GAAP for a local currency perspective, which method is usually required for translating a foreign subsidiary's financial statements into the parent's reporting currency?

A foreign subsidiary uses the first-in first-out inventory method. The following inventory balances are given at December 31, 2013 in local currency units (LCU): Compute the December 31, 2013, inventory balance using the current rate method.

A subsidiary of Porter Inc., a U.S. company, was located in a foreign country. The functional currency of this subsidiary was the Stickle (§), the local currency where the subsidiary is located. The subsidiary acquired inventory on credit on November 1, 2012, for §120,000 that was sold on January 17, 2013 for §156,000. The subsidiary paid for the inventory on January 31, 2013. Currency exchange rates between the dollar and the Stickle were as follows: What amount would have been reported for this inventory in Porter's consolidated balance sheet at December 31, 2012?

Ginvold Co. began operating a subsidiary in a foreign country on January 1, 2013 by acquiring all of the common stock for §50,000 Stickles, the local currency. This subsidiary immediately borrowed §120,000 on a five-year note with ten percent interest payable annually beginning on January 1, 2014. A building was then purchased for §170,000 on January 1, 2013. This property had a ten-year anticipated life and no salvage value and was to be depreciated using the straight-line method. The building was immediately rented for three years to a group of local doctors for §6,000 per month. By year-end, payments totaling §60,000 had been received. On October 1, §5,000 were paid for a repair made on that date and it was the only transaction of this kind for the year. A cash dividend of §6,000 was transferred back to Ginvold on December 31, 2013. The functional currency for the subsidiary was the Stickle (§). Currency exchange rates were as follows: January 1,2013 \S1=\ 2.40 October 1,2013 \S1=\ 2.22 Average for 2013 \S1=\ 2.28 December 31,2013 \S1=\ 2.16 Prepare a statement of retained earnings for this subsidiary in stickles and then translate the amounts into U.S. dollars.

Esposito is an Italian subsidiary of a U.S. company. Esposito's ending inventory is valued at the average cost for the last quarter of the year. The following account balances are available for Esposito for 2013: Compute the cost of goods sold for 2013 in U.S. dollars using the temporal method.

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 stated in Euro, the local currency. Sales 400,000 Inventory (bought on February 1, 2013) 20,000 Equipment (bought on January 1, 2012) 90,000 Dividends (paid on September 1, 2013) 20,000 Accumulated depreciation - Equipment 12/31/13 45,000 Depreciation expense - Equipment, 2013 9,000 $\text { Relevant exchange rates for } 1 \text { Euro are given below: }$ January 1, 2012 \ .91 January 1, 2013 .93 February 1, 2013 .94 September 1, 2013 .97 December 31, 2013 1.01 4 th quarter average, 2012 .90 4 th quarter average, 2013 .98 Average, 2013 .95 Assume the functional currency is the Euro; compute the U.S. balance sheet amount for equipment for 2013.

Boerkian Co. started 2013 with two assets: Cash of §26,000 (Stickles) and Land that originally cost §72,000 when acquired on April 4, 2010. On May 1, 2013, the company rendered services to a customer for §36,000, an amount immediately paid in cash. On October 1, 2013, the company incurred an operating expense of §22,000 that was immediately paid. No other transactions occurred during the year so an average exchange rate is not necessary. Currency exchange rates were as follows: April 4,2010 \S1=\ .28 January 1,2013 \S1=\ .29 May 1,2013 \S1=\ .30 October 1,2013 \S1=\ .31 December 31,2013 \S1=\ .35 Assume that Boerkian was a foreign subsidiary of a U.S. multinational company and the stickle (§) was the functional currency of the subsidiary. Calculate the translation adjustment for this subsidiary for 2013 and state whether this is a positive or a negative adjustment.

Westmore Ltd., is a British subsidiary of a U.S. company. Westmore's functional currency is the pound sterling (£). The following exchange rates were in effect during 2013: Jan. 1 £1=\ 1.60 June 30 £1=\ 1.64 Dec. 31 £1=\ 1.61 Weighted average rate for the year £1=\ 1.59 On December 31, 2013, Westmore had accounts receivable of £280,000. What amount (rounded) would have been included for this subsidiary in calculating consolidated accounts receivable?

A net liability balance sheet exposure exists and the foreign currency depreciates. Which of the following statements is true?

Under the temporal method, depreciation expense would be remeasured at what rate?

Kennedy Company acquired all of the outstanding common stock of Hastie Company of Canada for U.S. $350,000 on January 1, 2013, when the exchange rate for the Canadian dollar (CAD) was U.S. $.70. The fair value of the net assets of Hastie was equal to their book value of CAD 450,000 on the date of acquisition. Any acquisition consideration excess over fair value was attributed to an unrecorded patent with a remaining life of five years. The functional currency of Hastie is the Canadian dollar. For the year ended December 31, 2013, Hastie's trial balance net income was translated at U.S. $25,000. The average exchange rate for the Canadian dollar during 2013 was U.S. $.68, and the 2013 year-end exchange rate was U.S. $.65. Compute the amount of the patent reported in the consolidated balance sheet at December 31, 2013.

Which method of translating a foreign subsidiary's financial statements is correct?

Boerkian Co. started 2013 with two assets: Cash of §26,000 (Stickles) and Land that originally cost §72,000 when acquired on April 4, 2010. On May 1, 2013, the company rendered services to a customer for §36,000, an amount immediately paid in cash. On October 1, 2013, the company incurred an operating expense of §22,000 that was immediately paid. No other transactions occurred during the year so an average exchange rate is not necessary. Currency exchange rates were as follows: April 4,2010 \S1=\ .28 January 1,2013 \S1=\ .29 May 1,2013 \S1=\ .30 October 1,2013 \S1=\ .31 December 31,2013 \S1=\ .35 Assume Boerkian was a foreign subsidiary of a U.S. multinational company and the U.S. dollar was the functional currency of the subsidiary. Prepare a schedule of changes in the net monetary assets of Boerkian for the year 2013 and properly label the resulting gain or loss.

Certain balance sheet accounts of a foreign subsidiary of the Tulip Co. had been stated in U.S. dollars as follows: If the subsidiary's local currency is its functional currency, what total amount should be included in Tulip's balance sheet in U.S. dollars?

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 stated in Euro, the local currency. Sales 400,000 Inventory (bought on February 1, 2013) 20,000 Equipment (bought on January 1, 2012) 90,000 Dividends (paid on September 1, 2013) 20,000 Accumulated depreciation - Equipment 12/31/13 45,000 Depreciation expense - Equipment, 2013 9,000 $\text { Relevant exchange rates for } 1 \text { Euro are given below: }$ January 1, 2012 \ .91 January 1, 2013 .93 February 1, 2013 .94 September 1, 2013 .97 December 31, 2013 1.01 4 th quarter average, 2012 .90 4 th quarter average, 2013 .98 Average, 2013 .95 Assume the functional currency is the U.S. Dollar; compute the U.S. income statement amount for sales for 2013.

On January 1, 2013, Fandu Corp. began operations of a foreign subsidiary. On April 1, 2013, the subsidiary purchased inventory costing 150,000 stickles. One-fourth of this inventory remained unsold at the end of 2013 while 40% of the liability from the purchase had not yet been paid. The pertinent indirect exchange rates were: January 1,2013 \ 1=\S3.0 April 1,2013 \ 1=\S3.4 Average for 2013 \ 1=\S3.2 December 31,2013 \ 1=\S3.6 Required: What should have been the December 31, 2013 inventory and accounts payable balances for this foreign subsidiary as translated into U.S. dollars? (Round your answers to the nearest whole dollar.)

When preparing a consolidating statement of cash flows, which of the following statements is false?

Esposito is an Italian subsidiary of a U.S. company. Esposito's ending inventory is valued at the average cost for the last quarter of the year. The following account balances are available for Esposito for 2013: Compute ending inventory for 2013 under the temporal method.