Exam 14: Foreign Currency Financial Statements

When all elements of the financial statements are translated using a current exchange rate,it is referred to as the current rate method.

Plato Corporation,a U.S.company,purchases all of the outstanding stock of Socrates Company,which operates outside the U.S.on January 1,2014.Socrates' net assets have fair values that equal their book values with the exception of land that has a fair value of 200,000 foreign currency units and equipment with a fair value of 100,000 foreign currency units.Plato paid $180,000 for this acquisition.The balance sheets for Plato and Socrates are shown below just before the business combination.Socrates' functional currency is the foreign currency unit (fcu)and the exchange rate at the date of acquisition was $.40 per fcu.Socrates uses the fcu for record-keeping purposes. Required: Prepare a consolidated balance sheet for Plato and subsidiary at January 1,2014 immediately following the business combination.

The gain or loss on an after-tax basis from the hedging operations that can be considered a translation adjustment is limited in amount to the current translation adjustment from the equity investment.

On January 1,2014,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 31,2014. 2.Determine the equity adjustment on translation of the excess differential assigned to patent at December 31,2014.

Phim Inc.,a U.S.company,owns 100% of Sera Corporation,a New Zealand company.Sera's equipment was acquired on the following dates (amounts are stated in New Zealand dollars as NZ$): Jan.01,2014 Purchased equipment for NZ$40,000 Jul.01,2014 Purchased equipment for NZ$80,000 Jan.01,2015 Purchased equipment for NZ$50,000 Jul.01,2015 Sold equipment purchased on Jan.01,2014 for NZ$35,000 Exchange rates for the New Zealand dollar on various dates are: Sera's equipment has an estimated 5-year life with no salvage value and is depreciated using the straight-line method.Sera's functional currency and reporting currency are the New Zealand dollar. Required: 1.Determine the value of Sera's equipment account on December 31,2015 in U.S.dollars. 2.Determine Sera's depreciation expense for 2015 in U.S.dollars. 3.Determine the gain or loss from the sale of equipment on July 1,2015 in U.S.dollars.

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

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

A foreign subsidiary's accounts receivable balance should be translated for the consolidated financial statements at

Selvey Inc.is a wholly-owned subsidiary of Parsfield Incorporated,a U.S.firm.The country where Selvey operates is determined to have a highly inflationary economy according to GAAP definitions.Therefore,for purposes of preparing consolidated financial statements,the functional currency is

On January 1,2014,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 1,2014 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 2014 and the exchange rates for LCUs are as follows: Stockholders' equity Required: Determine the following: 1.Fair value of the patent from Pilgrim's investment in Settlement on January 1,2014 in U.S.dollars. 2.Patent amortization for 2014 in U.S.dollars. 3.Unamortized patent at December 31,2014 in U.S.dollars. 4.Equity adjustment from the patent in U.S.dollars. 5.Income from Settlement for 2014 in U.S.dollars. 6.Investment in Settlement balance at December 31,2014 in U.S.dollars.

Puddle Incorporated purchased an 80% interest in Soake Company,located in England.Puddle paid $1,560,000 on January 1,2014,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 2014,and the balance of Puddle's Investment in Soake account at December 31,2014.Soake's books are kept in pounds,which is the functional currency.

Intercompany transactions that produce receivable balances denominated in a currency other than the entity's functional currency are intercompany transactions.

Par Industries,a U.S.Corporation,purchased Slice Company of New Zealand for $1,411,800 on January 1,2014.Slice's functional currency is the New Zealand dollar (NZ$).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: Required: Determine the unrealized translation gain or loss at December 31,2014 relating to the excess allocated to the undervalued land.

Paskin Corporation's wholly-owned Canadian subsidiary has a Canadian dollar functional currency.In translating the subsidiary's account balances into U.S.dollars for reporting purposes,which one of the following accounts would be translated at historical exchange rates?

On January 1,2014,Paste Unlimited,a U.S.company,acquired 100% of Sticky Corporation of Italy,paying an excess of 112,500 euros over the book value of Sticky's net assets.The excess was allocated to undervalued equipment with a five year remaining useful life.Sticky's functional currency is the euro,and the books are kept in euros.Exchange rates for the euro for 2014 are: Required: 1.Determine the depreciation expense on the excess allocated to equipment for 2014 in U.S.dollars. 2.Determine the unamortized excess allocated to equipment on December 31,2014 in U.S.dollars. 3.If Sticky's functional currency was the U.S.dollar,what would be the depreciation expense on the excess allocated to the equipment for 2014?

All of the following factors would be used to define a foreign entity's functional currency,except

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 1,2014,the date of acquisition,and on December 31,2014,when the exchange rates were $.25 and $.20,respectively.The average exchange rate for 2014 was $.23,and Standy paid dividends in 2014 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 31,2014.

For each of the 12 accounts listed in the table below,select the correct exchange rate to use when either remeasuring or translating a foreign subsidiary for its U.S.parent company. Codes C = Current exchange rate H = Historical exchange rate A = Average exchange rate 2.Marketable debt securities 10.Accumulated depreciation on

Which of the following statements about the Current Rate method is false?

The Polka Corporation,a U.S.corporation,formed a British subsidiary on January 1,2014 by investing 550,000 British pounds (£)in exchange for all of the subsidiary's no-par common stock.The British subsidiary,Stripe Corporation,purchased real property on April 1,2014 at a cost of £500,000,with £100,000 allocated to land and £400,000 allocated to the building.The building is depreciated over a 40-year estimated useful life on a straight-line basis with no salvage value.The U.S.dollar is Stripe's functional currency,but it keeps its records in pounds.The British economy does not experience high rates of inflation.Exchange rates for the pound on various dates are: January 01,2014 =1£= \ 1.60 April 01, 2014 =1£= \ 1.62 December 31,2014 =1£= \ 1.65 2014 average rate =1£= \ 1.64 Stripe's adjusted trial balance is presented below for the year ended December 31,2014. $\text { In Pounds }$ Debits: Cash £200,000 Accounts receivable 72,000 Notes receivable 99,000 Building 400,000 Land 100,000 Depreciation expense 7,500 Other expenses 115,000 Salary expense Total debits Credits Accumulated depreciation £7,500 Accounts payable 100,000 Common stock 550,000 Retained earnings 0 Equity adjustment 0 Sales revenue Total credits £1,201,500 Required: Prepare Stripe's: 1.Remeasurement working papers; 2.Remeasured income statement; and 3.Remeasured balance sheet.