Exam 14: Foreign Currency Financial Statements

On January 1,2011,Pilgrim Corporation,a U.S.firm,acquired ownership of Settlement Corporation,a foreign company,for $168,000,when Settlement's stockholders' equity consisted of 300,000 local currency units (LCU)and retained earnings of 100,000 LCU.At the time of the acquisition,Settlement's assets and liabilities were fairly valued except for a patent that did not have any recorded book value.All excess purchase cost was attributed to the patent,which had an estimated economic life of 10 years at the date of acquisition.The exchange rate for LCUs on January 1,2011 was $.40.The functional currency for Settlement is LCU.Settlement's books are maintained in LCU. A summary of changes in Settlement's stockholders' equity during 2011 and the exchange rates for LCUs is as follows: Required: Determine the following: 1.Fair value of the patent from Pilgrim's investment in Settlement on January 1,2011 in U.S.dollars. 2.Patent amortization for 2011 in U.S.dollars. 3.Unamortized patent at December 31,2011 in U.S.dollars. 4.Equity adjustment from the patent in U.S.dollars. 5.Income from Settlement for 2011 in U.S.dollars. 6.Investment in Settlement balance at December 31,2011 in U.S.dollars.

Which of the following foreign subsidiary accounts will have the same value on consolidated financial statements,regardless of whether the statements are remeasured or translated?

Palk Corporation has a foreign subsidiary located in a country experiencing high rates of inflation.Information concerning this country's inflation rate experience is given below. The inflation rate that is used in determining if the subsidiary is operating in a highly inflationary economy is

Note to Instructor: This exam item is a continuation of Exercise 3 and proceeds forward with Skillet's second year of operations. Skillet Corporation,a British subsidiary of Pan Corporation (a U.S.company)was formed by Pan on January 1,2012 in exchange for all of the subsidiary's common stock.Skillet has now ended its second year of operations on December 31,2013.Relevant exchange rates are: Skillet's adjusted trial balance is presented below for the calendar year 2013.The amount of equity adjustment carried over from 2012 is a credit balance of $41,250 (in dollars). Required: For Skillet's second year of operations,prepare the: 1.Translation working papers; 2.Translated income statement;and 3.Translated balance sheet.

Pritt Company purchased all the outstanding stock of Standy Company (a manufacturing company in Argentina)when the book value of Standy's net assets equaled their fair value.Standy's summarized balance sheet is shown below on January 1,2011,the date of acquisition,and on December 31,2011,when the exchange rates were $.25 and $.20,respectively.The average exchange rate for 2011 was $.23,and Standy paid dividends in 2011 amounting to 300,000 pesos when the exchange rate was $.21. Required: If Standy's functional currency and reporting currency are the Argentine peso,compute the change to other comprehensive income that would result from the translation of these financial statements at December 31,2011.

Each of the following accounts has been converted to U.S.dollars from a foreign subsidiary's financial statements.Based on the information given,determine if the U.S.dollar or a foreign currency is the functional currency of the subsidiary.

On January 1,2011,Placid Corporation acquired a 40% interest in Superior Industries,a Canadian Corporation,for $811,900 when Superior's stockholders' equity consisted of 1,000,000 Canadian dollars (C$)capital stock and C$500,000 retained earnings.Superior's functional currency is the Canadian dollar and the books are kept in the same currency.The exchange rate at the time of the purchase was $1.15 per Canadian dollar.Any excess allocated to patents is to be amortized over 10 years.A summary of changes in the stockholders' equity of Superior during 2011 and related exchange rates follows: Required: Determine the following: 1.Fair value of the patent from Placid's investment in Superior on January 1,2011 in U.S.dollars 2.Patent amortization for 2011 in U.S.dollars 3.Unamortized patent at December 31,2011 in U.S.dollars 4.Equity adjustment from the patent in U.S.dollars 5.Income from Superior for 2011 in U.S.dollars 6.Investment in Superior balance at December 31,2011 in U.S.dollars

A foreign entity is a subsidiary of a U.S.parent company and has always used the current rate method to translate its foreign financial statements on behalf of its parent company.Which one of the following statements is false?

Par Industries,a U.S.Corporation,purchased Slice Company of New Zealand for $1,411,800 on January 1,2011.Slice's functional currency is the New Zealand dollar (NZ$).Slice's books are kept in NZ$.The book values of Slice's assets and liabilities were equal to fair values,with the exception of land which was valued at NZ$1,300,000.Slice's balance sheet appears below: Relevant exchange rates are shown below: January 1,2011 1 NZ$ = $0.78 Average rate 2011 1 NZ$ = $0.79 December 31,2011 1 NZ$ = $0.80 Required: Determine the unrealized translation gain or loss at December 31,2011 relating to the excess allocated to the undervalued land.

The primary goal behind consolidating financial statements of a controlled subsidiary is

Pan Corporation,a U.S.company,formed a British subsidiary on January 1,2012 by investing 450,000 British pounds (£)in exchange for all of the subsidiary's no-par common stock.The British subsidiary,Skillet Corporation,purchased real property on April 1,2012 at a cost of £500,000,with £100,000 allocated to land and £400,000 allocated to a building.The building is depreciated over a 40-year estimated useful life on a straight-line basis with no salvage value.The British pound is Skillet's functional currency and its reporting currency.The British economy does not have high rates of inflation.Exchange rates for the pound on various dates were: Skillet's adjusted trial balance is presented below for the year ended December 31,2012. Required: Prepare Skillet's: 1.Translation working papers; 2.Translated income statement;and 3.Translated balance sheet.

Plane Corporation,a U.S.company,owns 100% of Shipp Corporation,a Libyan company.Shipp's equipment was acquired on the following dates (amounts are stated in Libyan dinars): Jan.01,2011 Purchased equipment for 40,000 dinars Jul.01,2011 Purchased equipment for 80,000 dinars Jan.01,2012 Purchased equipment for 50,000 dinars Jul.01,2012 Sold equipment purchased on Jan.01,2011 for 35,000 dinars Exchange rates for the Libyan dinars on various dates are: Shipp's equipment has an estimated 5-year life with no salvage value and is depreciated using the straight-line method,calculating depreciation expense on a monthly basis.Shipp's functional currency is the U.S.dollar,but the company uses the Libyan dinar as its reporting currency. Required: 1.Determine the value of Shipp's equipment account on December 31,2012 in U.S.dollars. 2.Determine Shipp's depreciation expense for 2012 in U.S.dollars. 3.Determine the gain or loss from the sale of equipment on July 1,2012 in U.S.dollars.

Note to Instructor: This exam item is a continuation of Exercise 5 and proceeds forward with Stripe's second year of operations. Stripe Corporation,a British subsidiary of Polka Corporation (a U.S.company)was formed by Polka on January 1,2011 in exchange for all of the subsidiary's common stock.Stripe has now ended its second year of operations on December 31,2012.Relevant exchange rates are: January 01,2011 = 1£ = $1.60 April 01,2011 = 1£ = $1.62 December 31,2012 = 1£ = $1.57 2012 average rate = 1£ = $1.56 Stripe's adjusted trial balance is presented below for the calendar year 2012. Required: Prepare Stripe's: 1.Remeasurement working papers; 2.Remeasured income statement;and 3.Remeasured balance sheet.

A U.S.parent corporation loans funds to a foreign subsidiary to be used to purchase equipment.The loan is denominated in U.S.dollars and the functional currency of the subsidiary is the euro.This intercompany transaction is a foreign currency transaction of

Pew Corporation (a U.S.corporation)acquired all of the stock of Skunk Company (a Brazilian company)on January 1,2011 for $9,300,000 when Skunk had 10,000,000 Brazilian real (BR)capital stock and 5,000,000 BR retained earnings.The book value of Skunk's net assets equaled the fair value on this date,and any cost/book value differential is due to a patent with a 5-year remaining useful life.Skunk's functional currency is the BR.Skunk's books are maintained in the functional currency.The exchange rates for BR's for 2011 are shown below: Required: 1.Calculate the patent value from the business combination on January 1,2011 in U.S.dollars. 2.Calculate the patent amortization in U.S.dollars for 2011. 3.Prepare the journal entry (in U.S.dollars)required on Pew's books to record the patent amortization for 2011,assuming that Pew accounts for Skunk using the equity method.

Accounts representing an allowance for uncollectible accounts are converted into U.S.dollars at

Plate Corporation,a US company,acquired ownership of Saucer Corporation of Switzerland on January 1,2011 for $1,500,000 when Saucer's stockholders' equity in Swiss francs (SF)consisted of 700,000 SF Capital Stock and 300,000 SF Retained Earnings.The exchange rate for Swiss francs was $1.20 on January 1.All excess purchase cost was attributed to a Trademark that did not have a recorded book value.The trademark is to be amortized over 20 years. Saucer's functional currency is Swiss francs and the records are kept in the same currency.A summary of changes in Saucer's stockholders' equity during 2011 and relevant exchange rates are as follows: Required: Determine the following: 1.Fair value of the Trademark from Plate's investment in Saucer on January 1,2011 in U.S.dollars. 2.Trademark amortization for 2011 in U.S.dollars. 3.Unamortized Trademark at December 31,2011 in U.S.dollars. 4.Equity adjustment from the Trademark in U.S.dollars. 5.Income from Saucer for 2011 in U.S.dollars. 6.Investment in Saucer balance at December 31,2011 in U.S.dollars.

Puddle Incorporated purchased an 80% interest in Soake Company,located in England.Puddle paid $1,560,000 on January 1,2011,at a time when the book values of Soake equaled the fair values.Any excess cost/book value differential was attributed to a patent with a five-year remaining useful life.Soake's books are kept in the functional currency,pounds.A summary of Soake's equity is shown below for the first year that Puddle had ownership interest. Required: Determine Puddle's income from Soake for 2011,and the balance of Puddle's Investment in Soake account at December 31,2011.

On January 1,2012,Planet Corporation,a U.S.company,acquired 100% of Star Corporation of Bulgaria,paying an excess of 90,000 Bulgarian lev over the book value of Star's net assets.The excess was allocated to undervalued equipment with a three-year remaining useful life.Star's functional currency is the Bulgarian lev.Star's books are maintained in the functional currency.Exchange rates for Bulgarian lev for 2012 are: Required: 1.Determine the depreciation expense stated in U.S.dollars on the excess allocated to equipment for 2012. 2.Determine the unamortized excess allocated to equipment on December 31,2012 in U.S.dollars. 3.If Star's functional currency was the U.S.dollar,what would be the depreciation expense on the excess allocated to the equipment for 2012?

On January 1,2011,Psalm Corporation purchased all the stock of Solomon Corporation for $481,400 when Solomon had capital stock of 180,000 pounds (£)and retained earnings of 90,000£.The book value of Solomon's assets and liabilities represented the fair value,except for equipment with a 5-year life that was undervalued by 15,000£.Any remaining excess is due to a patent with a useful life of 6 years.Solomon's functional currency is the pound.Solomon's books are kept in pounds.Relevant exchange rates for a pound follow: Required: 1.Determine the equity adjustment on translation of the excess differential assigned to equipment at December 31,2011. 2.Determine the equity adjustment on translation of the excess differential assigned to patent at December 31,2011.