Solution manual advanced accounting 9e by hoyle ch10

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CHAPTER 10
TRANSLATION OF FOREIGN
CURRENCY FINANCIAL STATEMENTS
Chapter Outline
I.

In today's global economy, many companies have invested in operations in foreign countries.
A. In preparing consolidated financial statements on a worldwide basis, the foreign currency
accounts prepared by foreign operations must be restated into the parent company's
reporting currency.
B. There are two major issues related to the translation of foreign currency financial
statements.
1. Which method should be used?
2. How should the resulting translation adjustment be reported on the consolidated
financial statements?
C. Translation methods differ on the basis of which accounts are translated at the current
exchange rate and which are translated at a historical exchange rate. Translating accounts
at the current exchange rate creates a translation adjustment.
D. Historically, accountants have experimented with a number of different translation methods.
The dominant methods currently in use are the temporal method and the current rate
method.
E. Translation adjustments can be either (1) reported as a gain or loss in income or (2)
deferred in the stockholders' equity section of the balance sheet.

II. The primary objective of the temporal method is to maintain the underlying valuation method
used by the foreign entity to account for its assets and liabilities.
A. Assets and liabilities carried at current or future value are translated at the current exchange
rate. Assets and liabilities carried at cost and stockholders' equity items are translated at a
historical exchange rate.

B. By translating some assets at the current exchange rate and others at historical rates the
temporal method distorts financial ratios calculated in the foreign currency.
C. Most income statement items are translated at average-for-the-period rates. However, costof-goods-sold, depreciation, and amortization expense are translated at relevant historical
exchange rates.
D. Balance sheet exposure under the temporal method is defined as cash, marketable
securities, and receivables minus total liabilities. A net liability exposure often exists.
1. When a liability balance sheet exposure exists, depreciation of the foreign currency
results in a positive translation adjustment (gain) and appreciation of the foreign
currency results in a negative translation adjustment (loss).
2. Reporting a translation loss when the foreign currency appreciates is thought to be
inconsistent with economic reality.

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III. With the current rate method, the net investment in a foreign operation is considered to be
exposed to foreign exchange risk.
A. Assets and liabilities are translated at the current exchange rate; equity is translated at
historical rates.
B. Translating assets which are carried at cost using the current exchange rate results in a
translated value which is not readily interpretable; it is neither a current value nor a historical
cost.
C. However, translating all assets at the current rate does maintain underlying ratios and
relationships that exist in the foreign currency statements.

D. Revenues and expenses which occur evenly throughout the period are translated at the
average-for-the-period exchange rate. Income items, such as gains and losses, which are
the result of a discrete event, are translated at the actual exchange rate on the date of
occurrence.
E. Balance sheet exposure under the current rate method is equal to the foreign entity's net
assets (stockholders' equity).
1. Appreciation in the foreign currency results in a positive translation adjustment (gain);
depreciation results in a negative translation adjustment (loss).
IV. FASB Statement No. 52 provides guidelines for the translation of foreign currency financial
statements by U.S.-based multinational corporations. The appropriate translation method and
disposition of translation adjustment depends upon the functional currency of the foreign entity.
A. The functional currency is the primary currency of the foreign entity's operating environment.
It can be either the U.S. dollar or a foreign currency.
1. SFAS 52 lists six indicators that are to be used in determining an entity's functional
currency. There are no guidelines as to how these indicators are to be weighted.
B. If a foreign currency is the functional currency, the foreign entity's financial statements are
"translated" using the current rate method and the resulting translation adjustment is
reported as a separate component of equity. The average-for-the-period exchange rate is
used to translate the foreign entity's income statement.
1. Upon the sale or liquidation of a specific foreign entity, the cumulative translation
adjustment related to that entity is taken to income as an adjustment to the gain or loss
on sale or liquidation.
C. If the U.S. dollar is the functional currency, foreign currency financial statements are
"remeasured" using the temporal method with "remeasurement" gains and losses reported
in operating income.
D. If a foreign entity operates in a highly inflationary economy (cumulative three-year inflation
greater than 100%), its financial statements are remeasured into U.S. dollars using the
temporal method and remeasurement gains and losses are reported in income.
V. Some companies hedge the balance sheet exposures of their foreign entities so as to avoid
adverse effects on income and/or stockholders' equity.

A. SFAS 133 refers to this as a hedge of a net investment in a foreign operation and stipulates
that gains and losses on hedging instruments used in this manner should be treated in the
same fashion as the translation adjustment (remeasurement gain/loss) being hedged.
B. The paradox of hedging balance sheet exposure is that by avoiding a translation adjustment
(remeasurement gain/loss), realized foreign exchange gains and losses can arise.

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Learning Objectives
Having completed Chapter 10 of this textbook, "Translation of Foreign Currency Financial
Statements," students should be able to fulfill each of the following learning objectives:
1. Describe the procedures of the current rate and temporal methods of translation.
2. Understand the method by which the retained earnings balance of a foreign subsidiary is
translated.
3. Discuss the theoretical underpinnings and limitations of the current rate and temporal methods.
4. Understand balance sheet exposure and explain how it differs from transaction exposure to
foreign exchange risk.
5. Discuss SFAS 52 guidelines as to when foreign currency financial statements are to be
"translated" using the current rate method and when they are to be "remeasured" using the
temporal method.
6. Translate a foreign subsidiary's financial statements into its parent's reporting currency using
the guidelines of SFAS 52.
7. Determine the amount and placement of the translation adjustment that is reported as a result

of the translation process.
8. Remeasure a foreign subsidiary's financial statements using the guidelines of SFAS 52 and
calculate the associated remeasurement gain or loss.
9. Explain the reason for using the temporal method to translate financial statements of operations
in highly inflationary environments.
10. Understand the rationale for hedging a net investment in a foreign operation and describe the
treatment of gains and losses on forward contracts used for this purpose.
11. Prepare a consolidation worksheet for a parent and its foreign subsidiary.

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Answer to Discussion Question
How Do We Report This?
This case represents the ongoing debate as to the proper reporting of foreign currency balances.
Southwestern has invested the equivalent of $30,000 (150,000 vilseks) in each of three assets.
The relative value of the vilsek has now changed. Thus, 150,000 vilseks now can be converted
into $34,500. However, the subsidiary does not have vilseks--only land, inventory, and
investments. Although the current exchange rate is given, the company has no apparent plans to
convert its assets into dollars. Instead, these three assets are being held, each with a historical
cost of 150,000 vilseks. Under the temporal method, these assets (except for the investments if
carried at market value) would be reported in the parent's balance sheet at the original cost of
$30,000. Unfortunately, as the Finance Director points out, an old, outdated rate is being utilized if
the $30,000 figure is reported. (Of course, given that prices tend to change over time, the same

can be said for any asset reported at historical cost.)
Conversely, the current rate method requires that each of the three assets be reported at $34,500
based on the current exchange rate. As the controller indicates, though, $34,500 was not the
original cost expended by Southwestern. In addition, using the current rate means that each of the
assets will constantly report a "floating" value, one that will change with each exchange rate
fluctuation. Finally, the $34,500 figure is based on the current value of the vilsek ($.23) and the
historical cost in vilseks (150,000 vilseks) for the three assets. The current exchange rate is only
significant if the assets are sold with the proceeds being converted into U.S. dollars. Since an
imminent sale is not indicated, the validity of reporting the $34,500 might again be questioned. In
addition, even if the assets were sold, $34,500 does not accurately reflect the proceeds in U.S.
dollars because 150,000 vilseks is the historical cost and not the current market value of each of
these assets.
As a classroom exercise or written assignment, students could be required to select a reported
value for each of the three assets and then defend their position. What figure is actually the fairest
representation of each of the three assets? What figure is the best conveyor of information to an
outside party? There is no single best answer to these questions. The purpose of this type of
exercise is to force students to consider the objectives of financial reporting. Students should not
just assume that the current official pronouncement is correct. One possible approach to the case
is to assign several students to represent banks or stockholders and discuss the types of
information that is most needed by these users. Another group of students can take the position of
the company responsible for preparing the information and discuss management's preference for
providing one type of information over another. Yet another group could take a purely theoretical
approach and discuss the goals that accounting has attempted to reach. Although a final resolution
may not be achieved, some excellent class discussion is possible.
The temporal and current rate methods of translation differ primarily with regard to the exchange
rate used to translate those assets that are reported at historical cost--inventories, prepaids, fixed
assets, and intangibles. The debate regarding the appropriate exchange rate for translating assets
exists only because some assets are reported at historical cost. If all assets were reported at their
current value, there would be no need to use the historical exchange rate for translating assets in
order to maintain the asset's historical cost in U.S. dollar terms. All assets would be translated at

the current exchange rate. The differences between the temporal method and current rate method
would disappear.

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Answers to Questions
1. The two major issues related to the translation of foreign currency financial statements are: (a)
which method should be used and (b) where should the resulting translation adjustment be
reported in the consolidated financial statements. The first issue relates to determining the
appropriate exchange rate (historical, current, or average for the current period) for the
translation of foreign currency balances. Those items translated at the current exchange rate
are exposed to translation adjustment. The second issue relates to whether the translation
adjustment should be treated as a gain or loss in income, or should be deferred as a separate
component of stockholders’ equity.
2. Balance sheet exposure arises when a foreign currency balance is translated at the current
exchange rate. By translating at the current exchange rate, the foreign currency item in
essence is being revalued in U.S. dollar terms on the consolidated financial statements. There
will be either a net asset balance sheet exposure or net liability balance sheet exposure
depending upon whether assets translated at the current rate are greater or less than liabilities
translated at the current rate. Balance sheet exposure generates a translation adjustment
which does not result in an inflow or outflow of cash. Transaction exposure, which results from
the receipt or payment of foreign currency, generates foreign exchange gains and losses which
are realized in cash.

3. Although balance sheet exposure does not result in cash inflows and outflows, it does
nevertheless affect amounts reported in consolidated financial statements. If the foreign
currency is the functional currency, translation adjustments will be reported in stockholders’
equity. If translation adjustments are negative and therefore reduce total stockholders’ equity,
there is an adverse (inflationary) impact on the debt to equity ratio. Companies with restrictive
debt covenants requiring them to stay below a maximum debt to equity ratio, may find it
necessary to hedge their balance sheet exposure so as to avoid negative translation
adjustments being reported. If the U.S. dollar is the functional currency or an operation is
located in a high inflation country, remeasurement gains and losses are reported in income.
Companies might want to hedge their balance sheet exposure in this situation to avoid the
adverse impact remeasurement losses can have on consolidated income and earnings per
share.
The paradox in hedging balance sheet exposure is that, by agreeing to receive or deliver
foreign currency in the future under a forward contract, a transaction exposure is created. This
transaction exposure is speculative in nature, given that there is no underlying inflow or outflow
of foreign currency that can be used to satisfy the forward contract. By hedging balance sheet
exposure, a company might incur a realized foreign exchange loss to avoid an unrealized
negative translation adjustment or unrealized remeasurement loss.
4. The gains and losses arising from financial instruments used to hedge balance sheet exposure
are treated in a similar manner as the item the hedge is intended to cover. If the foreign
currency is the functional currency, gains and losses on hedging instruments will be taken to
other comprehensive income. If the U.S. dollar is the functional currency, gains and losses on
the hedging instruments will be offset against the related remeasurement gains and losses.

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5. The major concept underlying the temporal method is that the translation process should result
in a set of translated U.S. dollar financial statements as if the foreign subsidiary’s transactions
had actually been carried out using U.S. dollars. To achieve this objective, assets carried at
historical cost and stockholders’ equity are translated at historical exchange rates; assets
carried at current value and liabilities (carried at current value) are translated at the current
exchange rate. Under this concept, the foreign subsidiary’s monetary assets and liabilities are
considered to be foreign currency cash, receivables, and payables of the parent which are
exposed to transaction risk. For example, if the foreign currency appreciates, then the foreign
currency receivables increase in U.S. dollar value and a gain is recognized. Balance sheet
exposure under the temporal method is analogous to the net transaction exposure which exists
from having both receivables and payables in a particular foreign currency.
The major concept underlying the current rate method is that the entire foreign investment is
exposed to foreign exchange risk. Therefore all assets and liabilities are translated at the
current exchange rate. Balance sheet exposure under this concept is equal to the net
investment.
6. The Retained Earnings balance is created by a multitude of transactions: all revenues,
expenses, gains, losses, and dividends since the company’s inception. Identifying each
component of this account (so that a separate translation can be made) would be virtually
impossible. Therefore, in the initial year that Statement 52 was applied, the ending balance
calculated under Statement 8 was merely brought forward. Thereafter, the ending balance
translated each year for retained earnings becomes the beginning figure to be reported for the
following year.
7. The major differences relate to non-monetary assets carried at historical cost and related
expenses, i.e., inventory and cost of goods sold; property, plant, and equipment and
depreciation expense; and intangible assets and amortization expense. Under the temporal
method, these items are all translated at historical exchange rates. Under the current rate
method, the assets are translated at the current exchange rate and the related expenses are

translated at the average exchange rate for the current period.
8. The functional currency is the currency of the subsidiary’s primary economic environment. It is
usually identified as the currency in which the company generates and expends cash. SFAS 52
recommends that several factors such as the location of primary sales markets, sources of
materials and labor, the source of financing, and the amount of intercompany transactions
should be evaluated in identifying an entity’s functional currency. SFAS 52 does not provide
any guidance as to how these factors are to be weighted (equally or otherwise) when identifying
an entity’s functional currency.
9. The foreign subsidiary's net asset position in foreign currency at the beginning of the period is
first determined. Changes in net assets are determined to explain the net asset balance in
foreign currency at the end of the period. The beginning net asset position and changes in net
assets are translated at appropriate exchange rates and the ending net asset position in dollars
is determined.
The ending net asset balance in foreign currency is then translated at the current rate and this
result is subtracted from the ending net asset position in dollars (already calculated). The
difference is the translation adjustment. It is positive if the actual dollar net asset position is less
than the net asset position based on the current exchange rate. The translation adjustment is
negative if the actual dollar net asset position is greater than if translated at the current rate.

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10. One theory mentioned by the FASB identifies the translation adjustment as a measure of
unrealized increases and decreases that have occurred in the value of the foreign subsidiary

because of exchange rate changes. A second theory argues that this adjustment is no more
than a mechanically derived number that must be included to keep the balance sheet in
equilibrium although the figure has no intrinsic meaning. The FASB did not indicate in
Statement 52 that either theory is considered more appropriate.
11. Remeasurement is required in two situations:
a. The U.S. dollar is the functional currency.
b. The foreign subsidiary operates in a highly inflationary country.
Translation is required when a foreign currency is the functional currency.
Remeasurement is carried out using the temporal method, with remeasurement gains and
losses reported in consolidated income. Translation is done using the current rate method and
the resulting translation adjustment is carried as a separate component of stockholders’ equity.
12. The temporal method must be used to remeasure the financial statements of operations in
highly inflationary countries. One reason for mandating the use of the temporal method is that it
avoids the disappearing plant problem that exists when the current rate method is used. Under
the current rate method, fixed assets are translated at current exchange rates. With high rates
of inflation, the foreign currency will depreciate significantly. When the historical cost of fixed
assets is translated at a significantly lower current exchange rate, the dollar value of fixed
assets “disappears.” This problem is avoided by translating at the historical exchange rate as is
done under the temporal method.

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Answers to Problems

1. C
2. C
3. C
4. B Because the peso is the functional currency, the financial statements must be
translated using the current rate method. Therefore, answers a and d can be
eliminated. Because the subsidiary has a net asset position and the peso has
appreciated from $.16 to $.19, a positive translation adjustment will result.
5. A All asset accounts are translated at current rates.
6. A Because the foreign currency is the functional currency, a translation is
required. All assets accounts are translated at current rates.
7. C 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
historical rates.
8. B The foreign currency is the functional currency, so a translation is
appropriate. All assets (including inventory) are translated at the current
exchange rate [100,000 x $.17].
9. C Cost of goods sold is translated at the exchange rate in effect at the date of
accounting recognition, which is the date the goods were sold [100,000 x
$.18].
10. D The foreign currency is the functional currency, so a translation is
appropriate. All assets are translated at the current exchange rate of $.19.
11. C The U.S. dollar is the functional currency, so a remeasurement is appropriate.
Inventory (carried at cost) is remeasured at the historical exchange rate of
$.16. Marketable equity securities (carried at market value) are remeasured at
the current exchange rate of $.19.
12. C Beginning inventory
Purchases
Ending inventory
Cost of goods sold

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FCU

200,000 x $1.00 = $ 200,000
10,300,000 x $0.80 = 8,240,000
(500,000) x $0.75 =
(375,000)
FCU 10,000,000
$8,065,000

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13. C Beginning net assets, 1/1…………..
Increase in net assets:
Income ........................................
Ending net assets, 12/31 .................
Ending net assets at
current exchange rate ................
Translation Adjustment (positive) .

P20,000

x $.15 =

$ 3,000

10,000
P30,000

x $.19 =

1,900
$ 4,900

P30,000

x $.21 =

$ 6,300
$(1,400)

14. C By translating items carried at historical cost by the historical exchange rate,
the temporal method maintains the underlying valuation method used by the
foreign subsidiary.
15. A 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 ......................

P100,000

x $.16 =

$16,000

50,000

x $.20 =

10,000

(60,000)
(30,000)
(10,000)
P 50,000

x $.16 =
x $.18 =
x $.21 =

(9,600)
(5,400)
(2,100)
$ 8,900

P 50,000

x $.22 =

(11,000)
$(2,100)

16. C Marketable equity securities are carried at market value and therefore
translated at the current exchange rate under the temporal method.
17. B When the U.S. dollar is the functional currency, SFAS 52 requires
remeasurement using the temporal method with remeasurement gains and
losses reported in income.
18. B Wages payable is translated at the current exchange rate.
19. C Gains and losses on hedges of net investments (whether through a forward
contract, borrowing, or other technique) are offset against the translation
adjustment being hedged.
20. D Remeasurement gains are reported in the income statement as a part of
income from continuing operations.
21. (10 minutes) (Specify appropriate rates for a translation)
Rent expense—use actual (historical) rate at time of recording. Rent expense
would often be recorded evenly throughout the year so that an average rate for
the period is acceptable.
Dividends paid—use historical rate at time of recording, the date of declaration.
Equipment—as an asset, use current rate at the balance sheet date.
Notes payable—as a liability, use current rate at the balance sheet date.
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21. (continued)
Sales—use actual (historical) rate at time of recording. Sales often occur evenly
throughout the year so that an average rate is acceptable. However, if sales are
more prevalent at a particular time during the year, historical rates should be
used.
Depreciation expense—use historic rate at time of recording. In most cases,
average rate for the year is acceptable, because depreciation occurs evenly
throughout the year. Depreciation is recorded at year-end only as a matter of
convenience.
Cash—as an asset, use the current rate at the balance sheet date.
Accumulated depreciation—as a contra-asset account, use the current exchange rate at the balance sheet date.
Common stock—as an equity account, use historic rate at time of recording, the
date of issuance.
22. (5 minutes) (Determine translated values)
As a translation, both the asset (inventory) and the liability (accounts payable)
utilize the current exchange rate at the balance sheet date (December 31). Thus,
the translated values are as follows:
Inventory
LCU120,000 x 25% left
= LCU30,000 x 1/3.0 = $10,000
Accounts payable LCU120,000 x 40% unpaid = LCU48,000 x 1/3.0 = $16,000
23. (10 minutes) (Determine translation and remeasurement rates)
Accounts payable
Accounts receivable
Accumulated depreciation
Advertising expense
Amortization expense

Buildings
Cash
Common stock
Depreciation expense
Dividends paid (10/1)
Notes payable
Patents (net)
Salary expense
Sales

Translation
$.16 C
$.16 C
$.16 C
$.19 A
$.19 A
$.16 C
$.16 C
$.28 H
$.19 A
$.20 H
$.16 C
$.16 C
$.19 A
$.19 A

Remeasurement
$.16 C
$.16 C
$.26 H

$.19 A
$.25 H
$.26 H
$.16 C
$.28 H
$.26 H
$.20 H
$.16 C
$.25 H
$.19 A
$.19 A

* C = current rate, H = historical rate, A = average rate

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24. (20 minutes) (Calculate translation adjustment and remeasurement gain/loss and
explain their economic relevance)
The translation adjustment and remeasurement gain/loss can be determined as
the plug figure that keeps the dollar balance sheet in balance:
Translation
Remeasurement
CHF

Rate
US$
Rate
US$
Cash ............................
500,000
$.75 C
375,000
$.75 C
375,000
Inventory..................... 1,000,000
$.75 C
750,000
$.70 H
700,000
Fixed assets ............... 3,000,000
$.75 C 2,250,000
$.70 H 2,100,000
Total assets ............... 4,500,000
3,375,000
3,175,000
Notes payable.............
800,000
$.75 C
600,000
$.75 C
600,000
Owners equity ............ 3,700,000
$.70 H 2,590,000
$.70 H 2,590,000

Translation adjustment
185,000
Retained earnings
(remeasurement loss)
(15,000)
Total ......................... 4,500,000
3,375,000
3,175,000
Alternatively, the translation adjustment and remeasurement loss can be
calculated by analyzing the subsidiary’s balance sheet exposure:
Translation
Beginning net assets, 12/1
Ending net assets, 12/31 at
current exchange rate
Translation adjustment (positive)
$( 185,000)
Remeasurement
Beginning net monetary
liability position, 12/1
Ending net monetary liability
position, 12/31 at current
exchange rate
Remeasurement loss

CHF3,700,000

x $.70 = $2,590,000

CHF3,700,000

x $.75 = (2,775,000)

CHF(300,000)

x $.70 = $(210,000)

CHF(300,000)

x $.75 =

(225,000)
$ 15,000

Economic Relevance of Translation Adjustment
The translation adjustment increases stockholders’ equity by $185,000. The positive
translation adjustment arises because the Swiss subsidiary has a net asset position of
CHF3,700,000 and the Swiss franc appreciates by $.05 [CHF3,700,000 x $.05 =
$185,000]. The positive translation adjustment is not realized in terms of dollar cash
flow. It would be a realized gain only if Stephanie sold this operation on December 31
for exactly CHF3,700,000 and converted the sales proceeds into dollars at the current
exchange rate of $.75 per Swiss franc.
Economic Relevance of Remeasurement Loss
The remeasurement loss arises because the Swiss subsidiary has a net monetary
liability position of CHF300,000 (Cash of CHF500,000 less Notes payable of
CHF800,000) and the Swiss franc has appreciated by $.05 [CHF300,000 x $.05 =
$15,000]. The loss is unrealized. It would be realized only if the Swiss subsidiary
converted its Swiss franc cash into dollars at December 31, thereby realizing a
transaction gain of $25,000 [CHF500,000 x ($.75-$.70)], and the parent paid off the
Swiss franc note payable using U.S. dollars, thereby realizing a transaction loss of
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$40,000 [CHF800,000 x ($.75-$.70)]. (The note could have been paid at December 18 for
$560,000 [CHF800,000 x $.70]. At December 31, it takes $600,000 to pay off the note
[CHF800,000 x $.75].)

25. (30 minutes) (Prepare financial statements for a foreign subsidiary and then
translate them into U.S. dollars)
Fenwicke Company Subsidiary
Income Statement
LCU
U.S. Dollars
Rent revenue
60,000 x $1.90 A =
$114,000
Interest expense
(10,000) x $1.90 A =
(19,000)
Depreciation expense
(14,000) x $1.90 A =
(26,600)
Repair expense
(4,000) x $1.85*H =
(7,400)

Net income
32,000
$ 61,000
* Repair expense is the only expense not incurred evenly throughout the year.
Statement of Retained Earnings
LCU
U.S. Dollars
Retained earnings, 1/1
-0-0Net income
32,000
(above)
$61,000
Dividends paid
(5,000) x $1.80 H =
(9,000)
Retained earnings, 12/31
27,000
$52,000
Balance Sheet
LCU
Cash
41,000 x $1.80 C =
Accounts receivable
10,000 x $1.80 C =
Building
140,000 x $1.80 C =
Accumulated depreciation (14,000) x $1.80 C =
Total assets
177,000
Interest payable

10,000 x $1.80 C =
Note payable
100,000 x $1.80 C =
Common stock
40,000 x $2.00 H =
Retained earnings
27,000
(above)
Translation adjustment
(below)
Total liabilities and equities 177,000
Computation of Translation Adjustment
Beginning net assets
-0-0Increase in net assets:
Issued common stock
40,000
x $2.00 =
Net income
32,000
(above)
Decrease in net assets:
Dividends paid
(5,000) x $1.80 =
Ending net assets
67,000
Ending net assets at current
exchange rate
67,000
x $1.80 =
Translation adjustment (negative)

McGraw-Hill/Irwin
10-12

U.S. Dollars
$ 73,800
18,000
252,000
(25,200)
$318,600
$ 18,000
180,000
80,000
52,000
(11,400)
$318,600

$ 80,000
61,000
(9,000)
$132,000
120,600
$ 11,400
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26. (30 minutes) (Prepare a statement of cash flows for a foreign subsidiary and
then translate it into U.S. dollars)

Fenwicke Company Subsidiary
Statement of Cash Flows
LCU

U.S. Dollars

Operating Activities:
Net income
32,000 (from prob 25)
$ 61,000
plus: depreciation
14,000
x $1.9 A =
26,600
less: increase in accounts receivable (10,000)
x $1.9 A =
(19,000)
plus: increase in interest payable
10,000
x $1.9 A =
19,000
Cash flow from operations
46,000
87,600
Investing Activities:
Purchase of building
(140,000)
x $2.0 H = (280,000)
Financing Activities:
Sale of common stock

40,000
x $2.0 H =
80,000
Borrowing on note
100,000
x $2.0 H =
200,000
Dividends paid
(5,000)
x $1.8 H =
(9,000)
135,000
271,000
Increase in cash
41,000
78,600
Effect of exchange rate change on cash
(4,800)
Cash, 1/1
-0-0Cash, 12/31
41,000
x $1.80 C = $ 73,800

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27. (25 minutes) (Compute translation adjustment and remeasurement gain or loss)
a. Translation—only changes in net assets have an impact on the computation of
the translation adjustment.
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 adjustment—positive

KM30,000

x $.32 =

$ 9,600

5,000
1,000

x $.34 =
x $.35 =

1,700

350

(3,000)
(2,000)
KM31,000

x $.41 =
x $.37 =

(1,230)
( 740)
$ 9,680

KM31,000

x $.42 =

(13,020)
$(3,340)

b. Remeasurement—only changes in net monetary assets and liabilities have an
impact on the computation of the remeasurement gain.
Beginning net monetary
liability position
KM (3,000)
Increases in monetary assets:
Sold inventory 5/1
15,000
Sold land 6/1
5,000

Decreases in monetary assets:
Bought inventory 10/1
(12,000)
Bought land 11/1
(4,000)
Paid a dividend 12/1
(3,000)
Ending net monetary liability
position
KM(2,000)
Ending net monetary liability position
at current exchange rate
KM(2,000)
Remeasurement gain

x $.32 =

$ ( 960)

x $.34 =
x $.35 =

5,100
1,750

x $.39 =
x $.40 =
x $.41 =

(4,680)

(1,600)
(1,230)
$(1,620)

x $.42 =

(840)
$ (780)

Note: The purchase of land on account did not result in a decrease in monetary
assets, rather an increase in monetary liabilities. Payment on the note payable
and collection of accounts receivable do not affect the net monetary liability
position.

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28. (20 minutes) (Compute translation adjustment and remeasurement gain or loss)
a. 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 expense

Net assets, 12/31
Net assets, 12/31 at
current exchange rate
Translation adjustment (positive)

82,000 LCU x $.24 =

$19,680

30,000 LCU x $.25 =
(18,000) LCU x $.26 =
94,000 LCU

7,500
(4,680)
22,500

94,000 LCU x $.29 =

27,260
$(4,760)

b. The remeasurement gain or loss is based on changes in the net monetary assets
of the subsidiary.
Net monetary assets, 1/1
Changes in net monetary assets
Rendered services
Incurred expense
Net monetary assets, 12/31
Net monetary assets, 12/31 at

current exchange rate
Remeasurement gain
c. Translated value of land
Remeasured value of land

22,000 LCU x $.24 =

$ 5,280

30,000 LCU x $.25 =
(18,000) LCU x $.26 =
34,000 LCU

7,500
(4,680)
$ 8,100

34,000 LCU x $.29 =

9,860
$(1,760)

60,000 LCU
60,000 LCU

$17,400
$13,800

x $.29 =
x $.23 =

29. (10 minutes) (Determine the appropriate exchange rate)
Account
(a) Translation
Sales
20 A
Inventory
22 C
Equipment
22 C
Rent expense
20 A
Dividends
21 H
Notes receivable
22 C
Accumulated depreciation--equipment 22 C
Salary payable
22 C
Depreciation expense
20 A

(b) Remeasurement
20 A
19 H
13 H
20 A
21 H
22 C
13 H

22 C
13 H

C = current exchange rate, A = average exchange rate, H = Historical exchange
rate

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30. (30 minutes) (Hedge of balance sheet exposure)
a. Net assets, 1/1 (132,000 – 54,000)
Change in net assets:
Net income
Dividends, 3/1
Dividends, 10/1
Net assets, 12/31
Net assets at current
exchange rate, 12/31
Translation adjustment (negative)

78,000 kites

x $0.80 =

$62,400

26,000 kites
(5,000) kites
(5,000) kites
94,000 kites

x $0.77 =
x $0.78 =
x $0.76 =

20,020
(3,900)
(3,800)
$74,720

94,000 kites

x $0.75 =

70,500
$ 4,220

b. Forward contract journal entries
10/1
No entry
12/31

Forward Contract .................................
2,000

Translation Adjustment (positive) ..
2,000
(To record the change in the value of the forward contract as an
adjustment to the translation adjustment)
Foreign Currency (kites) ......................
150,000
Cash .................................................
150,000
(To record the purchase of 200,000 kites at the spot rate of $.75)
Cash ....................................................
152,000
Foreign Currency (kites) .................
150,000
Forward Contract ............................
2,000
(To record delivery of 200,000 kites, receipt of $152,000, and
close the forward contract account.)

c. The net negative translation adjustment (debit balance) to be reported in
other comprehensive income at 12/31 is $2,220 ($4,220 – $2,000).

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31. (45 minutes) (Translation and remeasurement of foreign subsidiary trial
balance)
a. Translation of Subsidiary Trial Balance
Debits
Credits
8,000 KQ x 1.62 $12,960
9,000 KQ x 1.62 14,580
3,000 KQ x 1.62
4,860
600 KQ x 1.62
$ 972
5,000 KQ x 1.62
8,100
3,000 KQ x 1.62
4,860
5,000 KQ x 1.62
8,100
10,000 KQ x 1.71
17,100
4,000 KQ x 1.66
6,640
25,000 KQ x 1.64
41,000
5,000 KQ x 1.64
8,200
600 KQ x 1.64
984
9,000 KQ x 1.64 14,760
$71,084
Translation Adjustment (negative)

948
$72,032 $72,032
Calculation of Translation Adjustment
Net assets, 1/1…………………………..
-0-0Increase in net assets:
Common stock issued……………….
10,000 KQ x 1.71 $17,100
Sales…………………………………….
25,000 KQ x 1.64
41,000
Decrease in net assets:
Dividends paid………………………..
( 4,000) KQ x 1.66
(6,640)
Salary expense………………………..
( 5,000) KQ x 1.64
(8,200)
Depreciation expense……………….
( 600) KQ x 1.64
( 984)
Miscellaneous expense …………….
( 9,000) KQ x 1.64
(14,760)
Cash………………………………….
Accounts Receivable……………..
Equipment…………………………..
Accumulated Depreciation………
Land…………………………………
Accounts Payable…………………
Notes Payable……………………..

Common Stock……………………
Dividends Paid…………………….
Sales…………………………………
Salary Expense……………………
Depreciation Expense……………
Miscellaneous Expense………….

Net assets, 12/31……………………….
Net assets, 12/31 at
current exchange rate…………….
Translation adjustment (negative)

16,400* KQ

$27,516

16,400 KQ x 1.62

26,568
$ 948

* This amount can be verified as ending assets (24,400 KQ) minus ending
liabilities (8,000 KQ) – net assets, 12/31 = 16,400 KQ.

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31. (continued)
b. Remeasurement of Subsidiary Trial Balance
Cash
Accounts Receivable
Equipment
Accumulated Depreciation
Land
Accounts Payable
Notes Payable
Common Stock
Dividends Paid
Sales
Salary Expense
Depreciation Expense
Miscellaneous Expense

8,000
9,000
3,000
600
5,000
3,000
5,000
10,000
4,000
25,000
5,000

600
9,000

KQ x 1.62
KQ x 1.62
KQ x 1.71
KQ x 1.71
KQ x 1.59
KQ x 1.62
KQ x 1.62
KQ x 1.71
KQ x 1.66
KQ x 1.64
KQ x 1.64
KQ x 1.71
KQ x 1.64

Remeasurement loss (debit)
Calculation of Remeasurement Loss
Net monetary assets, 1/1
-0Increase in net monetary assets:
Common stock issued
10,000
Sales
25,000
Decrease in net monetary assets:
Acquired equipment
(3,000)
Acquired land
(5,000)

Dividends paid
(4,000)
Salary expense
(5,000)
Miscellaneous expense
(9,000)
Net monetary assets, 12/31
Net monetary assets, 12/31
at current exchange rate
Remeasurement loss (debit)

Debits
$12,960
14,580
5,130

Credits

$ 1,026
7,950
4,860
8,100
17,100
6,640
41,000
8,200
1,026
14,760
$71,246
840

$72,086

$72,086

-0KQ x 1.71 $17,100
KQ x 1.64
41,000
KQ
KQ
KQ
KQ
KQ

x 1.71
x 1.59
x 1.66
x 1.64
x 1.64

9,000* KQ

(5,130)
(7,950)
(6,640)
(8,200)
(14,760)
$15,420

9,000 KQ x 1.62
$

14,580
840

* This amount can be verified as ending monetary assets (Cash + Accounts
receivable) minus ending monetary liabilities (Accounts payable + Notes
payable): 17,000 KQ – 8,000 KQ = 9,000 KQ.

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32. (30 minutes) (Translate the financial statements of a foreign subsidiary)
LIVINGSTON COMPANY
Income Statement
For Year Ending December 31, 2009
Goghs
270,000
(155,000)
115,000
(54,000)
10,000
71,000

Sales

Cost of Goods Sold
Gross Profit
Operating Expenses
Gain on Sale of Equipment
Net Income

U.S. Dollars
x 1/.63 = 428,571
x 1/.63 = (246,032)
182,539
x 1/.63 = (85,714)
x 1/.58 =
17,241
114,066

Statement of Retained Earnings
For Year Ending December 31, 2009
Retained Earnings, 1/1/09
Net Income
Dividends Paid
Retained Earnings, 12/31/09

Goghs
U.S. Dollars
216,000 given
395,000
71,000 above
114,066
(26,000) x 1/.62 = (41,935)
261,000

467,131

Balance Sheet
December 31, 2009
Cash
Receivables
Inventory
Fixed Assets (net)
Total

Goghs
44,000
116,000
58,000
339,000
557,000

U.S. Dollars
x 1/.65 = 67,692
x 1/.65 = 178,462
x 1/.65 = 89,231
x 1/.65 = 521,538
856,923

Liabilities
Common Stock
Retained Earnings
Translation Adjustment
Total

176,000 x 1/.65 = 270,769
120,000 x 1/.48 = 250,000
261,000 above 467,131
(130,977)
557,000
856,923

Translation Adjustment
Net assets, 1/1/09
Net income, 2009
Dividends paid
Net assets, 12/31/09
Net assets at current exchange rate,
12/31/09

Goghs
336,000 x 1/.60 =
71,000 above
(26,000) above
381,000

381,000 x 1/.65 = 586,154

Translation adjustment, 2009 (negative)
Cumulative translation adjustment, 1/1/09 (negative)
Cumulative translation adjustment, 12/31/09 (negative)
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e

U.S. Dollars

560,000
114,066
(41,935)
632,131

45,977
85,000
130,977

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33. (35 minutes) (Compute translation adjustment and remeasurement gain or loss)
a. Remeasurement Gain or Loss
Net monetary assets, 1/1/09*
Increases in net monetary assets:
Issued Common Stock (4/1/09)
Sold Building** (7/1/09)
Sales (2009)
Decreases in net monetary assets:
Purchased Equipment (4/1/09)
Paid Dividends (10/1/09)
Rent Expense (2009)
Salary Expense (2009)
Utilities Expense (2009)
Net monetary assets, 12/31/09
Net monetary assets, 12/31/09 at

current exchange rate
Remeasurement gain (credit)

2,000

KR x 2.50 = $ 5,000

10,000
22,000
80,000

KR x 2.60 = 26,000
KR x 2.80 = 61,600
KR x 2.70 = 216,000

(30,000)
(32,000)
(14,000)
(20,000)
( 5,000)
13,000

KR x 2.60 = (78,000)
KR x 2.90 = (92,800)
KR x 2.70 = (37,800)
KR x 2.70 = (54,000)
KR x 2.70 = (13,500)
KR
$ 32,500

13,000

KR x 3.00 = 39,000
$ (6,500)

* Net monetary assets: (Cash + Accounts Receivable) - (Account Payable +
Bonds Payable)
** To determine cash proceeds from the sale of the building, changes in the
Accumulated Depreciation and Buildings accounts must be analyzed along
with Depreciation Expense and Gain on Sale of Building. Depreciation
expense is KR 15,000; KR 5,000 is attributable to equipment (Accumulated
Depreciation—Equipment increases by KR 5,000), KR 10,000 is depreciation
of buildings. Accumulated Depreciation—Buildings increases by only KR
5,000 during 2009, therefore, the accumulated depreciation related to the
building sold during 2009 is KR 5,000. The Buildings account is decreased
by KR 21,000, thus the book value of the building sold must have been KR
16,000 (as given). The Gain on Sale of Building is KR 6,000; therefore, cash
proceeds from the sale are KR 22,000.

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33. (continued)
b. Translation Adjustment

Net assets, 1/1/09*
100,000 KR x 2.50
Increases in net assets
Issued Common Stock (4/1/09)
10,000 KR x 2.60
Gain on Sale of Building** (7/1/09) 6,000 KR x 2.80
Sales (2009)
80,000 KR x 2.70
Decreases in net assets
Paid Dividends (10/1/09)
(32,000) KR x 2.90
Depreciation Expense (2009)
(15,000) KR x 2.70
Rent Expense (2009)
(14,000) KR x 2.70
Salary Expense (2009)
(20,000) KR x 2.70
Utilities Expense (2009)
( 5,000) KR x 2.70
Net assets, 12/31/09
110,000 KR
Net monetary assets, 12/31/09 at
current exchange rate
110,000 KR x 3.00
Translation adjustment (positive)

= $250,000
=
=
=

26,000
16,800
216,000

=
=
=
=
=

(92,800)
(40,500)
(37,800)
(54,000)
(13,500)
$270,200

=

330,000
$(59,800)

* Net assets: Common stock + Retained earnings
** Selling a building at a gain of KR 6,000 increases net assets by that amount.
Although not required by Part b, the beginning translation adjustment as of
January 1, 2009 can be computed by translating the January 1 accounts and
assuming that the translation adjustment is the balancing figure:
Common Stock, 1/1/09
70,000 KR x 2.40 =

$168,000
Retained Earnings, 1/1/09
30,000 KR given
62,319
Net assets, 1/1/09
100,000 KR
$230,319
Net assets, 1/1/09 at current
exchange rate
100,000 KR x 2.50 =
250,000
Cumulative translation adjustment (positive), 1/1/09
$ (19,681)
Translation adjustment (positive), 2009
(59,800)
Cumulative translation adjustment (positive), 12/31/09
$ (79,481)

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34. (90 minutes) (Remeasure non-functional currency accounts into foreign
functional currency and then translate foreign functional currency financial
statements into U.S. dollars)

a. Remeasurement of Mexican Operations
Accounts payable
Accumulated depreciation
Building and equipment
Cash
Depreciation expense
Inventory (beginning
—income statement)
Inventory (ending
—income statement)
Inventory (ending—balance sheet)
Purchases
Receivables
Salary expense
Sales
Main office
Remeasurement loss
Total

Canadian Dollars
Debit
Credit
17,150
4,750
10,000
20,650
500

Pesos
49,000

19,000
40,000
59,000
2,000

x .35 C
x .25 H
x .25 H
x .35 C
x .25 H

23,000

x .30 A (’08)

6,900

28,000 x .34 A(’09)
28,000 x .34 A(’09)
9,520
68,000 x .34 A(’09) 23,120
21,000 x .35 C
7,350
9,000 x .34 A
3,060
124,000 x .34 A
30,000 given
Schedule One
10
81,110

Schedule One—Remeasurement Loss
Net monetary liabilities, 1/1/09*
Increases in net monetary assets
Sales
Decreases in net monetary assets
Purchases
Salary Expense
Net monetary assets, 12/31/09**
Net monetary assets, 12/31/09 at
current exchange rate
Remeasurement loss

9,520

42,160
7,530
81,110

Pesos
(16,000)

Canadian
Dollars
x .32 (5,120)

124,000

x .34

(68,000)
( 9,000)
31,000

x .34 (23,120)
x .34 ( 3,060)
10,860

31,000

x .35

42,160

10,850
10

* Net monetary liabilities, 1/1/09, can be determined by first determining the
net monetary assets at 12/31/09 and then backing out the changes in
monetary assets and liabilities during 2009—sales, purchases, and salary
expense.
** Net monetary assets, 12/31/09: Cash + Receivables – Accounts Payable

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34. (continued)
b. The following C$ financial statements are produced by combining the
figures from the main operation with the remeasured figures from the branch
operation. The Branch Operation and Main Office accounts offset each
other. Cost of goods sold for the Mexican branch is determined by
combining beginning inventory, purchases, and ending inventory as
remeasured in C$.
Income Statement
c. Translation into U.S. dollars—
For the Year Ended December 31, 2009
Current Rate Method
Sales
Cost of goods sold
Gross profit
Depreciation expense
Salary expense
Utility expense
Gain on sale of equipment
Remeasurement loss
Net income

C$

354,160
(223,500)
130,660
(8,500)
(29,060)

(9,000)
5,000
(10)
C$
89,090

x .67 A =
x .67 A =
x
x
x
x
x

.67 A
.67 A
.67 A
.68 H
.67 A

=
=
=
=
=

$ 237,287.20
(149,745.00)
87,542.20
(5,695.00)

(19,470.20)
(6,030.00)
3,400.00
(6.70)
$ 59,740.30

Statement of Retained Earnings
For the Year Ended December 31, 2009
Retained earnings, 1/1/09
Net income (above)
Dividends paid
Retained earnings, 12/31/09

McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e

C$
C$

135,530
89,090
( 28,000)
196,620

Given
Above
x .69 H =

$ 70,421.00
59,740.30

(19,320.00)
$110,841.30

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34. (continued)
Balance Sheet
December 31, 2009
Cash
Receivables
Inventory
Buildings and equipment
Accumulated depreciation
Total

C$

C$

Accounts payable
C$
Notes payable
Common stock
Retained earnings
Cumulative translation adjustment
Total

C$

46,650
75,350
107,520
177,000
(31,750)
374,770
52,150
76,000
50,000
196,620
374,770

x
x
x
x
x

.65 C
.65 C
.65 C
.65 C
.65 C

x .65 C = $ 33,897.50
x .65 C =
49,400.00
x .45 H =

22,500.00
Above
110,841.30
Schedule Two 26,961.70
$ 243,600.50

Schedule Two—Translation Adjustment
Net assets, 1/1/09
C$ 185,530
x .70 =
Changes in net assets
Net income
89,090
Above
Dividends
(28,000)
x .69 =
Net assets, 12/31/09
C$ 246,620
Net assets, 12/31/09 at
current exchange rate
C$ 246,620
x .65 =
Translation adjustment, 2009 (negative)
Cumulative translation adjustment, 1/1/09 (positive)
Cumulative translation adjustment, 12/31/09 (positive)

McGraw-Hill/Irwin
10-24

= $ 30,322.50
=
48,977.50
=
69,888.00
= 115,050.00
= (20,637.50)
$243,600.50

$129,871.00
59,740.30
(19,320.00)
$170,291.30
160,303.00
9,988.30
(36,950.00)
$(26,961.70)

$

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Solutions Manual


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35. (90 minutes) (Translate foreign currency financial statements and prepare
consolidation worksheet)
Step One
Simbel's financial statements are first translated into U.S. dollars after

reclassification of the 10,000 pound expenditure for rent from rent expense to
prepaid rent. Credit balances are in parentheses.
Translation Worksheet
Exchange
Account
Pounds
Rate
Dollars
Sales
(800,000)
0.274
(219,200)
Cost of goods sold
420,000
0.274
115,080
Salary expense
74,000
0.274
20,276
Rent expense (adjusted)
36,000
0.274
9,864
Other expenses
59,000
0.274
16,166
Gain on sale of fixed
assets, 10/1/09

(30,000)
0.273
(8,190)
Net income
(241,000)
(66,004)
R/E, 1/1/09
Net income
Dividends paid
R/E,12/31/09
Cash and receivables
Inventory
Prepaid rent (adjusted)
Fixed assets
Total
Accounts payable
Notes payable
Common stock
Add’l paid-in capital
Retained earnings, 12/31/09
Subtotal
Cumulative translation
adjustment (negative)
Total

McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e

(133,000)
(241,000)

50,000
(324,000)

Schedule 1 (38,244)
Above
(66,004)
0.275
13,750
(90,498)

146,000
297,000
10,000
455,000
908,000

0.270
0.270
0.270
0.270

39,420
80,190
2,700
122,850
245,160

(54,000)
(140,000)
(240,000)

(150,000)
(324,000)

0.270
0.270
0.300
0.300
Above

(14,580)
(37,800)
(72,000)
(45,000)
(90,498)
(259,878)

Schedule 2

14,718
(245,160)

(908,000)

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10-25