Exam 10: Translation of Foreign Currency Financial Statements

What exchange rate would be used to translate the asset and liability account balances of a foreign subsidiary? What justification can be given for using this exchange rate?

Kennedy Company acquired all of the outstanding common stock of Hastie Company of Canada for U.S. $350,000 on January 1, 2011, 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, 2011, Hastie's trial balance net income was translated at U.S. $25,000. The average exchange rate for the Canadian dollar during 2011 was U.S. $.68, and the 2011 year-end exchange rate was U.S. $.65. -Amortization of the patent, translated, for 2011 would be

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 2011: -Gunther Co. established a subsidiary in Mexico on January 1, 2011. The subsidiary engaged in the following transactions during 2011: What amount of foreign exchange gain or loss would have been recognized in Gunther's consolidated income statement for 2011?

A U.S. company's foreign subsidiary had the following amounts in stickles (§) in 2011: Cost of goods sold \S12,000,000 Ending inventory 600,000 Beginning inventory 240,000 The average exchange rate during 2011 was §1 = $.96. The beginning inventory was acquired when the exchange rate was §1 = $1.20. The ending inventory was acquired when the exchange rate was §1 = $.90. The exchange rate at December 31, 2011 was §1 = $.84. Assuming that the foreign country had a highly inflationary economy, at what amount should the foreign subsidiary's cost of goods sold have been reflected in the 2011 U.S. dollar income statement?

On January 1, 2011, Fandu Corp. began operations of a foreign subsidiary. On April 1, 2011, the subsidiary purchased inventory costing 150,000 stickles. One-fourth of this inventory remained unsold at the end of 2011 while 40% of the liability from the purchase had not yet been paid. The pertinent indirectexchange rates were: January 1, 2011 \ 1=\S3.0 April 1, 2011 \ 1=\S3.4 Average for 2011 \ 1=\S3.2 December 31,2011 \ 1=\S3.6 Required: What should have been the December 31, 2011 inventory and accounts payable balances for this foreign subsidiary as translated into U.S. dollars? (Round your answers to the nearest whole dollar)

Contrast the purpose of remeasurement with the purpose of translation.

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 2011: -Westmore reported sales of $\le$ 1,500,000 during 2011. What amount (rounded) would have been included for this subsidiary in calculating consolidated sales?

Boerkian Co. started 2011 with two assets: cash of §26,000 (stickles) and land that originally cost §72,000 when acquired on April 4, 2008. On May 1, 2011, the company rendered services to a customer for §36,000, an amount immediately paid in cash. On October 1, 2011, 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: -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 2011 and properly label the resulting gain or loss.

Certain balance sheet accounts of a foreign subsidiary of Parker Company at December 31, 2011, have been restated into U.S. dollars as follows: -Assuming the functional currency of the subsidiary is the U.S. dollar, what total should be included in Parker's consolidated balance sheet at December 31, 2011, for the above items?

Under the temporal method, retained earnings would be remeasured at what rate?

Ginvold Co. began operating a subsidiary in a foreign country on January 1, 2011 by acquiring all of the common stock for §50,000. This subsidiary immediately borrowed §120,000 on a five-year note with ten percent interest payable annually beginning on January 1, 2012. A building was then purchased for §170,000 on January 1, 2011. 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, 2011. The functional currency for the subsidiary was the stickle. Currency exchange rates were as follows: January 1,2011 \S1=\ 2.40 October 1,2011 \S1=\ 2.22 Average for 2011 \S1=\ 2.28 December 31,2011 \S1=\ 2.16 -Prepare a balance sheet for this subsidiary in stickles and then translate the amounts into U.S. dollars.

Perez Company, a Mexican subsidiary of a U.S. company, sold equipment costing 200,000 pesos with accumulated depreciation of 75,000 pesos for 140,000 pesos on March 1, 2011. The equipment was purchased on January 1, 2010. Relevant exchange rates for the peso are as follows: January 1, 2010 \ .11 March 1, 2011 .106 December 31, 2011 102 Average, 2011 .105 -The financial statements for Perez are translated by its U.S. parent. What amount of gain or loss would be reported in its translated income statement?

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

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 2011: -On December 31, 2011, Westmore had accounts receivable of $\le$ 280,000. What amount (rounded) would have been included for this subsidiary in calculating consolidated accounts receivable?

Which accounts are remeasured using current exchange rates?

Quadros Inc., a Portugese firm was acquired by a U.S. company on January 1, 2010. Selected account balances are available for the year ended December 31, 2011, and are stated in euro, the local currency. -Assume the functional currency is the euro, compute the U.S. income statement amount for depreciation expense for 2011.

Boerkian Co. started 2011 with two assets: cash of §26,000 (stickles) and land that originally cost §72,000 when acquired on April 4, 2008. On May 1, 2011, the company rendered services to a customer for §36,000, an amount immediately paid in cash. On October 1, 2011, 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: -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 2011 and state whether this is a positive or a negative adjustment.

In translating a foreign subsidiary's financial statements, what exchange rate should be used for the subsidiary's revenues and expenses?

Under the current rate method, depreciation expense would be translated at what rate?

Quadros Inc., a Portugese firm was acquired by a U.S. company on January 1, 2010. Selected account balances are available for the year ended December 31, 2011, and are stated in euro, the local currency. -Assume the functional currency is the euro, compute the U.S. balance sheet amount for inventory at December 31, 2011.