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CHAPTER 7
SOLUTIONS TO MULTIPLE CHOICE QUESTIONS, EXERCISES AND PROBLEMS

MULTIPLE CHOICE QUESTIONS
1. a
Remeasurement changes local currency accounts (euros) to the functional currency (krona).
Translation changes the functional currency accounts (krona) to the reporting currency
(U.S. dollars).
2. d
Remeasure the equipment to U.S. dollars using the rates when the equipment was
purchased. (€1,000,000 x $1.40) + (€3,000,000 x $1.50) = $5,900,000.
3. a

Beginning net assets (200,000 + 600,000)
+ Net income
(4,000,000 – 2,300,000 – 300,000 – 1,200,000)
- Dividends
Ending net assets
Translation loss

€
800,000

Rate
1.45

U.S. $
1,160,000

200,000
(100,000)

1.35
1.32

900,000

1.30

270,000
(132,000)
1,298,000
1,170,000
128,000

4. c

Beginning net assets carried at fair value
(200,000 – 1,400,000)
+ Sales
- Purchases [2,300,000 + (500,000 – 400,000)]
- Out of pocket expenses
- Dividends
Ending net assets carried at fair value
(180,000 – 1,080,000)
Remeasurement gain

Solutions Manual, Chapter 7

€

Rate

U.S. $

(1,200,000)
4,000,000
(2,400,000)
(1,200,000)
(100,000)

1.45
1.35
1.35
1.35
1.32

(1,740,000)
5,400,000
(3,240,000
(1,620,000)
(132,000)
(1,332,000)

(900,000)

1.30

(1,170,000)

162,000

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5. b
Translation multiplies the current ratio numerator and denominator by the same rate.
6. c
A steadily weakening dollar means the direct rate is rising. Translated assets are multiplied by
an increasing rate.
7. b
The direct rate is falling. Entry R debits goodwill at the lower ending rate, and eliminates the
remaining investment balance, created at higher rates, leading to a debit to OCI. Entry O
credits goodwill at the ending rate and debits impairment loss at the higher average rate,
leading to a credit to OCI.
8. c

Reported net income
Goodwill impairment
Equity in net income

£
500,000
(20,000)
480,000

Rate

1.65
1.65

U.S. $
825,000
(33,000)
792,000

Note: the limited life intangibles were written off prior to 2015.
9. b
IFRS: (10,000,000 x 400/100) x £0.01 = £400,000
U.S. GAAP: (10,000,000 x £0.05) = £500,000
10. d
For non-inflationary economies, IFRS and U.S. GAAP remeasurement and translation
procedures are the same.

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EXERCISES
E7.1

Translation and Remeasurement of Inventory, Cost of Sales, Plant Assets and
Depreciation

a. (1) 20,000 x $0.52 = $10,400
(2) Cost of sales in R is: (100,000 + 75,000 - 20,000) = R155,000
155,000 x $0.475 = $ 73,625
b. (1) 20,000 x $0.50 = $10,000
(2)
Purchase
100,000 x $0.45 =
Purchase
75,000 x $0.50 =
Ending inventory
(20,000) x $0.50 =
Cost of sales
c.

$ 45,000
37,500
(10,000)
$ 72,500

Property, plant and equipment at December 31, 2013, in S$, is as follows:
[1,500,000 - (3)(150,000)] =
S$ 1,050,000
[900,000 - (2)(90,000)] =
720,000
PP&E, net
S$ 1,770,000
(1) 1,770,000 x $0.525 = $929,250
(2) (150,000 + 90,000) x $0.55 = $132,000

d. (1) (1,050,000 x $0.675) + (720,000 x $0.625) = $1,158,750

(2) (150,000 x $0.675) + (90,000 x $0.625) = $157,500
E7.2 Translation and Remeasurement Gain or Loss Calculations and Consolidation
a.

Remeasurement gain or loss
Exposed position, 9/10/14
Purchase of equipment
Operating expenses
Exposed position, 12/31/14
Remeasurement gain (income statement)

b.

S/
S/ 10,000,000
(2,700,000)
(2,900,000)

$/S/
0.30
0.30
0.31

S/ 4,400,000

0.33

S/
S/ 10,000,000
(2,900,000)

$/S/
0.30
0.31

S/ 7,100,000

0.33

$
$3,000,000
(810,000)
(899,000)
1,291,000
-1,452,000
$(161,000)

Translation gain or loss
Exposed position, 9/10/14
Operating expenses
Exposed position, 12/31/14
Translation gain (OCI)

Solutions Manual, Chapter 7

$
$3,000,000
(899,000)
2,101,000
-2,343,000

$(242,000)

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c.

Globe’s entries, remeasurement
Equity in net loss of sub
Investment in sub
$(738,000) = $(2,900,000 x 0.31) – $161,000

738,000
738,000

Globe’s entries, translation
Equity in net loss of sub

899,000

Investment in sub
OCI
$(899,000) = ($2,900,000 x 0.31)
d.

657,000
242,000

Remeasurement consolidation
Globe
Subsidiary
Dr (Cr)
Dr (Cr)
Dr
Cr
Consol
Cash
$ 500,000 $ 1,452,000
$ 1,952,000
PP&E
22,000,000
810,000
22,810,000
Investment in sub
2,262,000
(C) 738,000 3,000,000 (E)
Liabilities
(16,000,000)
(16,000,000)
Capital
(5,000,000) (3,000,000) (E) 3,000,000
(5,000,000)
RE, beg
(2,000,000)
(2,000,000)
Revenues
(15,000,000)

(15,000,000)
Equity in NL
738,000
738,000 (C)
Expenses
12,500,000
899,000
13,399,000
Remeasurement
________
(161,000)
________ ________
(161,000)
gain
$
-0- $
-0$3,738,000 $3,738,000
$
-0Translation consolidation

Cash
PP&E
Investment in sub
Liabilities
Capital
RE, beg
AOCI
Revenues
Equity in NL
Expenses

Globe
Subsidiary
Dr (Cr)
Dr (Cr)
$ 500,000 $ 1,452,000
22,000,000
891,000
2,343,000
(16,000,000)
(5,000,000) (3,000,000)
(2,000,000)
(242,000)
(242,000)
(15,000,000)
899,000
12,500,000
899,000
$
-0- $
-0-

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Dr

(C)

Consol

$ 1,952,000
22,891,000

899,000 3,242,000 (E)

(E) 3,000,000
(E)

Cr

242,000

(16,000,000)
(5,000,000)
(2,000,000)
(242,000)
(15,000,000)

899,000 (C)
________ ________
13,399,000
$4,141,000 $4,141,000
$
-0-

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E7.3

Translation and Remeasurement of Account Balances

a.
Cash

4,000,000 x $.75

$3,000,000

Inventory is remeasured at historical rates. There are two layers:
(1) quantity acquired in January, 2012; 1,000,000 x $.85
(2) quantity acquired in January, 2014; 2,000,000 x $.78
Total remeasured inventory

$ 850,000
1,560,000
$2,410,000

Machinery and equipment are remeasured at historical rates.
Remaining equipment purchased in January, 2012; 4,000,000 x $.85
Equipment purchased in January, 2013; 7,000,000 x $.80
Total remeasured machinery and equipment

$3,400,000
5,600,000
$9,000,000

Depreciation expense is remeasured at the same historical rate(s) used to remeasure the

related machinery and equipment.
Depreciation expense on remaining January, 2012 equipment:
$.85(4,000,000/10)
$ 340,000
Depreciation expense on January, 2013 equipment:
$.80(7,000,000/10)
560,000
Total remeasured depreciation expense
$ 900,000
b.
Cash
Inventory
Machinery and equipment
Depreciation expense

E7.4

4,000,000 x $.75 = $3,000,000
3,000,000 x $.75 = $2,250,000
11,000,000 x $.75 = $8,250,000
1,100,000 x $.76 = $ 836,000

Translation and Remeasurement Gain and Loss

(in millions)
a.
Exposed position, 1/1/14
Acquisition of plant assets for debt
Purchase of inventory
Sales

Operating expenses
Exposed position, 12/31/14
Remeasurement gain
Solutions Manual, Chapter 7

Amount (£)
£ 700
(1,000)
(3,500)
6,000
(1,200)
£ 1,000

$/£
Amount($)
1.90
$ 1,330
1.95
(1,950)
1.97
(6,895)
1.97
11,820
1.97
(2,364)
1,941
2.01
- 2,010
$
(69)

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NOTE: The following items did not affect the remeasurement gain or loss:
1.
2.
3.
4.

Collection of receivables has no net effect -- one exposed asset (receivables) is
simply replaced by another (cash).
Depreciation expense does not affect the exposed position.
Refinancing of commercial paper has no net effect -- one
liability is simply replaced by another.
Cost of goods sold does not affect the exposed position.

b.
Amount (£)
£ 1,200
1,100

Exposed position, 1/1/14
Net income in 2014 (6,000 – 3,300 – 400 -1,200)
Exposed position, 12/31/14
Translation gain

£ 2,300

E7.5

Translation and Remeasurement Gains and Losses

a.

Calculation of Remeasurement Gain or Loss
January 1, 2014 beginning balance
Purchases
Book value of land sale
Gain on land sale
Sales
Cash operating expenses
December 31, 2014 ending balance
2014 remeasurement gain (income)

b.

$/£
Amount($)
1.90
$ 2,280
1.97
2,167
4,447
2.01
- 4,623
$ (176)

€
€ (12,000,000)
(8,000,000)
700,000
300,000
10,000,000
(1,800,000)

$/€
1.13
1.10
1.15
1.11
1.12
1.12

€ (10,800,000)

1.10

€
€ 9,000,000

$/€
1.13

$
$10,170,000

2,300,000

1.12

€ 11,300,000

1.10

2,576,000
12,746,000
- 12,430,000
$ 316,000

$
$(13,560,000)
(8,800,000)
805,000
333,000
11,200,000
(2,016,000)
(12,038,000)
- (11,880,000)
$ (158,000)

Analysis of Translation Gain or Loss
Exposed position, 1/1/14
Net income (10,000,000 + 300,000 6,000,000 – 1,800,000 - 200,000)
Exposed position, 12/31/14
2014 translation loss (OCI)

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E7.6

Effect of Translation and Remeasurement on Ratios

(in thousands)
a.

Rands

return on assets =
1,000/8,000 =
12.5% =

return on sales
1,000/5,000
20%

x
x
x

asset turnover

5,000/8,000
62.5%

$ (remeasurement)

130/2,000 =
6.5% =

130/750
17.3%

x
x

750/2,000
37.5%

$ (translation)

150/1,400 =
10.7% =

150/750
20%

x
x

750/1,400
53.6%

Translation maintains the local currency relationships better than remeasurement.
b.

The direct exchange rate appears to be falling with the dollar strengthening and the rand
weakening. This can be seen by observing that remeasured assets of $2,000,000
(remeasured at historical rates) are higher than translated assets of $1,400,000 (translated
at average of beginning and ending current rates).
Similarly, remeasured operating income of $130,000 is lower than translated operating
income of $150,000, due to depreciation and amortization expenses being remeasured at
higher historical rates when the functional currency is the $.
The declining exchange rate causes the DuPont analysis performance measures to be
distorted by the changing exchange rate. If performance measured in the local currency-rands--is the benchmark, translation does a much better job of preserving the local
currency results than remeasurement.
Under either method, though, changes in exchange rates over the years weaken our
ability to effectively make year-to-year comparisons of $ performance measures.

Solutions Manual, Chapter 7

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E7.7

Remeasured Financial Statements

Sales

Cost of goods sold
Operating expenses
Depreciation expense
Amortization expense
Remeasurement gain
Net income

Mexico City Subsidiary
Statement of Income
For the Year Ended December 31, 2013
P
$/P
P 12,000,000
0.12
(7,000,000)
0.12
(3,000,000)
0.12
(75,000)
0.11
(60,000)
0.10
_________
P 1,865,000

Cash
Inventory
Office equipment, net
Organization costs, net
Total assets

Mexico City Subsidiary
Balance Sheet
December 31, 2013
P
P 8,700,000
2,000,000
925,000
240,000
P 11,865,000

Capital
Retained earnings
Total equity

P 10,000,000
1,865,000
P 11,865,000

$/P
0.15
0.11
0.11
0.10

$
$ 1,305,000
220,000
101,750
24,000

$ 1,650,750

0.10
see above

$ 1,000,000
650,750
$ 1,650,750

Calculation of Remeasurement Gain
P
$/P
Exposed position, 1/2/13 (cash)
P 10,000,000
0.10
Sales
12,000,000
0.12
Organization costs
(300,000)
0.10
Equipment purchase
(1,000,000)
0.11
Merchandise purchase
(2,000,000)
0.11
Merchandise purchase
(7,000,000)
0.12

Cash operating expenses
(3,000,000)
0.12
Exposed position, 12/31/13
Remeasurement gain (income)

©Cambridge Business Publishers, 2013
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P 8,700,000

$
$ 1,440,000
(840,000)
(360,000)
(8,250)
(6,000)
425,000
$ 650,750

0.15

$
$ 1,000,000
1,440,000
(30,000)
(110,000)
(220,000)
(840,000)
(360,000)

880,000
- 1,305,000
$ (425,000)

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E7.8

Change in Functional Currency

Exposed position, January 1
Net income
Dividends
Exposed position, December 31
Translation loss
Balance, 1/1/14 (gain) (1)
Balance, 12/31/14 (gain)

C$
C$ 20,000,000
2,500,000
(1,000,000)

$/C$
1.05
1.03
1.02

C$ 21,500,000

1.01

(1)
Translated net assets: $1.05 x 20,000,000 =
Less remeasured net assets
Beginning balance of translation adjustment account 1/1/14 (gain)

E7.9

$
$21,000,000
2,575,000
(1,020,000)
22,555,000
- 21,715,000
840,000
(6,000,000)
$ (5,160,000)

$ 21,000,000
(15,000,000)
$ 6,000,000

Translated/Remeasured Financial Statements

a.

Sales
Cost of goods sold
Depreciation expense
Other expenses
Net income

Income Statement (Translated)
SAR
SAR 85,000,000
(40,000,000)
(10,000,000)
(15,000,000)
SAR 20,000,000

Balance Sheet (Translated)
SAR
Cash
SAR 95,000,000
Inventory
25,000,000
Plant assets
90,000,000
Total assets
SAR210,000,000
Capital
SAR200,000,000
Retained earnings
10,000,000
Accumulated other comprehensive loss
__________

Total equity
SAR210,000,000

Solutions Manual, Chapter 7

$/SAR
.265
.265
.265
.265

$
$ 22,525,000
(10,600,000)
(2,650,000)
(3,975,000)
$ 5,300,000

$/SAR
.25
.25
.25

$
$ 23,750,000
6,250,000
22,500,000
$ 52,500,000
$ 60,000,000
2,750,000

(10,250,000)
$ 52,500,000

.30
(1)
(2)

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(1) Analysis of Retained Earnings (Translated)
Net income
Dividends
Retained earnings, 12/31/13

SAR
SAR 20,000,000
(10,000,000)
SAR 10,000,000

$/SAR
.265
.255

$
$ 5,300,000
(2,550,000)

$ 2,750,000

SAR
SAR 200,000,000
20,000,000
(10,000,000)

$/SAR
.300
.265
.255

SAR 210,000,000

.250

$
$60,000,000
5,300,000
(2,550,000)
62,750,000
- 52,500,000
$10,250,000

(2) Analysis of Translation Loss
Exposed position, 1/1/13
Net income
Dividends
Exposed position, 12/31/13
2013 translation loss

b.

Sales
Cost of goods sold
Depreciation expense
Other expenses
Remeasurement loss
Net income

Cash
Inventory
Plant assets
Total assets
Capital
Retained earnings
Total equity

©Cambridge Business Publishers, 2013
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Income Statement (Remeasured)
SAR
SAR 85,000,000
(40,000,000)
(10,000,000)
(15,000,000)
__________
SAR 20,000,000

$/SAR

.265
.300
.300
.265
(3)

$
$ 22,525,000
(12,000,000)
(3,000,000)
(3,975,000)
(3,275,000)
$
275,000

Balance Sheet (Remeasured)
SAR
SAR 95,000,000
25,000,000
90,000,000
SAR 210,000,000

$/SAR
.25
(4)
.30

$
$ 23,750,000
6,975,000

27,000,000
$ 57,725,000

.30
(5)

$ 60,000,000
(2,275,000)
$ 57,725,000

SAR 200,000,000
10,000,000
SAR 210,000,000

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(3) Analysis of Remeasurement Loss
SAR
SAR 50,000,000
85,000,000
(15,000,000)
(15,000,000)
(10,000,000)

$/SAR
.300
.265

.265
.265
.255

SAR 95,000,000

.250

(4) Remeasurement of 12/31/13 Inventory Balance
SAR
Inventory purchased 1/1/13
SAR 10,000,000
Inventory purchased evenly in 2013
15,000,000
Inventory balance, 12/31/13
SAR 25,000,000

$/SAR
.30
.265

Exposed position, 1/1/13
Sales
Purchases
Cash expenses
Dividends
Exposed position, 12/31/13
2013 remeasurement loss

$

$ 15,000,000
22,525,000
(3,975,000)
(3,975,000)
(2,550,000)
27,025,000
- 23,750,000
$ 3,275,000

$
$ 3,000,000
3,975,000
$ 6,975,000

(5) Analysis of Retained Earnings (Remeasured)
Net income
Dividends
Retained earnings, 12/31/13

SAR
SAR 20,000,000
(10,000,000)
SAR 10,000,000

$/SAR
I/S
.255

$
275,000

(2,550,000)
$(2,275,000)

$

E7.10 Exchange Rate Changes and Return on Assets
a.

b.

Return on Assets (000,000 omitted)
$
2014
12/.5(112 + 95) = .116
2015
10.89/.5(95 + 95) = .115
Note: 10 = 12/1.2; 12.1 = 10.89/.9; 80 = 112/1.4

€
10/.5(80 + 95) = .114
12.1/.5( 95+ 95) = .127

Although the ROA based on euro data increased by 11.4% [= (.127 - .114)/.114],
translated data produced an ROA that declined slightly over the period. This distortion
created by translation can be attributed to two factors.
1.

The declining average exchange rate caused translated operating income to fall by
9.3% [= (10.89 - 12)/12] even though euro income rose by 21%. Thus the
numerator of the euro ROA rose while the numerator of the translated ROA fell.

2.

Translated average total assets decreased by 8.2% [= (95 -103.5)/103.5], whereas
average euro assets increased by 8.6% [= (95 - 87.5)/87.5]. This increased the
denominator of the euro ROA relative to the translated ROA.

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The net effect of the changing exchange rate on euro income and average total assets
creates a divergence between the euro ROA -- which suggests improved profitability of
the asset portfolio -- and the slightly weakening ROA based on translated data.
Since the euro is the entity's functional currency, the entity's financial performance is best
measured by euro data. Internal management has these euro data and can decide whether
to make decisions based on translated data. Financial statement users outside the entity,
however, cannot easily determine that translated data provide the wrong performance
signal and factor out the translation effects that produce the wrong performance signal.

E7.11 Comparison of Translation and Remeasurement
a.

The direct exchange rate has been steadily increasing. This means that many remeasured
expenses are lower than translated expenses, since historical rates are lower than average
rates. Since Sears Canada has a positive exposed position for remeasurement, the

increase in rate will result in a remeasurement gain on the income statement. For these
reasons, remeasured income is higher than translated income.
If Sears Canada had a net negative exposed position for remeasurement, a
remeasurement loss would be shown on the income statement, possibly offsetting the
effect of lower expenses. In this case, no clear statement can be made concerning the
relationship between remeasured and translated income.

b.

Remeasured assets are lower than translated assets since historical rates are lower than
the current rate. From above, remeasured income is higher than translated income.
These factors combine to show remeasured ROA as greater than translated ROA.

c.

Remeasured current assets may be slightly lower than translated current assets, as
inventories and possibly prepaids would be remeasured at lower historical rates. Current
liabilities are likely to be the same under both methods. Therefore the remeasured
current ratio is lower than the translated current ratio.
Remeasured and translated debt should be the same. Remeasured total assets are lower
since the older noncurrent assets are remeasured at lower historical rates. Thus
remeasured debt to assets is higher than translated debt to assets.

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E7.12 Cash Flow Statement Conversion
The Luh Company
Statement of Cash Flows
For the Year Ended December 31, 2014
(in thousands)
NT$

$/NT$

$

NT$ 100,000,000
45,000,000
(4,000,000)

.0400
.0400
.0400

$ 4,000,000
1,800,000
(160,000)

Decrease in other current operating assets
Decrease in current operating liabilities
Cash provided by operating activities

24,000,000
(32,000,000)

133,000,000

.0400
.0400

960,000 +
(1,280,000)+
5,320,000

Investing Activities
Acquisition of plant assets
Sale of long-term investments

(85,000,000)
50,000,000

.0423
.0394

(3,595,500)
1,970,000

Operating Activities
Net income
Depreciation and amortization expense
Gain on sale of long-term investments

Cash used in investing activities
Financing Activities
Retirement of long-term debt

Issuance of common stock
Dividends paid
Cash provided by financing activities
Effect of exchange rate changes on cash
Cash balance, January 1, 2014
Cash balance, December 31, 2014

(35,000,000)
(98,000,000)
170,000,000
(65,000,000)
7,000,000
210,000,000
NT$ 315,000,000

(1,625,500)
.0394
.0423
.0400

.0420
.0390

(3,861,200)
7,191,000
(2,600,000)
729,800
(959,300)*
8,820,000
$12,285,000

+ These adjustments to income are for items (1) included in income but not using cash
(depreciation, decrease in other current operating assets) or are not operating flows (gain on sale
of investments) or are (2) not included in income (decrease in current operating liabilities) but
using cash. All such items are translated at the rates used for them in the income statement.

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* Effect of exchange rate changes on cash:
Beginning exposed position (cash)
Increases in cash:
Cash provided by operations:
Net income
Depreciation and amortization expense
Gain on sale of long-term investments
Decrease in other current assets
Decrease in current operating liabilities
Sale of long-term investments
Proceeds from stock issuance
Decreases in cash:
Acquisition of plant assets
Retirement of long-term debt
Dividends paid

Ending exposed position (cash)
Translation loss on cash

NT$
NT$ 210,000,000

$/NT$
.0420

100,000,000
45,000,000
(4,000,000)
24,000,000
(32,000,000)
133,000,000
50,000,000
170,000,000
220,000,000

.0400
.0400
.0400
.0400
.0400

(85,000,000)
(98,000,000)
(65,000,000)
(248,000,000)

.0423
.0394
.0400

NT$ 315,000,000

.0394
.0423

.0390

$
$ 8,820,000

4,000,000
1,800,000
(160,000)
960,000
(1,280,000)
5,320,000
1,970,000
7,191,000
9,161,000
(3,595,500)
(3,861,200)
(2,600,000)
(10,056,700)
13,244,300
- 12,285,000
$ 959,300

E7.13 Consolidation of an International Subsidiary at Date of Acquisition

Price paid
Book value
Undervaluation of inventories
Overvaluation of noncurrent assets
Goodwill

P
P 180,000,000
(100,000,000)
(15,000,000)
5,000,000
P 70,000,000

$/P
0.10
0.10
0.10
0.10

U.S.$
$ 18,000,000
(10,000,000)
(1,500,000)
500,000
$ 7,000,000

Entries to consolidate the balance sheets of parent and subsidiary (amounts are in U.S. dollars):

(E)
Capital stock
8,000,000
Retained earnings
2,000,000
Investment in subsidiary
10,000,000
(R)
Inventories
1,500,000
Goodwill
7,000,000
Noncurrent assets
500,000
Investment in subsidiary
8,000,000

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PROBLEMS
P7.1

Translating and Remeasuring Selected Accounts

(in millions)
a.
TEurope AG
Remeasurement of Selected Accounts into Dollars
December 31, 2012 and December 31, 2013
December 31, 2013
CHF
$/CHF
Accounts receivable (net)
CHF 40,000
.67
Inventories, at cost
80,000
.58
Property, plant and equipment
163,000 Schedule 1
Long-term debt
100,000
.67
Common stock
50,000
.50
December 31, 2012
Accounts receivable (net)
CHF 35,000
.58
Inventories, at cost
75,000
.50
Property, plant and equipment

150,000
.50
Long-term debt
120,000
.58
Common stock
50,000
.50

$
$ 26,800
46,400
86,090
67,000
25,000
$ 20,300
37,500
75,000
69,600
25,000

Schedule 1
Remeasurement of Property, Plant, and Equipment (Net) into U.S. Dollars
at December 31, 2013
CHF
$/CHF
$
Land purchased on 1/1/12
CHF 24,000
.50

$ 12,000
Plant and equipment purchased on 1/1/12:
Original cost
140,000
.50
70,000
Accumulated depreciation
(28,000)
.50
(14,000)
112,000
56,000
Plant and equipment purchased on 7/4/13:
Original cost
Accumulated depreciation
Total property, plant and equipment

Solutions Manual, Chapter 7

30,000
(3,000)
27,000
CHF 163,000

.67
.67

20,100
(2,010)
18,090

$ 86,090

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b.
TEurope AG
Translation of Selected Accounts into Dollars
December 31, 2013 and December 31, 2012
December 31, 2013
CHF
$/CHF
Accounts receivable (net)
CHF 40,000
.67
Inventories, at cost
80,000
.67
Property, plant and equipment
163,000
.67
Long-term debt
100,000
.67
Common stock
50,000
.50

December 31, 2012
Accounts receivable (net)
CHF 35,000
.58
Inventories, at cost
75,000
.58
Property, plant and equipment
150,000
.58
Long-term debt
120,000
.58
Common stock
50,000
.50

P7.2

$
$ 26,800
53,600
109,210
67,000
25,000
$ 20,300
43,500
87,000
69,600
25,000

Existing Subsidiary—Remeasurement

a.
Valiant Corporation
Remeasured Trial Balance at January 1, 2013
Account
kr
Cash
kr 175,000
Accounts receivable, net
400,000
Plant and equipment, net
2,320,000
Accounts payable
(535,000)
Notes payable
(800,000)
Capital stock
(400,000)
Retained earnings, January 1, 2013
(1,160,000)
kr
0

©Cambridge Business Publishers, 2013
16

$/kr
.16

.16
.16
.16
.16
.16
.16

$
$ 28,000
64,000
371,200
(85,600)
(128,000)
(64,000)
(185,600)
$
0

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Valiant Corporation
Remeasured Trial Balance at December 31, 2013
Account
kr
$/kr
Cash
kr 240,000

.19
Accounts receivable, net
360,000
.19
Plant and equipment, net
2,000,000
.16
Accounts payable
(200,000)
.19
Notes payable
(600,000)
.19
Capital stock
(400,000)
.16
Retained earnings, January 1, 2013
(1,160,000)
.16
Sales
(1,200,000)
.17
Depreciation expense
320,000
.16
Other expenses
640,000
.17
see
Remeasurement loss

_______
sch.
kr
-0Valiant Corporation
Remeasurement Loss for 2013
kr
Exposed position, January 1
kr (760,000)1
Sales
1,200,000
Other expenses
(640,000)

$/kr
.16
.17
.17

Exposed position, December 31
.19
kr (200,000)2
Remeasurement loss
1
Net exposure 1/1/13: (760,000) = 175,000 + 400,000 - 535,000 - 800,000
2
Net exposure 12/31/13: (200,000) = 240,000 + 360,000 - 200,000 - 600,000

Solutions Manual, Chapter 7

$

$ 45,600
68,400
320,000
(38,000)
(114,000)
(64,000)
(185,600)
(204,000)
51,200
108,800
11,600
$
-0-

$
$ (121,600)
204,000
(108,800)
(26,400)
- (38,000)
$ 11,600

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b.
Valiant Corporation

Remeasured Income Statement
For the Year Ended December 31, 2013
Sales
Depreciation expense
Other expenses
Total Expenses
Operating income
Remeasurement loss
Net Income

$204,000
$ 51,200
108,800
$160,000
$ 44,000
11,600
$ 32,400
Valiant Corporation
Remeasured Balance Sheet
December 31, 2013

Assets
Cash
Accounts receivable, net
Plant and equipment, net
Total assets
Liabilities and Stockholders’ Equity
Accounts payable
Notes payable
Capital stock

Retained earnings ($185,600+ $32,400)
Total liabilities and stockholders' equity

©Cambridge Business Publishers, 2013
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$ 45,600
68,400
320,000
$ 434,000
$ 38,000
114,000
64,000
218,000
$ 434,000

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P7.3

Existing Subsidiary—Translation

a.
Valiant Corporation
Translated Trial Balance at January 1, 2013
Account
kr

$/kr
Cash
kr 175,000
.16
Accounts receivable, net
400,000
.16
Plant and equipment, net
2,320,000
.16
Accounts payable
(535,000)
.16
Notes payable
(800,000)
.16
Capital stock
(400,000)
.16
Retained earnings, 1/1/13
(1,160,000)
.16
Accumulated other comprehensive income
--kr
-0-

$
$ 28,000
64,000
371,200

(85,600)
(128,000)
(64,000)
(182,400)
-$
-0-

Valiant Corporation
Translated Trial Balance at December 31, 2013
Account
kr
$/kr
Cash
kr 240,000
.19
Accounts receivable, net
360,000
.19
Plant and equipment, net
2,000,000
.19
Accounts payable
(200,000)
.19
Notes payable
(600,000)
.19
Capital stock
(400,000)
.16

Retained earnings, 1/1/13
(1,160,000)
.16
Sales
(1,200,000)
.17
Depreciation expense
320,000
.17
Other expenses
640,000
.17
see
Accumulated other comprehensive gain
-sch.
kr
0
Analysis of Translation Adjustment
kr
Net assets, January 1 (400,000 + 1,160,000)
kr 1,560,000
Net income, 2013 (1,200,000 - 320,000 - 640,000)
240,000
Net assets, December 31
Translation gain
Cumulative translation adjustment, January 1
Cumulative translation gain, December 31

Solutions Manual, Chapter 7

kr 1,800,000

$

$
45,600
68,400
380,000
(38,000)
(114,000)
(64,000)
(185,600)
(204,000)
54,400
108,800

(51,600)
$
0

$/kr
.16
.17
.19

$
$249,600
40,800
290,400
- 342,000

(51,600)
-$(51,600)

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b.
Valiant Corporation
Translated Income Statement
For the Year Ended December 31, 2013
Sales
Depreciation expense
Other expenses
Total expenses
Net income

$204,000
$ 54,400
108,800
$163,200
$ 40,800
Valiant Corporation
Translated Balance Sheet
December 31, 2013

Assets
Cash

Accounts receivable, net
Plant and equipment, net
Total assets
Liabilities and stockholders’ equity
Accounts payable
Notes payable
Capital stock
Retained earnings ($185,600 + $40,800)
Accumulated other comprehensive income
Total liabilities and stockholders' equity

©Cambridge Business Publishers, 2013
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$ 45,600
68,400
380,000
$ 494,000
$ 38,000
114,000
64,000
226,400
51,600
$ 494,000

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P7.4

Translation and Performance Evaluation

a.

In euros, net income increased about 42% [= (595 - 420)/420], driven by the 20%
increase in sales. Expenses increased by 14% but, because they amount to less than
sales, there is a much greater impact on the bottom line.
Next, we compare 2015 and 2014 in dollars when the functional currency is the euro.
Translation comparison
(in thousands)
2015
€
$/€
$
Sales
€2,400 1.35
$3,240
Cost of sales
1,320 1.35
1,782
Gross margin
1,080
1,458
Other operating expenses
230 1.35
310.5
Profit before taxes
850

1,147.5
Income tax expense
255 1.35
344.25
Net income
€ 595
$803.25
% change in net income
42%
32%

€
€2,000
1,200
800
200
600
180
€ 420

2014
$/€
1.45
1.45
1.45
1.45

$
$2,900
1,740

1,160
290
870
261
$ 609

Translated net income shows a 32% increase on a 12% increase in sales. This picture is
less favorable than that depicted in euros.
b.

Remeasured net income increases by about 36%, as shown below.
Remeasurement comparison
(in thousands)
2015
2014
€
$/€
$
€
$/€
$
Sales
€2,400 1.35
$ 3,240 €2,000
1.45 $2,900
Cost of sales
1,320 1.37
1,808.4
1,200
1.48 1,776

Gross margin
1,080
1,431.6
800
1,124
Other operating expenses
230 1.37
315.1
200
1.48
296
Profit before taxes
850
1,116.5
600
828
Income tax expense
255 1.35
344.25
180
1.45
261
Net income
€ 595
$ 772.25 € 420
$ 567
% change in net income
42%
36%

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c.

The basic problem with internal performance evaluation based on either translated or
remeasured data is that management is being judged in part on an important factor that it
cannot control--the exchange rate. Moreover, because the exchange rate changes each
year, "comparative" data tend to become incomparable. At least two approaches could
be considered.
First, probably the most obvious approach to avoiding exchange rate distortions is to use
the euro data, particularly when the euro is the entity's functional currency. High
inflation rates or changes in prices of the goods and services bought and sold by the entity
weaken the comparability of the comparative euro data.
A second approach involves removing the effect of year-to-year exchange rate changes.
When the functional currency is the euro, the 2015 euro results can be translated at the
2014 average $/€ rate. Under this approach, 2015 income of €595 translated at the 2014
rate of $1.45/€ amounts to $863, an increase of 42% over 2014's $609.
When the functional currency is the U.S. dollar, both the average rate for 2014 as well as
the historical rates used in 2014 remeasurement must be retained, as shown below. This
approach shows remeasured net 2015 income, using 2014 rates, about 44% higher than
reported in 2014.
(in thousands)
Sales
Cost of sales

Gross margin
Other operating expenses
Profit before taxes
Income tax expense
Net income
% change in net income

€
€2,400
1,320
1,080
230
850
255
€ 595
42%

2015
$/€
1.45
1.48
1.48
1.45

$
$3,480
1,953.6
1,526.4
340.4
1,186

369.75
$ 816.25
44%

€
€2,000
1,200
800
200
600
180
€ 420

2014
$/€
1.45
1.48
1.48
1.45

$
$2,900
1,776
1,124
296
828
261
$ 567

For these data, retaining 2014 $/€ exchange rates to translate and remeasure 2015 euro

data provides percentage changes in dollar income close to that observed in euros.
However, as pointed out in the chapter, applying this approach to remeasurement
generally produces similar results only by coincidence.

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P7.5

Translation and Ratio Analysis

(in thousands)
a.
Income Statement (*)
Sales
Cost of sales
Operating expenses
Net Income
* $ amounts = € amounts x 1.3

$ 650,000
(416,000)
(182,000)
$ 52,000

Balance Sheet (*)
Cash
$ 11,000 Liabilities
Merchandise inventory
220,000 Capital stock (200,000 x $1.50)
Plant assets
275,000 Retained earnings
Accumulated other
______ comprehensive income
Total assets
$506,000 Stockholders’ Equity
* $ amounts of assets and liabilities = € amounts x 1.1
Analysis of Translation Adjustment for 2014
€
Exposed position (net assets), January 1, 2014
€200,000
Plus net income in 2014 (500,000 - 460,000)
40,000
Exposed position (net assets),December 31, 2014
Translation loss (OCI)

€240,000

$/€
1.50
1.30
1.10

$242,000
300,000

52,000
(88,000)
$506,000

$
$300,000
52,000
352,000
- 264,000
$ 88,000

b.
Income Statement
Sales
Cost of sales (1)
Cash operating expenses (90,000 x 1.3)
Depreciation expense (50,000 x 1.5)
Remeasurement gain (see schedule below)
Net income

$ 650,000
(446,000)
(117,000)
(75,000)
62,000
$ 74,000

(1)
Purchases
Ending inventory

Cost of sales

Solutions Manual, Chapter 7

€
€ 520,000
(200,000)
€ 320,000

$/€
1.30
1.15

$
$ 676,000
(230,000)
$ 446,000

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Balance Sheet
Cash
$ 11,000 Liabilities
Merchandise inventory (2)
230,000 Capital stock
Plant assets (3)

375,000 Retained earnings
Total assets
$616,000 Stockholders’ equity
(2) 200,000 x 1.15; (3) 250,000 x 1.50
Analysis of Remeasurement Gain
€
Exposed position, January 1, 2014
(100,000 – 200,000)
€(100,000)
Plus sales
500,000
Less purchases
(520,000)
Less cash expenses
(90,000)

$/€
1.50
1.30
1.30
1.30

€(210,000)

Exposed position, December 31, 2014
Remeasurement gain (income)

$242,000
300,000
74,000

$616,000

1.10

$
$(150,000)
650,000
(676,000)
(117,000)
(293,000)
- (231,000)
$ (62,000)

c.
$
Net income/sales
Net income/total assets,
12/31/14

€
.080 (=40/500)

translation
.080 (=52/650)

remeasurement
.114 (=74/650)

.087 (=40/460)

.103 (=52/506)

.120 (=74/616)

Note to Instructor: The solution to this problem uses net income. Using operating
income (excluding the remeasurement gain), the ratios using remeasured data are:
Operating income/sales
Operating income/total assets

(12/650) =
(12/616) =

.018
.019

The ratios computed using translated data do a better job of preserving the same
relationships expressed in euros than do the remeasured ratios. With ratios like return on
sales, gross margin percentage and the current ratio, the translated results will be the
same as the euro results. This happens because in translation, the numerator and
denominator of each ratio are multiplied by the same constant (exchange rate) which
then cancels out.
Return on assets using translated data will differ somewhat from the euro ratio depending
on how much the exchange rate has changed during the year. In this ratio, translated net
income reflects the weighted average exchange rate for a year while total assets could be
translated at the ending exchange rate or a simple average of beginning and ending rates
which may differ from the weighted average.
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