Solution Manual Advanced Ch 12

March 22, 2018 | Author: Marietha Ayu Safitri | Category: Debits And Credits, International Financial Reporting Standards, Exchange Rate, Balance Sheet, Retained Earnings
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign EntityStatements CHAPTER 12 MULTINATIONAL ACCOUNTING: ISSUES IN FINANCIAL REPORTING AND TRANSLATION OF FOREIGN ENTITY STATEMENTS ANSWERS TO QUESTIONS Q12-1 Expected benefits of adopting a single set of high-quality accounting standards include: 1. Continued expansion of capital markets across national borders. 2. Faster availability of financial statements that provide needed information to investors in countries where standards have not previously focused on information needs of investors. 3. More rapid development of stable, liquid capital markets. 4. Increased economic growth. 5. Improve ability of investors to evaluate opportunities across national borders. 6. Improve the efficient use of global capital. 7. Reduce reporting costs for corporations that wish to access capital in markets outside of their home country. 8. Increase confidence of financial statement users in the quality of financial reporting. Q12-2 The IASB is an independent, privately funded accounting standards-setting body. the mission of the IASB is to develop a single set of high-quality, understandable, and enforceable global accounting standards. The IASB is composed of 14 members who each serve a five-year term subject to one reappointment. Members are required to sever all employment relationships that might compromise their independent judgement in setting accounting standards. The IASB is based in London. Q12-3 The IASB solicits input from the public when evaluating potential standards and publishes a discussion paper and/or an exposure draft which are subject to comment before issuing a final standard. Q12-4 IFRS are already mandated or permitted in over 100 countries around the world. Beginning with 2005, the European Union mandated the use of IFRS for companies listing on stock exchanges in the EU, although the EU also continues to accept statements prepared according to US GAAP. Beginning in 2008, foreign private issuers who list their shares on US stock exchanges may use IFRS in their financial statements without reconciliation to US GAAP. Q12-5 The SEC is considering allowing US companies to use IFRS in their financial reports. The SEC held roundtable discussions in December 2007. Among those participating in the roundtable, there was overwhelming support for adopting for the use of a single of global standards, and the majority of the panellists agreed that IFRS ultimately will be the standard. There was general agreement among roundtable participants that the SEC should specify a date by which US issuers would be required to prepare financial statements in accordance with IFRS. The target date most often mentioned should conversion be required is 2011, to coincide with the adoption of IFRS by a number of other countries including Canada and India. 12-1 Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements Q12-6  Improve global competitive position of US corporations.  Increase the quality of information available to investors.  Reduce costs of compliance for companies that are currently using multiple reporting frameworks.  Enhance global capital markets.  Companies would have easier access to raising capital in the global markets.  Because SEC now permits foreign private issuers to file their financial reports using IFRS without reconciliation, not allowing US companies to report under IFRS could result in US companies bearing costs not incurred by foreign private issuers.  Enhance comparability across companies for users. SEC chairman Cox noted that two-thirds of US investors own securities of foreign companies, a 30 percent increase in the last five years. Q12-7 a. Local currency unit. The local currency unit (LCU) is the currency used locally; that is, the currency used in the country in which the company is located. b. Recording currency. The recording currency is the currency used to record the economic activities in the journals and ledger of the business entity. The recording currency is typically the local currency, but may be some other currency. c. Reporting currency. The reporting currency is the currency used on the financial statements of the business entity. Typically, the reporting currency is the same as the recording currency. Q12-8 The functional currency is normally the currency in which the foreign entity performs most of its cash functions. However, for entities operating in highly inflationary economies, the functional currency is designated as the U.S. dollar regardless of the actual currency used for cash functions. The definition of a highly inflationary economy is one that has a cumulative inflation of approximately 100 percent or more over a 3-year period. FASB 52 provides six indicators to be used to determine a foreign entity's functional currency: (1) cash flows, (2) sales prices, (3) sales markets, (4) expenses, (5) financing, and (6) intercompany transactions and arrangements. If most of these indicators take place in the foreign currency unit, then the FCU is the functional currency. If most take place in the U.S. dollar, then the dollar is the functional currency. Q12-9 Harmonization means to standardize the accounting principles used around the world. For example, the U.S. does not allow a company to revalue its own assets for the effects of inflation. Several countries do, however, allow for this revaluation and subsequent depreciation on the revaluation. Differences in accounting principles from country to country make it difficult to compare business entities doing business in different countries. The harmonization of accounting principles around the world would eliminate many of the problems of combining and consolidating multinational entities. A U.S. company with international investments could then be assured of essentially the same accounting principles being applied; therefore, revenues, profits, and investments in these foreign investments could effectively be compared and contrasted. 12-2 Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements Q12-10 When the local currency is the foreign entity's functional currency, the translation method is used to convert the foreign entity's financial statements into U.S. dollars, the parent company's reporting currency. The translation method uses the current exchange rate for converting all assets and liabilities. The appropriate historical exchange rate is used to convert the Canadian entity's stockholders' equity accounts. The weighted average exchange rate is used to convert the Canadian entity's income statement accounts. The change in the translation adjustment during the period is reported as an element of other comprehensive income on the Statement of Comprehensive Income, and is then accumulated with the other elements of comprehensive income and reported within the stockholders’ equity section of the consolidated balance sheet. The translation adjustment may have a debit or credit balance, depending on the relative change in the exchange rate since the parent acquired the subsidiary. Q12-11 Remeasurement is used when the U.S. dollar is the functional currency of the foreign entity. Furthermore, FASB 52 requires that the financial statements of foreign entities operating in highly inflationary economies be remeasured as if the functional currency were the reporting currency. Remeasurement requires the use of the current exchange rate to convert all monetary assets and liabilities. The historical exchange rate is used to convert nonmonetary assets and the stockholders' equity accounts. The appropriate historical rate is the rate on the later of the two following dates: (1) the day the foreign entity obtained the asset or the day the foreign entity made a transaction affecting the stockholders' equity section such as selling additional stock or declaring dividends, or (2) the day the U.S. parent company purchased the foreign affiliate. In the case of a pooling of interests, the appropriate historical rate is the rate for the day the foreign affiliate transacted to obtain the asset or transacted in a stockholders' equity item. The weighted average exchange rate for the period covered by the income statement is used for revenues or expenses incurred evenly over the period except for those expenses that are allocations of balance sheet items, such as depreciation, cost of goods sold (inventories), or write-offs of goodwill. For cost allocations, the same rate used on the balance sheet to convert the items to U.S. dollars is used on the income statement. Q12-12 Translation adjustments are the balancing items to make the debit and credit items equal in the translated trial balance measured in U.S. dollars. The parent company records its share of the translation adjustment in its books through an adjusting entry. The change during the period in the translation adjustment is reported as a component of other comprehensive income in the Statement of Comprehensive Income. The accumulated other comprehensive income is reported as a separate item of stockholders’ equity in the balance sheet. The cumulative translation adjustment may have a debit balance or credit balance. A debit balance usually means that the current exchange rate is less than the historical rate used to translate the stockholders’ equity accounts. This means the dollar is strengthening relative to the foreign currency. A credit balance usually results when the dollar is weakening relative to the foreign currency, and the current exchange rate is higher than the historical exchange rate. Q12-13 The remeasurement gain or loss first appears as the trial balance balancing item in the income statement section of the foreign affiliate's trial balance. The parent company recognizes its share of the remeasurement gain through an adjusting entry. Typically, the remeasurement gain is shown in the "Other Income" section of the consolidated income statement. 12-3 Net income is obtained from the income statement and dividends are translated using the exchange rate in effect the date the dividends are declared. companies are not consolidated.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements Q12-14 The stockholders' equity accounts are translated at the historical rate in effect the date the parent company acquired the foreign affiliate because this aids in the elimination entry process used to prepare the consolidated statements. the translation method is used to convert the foreign entity's financial statements into U. The translation adjustment is part of the accumulated other comprehensive income that is reported in the stockholders’ equity section of the consolidated balance sheet. dollars. return on equity. Q12-18 Not all foreign subsidiaries are consolidated. FASB 52 requires that the differential be evaluated in terms of the foreign currency unit. These ratios include accounts with different translation exchange rates. This difference becomes part of the translation adjustment. Thus. input from non-local management.S. Q12-15 The current rate method uses the current exchange rate to translate the foreign affiliate's assets and liabilities. the current ratio in U. However. The retained earnings include the effects of revenue and expense transactions.S. The investment account on the parent company's books includes the initial investment measured in terms of the exchange rate on the date the parent purchased the foreign affiliate. or other operating or financing aspects of the business. This may not be the case if the foreign subsidiary is located in a country in which the government places significant restrictions on dividend declarations. This results from the use of a constant translation multiplier within the financial statements. The remaining unamortized differential is translated at the current exchange rate at the end of the period. Q12-17 The change during the period in the translation adjustment is reported as a component of other comprehensive income. The different exchange rates used typically result in a difference when measured in U. dollars. dollar statements will be the same as in the foreign currency statements. this relationship does not hold when computing ratios using a balance sheet account and an income statement account: for example. company's financial 12-4 . measured in the foreign currency. For example. they are reported as a long-term investment on the U. The beginning translated retained earnings. Q12-16 The excess of cost over book value has two effects: (1) the portion amortized for the period is reported in the income statement.Chapter 12 . instead.S. is taken from last year's ending retained earnings. The parent must be able to exercise control over the foreign subsidiary's operating and financial policies before consolidation is proper. the period's amortization. When the local currency unit is the functional currency. This means that the relationships within the assets and liabilities of the foreign affiliate's balance sheet are not changed in the translation process. dollars. The weighted-average exchange rate is used to translate the foreign affiliate's revenues and expenses. the basic eliminating entry to eliminate the investment account against the capital stock and additional paid-in capital includes accounts with the same currency measurement rate. all measured at different rates over time. is translated at the weighted average exchange rate.S.S. Q12-19 A recent Accounting Trends and Techniques indicated that approximately one-quarter of the foreign subsidiaries of U. as measured in U.S. and (2) the unamortized balance is reported in the balance sheet. Therefore. As the rate changes.S. however.Chapter 12 . 12-5 . FASB 52 states that the intercompany profit should be eliminated based on the exchange rate at the date the intercompany transaction occurred. the underlying accounts may be translated at different exchange rates. The unrealized profit determined at the time of the initial intercompany transaction is a function of the currency exchange rate at that time. thus affecting the computation of unrealized intercompany profit. This eliminates any potential problems from subsequent changes in exchange rates.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements statements. The cost method is used to account for the foreign investment. usually under the equity method. if the U. Q12-20* The issue with intercompany transactions is with regard to the amount of unrealized profit. investor is not able to exercise significant influence over the foreign investee's operating and financial policies. org. These standards are called International Financial Reporting Standards (IFRS). C12-3 IASB Deliberations Research The IASB Web site is www. and raise funds to support the organization. At the top of the page. Access this publication on the Web at http://www.pwc. On the Current Projects page.iasb. On pages 4-11.htm . C12-4 Determining a Functional Currency The choice of a functional currency is based on the currency used for six criteria 12-6 .iasb.org. click on the IASB link.org/Current+Projects/IASB+Projects/IASB+Work+Plan. Solution The International Accounting Standards Committee (IASC) Foundation is the parent entity of the IASB. Briefly describe the structure of the IASB. The IASC Foundation is an independent organization. click on the link About Us. The IASC Foundation also appoints the Standards Advisory Council. that provides a topic-based comparison. Similarities and differences: A comparison of IFRS and US GAAP.com/gx/eng/about/svcs/corporatereporting/SandD_07.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements SOLUTIONS TO CASES C12-1 Comparison of US GAAP and IFRS Research PricewaterhouseCoopers offers a publication on its Web site.Chapter 12 .iasb. What are three projects on the active agenda that are being addressed by the IASB? What is the timetable identified for milestones on each of the projects? What is the status of the Conceptual Framework project? Solutions will vary by student depending on the particular items he or she selects. The IASB has the sole responsibility for setting accounting standards. exercise oversight. Solutions will vary by student depending on the particular items he or she selects. pdf. which advises the IASB and the International financial Reporting Interpretations Committee. Select any three of the items and read about the nature of the differences. The IASC Foundation trustees appoint the IASB members. there is a table of differences between US GAAP and IFRS by reporting issue. C12-2 Structure of the IASB Research The IASB Web site is www. Prepare a short paper approximately two to three pages long that defines the nature of the differences and discusses what you have learned. Access the Web site and click on the link at the top of the page for Current Projects. There is also a reference to the pages in the document where each of these items is explained in more detail. You may also access this page directly at http://www. Argentinean peso Foreign Entity's Functional Currency U. The choice of a functional currency is made by management after a subjective evaluation of these criteria. as follows: (1) cash flows. dollar is specified as the functional currency in cases in which the foreign affiliate of a U.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements provided in FASB Statement No.S. then translation from euro to dollars Note: This case shows that the local currency of the country in which the foreign affiliate is located may not be the foreign affiliate's functional currency. dollar Process of Restatement into U. dollar is the specified functional currency for foreign subsidiaries located in countries with highly inflationary economies.S.Chapter 12 . Management probably would select the specific functional currency on the basis of financial effects. (3) sales markets. company is located in a country experiencing high inflation (approximately 100 percent or more over a three-year period). Foreign Entity's Reporting Currency 1. a third currency presents the functional currency. However.S. (4) expenses. management may select either.S. (2) sales prices. Either Note: This case indicates that the criteria are not always absolute. 3. British pound British pound Translation 4. 12-7 . (5) financing. 2. Mexican pesos Either peso or dollar. such as effect on earnings per share. the U.S. Swiss franc European euro Remeasurement from franc to euro. instead. 52. Dollars Remeasurement Note: This case shows that the U. and (6) intercompany transactions and arrangements. It is possible. Ltd. If not. 20X7 3. Average exchange rate for 20X7 10. that the country of Kolay may have severe restrictions on the decision-making abilities of non-Kolay investors. Historical exchange rate at January. The appropriate exchange rates for each of the 10 items are presented below: 1. 8. the foreign subsidiary should be consolidated. Current exchange rate at December 31.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements C12-5 Principles of Consolidating and Translating Foreign Accounts [AICPA Adapted] a. Current exchange rate at December 31. or that Kolay may have restrictive laws regulating commerce within Kolay. 20X7 4. The key element is the degree of control Petie Products has over the financial and operating policies of Cream. Average exchange rate for 20X7 (assumes revenues earned evenly throughout year) 9. Typically. Average exchange rate for 20X7 12-8 . The foreign subsidiary's assets and liabilities are translated using the current exchange rate at the end of 20X7. The income statement accounts are translated at the weighted average exchange rate during 20X7. If they do possess the necessary level of control. a 90 percent stock ownership level would assure the parent company's control of the subsidiary. Current exchange rate at December 31. however.Chapter 12 . The rules for consolidating a foreign subsidiary are essentially the same as for a domestic subsidiary. The stockholders' equity accounts are translated at appropriate historical rates. b. Current exchange rate at December 31. then the foreign subsidiary is reported as an investment on the parent company's financial statements. 20X7 6. 20X7 5. Beginning Retained Earnings is carried forward as a composite from prior years' operations. Translation means that the local currency unit is functional. Current exchange rate at December 31. 20X4 7. 20X7 2. The beginning Retained Earnings is the prior period's ending Retained Earnings. Petie Products' management must evaluate their ability to control the foreign subsidiary. the current exchange rate at December 31. For the equipment cost and the accumulated depreciation. This exchange rate is referred to as the historical rate. acquired its investment in Wahl A.S. The gain or loss from remeasuring Wahl A's financial statements is reported in the consolidated income statement. Sales market indicators 4. Expense indicators 5. should be used for translation. The objectives of translating a foreign subsidiary's financial statements are to: 1. The amount required to bring the restated financial statements into balance is termed the gain or loss from the translation or remeasurement. ‘Unbalanced’ means that the debits will not equal the credits in the subsidiary's trial balance prepared in U. as measured in its functional currency and in conformity with generally accepted accounting principles. or (2) the date(s) the equipment was purchased by Wahl A. 12-9 .Chapter 12 . All accounts relating to Wahl F's equipment are translated by using the current exchange rates prevailing between the U. Applying different exchange rates to the various financial statement accounts causes the restated financial statements to be unbalanced.S. Intercompany transactions and arrangement indicators d. The functional currency is the foreign currency or the parent's currency that most closely correlates with the following economic indicators: 1. 2. All accounts relating to Wahl A's equipment — the equipment. and depreciation expense accounts — are remeasured by using the exchange rate prevailing between the U. and Australian dollars at the later of the two following dates: (1) the date at which Wahl Co. b.S. Reflect the subsidiary's financial results and relationships in single currency financial statements. accumulated depreciation. Cash flow indicators 2. Depreciation expense is translated at an appropriate weighted average exchange rate for 20X5. dollars. Provide information that is generally compatible with the expected economic effects of a rate change on a subsidiary's cash flows and equity. Sales price indicators 3. The gain or loss arising from translating Wahl F's financial statements (described as a translation adjustment) is reported as a component of comprehensive income and then accumulated with other comprehensive income items and reported under stockholders' equity in the consolidated balance sheet. Financing indicators 6. c. 20X5.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements C12-6 Translating and Remeasuring Financial Statements of Foreign Subsidiaries [AICPA Adapted] a. dollar and the European euro. 20XX Assets Cash Receivables Inventories Property. 20XX Consolidated Net Income to Controlling Interest Other Comprehensive Income: Translation Adjustment Comprehensive Income c.000.000) is comprised of the January 1 balance of $135. Plant.000 100. 20XX Sales Cost of Sales Gross Profit Operating Expenses Income from Operations Consolidated Net Income to Controlling Interest b. and Equipment (net) Total Assets Liabilities and Stockholders’ Equity Current Payables Long-Term Payables Capital Stock Retained Earnings Accumulated Other Comprehensive Income: Translation Adjustment Total Liabilities and Stockholders’ Equity $ 50.000 181. for the subsidiary Subsidiary Statement of Income Year Ended December 31. $ 560.000 (140.000) $ 135.000 258.000 Note: The end-of-year retained earnings ($258.000 24. plus net income of $135.Chapter 12 .000 Statement of comprehensive income for the year.000 (12.700 60.000 Balance sheet as of December 31.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements C12-7 Translation Adjustment and Comprehensive Income a. Statement of income for the year. for the subsidiary Subsidiary Balance Sheet December 31.000 $ 463.000) $ 123.000 $ 16.300 328. for the subsidiary Subsidiary Statement of Comprehensive Income Year Ended December 31. $ 135. less dividends of $12.000) $ 275.000.000 (92. 12-10 .000) $ 463.000.000 $ 135.000 (285. The one-statement format presents the other comprehensive income elements immediately below net income. followed with the elements of other comprehensive income. 130 allows for either the one-statement format for the combined statement of income and comprehensive income. The statement of income ends with net income.Chapter 12 . Then. The two-statement format presents a separate statement of income as was done prior to FASB 130. FASB Statement No. and ends with comprehensive income. Both formats must include all the elements of comprehensive income. a separate statement of comprehensive income begins with net income. or the two-statement format for a statement of income and a separate statement of comprehensive income.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements C12-7 (continued) d. 12-11 . as follows: 1. taking out more local debt.Chapter 12 . 2. the dollar had strengthened versus the local currency units).Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements C12-8 Changes in the Cumulative Translation Adjustment Account Johnson & Johnson Company applied the concepts presented in the chapter for translating the trial balances of its foreign subsidiaries. other than the accumulated other comprehensive income (AOCI) from the translation adjustment.e. The foreign subsidiaries could be decreasing their local assets. The following condensed balance sheets can be presented: 20X1 Translated Balance Sheets of All Foreign Subsidiaries Net assets $634 Stockholders’ equity: Other than AOCI AOCI Translation Adjustment $ 500 134 20X2 Translated Balance Sheets of All Foreign Subsidiaries Net assets $354 Stockholders’ equity: Other than AOCI AOCI Translation Adjustment $ 500 (146) 20X3 Translated Balance Sheets of All Foreign Subsidiaries Net assets $162 Stockholders’ equity: Other than AOCI AOCI Translation Adjustment 12-12 $ 500 (338) . Question d. The translation adjustment is related to the translated net asset balance (assets minus liabilities) of the foreign subsidiaries..e.. Several factors could account for the decrease in the net assets of Johnson & Johnson's foreign subsidiaries. 3. The direct exchange rate of the dollar versus the local currency units of the countries in which the company has foreign subsidiaries has been decreasing over time (i. Remember that it is assumed that the translated stockholders' equity. not maintaining their physical capital through reinvestment. The resulting cumulative translation adjustment has changed dramatically from a credit balance of $134 million at the end of 20X1 to a debit balance of $338 million at the end of 20X3.. The foreign subsidiaries could be increasing their local liabilities. remained constant at $500 million for each of the three years.e. i. i. can be used to demonstrate these factors. The company completed relatively minor sales of foreign subsidiaries and operations during 20X2 and 20X3. the company acquired approximately $47 million in Japanese companies. dollar was strengthening versus the local currency units of the foreign countries in which Johnson & Johnson Company had subsidiaries. The direct exchange rate would decrease if the dollar were strengthening versus the local currency units of the countries in which the company had foreign subsidiaries. the balance of the local assets and local liabilities of each of the foreign subsidiaries. the translated net assets would decrease. or an increase in local liabilities. A more specific analysis would require knowledge of the amount of the foreign investments in each country. the company acquired approximately $266 million in European companies. In 20X2. thus causing a decrease (debit change) in the translation adjustment.Chapter 12 . Thus. Other causes for the decrease in the translated net assets would be a decrease in local assets.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements C12-8 (continued) If the direct exchange rate decreased over the two-year period.S. 12-13 . it appears that the major reasons for the significant debit change in the accumulated other comprehensive income — translation adjustment account over the two-year period was that the foreign subsidiaries were increasing their local debt. Johnson & Johnson Company did make several changes in its foreign investment portfolio during 20X2 and 20X3 that would have resulted in a change in the combined stockholders' equity of the company's foreign investments. and that the U. During 20X3. and the knowledge of the exchange rates for the dollar versus the foreign currencies of the countries in which the company has invested. the supply of trained labor forces (including local management personnel). while the company is able to increase overall revenue and income. production facility. the political and economic environment. if the company produces a labor-intensive product. 12-14 . The U. In addition. as tariffs are reduced.S.S. the accounting and tax laws.S.S. Thus transportation costs of the finished goods are decreased. some additional variables should be considered for the foreign country such as: home-country laws.S. Many companies go to non-U.S. companies may find it more advantageous to move their production facilities to nonU. One possible outcome is that the costs of the finished goods to U. the status of labor organization.S. government has proposed retraining programs for dislocated workers who lose their jobs because the company has closed the U. Students should be encouraged to develop some new and novel approaches to solving the problem of the general change in the types of new jobs being created in the U.S. the economics of the decision may favor foreign production.S. Some companies make investment in foreign production facilities in order to have a production capability closer to a foreign market. locations. production sources because of the lower costs for labor. However. and the different cultural aspects that might impact on obtaining the factors of production or on the markets for the company's goods.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements C12-9 Pros and Cons of Foreign Investment The focus of this case is to consider the variables involved with the business decision of expanding a company's production and/or marketing investment in a foreign country. economy.S. consumers would be lower for goods manufactured outside the U.Chapter 12 . consumers would not be able to purchase the products. the cost-of-living and prevailing wages. Thus. an argument often raised in the political arena is that unemployed U. But. Many of the variables would be similar to those considered in the decision to increase a company's physical capital in the U. U. 52. FASB 52 also indicates that. Further. it is the currency the country that is primary economic environment of the company’s business operations as indicated by items such as sales.Chapter 12 . FASB 52 states that management should make the final determination as to the functional currency. and financing activities. CFO. Any adjustment that occurs as a result of translating nonmonetary assets using the current rate method should be reported as a component of other comprehensive income. dollar.S. These transactions are denominated in the peso. and expense.S. dollar. Management should assess all aspects of Luz Maxima’s operation to determine the most appropriate and relevant functional currency for this subsidiary. dollar to the Mexican peso. Appendix A of FASB 52 provides indicators that should be considered in determining a foreign subsidiary’s functional currency. it may be appropriate to change the determination of the functional currency. Luz Maxima’s current financial statements should be converted to U.  Sales market indicators – Luz Maxima now sells a significant amount of product in Mexico and South America. To the extent indicators are mixed and Luz Maxima also has sales. dollar. if economic facts change. Maxima Corporation From: _______________ Department Re: ____________________. Controller’s Functional Currency of Luz Maxima According to FASB Statement No. expense.S. dollars using the current rate translation method. expenses. and financing indicators. its functional currency was originally determined to be the U.S. dollar to the Mexican peso. 12-15 . and financing transactions denominated in the U. Because Luz Maxima initially did business exclusively with Maxima Corporation and these transactions were denominated in the U. Among the indicators that may be relevant for evaluating the functional currency of Luz Maxima are sales. it appears that changes in Luz Maxima’s operation over the past five years may result in a change in the functional currency from the U.  Expense indicators – Luz Maxima obtains a significant amount of materials from local suppliers.  Financing indicators – Luz Maxima obtained long-term debt financing and a line of credit from banks in Mexico. while it is desirable for the functional currency to be used consistently. the functional currency for a company is the primary currency that is generated by cash inflows and used for cash outflows. However. If a decision is made to change the functional currency from the U. S.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements C12-10 Determining an Entity’s Functional Currency MEMO To: Garry Parise.S. CPA. 52 normally does not require that changes in the translation adjustment be included in earnings. Par. the amount of the translation adjustment that is included in equity should be removed from equity and should be reported as part of the gain or loss in the period in which the transaction occurs. Par. when there is a sale or liquidation of a subsidiary. Prior to the liquidation of an investment in a subsidiary. the balance of the cumulative translation adjustment. In the presentation of comprehensive income. 46 Suggested Query: functional currency* C12-11 Accounting for the Translation Adjustment MEMO To: Renee Voll. Par. Sonoma should disclose the amount by which the gain is decreased because of the adjustment for the cumulative translation adjustment. Par. FASB Statement No. 12-16 . However. the gain on the sale of the Valencia investment should be reduced by 30% of the (debit balance) cumulative translation adjustment related to this investment. the adjustment to the translation adjustment should be identified as a reclassification adjustment so that the same amount is not included in both net income and in comprehensive income. 41. the FASB believes that the effects of such translation adjustments are uncertain and should not be included in income. 5. Par. According to FIN 37. the company is still required to recognize a portion of the translation adjustment in computing the gain or loss. should be reduced proportionately. included in consolidated stockholders’ equity. CPA Re: Translation Adjustment for Valencia subsidiary Since Sonoma has sold 30% of the investment in our Spanish subsidiary. Controller From: ___________ _______________. a pro rata portion of the accumulated translation adjustment that is attributable to the subsidiary must be included in the calculation of the gain or loss on the sale of a portion of the subsidiary. Although Sonoma has not completely liquidated the investment in Valencia. 42. Therefore.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements C12-10 (continued) Authoritative support for the above memo can be found in the following references: FASB 52. 9.Chapter 12 . 31. Par.Chapter 12 . 2 Suggested Query: translation adjustment* sale 12-17 . Par. 111 FASB 130. 19 FIN 37. 14.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements C12-11 (continued) Authoritative support for the above memo can be found in the following references: FASB 52. Par. Par. Par. d.250 $169.583 b. Dollar is Functional Currency $215. $755. a.S.000 LCU / 1.000 LCU x $.000 d.000 ($100.5 LCU 90.8 LCU = $144.Chapter 12 . 25.000 LCU x $.6 LCU = $113. 170. (All assets are translated at current rate) = $ 60. 6. a.000 + $30.000 + $45.000 + $70.500 5.000 LCU / 1. a.364 260.2 LCU = $ 11. 7. $225.44 = $176.200 $880.44 3.000 + $25. 400.44 200. c.000 b.000 LCU x $.000 + $700.000) 12-18 .444 4.000 ($85. 120.50 80.000 LCU x $.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements SOLUTIONS TO EXERCISES E12-1 Multiple-Choice Translation and Remeasurement [AICPA Adapted] Foreign Currency is Functional Currency 1.200 = 88.000 + $50. a. 25.000 LCU / 1.000 d. Indirect rates used c. a.000 = 35.000) 2. d. c.000 LCU / 2 LCU = $12.000 $183.000 LCU / 2. U.333 = 56. 000 $10.000 = Preadjusted foreign exchange loss 4. b. $10.000 = Foreign currency transaction loss ($100. $15.000) $21. bonds payable and accrued liabilities are both monetary accounts and would be restated using the balance sheet exchange rate.000 $15. $13.000 = Foreign exchange loss 3. $120.000 = Preadjusted foreign exchange loss 4. In this question.000 = 2/15/X2 $ value (110. d. $40.000 = Foreign exchange gain 2.Chapter 12 . U.000 = Foreign currency transaction loss 20.000 .S.000) = Remeasurement gain $10.000 = Preadjusted foreign exchange loss 6. Since they are stated at cost. $21.000 = Foreign exchange gain $17.000 = Foreign exchange loss 4.000 $13.000 $41.$106. Inventories are also a nonmonetary asset. while nonmonetary accounts are restated using the exchange rate(s) at the date(s) the transaction(s) occurred which are reflected in the account balance. c.000 . Trading securities represent a nonmonetary account. a historical exchange rate would be used to restate inventories.000 d.000 = Net foreign exchange loss When the remeasurement method is used.000 = Remeasurement gain $41.000 b.000 = Preadjusted foreign exchange loss 6. Trading securities would be restated using the balance sheet rate because the account balance is stated at the market values at the balance sheet date.000 = Foreign currency transaction loss ($60.000) = 12/31/X1 $ value $ 10.000 = Foreign currency transaction gain 30.000 = Foreign currency transaction loss (7.$64.000) $17. 12-19 .000 = Remeasurement gain $40. Dollar is Functional Currency $10. monetary accounts are restated at the exchange rate at the balance sheet date.000 = Net foreign exchange loss a. a.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements E12-2 Multiple-Choice Questions on Translation and Foreign Currency Transactions [AICPA Adapted] Foreign Currency is Functional Currency 1. a. The change in the translation adjustment during the period is reported as a component of other comprehensive income and then carried forward to be accumulated in the stockholders’ equity section of the balance sheet with the other components of other comprehensive income. F 4. the exchange gain on the hedge is reported along with the change in the translation adjustment. C 8. Therefore. in this case in which a hedge of a net investment in a foreign entity is used.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements E12-2 (continued) 5. D 5. G 3. E 11. The current rate method of translation allows the use of a weighted average exchange rate for revenues and expenses that occur throughout the year. B 7. E 6. C 12-20 . b. For hedges of net investments in a foreign entity. the amount of the change in fair value of the hedging instrument is recorded to other comprehensive income that then becomes part of the accumulated other comprehensive income. B 9. D 10. J 12.Chapter 12 . a weighted average exchange rate can be used for translation. 6. E12-3 Matching Key Terms 1. Since both sales and wages expense occur throughout the year. H 2. D € 5.000 ($ 42.500 (€ 35.32) Ringitts RM 50.500 x $1.500 1.000 x $1.580 (€ 31.000 128.580 minus $37.Chapter 12 .21 x .000 / $1.20 Goodwill Goodwill Impairment Balance Dollars $42. C Investment cost on January 1.000 $ 42.000 x $1.660 = $3.000cr 3.000 4.520 $ 31.000 ringitts x $.500 / 10 = $1.000 x $1.22) 3.21) 5.000 360.050 4.500 6.480 C Goodwill Impairment Dollars $10.500 / $.000 / 10) $402.500 Translation adjustment: $41.000 / 10) € 31.24) $37. A € 25.000 x $.100 (RM 5.000 ($10.340 (€ 3.000 (RM 50.24 = $31. 20X5 Less: Book and fair values of sub’s net assets: € 300.000 5. 7.90 = Goodwill $160.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements E12-4 Multiple-Choice Questions on Translation and Remeasurement 1. B Translation adjustment from translating the trial balance Translation adjustment from translating goodwill Total translation adjustment $12.500 x $1.920 – use for question 7.000 Euros € 35. A Impairment loss = $10. 2.20) 3.920cr $15.660 Translated balance $41.920cr 12-21 .30 = $6. B Investment cost Less: Book and fair values of sub's net assets 680. 000 60.80 .000 70.000 15.000 12.75 $ 8.000 100.500 22.Chapter 12 .550 $219.80 .000 25. 20X1 Swiss Francs Translation Rate U.000 30.73 .500 7.75 .Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements E12-5 Translation RoadTime Company Trial Balance Translation December 31.000 43.80 .80 .000 SFr 282. Dollars Cash Accounts Receivable (net) Receivable from Popular Creek Inventory Plant and Equipment Cost of Goods Sold Depreciation Expense Operating Expense Dividends Paid Total Debits SFr 7.S.80 .600 16.000 20.80 .000 150.750 $219.000 4.000 .000 80.000 SFr 282.500 $213.000 5.000 20.80 .77 $ 5.75 .75 .650 12-22 .500 11.000 10.000 .900 5.600 40.000 50.800 112.000 52.650 Accumulated Depreciation Accounts Payable Bonds Payable Common Stock Sales Total Accumulated Other Comprehensive Income — Translation Adjustment (credit) Total Credits SFr 10.80 .000 9. 000 Change in other comprehensive income translation adjustment during year net increase Accumulated other comprehensive income — translation adjustment — January 1 $ 5.000 $ -030.550) SFr 85.450 5. 1/1/X1 Net income Dividends *Retained earnings.77 30.250 68.* AOCI Total Retained earnings. Popular Creek Corporation and Subsidiary Proof of Translation Adjustment Year Ended December 31.800 18.000 (15.000 Common Stock $68.000 Balance Sheet. Earn.000 .73 $ 43.S. 20X1 Net assets at beginning of year Adjustment for changes in net asset position during year: Net income for year Dividends paid Net assets translated at: Rates during year Rates at end of year SFr Translation Rate SFr 60.000 Net Assets CGS Depreciation Oper. U.Chapter 12 . 12/31/X1 $68. Expenses Net Income (70.450 .750 is included as a credit in the other comprehensive income on the Statement of Comprehensive Income. 12/31/X1 12-23 $ 43.75 .000 (11. The other comprehensive income is then accumulated and reported in the stockholders’ equity section of the consolidated balance sheet.800 40.750 The change in the translation adjustment of $5. Dollars $ 5.000 (11.000) (30.000 Ret.80 $ 62. Supporting computations: Net income: Sales SFr 150.550) $ 18.000) Total SFr 40.750 -0- Change in other comprehensive income — translation adjustment December 31 (credit) b.000 .000) .750 $ 68.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements E12-6 Proof of Translation Adjustment a.000) (10. 74 . Dollars Rate .250) $ 52.80 .000 (25.000 .80 .000 4.000 150.000 SFr 282.77 .000 10.500 11.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements E12-7 Remeasurement RoadTime Company Trial Balance Remeasurement December 31.75 .400 9.73 .000 52.550 $212.000 15.250 74.300 Accumulated Depreciation Accounts Payable Bonds Payable Common Stock Sales Total Credits SFr 10.000 $213.80 .S.250 $ 71.000 7. Dollars Rate Cash Accounts Receivable (net) Receivables from Popular Creek Inventory Plant and Equipment Cost of Goods Sold Depreciation Expense Operating Expense Dividends Paid Total Remeasurement Loss Total Debits SFr 7.000 19.000 60.000 30.800 112.000) SFr 70.000 5.000 20.S.000 43.74 (a) .80 .75 $ Swiss Francs (a) Cost of Goods Sold: Beginning Inventory Purchases Goods Available for Sale Less: Ending Inventory Cost of Goods Sold SFr -095.000 .000 25.75 .000 50.400 22.77 $ -071.000 70.Chapter 12 .77 $ 5.000 100.300 1.000 .600 16.80 .000 SFr 95.250 (19.000 12.300 U.600 40. 20X1 Swiss Francs U.500 $213.000 SFr 282.74 .75 .000 12-24 7. 000 SFr 32.000) . Dollars SFr 60.800 150.250) (22.80 (24.000) .75 .Chapter 12 .500 -0- (95.550) (100.75 112.000 -0- .000 5. 20X1 Schedule 1 Statement of Net Monetary Position Monetary Assets: Cash Accounts Receivable (net) Receivables from Popular Creek Total Less Monetary Liabilities: Accounts Payable Bonds Payable Total Net Monetary Assets End of Year Beginning of Year SFr 7.75 .000) .500) (11.77 (71.000) 12-25 .S.000 -0-0SFr -0SFr 60.000 Change in net monetary investment during 20X1 SFr (90.000) $(23.000) $ (1.000 50.000) SFr(30.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements E12-8* Proof of Remeasurement Gain (Loss) a.73 $ 43.000) SFr SFr 60.000 . Popular Creek Corporation and Subsidiary Proof of Remeasurement Loss Year Ended Dec.000) Schedule 2 Analysis of Changes in Monetary Accounts Exposed net monetary asset Position – January 1 Adjustments for changes in the net monetary position during the year: Increases: From operations: Sales From other sources Decreases: From operations: Purchases Cash expenses From dividends From purchase of plant and equipment Net monetary position prior to remeasurement at year-end rates Exposed net monetary liability Position – December 31 Remeasurement loss SFr Exchange Rate U. 31.74 (74.000 SFr(62.000) (15.000 SFr 12.000 20.000) (30.000 Net Monetary Liabilities SFr 30.000 SFr 60. 000 remeasured using the rates in effect at the times of the transactions.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements E12-8* (continued) Note: The issuance of the bonds payable has no effect on net monetary assets. a monetary liability. The remeasurement loss is included in the period's consolidated statement of income. a monetary asset. is increased. Cash. is increased and bonds payable. The Remeasurement Loss results from the decrease in the net monetary asset position during a period in which the exchange rate has increased. b. The end-ofperiod remeasured net liability position of $24. 12-26 .Chapter 12 .000 is more than the net monetary liability position of $23. 75 .000 Accumulated Depreciation Accounts Payable Bonds Payable Common Stock Sales Total Credits SFr Rate .000 112.000 15.000 U.060 SFr 282.000 30.500 7.000 SFr 282.850 .000 Change in other comprehensive Income — translation adjustment during year — net decrease Accumulated other comprehensive income — translation adjustment — January 1 Accumulated other comprehensive income — translation adjustment — December 31 (debit) 12-27 Translation Rate U.S.75 .100) .500 $213.500 48.250 73.73 .73 $ 66.75 .S. Dollars .060 NOT REQUIRED: Proof of Translation Adjustment SFr Net assets at beginning of year SFr 60.74 30.300 8.000 Adjustment for changes in net asset position during year: Net income for year 40. Dollar a.100 $208.S.850 $213.80 $ 48.110 14.000 .000 100.75 $ 7.000 70. 20X1 Swiss Francs Cash Accounts Receivable (net) Receivable from Popular Creek Inventory Plant and Equipment Cost of Goods Sold Depreciation Expense Operating Expense Dividends Paid Total Accumulated Other Comprehensive Income — Translation Adjustment (debit) Total Debits SFr 7.650 18.000 Dividends paid (15.000 52.73 .000 10.500 22.73 .000 150.Chapter 12 .73 .500 11.000 5.80 .050) $ 4.900 (62. RoadTime Company Trial Balance Translation December 31.850 -0- $ 4.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements E12-9 Translation with Strengthening U.75 .600 3.000 SFr 282.000 12.73 .73 .000 60.760 36. Dollars .000 (11.73 .000 10.000) Net assets translated at: Rates during year Rates at end of year SFr 85.000 25.73 .74 $ 5.210 4.000 20.000 50. 850 is reported as a component of other comprehensive income on the Statement of Comprehensive Income. dollar strengthened against the Swiss franc during the year..000 credit translation adjustment was the balancing item because the translated net assets of the foreign subsidiary were higher at the end of the year than the net assets at the beginning of the year adjusted for changes in the net assets that occurred during the year (income less dividends). the direct exchange rate increased during the 20X1 year. the direct exchange rate decreased during the year. the U. i. In Exercise 12-9.S. In Exercise 12-5. the U. 12-28 .e. the $4. Thus.850 debit translation adjustment was the balancing item in Exercise 12-9 because the translated net assets at the end of the year were lower than the translated net assets at the beginning of the year as adjusted for changes during the year.Chapter 12 . i. The periodic change in the translation adjustment of $4. and is then accumulated with other comprehensive income items and reported in the stockholders’ equity section of the consolidated balance sheet.S.e. dollar weakened against the Swiss franc. the $11..Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements E12-9 (continued) b. Thus. 750 .000 25.100 $212.650 18.75 $ Swiss Francs (a) Cost of Goods Sold: Beginning Inventory Purchases Goods Available for Sale Less: Ending Inventory Cost of Goods Sold SFr -095. Dollar a.000 10.000 SFr 95. 20X1 Swiss Francs Rate U.600 3.700 8.000 (25.77 .000 .760 36.74 $ Accumulated Depreciation Accounts Payable Bonds Payable Common Stock Sales Total Credits SFr 10.000 60.000 52.000 70.250 (18.S.75 .000 100.S.000 50.750 7.S.80 .73 .77 .000 150.000) SFr 70.73 .000 5.75 .000 30.77 (a) .000 20. Dollars Cash Accounts Receivable (net) Receivable from Popular Creek Inventory Plant and Equipment Cost of Goods Sold Depreciation Expense Operating Expense Dividends Paid Total Remeasurement Loss Total Debits SFr 7.910 550 $213.000 SFr 282.74 5.000 112.250 $ 71.500 $213.000 15.74 .000 12-29 Rate .500 77.73 .80 .700 22.000 . Dollars $ -071.73 .500 48.460 7.Chapter 12 .460 U.110 14.500 11. RoadTime Company Trial Balance Remeasurement December 31.73 .Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements E12-10 Remeasurement with Strengthening U.000 12.500) $ 52.000 SFr 282. 000) SFr SFr 60. In Exercise 12-5.000 50. the U.000 5. the $550 remeasurement loss in E12-10 results from the fact that the remeasured net monetary liability position at the end of the year is greater than the net monetary position prior to remeasurement at year-end rates. dollar weakened against the Swiss franc. the U. i.000 SFr 60. Note that the remeasurement gain or loss is computed only on monetary items.000 SFr 32. In Exercise 12-10. This is shown in the proof below which was not required for the exercise.000 -0-0SFr -0SFr 60.000 SFr(62.000 remeasurement loss resulted from the decrease in the net monetary items during a period in which the exchange rate increased. dollar strengthened against the Swiss franc during the year.000 20. The $1.Chapter 12 . the net monetary items decreased during the year.000 Net Monetary Liabilities 12/31/X1 SFr 30.e.000 Change in net monetary investment during 20X1 SFr (90.S. In E12-10.000) 12-30 .000 SFr 12. Thus. the direct exchange rate increased during the 20X1 year..S. NOT REQUIRED: Proof of Remeasurement Loss Schedule 1 Statement of Net Monetary Position End of Year Monetary Assets: Cash Accounts Receivable (net) Receivables from Popular Creek Total SFr Less Monetary Liabilities: Accounts Payable Bonds Payable Total Net Monetary Assets 1/1/X1 Beginning of Year 7.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements E12-10 (continued) b. Dollars SFr 60.0080 $0.Chapter 12 .000 (180.000) $(21.0082 U.75 .77 (77.000 P 1.540 6.000) (15.088 .000 .S.000 -0- .350) SFr (30. Dollars $ 7. Translation: Spanish Pesetas P 886.768 $ 8.S.832 b.74 (71.75 .000) (30.000) .066.000) P 886.100) (100.000 846.000 Beginning Inventory Purchases Goods Available Less Ending Inventory Cost of Goods Sold Rate $0.000 150.75 112.308 (1.S.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements E12-10 (continued) NOT REQUIRED: Proof of Remeasurement Loss (continued) Schedule 2 Analysis of Changes in Monetary Accounts Exposed net monetary asset Position — January 1 Adjustments for changes in the net monetary position during the year: Increases: From operations: Sales From other sources Decreases: From operations: Purchases Cash expenses From dividends From purchase of plant and equipment Net monetary position prior to remeasurement at year-end rates Exposed net monetary liability Position--December 31 Remeasurement loss SFr Exchange Rate U.73 (21.0070 $0.500 -0- (95.900) $ (550) E12-11 Remeasurement and Translation of Cost of Goods Sold a.250) (22.000) .000 Cost of Goods Sold 12-31 Rate $0.0080 U.500) (11.000) . Remeasurement: Spanish Pesetas P 220.80 $ 48.476) $ 6. Dollars $ 1. 440 through a debit to the Investment in Thames Company account and a corresponding credit to the Other Comprehensive Income — Translation Adjustment account. 31 translated at year-end rate 5. would be $43. Investment in Thames Company Other Comprehensive Income — Translation Adjustment Recognize translation adjustment for increase in differential.000 x $1.550.000 = $60.000 1.65 44. d.000 (3.120 British Pounds Exchange Rate U. without any adjustment. 1.120 = $6. Dollars £30.000 x $1.63 4.60 $48.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements E12-12 Equity-Method Entries for a Foreign Subsidiary a.890) $43.80 c.000 1.440 Income from Subsidiary Investment in Thames Company Amortization of trademark for 20X1: $4.000 1. The differential adjustment adjusts to the amount needed for the balance sheet.680 Investment in Thames Company Income from Subsidiary Record equity accrual: $48.890 .550 Difference to translation adjustment $ 1.000) £27.440 Note that the amount of the differential necessary for the balance sheet is $44.64 x .680 48.890 12-32 1. the differential portion of the parent company’s investment must be increased by $1.80 48.400 x .110.110 £27. Income Statement: Differential Jan.000 Other Comprehensive Income — Translation Adjustment Investment in Thames Company Parent's share of subsidiary's translation adjustment: $5. while the amount.890 = £3.63 (4.000 x . 20X8 (10-year life) Amortization for 20X8 Remaining balance Balance Sheet: Remaining balance on Dec.440 4. b.680 = £15.S.80 19.120 5. Cash Investment in Thames Company Receive dividend: $19. 1. Therefore.000 19.Chapter 12 . 120 . For 20X8.440 translation adjustment that is made only by the parent company due to the adjustment of the differential. 12-33 . other comprehensive income would report $3.Chapter 12 .680 ($3.440) due to foreign translations.$1. Therefore.680 = $5.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements E12-12 (continued) e.120 which is the parent company’s portion of the translation adjustment resulting from translating the subsidiary’s trial balance. Other comprehensive income reports the periodic change in the translation adjustment. less the $1. this would be the sum of a debit of $5. S.03095 6.000 680.809 $66. b.000 500.02857 $.474 (20.03095 = average of beginning and ending exchange rates.000 450. therefore. The dollar continued to strengthen during 20X7.570 $63. 20X6 December 31.809 R 720.03333 Dollars $16. balance sheet: Cash Receivables Inventory Fixed assets Total Accumulated other comprehensive income — translation adjustment (debit) Total debits Current payables Long-term debt Common stock Retained earnings Total credits Subsidiary’s Trial Balance (in rupees) R 100.000 $.$2. 20X6 December 31.712 2. Effects of a Change in the Exchange Rate — Translation and Other Comprehensive Income Direct and indirect exchange rates: Direct ($/R 1) $.000 Translation Rate $.025 = R 1 January 1.615 *$.665 220.000 1.030945 = [($.02857 $.02857 Translated Trial Balance (in $) $ 2.000 1.03333 $.857 12.230.000 R 2.713 16.250.903 $66. dollar could acquire at the end of the year (35) is greater than the number of rupees that could be acquired at the beginning of the year (30). 1/1/X6 Adjustment for changes in net assets during year: Net income Net assets translated at: Rates during year Rate at end of year Change in translation adjustment during year (debit) Rupees R 500.02857 $.000 Direct Exchange Rate $.02857 $.000 R 2.428 35.903) due to rounding of exchange rates. rounded to 4 decimal points: $.615 R 260.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements E12-13 a. the value of the dollar has increased relative to the rupee during 20X6.000 $. 20X6.857 19.02857) / 2] (Not required: Proof of translation adjustment (debit) of $2.903) Net assets. Translated December 31.904* *Difference of $1 ($2.02857 $23.428 28.Chapter 12 .03333 + $.230.02857 $.665 6.904 .000 $. 12-34 .000 220.03333 = R 1 $. 20X7 Indirect (R/$1) R 30 = $1 R 35 = $1 R 40 = $1 The dollar strengthened during 20X6 because the number of rupees one U.02857 = R 1 $ .03095* $ 7.570) $ 2.000. 000 $.885 R 340.02857 Dollars $20.025 Translated Trial Balance (in $) $ 2.025)/2] which equals $2.220 = $6.500 16. is $9.000 1.025 $. 1/1/X7 12-35 Translation Rate $.025 $.000 Net assets. Therefore. which is the change in retained earnings in rupees multiplied by the average 20X7 exchange rate of $.000 Net assets translated at: Rates during year Other comprehensive income — Rate at end of year R 810.025 $.500 27.250 5.500 $56.000 R 2.250.000 Direct Exchange Rate $.411).000 550.981 $.000 Change in other comprehensive Income — translation adjustment during year (debit) Accumulated other comprehensive Income — translation adjustment. 20X7.025 $.Chapter 12 .250. To this would be added 20X7's net income of R 90.000 13.000 500.03333 (a) $ 8.411 $22.02679 2.731 2.000 22. 20X6's.02857 + $.885 (a) The retained earnings in dollars would begin with the December 31.635 $61.635) Rupees R 720.000 R 2.665 9.000. 20X7.000 310.025 $. Translated December 31.000 720.100. 1/1/X7 Adjustment for changes in net assets during year: Net income 90.809 + $2.904 .809) that would be carried forward.025 (20.570 $.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements E12-13 (continued) c.000 900.250) $ 2.220 $61. dollar balance ($6.02679 [($. translated retained earnings on December 31.220 ($9.411. balance sheet: Cash Receivables Inventory Fixed assets Total Accumulated other comprehensive income — translation adjustment (debit) Total debits Current payables Long-term debt Common stock Retained earnings Total credits Subsidiary’s Trial Balance (in rupees) R 80.750 18. (Not required: Proof of translation adjustment (debit) of $5. 731 change in the accumulated other comprehensive income — translation adjustment during 20X7 would be reported as a component of other comprehensive income on 20X7's statement of other comprehensive income. 12-36 .Chapter 12 .12/31/X7 (debit) E12-13 (continued) d. $ 5.635 The $2.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements Accumulated other comprehensive Income — translation adjustment. which is an objective of the remeasurement method. The direct exchange rate on 1/1/X1 is $.000. Land Cash P 2.000.000 P 1.000 $.000.000 33. and on 12/31/X2 is $.000.000.333 The effect on the parent company’s net income ($50.83333 because the transaction is significant to the subsidiary. land will be based on its historical cost of P 2.333): Note that under remeasurement the nonmonetary items are not adjusted for changes in the exchange rate.083333 $200. 20X2 balance sheet: Cash Total Remeasurement loss Total debits Common stock Gain on sale of land Total credits Subsidiary’s Trial Balance (in pesos) P 3. of the problem.000.083333 Remeasured Trial Balance (in $) $250.000 = $83.000. on 12/31/X1 is $.000 P 2. Therefore.000. if transacted in U. in pesos.000 P 3.333 P 2. which equals a remeasured basis for the land of $200.000.000 x $.000.000 Direct Exchange Rate $.000 x $. Computation of Gain or Loss on Sale of Asset by Foreign Subsidiary Journal entries.000 P 1.10 ($1 = P 10).10.000. regarding the land: 1/1/X1 12/31/X2 b.000 .10) Cash $200. would be: 1/1/X1 12/31/X2 Land (P 2.000 P 2.08333) Land Gain on Sale of Land $250.Chapter 12 . The equivalent journal entries to those in part a.000 $250.333).000 $ 50. and occurred on a specific date. The appropriate exchange rate to use to remeasure the gain on the sale of the land is $.S.000 P 3.090909 ($1 = P 11).333 – $33.000 $200. solitary to the operations.000 12-37 $200.000.333 $283. dollars. dollars.000 x $.333 $283.083333 ($1 = P 12).000. the direct exchange rate on 1/1/X1.000 Amount of transaction gain ($83. Remeasured December 31.000.333) is the same as if the transactions had been transacted in U.10 $.000 Cash (P 3.000 83.000 Cash Land Gain on Sale of Land P 3.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements E12-14 a.S. and remeasurement loss ($33. the last day of the year. 818 $181.000 P 2.$18.333 $283.000.000 $200.333 12-38 . which is an element of other comprehensive income for 20X2.000 P 2. in the amount of $33.182 $200. which is reported on 20X2's statement of comprehensive income.000 $250. The next step is to translate the subsidiary’s 12/31/X2 trial balance.333 $283.151): To compute the change in the translation adjustment for 20X2.000.000 Direct Exchange Rate $.151 = $33.333 The change in the translation adjustment during 20X2 is $15.Chapter 12 .000 Direct Exchange Rate $.333 .083333 $200.000. balance sheet: Cash Total Accumulated other comprehensive income– translation adjustment (debit) Total debits Common stock Gain on sale of land Total credits Subsidiary’s Trial Balance (in pesos) P 3. 20X2.000 P 3. balance sheet: Land Total Accumulated other comprehensive income — translation adjustment (debit) Total debits Common stock Total credits Subsidiary’s Trial Balance (in pesos) P 2. 20X1.151 ($15. and other comprehensive income effect in 20X2 ($15.000 $. The stockholders’ equity section of the 12/31/X2 consolidated balance sheet would report the accumulated other comprehensive income which includes the accumulated translation adjustment. Amount of transaction gain ($83.000 P 1.000 P 3.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements E12-14 (continued) c. as of 12/31/X2. Translated December 31.000 $.10 $.000 83. it is necessary to prepare the translated trial balance as of the end of 20X1.000 P 2.000 33.090909 Translated Trial Balance (in $) $181.000.083333 Translated Trial Balance (in $) $250.000.000.000. as follows: Translated December 31.000.000.333).182 as of the end of 20X1.182).10 $200.818 18.333 P 2.000 Note that the translation adjustment account has a debit balance of $18. 60) Cost to parent Intercompany profit $12.S. $12.750 £7. reported in U.000) $ 4.750 = $12.750 ($8.000 (8.70 = £1): Inventory translation ($12.750 Inventory of United.000 intercompany profit) 12-39 .000 / $1.500 a.70) b.750 .S. Dollars Measured in British Pounds Initial inventory transfer date ($1.750 = £7.750 = £7.70) $12.$4.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements E12-15* Intercompany Transactions Measured in U. Ltd.500 x $1.60 = £1): Selling price (£7. ($12.500 x $1.500 = $12.000 £7. $ 8.Chapter 12 ..500 Balance sheet date ($1. dollar trial balance of consolidation workpaper. 20X1 Differential Canadian Dollars Exchange Rate U.80 $8.500 $ 950 $ 4. 12-40 .300 for plant and equipment.000 $ 48.000 C$ 9.80 72.75 (750) (5.000 $40.S.000 C$50.70 . Dollars Income Statement: Differential at date of acquisition: Plant and equipment Trademark Amortization this period: Plant and equipment (10 years) Trademark (10 years) Remaining balance: Plant and equipment Trademark Balance Sheet: Remaining balance on 12/31/X1 translated at year-end exchange rates: Plant and equipment Trademark C$10.000 Difference to OCI— translation adjustment: Plant and equipment Trademark $36.000 90. The differential adjustment adjusts to the correct amount necessary to prepare the consolidated balance sheet.75 .S.Chapter 12 .000 .000 .80 $120.000) C$ 9. and $31. requiring a credit to the Investment in North Bay Company account with a corresponding debit to the Other Comprehensive Income — Translation Adjustment account.000 (3.70 $6. Therefore.250 for plant and equipment and from $36.000) (1.500 for trademark. The required amounts for the consolidated balance sheet are $6.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements SOLUTIONS TO PROBLEMS P12-16 Parent Company Journal Entries and Translation a. Dollars C$150.250 C$45. in each of these cases.300 $31.000 C$ 60.80 .000 C$45.250 .000 .250 for trademark.000 Exchange Rate U.750) $7. the differential adjustment will reduce the amount of the differential component in the investment account. Canadian Dollars P 1/1/X1 100% NB Investment cost Book value of investment on January 1.750 Note that the differential adjustment is from the amounts of $7.000 . 000 (3) Foreign Currency Units (C$) Investment in North Bay Company Dividend from foreign subsidiary: $6.75 6.000 15.000 = C$8.750 Total $4. (2) Investment in North Bay Company Income from Subsidiary Equity in income of subsidiary: $15. Entries on Par Company's books during 20X1: (1) Investment in North Bay Company Cash Acquire North Bay Company.700 6.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements P12-16 (continued) b.000 4.750 Total $5.75 average exchange rate 120.700 5.000 15.000 (4) Income from Subsidiary Investment in North Bay Company Amortization of differential: Plant and equipment $ 750 Trademark 3.000 120.500 5.000 = C$20. Therefore.000 x . 12-41 . the investment account must be credited to reflect this decrease in the portion allocated to the differential.700 Note: The amount of the differential is being decreased as a result of the translation adjustment.Chapter 12 .000 x .500 4.500 (5) Other Comprehensive Income – Translation Adjustment Investment in North Bay Company Recognize translation adjustment on differential: Plant and equipment $ 950 Trademark 4. 20X1: C$8.000 (6.000 (8.Chapter 12 .000 .75 Foreign Currency Transaction Loss December 31. Dollars Equivalent U. 1/1/X1 Canadian Dollars Exchange Rate C$ 90.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements P12-16 (continued) c.000) Adjustment for changes in assets position during year: Net income for year Dividends paid Net assets translated at rates in effect for those items Net assets at end of year $81. d.75 15. dollar value of C$8.000 $ 400 400 400 . 20X1 (7) Foreign Currency Transaction Loss Foreign Currency Units (C$) Recognize exchange loss on foreign currency units held.000 20.600 9. 20X1 Net assets at beginning of year. 12-42 9.70 71.000 on December 31. U.000 x $. 20X1 (6) Other Comprehensive Income — Translation Adjustment Investment in North Bay Company Parent's share (100%) of translation adjustment from translation of subsidiary's accounts.000 C$102.S.75 .000 x $. dollar value of C$8.400 Change in other comprehensive income — translation adjustment during year — net decrease (debit) $ 9.000) .600 $5.000 .80 $72.S. Par Company and North Bay Company Proof of Translation Adjustment Year Ended December 31.70 Equivalent U.600 6.S.000 at date of receipt: C$8.600 December 31. 000 10.700 126. Plant.21 .21 .000 45.000 82.000 270.19 Balance Dollars $ 31.000 410.Chapter 12 .000 $354.000 450. Consolidated Comprehensive Income.21 .000 138.000 40.20 .Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements P12-17 Translation.21 . Vikix Inc. Trial Balance Translation December 31.000 600. and Equipment Cost of Goods Sold Operating Expenses Depreciation Expense Dividends Paid Total Debits Accumulated Depreciation Accounts Payable Notes Payable Common Stock Retained Earnings Sales Total Accumulated Other Comprehensive Income — Translation Adjustment (credit) Total Credits 12-43 Balance Kroner NKr 150.000 7.600 $375.20 $ 31.000 NKr 1.000 100.18 . 20X5 Item Cash Accounts Receivable (net) Inventory Property.21 .000 Exchange Rate .000 690. and Stockholders' Equity a.800 NKr 150.000 20.000 250.000 56.21 .20 .000 50.500 42.000 .800 .900 81.20 .500 18.000 NKr 1.000 190.900 39. Journal Entries.300 21.500 $375.820.000 90.21 .820.000 200.18 . 19 December 31 Investment in Vikix Company Common Income from Subsidiary Equity in net income of foreign subsidiary: $26.020 12-44 7.600 Investment in Vikix Company Common Other Comprehensive Income — Translation Adjustment Translation adjustment applicable to the differential: Property.020 4. plant.00 Income from Subsidiary Investment in Vikix Company Common Amortization of differential: Property.500 3.900 Patent 1.20 Investment in Vikix Company Common Other Comprehensive Income — Translation Adjustment Parent's share of translation adjustment from translation of subsidiary's accounts: $21.200 151.000 = Income of NKr130.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements P12-17 (continued) b.500 x 1.600 = NKr40.000 1.020 . plant.600 $2.000 21.120 Total — see supporting schedule 2 $4.600 26. 151.200 July 1 Cash Investment in Vikix Company Common Dividend received from foreign subsidiary: $7.000 x $.500 21.600 $3. and equipment Patent Total — see supporting schedule 2 7.600 3.000 26.000 x $. Entries for 20X5: January 1 Investment in Vikix Company Common Cash Purchase of Vikix Inc.600 4.Chapter 12 . and equipment $2. 18 $18.000 .18) Differential Differential allocated to: Property.20 (2.000 (10.000) NKr 32.020 = $2.000 .600) $ 5. 12-45 .000) $16.000 .21 6.20 (1.120 Note that the property.000 / 5 years) Remaining balances Balance sheet: Remaining balance on December 31. 20X5 Less: Book value of net assets acquired on January 1. The portion of the differential attributable to patent must be increased from $5. Dollars NKr 100.000 x $.S.200 Schedule 2: Determining the differential amortization for 20X5: Norwegian Kroner Property.200 (126.000) NKr 90.18 $ 7.900 $ 2.200 $ 18. plant. translated at year-end exchange rate Difference to other comprehensive income — translation adjustment Translation Rate U. and equipment portion of the differential must be increased from $16. plant.600 NKr 32.900 to the investment account.120 to the investment account.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements P12-17 (continued) Schedule 1: Determining the differential for 20X5: Investment cost at January 1.720 $ 1.000 7.000) $ 25. requiring a debit of $2.720.000 NKr 90.000 . requiring a debit of $1. 20X5 (NKr700.000 .21 18.000 to $19.600 to $6.200 $ 25. 20X5.200 (8. and equipment Patent Total $ 151.000 / 10 years) Remaining balances Balance sheet: Remaining balance on December 31. translated at year-end exchange rate Difference to other comprehensive income — translation adjustment Patent: Income statement: Difference at beginning of year Amortization for 20X5 (NKr40. and equipment: Income statement: Difference at beginning of year Amortization for 20X5 (NKr100.900 NKr 40.000 . The corresponding credit is to the Other Comprehensive Income – Translation Adjustment account ($4. plant.000.900 + $1.Chapter 12 .120). 20X5. 20X5 1. 20X5 Add: Net income for 20X5 Deduct: Dividends declared by Taft during 20X5 Add: Accumulated other comprehensive income: Foreign currency translation adjustment Consolidated Stockholders’ Equity at Dec.600) $ 297.500 + $4.520 $ 322. Income from Taft’s operations for 20X5. Taft’s consolidated comprehensive income for 20X5: 1.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements P12-17 (continued) c.Chapter 12 . 31. d. exclusive of income from the Norwegian subsidiary Add: Income from the Norwegian subsidiary for 20X5 Deduct: Amortization of differential for 20X5 Taft’s Net Income Add: Translation Adjustment ($21.520 $3. 3.400 25.920 . 3. 20X5: Taft’s stockholders’ equity at Jan. 2. 4.000 297.020) Taft’s Consolidated Comprehensive Income $ 275.500.000 26.722. 4. 12-46 $3.400 (100.000) 25. 1. 2.920 Taft’s consolidated stockholders’ equity at December 31.000 (3. 450 20.21 . 20X5.800 .000 190.600 $348.000 100. Dollar $ 46. Journal Entries.000 7.18* .000 50. Remeasurement.S.000 NKr 150.205 . the date the subsidiary was acquired by Taft Company (a) Norwegian Kroner Cost of goods sold: Beginning inventory (CGS of NKr410. Plant.820.800 (55.000 NKr 680.000 420.18 = exchange rate at January 1.900 39.000 410.18* (a) .450 .18* .18* .21 .000 NKr 1.800 * .Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements P12-18 a. dollars: Item Cash Accounts Receivable (net) Inventory Property.000 40.Chapter 12 . and Stockholders' Equity Schedule remeasuring the trial balance into U.21 .000 45. Consolidated Net Income.000 9.000) NKr 410.350 108.000 $130.000 18.820.000 90.900 81.350) $ 75.19 Balance Dollars $ 31.000 690.) Purchases Cost of goods available Less ending inventory Cost of goods sold NKr 260.000 $349.S.000 250.000 138.000 12-47 Exchange Rate .000 600.000 minus purchases of NKr420.18 .900 900 $349.000 75.000 = Beg.20 .000 Exchange Rate . Inv. and Equipment Cost of Goods Sold Operating Expenses Depreciation Expense Dividends Paid Total Remeasurement Loss Total Debits Accumulated Depreciation Accounts Payable Notes Payable Common Stock Retained Earnings Sales Total Credits Balance Kroner NKr 150.000 450.000 (270.000 270.000 55.20 $ 27.18* .500 42.000 NKr 1.205 U.800 84.20 .000 + ending inventory of NKr270.21 .000 200. 000 x $. Inc.000 Less: Cost of goods sold (75.200 / 5 years) Total 12-48 $151.550 Less: Remeasurement loss (900) Income recorded by Taft $ 32.650 Income from Subsidiary Investment in Vikix Company Common Amortization of the differential (See Schedule 1 below).600 = NKr40. Journal entries for 20X5: January 1 Investment in Vikix Company Common Cash Purchase of Vikix.19 December 31 Investment in Vikix Company Common Income from Subsidiary Equity in net income of foreign subsidiary: Income from the Norwegian sub: Sales $138.000) Depreciation expense (9.000 x $.000) Income $ 33.200 July 1 Cash Investment in Vikix Company Common Dividend received from foreign subsidiary: $7.18) Differential Differential allocated to: Property.240 Schedule 1: Determining and amortizing the differential for 20X5: Investment cost at January 1.Chapter 12 . plant. and equipment Patent Total Amortization for 20X5: Property.200 (126.650 3. plant. 20X5 Book value of net assets acquired on January 1.000 7.000 / 10 years) Patent ($7.240 . 7.240 3.800 1. 151.200 $ 18.600 7.200 $ $ 1.600 32.000) $ 25.450) Operating expenses (20.440 3. and equipment ($18.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements P12-18 (continued) b.650 32.200 $ 25. 20X5 (NKr700.200 151. 000 (40. Dollars NKr 700.400 165.S.500 .900 Change in other comprehensive income — translation adjustment during year Accumulated other comprehensive income — translation adjustment — January 1 Accumulated other comprehensive income — translation adjustment — December 31 (credit) 12-49 $ 21.20 .000 32. Income from Taft's operations for 20X5.704. Deduct: Dividends declared by Taft during 20X5 Consolidated stockholders' equity at December 31. 20X5 2.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements P12-18 (continued) c. Add: Income from the Norwegian subsidiary 3.410 P12-19 Proof of Translation Adjustment Net assets at beginning of year Adjustments for changes in net assets position during 20X5: Net income Dividends paid Net assets translated at: Rates during year Rates at end of year Norwegian Kroner Exchange Rate U.000 304.21 $144. Add: Consolidated net income for 20X5 3.650 (3.500 -0$ 21.000 .410 Consolidated stockholders' equity at December 31.500.000 . Deduct: Amortization of differential for 20X5 Consolidated net income for 20X5 d. Taft's stockholders' equity at January 1.18 $126. 20X5 $3.19 26.000 (7.240) $304.000) . $275. exclusive of income from the Norwegian subsidiary 2.000) $3.Chapter 12 .000 130. 20X5: 1. Consolidated net income for 20X5: 1.410 (100.600) NKr 790. 000) .20 .000) .Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements P12-20* Remeasurement Gain or Loss Proof of remeasurement loss for 20X5: Exposed net monetary liability position at January 1 Norwegian Kroner Exchange Rate U.20 .000) (100.000) (20.000) (40.19 (84.800) NKr 690. Dollars NKr (60.000 .700) $ 12-50 900 .000 Remeasurement loss .000) (7.21 (14.Chapter 12 .S.000 (420.600 Exposed net monetary asset position at December 31 NKr 70.18 $(10.600) Adjustments for changes in net monetary position during 20X5: Increases: From operations: Sales Decreases: From operations: Purchases Operating expenses From dividends Net monetary asset position prior to remeasurement at year-end rates $ 15.20 138. 20 .000 25.700 82.000 $ 2.20 .800 5.000 38.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements P12-21 Translation and Calculation of Translation Adjustment a.20 .072. Dollars .400 220 4.000 4.000 3.20 .400 350.100 .S.170 Accumulated Other Comprehensive Income — Translation Adjustment (debit) Total Debits Accumulated Depreciation Accounts Payable Income Tax Payable Interest Payable Notes Payable Bonds Payable Common Stock Additional Paid-In Capital Retained Earnings Sales Total Credits Schedule A Dividends April 7 Dividends October 9 30.23 $ BRL 12-51 10.25 .000 24.072.Chapter 12 .000 125.420 BRL .20 .000 $267.800 3.400 19.30 .100 Exchange Rate U.250 $237. DaSilva Company Trial Balance Translation December 31.28 .25 .000 27.20 .000 150.300 25.000 24.000 152.20 .000 BRL 1.000 2.20 .075 6.000 120.500 12.000 15.30 .000 230.000 1.000 50.25 .000 BRL 1.540 16.100 20.500 800 8.000 15.000 24.000 480 70.000 95.000 57.000 30.450 6.000 6.000 80.25 $ 20.125 3. A $ 11.20 .20 .30 .000 45.25 .200 32.20 .25 Sch. 20X4 Reals Cash Accounts Receivable (net) Inventory Prepaid Insurance Plant and Equipment Intangible Assets Cost of Goods Sold Insurance Expense Depreciation Expense Amortization Expense Operating Expense Dividends Paid Total BRL 57.250 .20 .000 500.420 BRL 100.250 $ 267. 28 . is necessary to “balance” the translated balance sheet.500 (2.000 Stockholders’ equity (from 1/1/X4) 20X4 Income Less dividends Total $65.250) Total $65.000 (10.000 Stockholders’ equity $84. 1/1/X4 Net assets $84. 12-52 .000 Accumulated other comprehensive Income — translation adjustment (debit) $30.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements P12-21 (continued) b.30 $84.450) BRL 325.250 65. Dollars BRL 280. Schedule to compute the accumulated other comprehensive income – translation adjustment as of December 31. 12/31/X4 Net assets $65.250 Accumulated other comprehensive income — translation adjustment (30.000 The translated balance sheet at the end of the year would be: Translated balance sheet.800) (3.000 70. Net assets at beginning of year Adjustment for changes: Net income for year Dividends paid: April 7 October 9 Net assets translated at: Rates during year Rates at end of year Reals Exchange Rate U.25 .250 Another way of interpreting the direction (debit or credit) of the translation adjustment is to consider the translated balance sheets.000) (15.500 (6.250) 11. as follows: Translated balance sheet.000 $84.23 17.000 .250 in the accumulated other comprehensive income – translation adjustment.000 .S.000 The debit balance of $30. 20X4.000) .Chapter 12 .000 $17.20 $95. E .400 350.750 720 103.30 .000 120.072.30 .30 .800 5.300 25.200 32.600 38.20 .30 .000 30.000 BRL 1.30 Sch.30 Sch. A .100 20.000 1.25 Sch.700 82. B .000 500.100 .000 24.145 12-53 .000 230.20 .20 .20 . Dollars Cash Accounts Receivable (net) Inventory Prepaid Insurance Plant and Equipment Intangible Assets Cost of Goods Sold Insurance Expense Depreciation Expense Amortization Expense Operating Expense Dividends Paid Total Debits BRL 57.000 2.250 $285.875 $285.072.500 12.000 24.250 960 9.25 $ 29.600 3.20 .000 80. C .000 24.000 125.20 .25 .000 152.100 Remeasurement Gain Total Credits 7.000 15.270 100.400 23.000 62.000 $277.30 Sch.000 95.000 9.000 27.000 BRL 1.145 Accumulated Depreciation Accounts Payable Income Tax Payable Interest Payable Notes Payable Bonds Payable Common Stock Additional Paid-In Capital Retained Earnings Sales Total BRL Sch.S.000 50. 20X4 Reals Exchange Rate U.20 . DaSilva Company Trial Balance Remeasurement December 31.540 16.Chapter 12 .Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements P12-22* Remeasurement and Proof of Remeasurement Gain or Loss a.000 45.000 150.075 6.000 3.850 4.400 220 4. D $ 11. 28 12-54 $ $ $ $ 7.000 BRL 95.500 57.30 .500 .000 15.23 BRL 80. 20X4 April 7.750 2. 20X4: January 1.000 BRL 325. 20X4 April 7.000 230.000 7.500 BRL 100.000) BRL 230.000 .850 .28 BRL 10.500 $ 86.000 (95.500 2.000 12.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements P12-22* (continued) Exchange Rate U.000 100.250 $ 24.30 .000 (23. 20X1 July 10.100 $ 29.450 6. 20X4 Schedule E Accumulated Depreciation Before January 1.000 BRL 350.30 . 20X2 April 7.28 $ 75.250 Reals Schedule A Plant and Equipment Before January 1. 20X4 Oct.30 .800 3.25 *Acquired before January 1.500 BRL 32.100 9. 20X4 Schedule D Dividends April 7. 9.30 .000 3.28 . Schedule C Depreciation Expense Before January 1.S.000 BRL 25.000 $103. 20X4 Schedule B Cost of Goods Sold Beginning Inventory* Purchases Goods Available Less Ending Inventory .000 28. Dollars BRL 250. use the exchange rate at date parent acquired subsidiary.600 2.000 .25 $ 28.Chapter 12 .000 .500 7. 20X4 BRL 25.750) $ 62.000 . 20X4. 30 $(13.300) (25.28 (28.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements P12-22* (continued) b.000 20. 20X4 Exchange Rate BRL (45.875 .000 120.000 x .000 x .000 27.400) 12-55 . 20X4 Remeasurement gain U.000 83.530) 500.000 BRL 139.000 30.end rates Exposed net monetary liability Position-December 31. Dollars (6.700 BRL 62.300) Schedule 2: Analysis of Changes in Monetary Accounts: Reals Exposed net monetary liability position-January 1.100) .000 120.000 BRL (191.000 .000) Increases From operations: Sales Decreases From operations: Purchases Operating expenses From dividends From purchases of plant and equipment Net monetary position prior to remeasurement at year.25 10.100) BRL BRL (52.400) BRL (45.Chapter 12 .900 BRL 145.23 (57.700 82.25 125.250) $(18.000) .000 1.100 20.000) (152.480) $ 7.28 15.000) .000 1. Proof of Remeasurement Gain Schedule 1: Statement of Net Monetary Position: End of Year Monetary Assets: Cash Accounts Receivable (net) Total Monetary Liabilities: Accounts Payable Income Taxes Payable Interest Payable Notes Payable Bonds Payable Total Net Monetary Liabilities Beginning of Year BRL 57.900 BRL 24.S.100) 20.25 .000 (230.20 (10.500) (38.000) Increase in net monetary liabilities during 20X4 BRL (7.355) BRL (52.075) (100.000 BRL (192. 100 72.420 63. Dollars $ 26.000 .000 3.300 Accumulated Depreciation Accounts Payable Payable to Alamo.700 90.600 144.480 1.70 .330 .600 85.Chapter 12 .570 16.000 214. Western Ranching Company Trial Balance Translation December 31.65 . Inc.65 .S.800 60.60 .500 5.500 15.705 6.60 .000 240. 20X3 Australian Dollars Exchange Rate A$ 44.60 .000 32.000 28.000 330.65 .000 579. Interest Payable 12% Bonds Payable Premium on Bonds Common Stock Retained Earnings Sales Total Credits A$ 60.000 100.60 .60 .030 $590.200 51.60 .000 A$942.67 Cash Accounts Receivable (net) Inventory Plant and Equipment Cost of Goods Sold Depreciation Expense Operating Expense Interest Expense Dividends Declared Total Accumulated Other Comprehensive Income — Translation Adjustment (debit) Total Debits A$942.280 6.000 40.000 131.000 5.60 .000 53.800 3.70 .330 .350 $607.475 3.000 376.760 $607.60 .65 $ 36.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements P12-23 Translation a.000 24.300 12-56 U.460 43.65 .000 86.60 .60 .700 9.800 10. 280) $ 16.760 .040 (125.000 87.800 (9.000 . Dollars A$130.70 $ 91. 1/1 Accumulated other comprehensive Income — translation adjustment.67 57.65 .60 $142.070 (6. 12/31 12-57 Australian Dollars Exchange Rate U.800 .030) A$208.Chapter 12 .000) . Schedule to prove translation adjustment: Net assets at beginning of year Adjustments for changes: Net income for year Dividends paid Net assets translated: Rates during year Rates at end of year Change in other comprehensive Income — translation adjustment (debit) Accumulated other comprehensive Income — translation adjustment.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements P12-23 (continued) b.760 -0$ 16.S. 60 $39.000 x .200 Book value (A$130.000 > $39.120 ($3.600.000) (5.120 (Note: The differential translation adjustment is necessary to decrease the buildings and equipment component of the parent company’s differential from $25.000 56. Thus.800 + $5.S.70 = $ 72.640) $35.400 .400 (3.000 x $.800 Australian Dollars Exchange Rate U.400 to $21.600) Adjusted balance Dec.65 .000 x $.70 Patent: A$56. 1.000 x $.320) with a corresponding debit to the parent company’s Other Comprehensive Income – Translation Adjustment account.70 $28.000 80% > Revaluation: PPE: A$40.560 (21.240) Differential Translation Adjustment: Patent Buildings and Equipment $ 5.70 $140. and to decrease the patent component from $35.200 $25.) 12-58 .800 Total Differential Translation Adjustment $ 9.65 (2.Chapter 12 . 20X3 Buildings and Equipment Patent A$36.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements P12-24 Parent Company Journal Entries and Translation P Investment cost = A$200.000 Amortization: Buildings and Equipment (10 years) Patent (10 years) Remaining Balance (4.000 A$50.000 .320 3.000 1/1/x3 Fair value $140. Dollars Balance Jan. a credit will be made to the parent company’s investment account for the total of $9.600) A$86.400 .240.60 . 20X3 Differential: Buildings and Equipment Patent A$40.70 S > $28.70 .80) x $.600) (30.560 to $30. 31. 700) A$ 87.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements P12-24 (continued) Parent company journal entries 20X3: (1) (2) (3) Investment in Subsidiary Cash Acquire foreign investment.000 x .80 x $.800 Patent = 5.80 $ 45.475) (3.Chapter 12 .656 45.600 = 3.80 $ 45.67 4.408 13.240 Other Comprehensive Income — Translation Adjustment Investment in Subsidiary Translation adjustment related to decrease in differential: Buildings and equipment = $3.320 $9.070 9.000 Cash Investment in Subsidiary Receive dividend: A$9.640 $6.656 A$ A$579.705) $ 57.120 13.240 6. dollar equivalent Parent's percent Equity accrual (4) 140. (5) (6) 140.120 9.408 .000 (330.070 x .824 4.500) (15.500) (5.S.070 x .656 Sales Cost of goods sold Depreciation expense Operating expense Interest expense Income Average exchange rate U.80 12-59 U.240 = $2.656 6.350 (214.S.600) (85.65 $ 57.000 Income from Subsidiary Investment in Subsidiary Amortization of differential: Buildings and equipment Patent $ 57.408 = $16.$ $376.000) (131.800 x .760 x .824 Investment in Subsidiary Income from Subsidiary Equity accrual for percentage of subsidiary's income: 45.120 Other Comprehensive Income — Translation Adjustment Investment in Subsidiary Parent company's share of translation adjustment from subsidiary: $13.000) (24. 20X3 (2) 4. Dec.000 Dividends 45. December 31.656 39.240 Equity accrual Balance.656 _______ Balance.240 Translation adjustment related to differential (5) 9.Chapter 12 . 31.416 .824 Amortization (4) 6.120 Parent’s share of subsidiary’s translation adjustment (6) 13.408 152.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements P12-24 (continued) Entries posted to T-accounts (not required): Original cost (1) Equity accrual (3) Investment in Subsidiary 140.064 Income from Subsidiary Amortization (4) 6. 20X3 12-60 (3) 45. 824 34.120 .070 x .20 Investment in Subsidiary Differential Eliminate differential translation adjustment. 12-61 4.20 $1.200 140.200 = $91.208 13. 39.408 Noncontrolling Interest Other Comprehensive Income to Noncontrolling Interest Assign a proportionate share of the subsidiary’s other comprehensive income to the noncontrolling interest: $3.120 9.20 11.20 Common Stock Retained Earnings.000 0 67.030 x .352 = $16.000 28.414 = $57.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements P12-25 Consolidation Workpaper after Translation Workpaper elimination entries: E(1) E(2) E(3) E(4) E(5) E(6) Income from Subsidiary Dividends Declared Investment in Subsidiary Eliminate income from subsidiary.760 x .206 10.Chapter 12 .206 = $6.760 x .414 Investment in Western Ranching Other Comprehensive Income – Translation Adjustment Eliminate other comprehensive income from the subsidiary that had been recorded by the parent: $13.200 9.80 13.408 = $16.000 18.408 3.352 3.000 x .416 Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $11. January 1 Accumulated Other Comprehensive Income. (1/1) Differential Investment in Subsidiary Noncontrolling Interest Eliminate investment and establish noncontrolling interest's share of beginning equity of subsidiary: $18.352 63.592 1. 800 $33.480 12-62 58.880 Depreciation Expense Amortization Expense Accumulated Depreciation Patent Amortization of differential.200 .Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements P12-25 (continued) E(7) E(8) E(9) Plant and Equipment Patent Differential Assign differential.Chapter 12 .200 = $28. net of differential adjustment: $24.480 . 2.320 24.880 = $39.600 3. 6.640 6.$3.000 .200 33.640 Payable to Alamo Receivable from Western Ranching Eliminate intercompany payable/receivable.600 3.$5.080 2. and Subsidiary Consolidation Workpaper For the Year Ending December 31.280) 205.830 (2) 11.000 376.120 (5) 67.760 282.376.600 Consolidated 1.000 15.500 (8) 2.414) 204.592 (5)140.070 205.000 (9) 152.414 (11.200 Differential Patent Accumulated Other Comp.408 (6) 9.000) 57.072 335.000 500.000 51.705 (1.070 205.070 (6. carry forward Retained Earnings.206 (50. January 1 Net Income.Chapter 12 .200 6.080 (8) 3.120 (7) 58.030) 57.705 (834.350 214.000 (6) 9.000 85.824 1.640 289.500 28.000.460 140.376.350 39.350 (1) 39.200 183.039.148.070 179.200 (8) 3.416 385.000 179.416 600.656 28.760 30.600 46.520) 216.416 385. Inc.600 144.416 1.000 43.200 (7) 24.350 814.072 (50.030 335.070 57.020 12-63 6.640 16.064 (7) 33. (from below) Total Debits Eliminations Debit Credit (1) 34.000 3.480 128.000) 6. Income.000 26.000 (5) 28.000) (319.600 668.072 -0- (1) (2) 85.475 5.200 (3) 13.656 205.475 2.240 22.528 1.416 57. from above Dividends Declared Retained Earnings.416 1. carry forward Cash Accounts Receivable (net) Receivable from Western Ranching Inventory Plant and Equipment Investment in Subsidiary Alamo Western Ranching 1.159.070 85.000 376.528 987.072 16.460 64.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements P12-25 (continued) Alamo. 20X3 (after translation) Item Sales Income from Subsidiary Credits Cost of Goods Sold Depreciation Expense Amortization Expense Operating Expense Interest Expense Debits Income to Noncontrolling Interest Net Income.880 22.228 .072 79.480 179.040 38.416 4.640 3. 000 3.880) (4) 3.Chapter 12 . 1/1 Other Comp.420 500.000 335.600 6. Income.760 (22.352 3.000 335.760) $125.480 (4) 3.000 500.056 1.070 987.710 -0- -0- (5) -0- (22.056 12-64 128.000 2.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements P12-25 (continued) Item Accumulated Depreciation Accounts Payable Payable to Alamo Interest Payable 12% Bonds Payable Premium on Bonds Common Stock Retained Earnings Noncontrolling Interest Credits Accumulated Other Comp.000 3.480 1.800 60.710 25.040 Eliminations Debit Credit (8) 2.280 x .280 6.208 (5)18. Accumulated Other Comp.760) (16.352 (22.000 32.600 92.000 60.528) Consolidated . (debit) carry up Alamo 90.420 63. Int.030 3.040 (16.072 (2)10.000 79. Income to Noncon.280 (9) 6. Income.352 16.228 (5)63.072 Western Ranching 36.000 85. 12/31.020 305. Income – Translation Adj.148.528) (16.760) -0- -0(3)13.20 $ 25.200 305.800 60.072 282.000 79.(dr) Other Comp.408 (25.528) Proof of noncontrolling interest's percentage of subsidiary's stockholders' equity: Subsidiary's Stockholders' Equity: Common Stock Retained Earnings Accumulated Other Comprehensive Income — Translation Adjustment Subsidiary's Stockholders' Equity Noncontrolling Percent Noncontrolling Interest $ 63. alternate workpaper placement of accumulated other comprehensive income below the income section Alamo.352 3.830 (2)11.500 28.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements P12-25 (continued) Optional.000 376.350 214.475 5.070 79.640 3.072 Consolidated 85.072 (1) 4.000 85.000.376.656 28.Chapter 12 .000) 6.070 85.475 2.350 39.000 376.824 (2) 1.640 289.200 (8) 3.000) (319. January 1 Net Income. 20X3 (after translation) Item Sales Income from Subsidiary Credits Cost of Goods Sold Depreciation Expense Amortization Expense Operating Expense Interest Expense Debits Income to Noncontrolling Interest Net Income.520) 216.352 16.705 (1.206 (50. IncomeTranslation Adj.880) (4) 3.416 385.656 -0- 205.(dr) Other Comp.416 57.350 814.416 600.760 (22.000 15.040 12-65 -0- -0- (22.500 (8) 2.350 (1)39. from above Dividends Declared Retained Earnings.070 (5) (16.414 (11.376.414) 204.030) 57. Retained Earnings.070 -0- -0- (22.528) 335.072 (50.070 (6.416 -0- (3)13.705 (834.528) (16. (debit) carry dwn.000 (5)28.072 .280) 205. Inc.600 Eliminations Debit Credit 1.408 (25.030 335.600 46. Income. 12/31.070 205.416 385. Income to NCI Accumulated Other Comp.760) 57. and Subsidiary Consolidation Workpaper For the Year Ending December 31.416 1.000 3.760) -0- 179.000) 57.039.528) 179.159. carry forward Accumulated Other Comp. 1/1 Other Comp.416 1. carry forward Alamo Western Ranching 1.000 205. Income. 640 -0- 16.072 282.000 335.200 22.030 3.228 Note: This optional presentation shows the accumulated other comprehensive income section of the worksheet immediately below the computation of net income. 12-66 .000 500.600 144. Thus.000 43.240 (9) 6.000 (6) 9. It is just a preference as to the organization of the consolidation worksheet.064 Accumulated Depreciation Accounts Payable Payable to Alamo Interest Payable 12% Bonds Payable Premium on Bonds Common Stock Retained Earnings Noncontrolling Interest Total Credits 16.280 (8) 30.120 (5)67.480 (7)24.072 (2) 10.592 (5)140.760 282.120 (7) 58. Income.000 500.280 6.460 140.000 32.880 (1) 34.000 3.528 1.000 3.352 987.020 179.480 (5)63.056 1.480 1.200 (9) Differential Patent Accumulated Other Comp. This alternate presentation also shows students that the consolidating worksheet is a means to the end of computing the amounts that will be reported on the consolidated financial statements.000 60.420 500.070 (4) 3.600 92. and that alternate worksheet formats will be found in practice.408 (6) 9.480 128.200 (7)33.000 Western Ranching 26.200 305.Chapter 12 .800 60.020 90.710 6.000 36.000 79.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements P12-25 (continued) Optional format Item Cash Accounts Receivable (net) Receivable from Western Ranching Inventory Plant and Equipment Investment in Subsidiary Alamo 38.080 (8) 3.208 (5) 18.760 22.200 (3)13. the placement of the accumulated other comprehensive income section does not affect the computation of any worksheet amounts.800 60.000 335.200 6.228 2.040 2.000 152.528 987.710 25.420 63.148.000 85.000 51.600 668.072 6. (from above) Total Debits Eliminations Debit Credit 305.600 128.460 183.148.072 Consolidated 64. 60 .000 x .280 6.900) $217.65 168.000 .000 (86.000 A$942.70 .Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements P12-26* Remeasurement a.000 24.500 $273.65 180.70 60.000 32.60 .000 40.300 .100 72.60 . Western Ranching Company Trial Balance Remeasurement December 31.65 A$942.370 .000 100.65 U.000 579.300 $ 42.60 .70 .S.60 .70 (a) .475 3.350 $613.700 90.65 .480 1.000 5.800 10.200 227.460 43.S.200 55.030 $623.040 $623.800 85. Dollars $ 46. Interest Payable 12% Bonds Payable Premium on Bonds Common Stock Retained Earnings Sales Total Remeasurement Gain Total Credits A$ 60.Chapter 12 .705 6.800 60.70 .000 28.800 16.60 .000 Exchange Rate .000 131.60 . 20X3 Australian Dollars Exchange Rate U.700 (55.900 Cost of Goods Sold Depreciation Expense Operating Expense Interest Expense Dividends Declared Total Debits 330.67 Accumulated Depreciation Accounts Payable Payable to Alamo.800 3.330 10.000 240. Inc.70 .000 376.000 3.000) A$330. Dollars Cash Accounts Receivable (net) Inventory Plant and Equipment A$ 44.500 5.000 217.000 x .000 53.000 A$416.370 (a) Cost of Goods Sold: Beginning Inventory Purchases Goods Available Minus Ending Inventory Cost of Goods Sold Australian Dollars A$ 66.000 86.70 .65 .000 $ 26.420 63.700 9.800 12-67 .000 350. 000 .700) (9.705) (6.65 .475) (3.000) .200) A$(80. Dollars A$ (80.800 3.000) .67 (227.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements P12-26* (continued) b.60 (34.100 72. Proof of Remeasurement Gain: Schedule 1: Statement of Net Monetary Position End of Year Beginning of Year Monetary Assets: Cash Accounts Receivable (net) Total A$ 44.350 (350.800 10.S.000 A$116.000) 579.320) $ 10.500) (5.100 Monetary Equities: Accounts Payable Payable to Parent Company Interest Payable 12% Bonds Payable Premium on Bonds Total A$ 53.000) Net Monetary Position Prior to Remeasurement at Year-End Rate $ (44.000) (131.70 $ (56.000) .200) Remeasurement Gain .360) Exposed Net Monetary Liability Position — December 31 A$ (57.300 Net Monetary Equities Decrease in net monetary equities during year A$(57.700 A$173.65 .800) Schedule 2: Analysis of Changes in Monetary Accounts Exposed Net Monetary Liability Position — January 1 Increases: From Operations: Sales Decreases: From Operations: Purchases Cash Expense Interest Expense From Dividends From Purchase of Plant and Equipment Australian Dollars Exchange Rate U.000 5.Chapter 12 .70 (42.030) (60.65 376.65 .040 12-68 .500) (85.000 100.000) A$(22. 000 > $39.000 1/1/x3 Fair value $140.200 / 10) $6.000 80% > Revaluation: PPE: A$40. 140.80) x $.000 x $.000 Cash Investment in Subsidiary Receive dividend: $4.70 = > $28.824 Investment in Subsidiary Income from Subsidiary Equity accrual for percentage of subsidiary's income: 50.350 (217.610 x .70 Patent: A$56.000 Income from Subsidiary Investment in Subsidiary Amortization of differential: Buildings and Equipment Patent 12-69 6.000 / 10) = 3.000 x .000 x $.80 $ 50.800) (16.720 6.70 S Book value (A$130.040 $ 62.920 ($39.80 x $.475) (3.088 U.70 = $140.800 ($28.S.$ $ 376.800 Parent company journal entries – 20X3: (1) (2) (3) Investment in Subsidiary Cash Acquire foreign investment.720 = $2.824 = A$9.088 50.800) (85.088 Sales Cost of goods sold Depreciation expense Operating expense Interest expense Remeasurement gain Subsidiary's income Parent's percent Equity accrual (4) 140.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements P12-27 Parent Company Journal Entries and Remeasurement P Investment cost A$200.720 .67 4.705) 10.000 x $.824 4.200 $ 72.Chapter 12 .000 x . 368 .544 Income From Subsidiary 6. December 31.720 (3) 50.Chapter 12 .824 6.088 178.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements P12-27 (continued) NOT REQUIRED: Entries posted to T-accounts Original cost Equity accrual (1) (3) Balance.720 Equity accrual Balance.088 Amortization (2) (4) 4. December 31.000 Dividends 50. 20X3 12-70 43. 20X3 Amortization (4) Investment in Subsidiary 140. 000 28. 2.480 .200 = $91.20 63.920 Payable to Alamo Receivable from Western Ranching Eliminate intercompany payable/receivable.920 6.000 x .480 12-71 2.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements P12-28* Consolidation Workpaper after Remeasurement Workpaper elimination entries: E(1) E(2) E(3) E(4) E(5) E(6) Income from Subsidiary Dividends Declared Investment in Subsidiary Eliminate income from subsidiary.030 x .800 3.206 = $6. 6.000 18.20 12. January 1 Differential Investment in Subsidiary Noncontrolling Interest Eliminate beginning-of-period investment balance and establish noncontrolling interest's share of beginning equity of subsidiary: $18.316 140.200 4.610 x .000 67.200 Plant and Equipment Patent Differential Assign differential.824 38.800 3. 28.544 1.522 Common Stock Retained Earnings.368 Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $12.000 39.Chapter 12 .522 = $62.206 11. 43.20 $1.200 67.200 Depreciation Expense Amortization Expense Accumulated Depreciation Patent Amortize differential. 368 Consolidated 1.030 339.164.656 -0(1) (2) 90.200 (4)39. 20X3 (after translation) Item Sales Income from Subsidiary Remeasurement Gain Credits Cost of Goods Sold Depreciation Expense Amortization Expense Operating Expense Interest Expense Debits Income to Noncontrolling Interest Net Income.040 386.824 1. carry forward Retained Earnings.030) 62.800 47.522 (12.024 84.920 289.705 (1.162.024 4.376.890 (2)12. Inc.000 500.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements P12-28* (continued) Alamo.040 1.800 (5) 2.000) 62.024 6.Chapter 12 .000 (4) 67.610 90.610 (6.705 (834.000.580 38.368 10.610 62.350 (1)43.000 Western Ranching Eliminations Debit Credit 376.840 .390 600.800 28.920 35.000 (4)28.000 209.000 (3)28.610 -0- 209.522) 204.024 (50.000 (6) (3)67.368 179.368 389.386.000 26.544 (3)140.460 140.368 62.043.000 55.610 179.460 64.600 (5) 3.350 43.656 28.368 389.280 1.900 168. from above Dividends Declared Retained Earnings.000) 6.200 293.024 339.000 16.475 5.000 217.206 (50.000 178.560 12-72 183.480 128.480 (1) 38. carry forward Cash Accounts Receivable (net) Receivable from Western Ranching Inventory Plant and Equipment Investment in Subsidiary Differential Patent Total Debits Alamo 1.800 817.000 43. and Subsidiary Consolidation Workpaper For the Year Ending December 31.200 183.544 991.475 2.920 3.500) 221.368 1.200 (5) 3.000) (323.390 10.200 6. January 1 Net Income.000 85.900 696.610 209.000 3.780) 209. Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements P12-28* (continued) Item Accumulated Depreciation Accounts Payable Payable to Alamo Interest Payable 12% Bonds Payable Premium on Bonds Common Stock Retained Earnings Noncontrolling Interest Total Credits Alamo 90,000 60,000 2,000 500,000 339,024 991,024 Western Ranching 42,000 32,280 6,480 1,800 60,000 3,420 63,000 84,580 293,560 Eliminations Debit Credit (5) 2,800 (3)63,000 90,610 6,030 3,800 60,000 3,420 500,000 339,024 294,490 (2)11,316 (3)18,200 294,490 29,516 1,162,840 $ 63,000 84,580 $147,580 x .20 $ 29,516 12-73 134,800 92,280 (6) 6,480 Proof of noncontrolling interest's percentage of subsidiary's stockholders' equity: Subsidiary's Stockholders' Equity: Common Stock Retained Earnings Subsidiary's Stockholders' Equity Noncontrolling Percent Noncontrolling Interest Consolidated Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements P12-29 Foreign Currency Remeasurement [AICPA Adapted] Kiner Company's Foreign Subsidiary Remeasurement of Selected Captions into United States Dollars December 31, 20X2, and December 31, 20X1 Balance in LCUs December 31, 20X1 Accounts Receivable (net) Inventories, at cost Property, Plant, and Equipment (net) Long-Term Debt Common Stock December 31, 20X2 Accounts Receivable (net) Inventories, at cost Property, Plant, and Equipment (net) Long-Term Debt Common Stock 35,000 LCU 75,000 Indirect Exchange Rate Remeasured into U.S. Dollars 1.7 LCU = $1 2.0 LCU = $1 $20,588 37,500 150,000 120,000 50,000 2.0 LCU = $1 1.7 LCU = $1 2.0 LCU = $1 75,000 70,588 25,000 40,000 80,000 1.5 LCU = $1 1.7 LCU = $1 26,667 47,059 163,000 100,000 50,000 Schedule 1 1.5 LCU = $1 2.0 LCU = $1 86,000 66,667 25,000 Schedule 1: Computation of Translation of Property, Plant and Equipment (Net) into United States Dollars on December 31, 20X2 Balance in LCUs Land purchased on January 1, 20X1 Plant and equipment purchased on January 1, 20X1: Original cost Depreciation for 20X1 Depreciation for 20X2 Plant and equipment purchased on July 4, 20X2: Original cost Depreciation for 20X2 Indirect Exchange Rate Remeasured into U.S. Dollars 24,000 LCU 2.0 LCU = $1 $12,000 140,000 LCU (14,000) (14,000) 112,000 LCU 2.0 LCU = $1 2.0 LCU = $1 2.0 LCU = $1 2.0 LCU = $1 $70,000 (7,000) (7,000) $56,000 30,000 LCU (3,000) 27,000 LCU 163,000 LCU 1.5 LCU = $1 1.5 LCU = $1 1.5 LCU = $1 $20,000 (2,000) $18,000 $86,000 12-74 Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements P12-30 Foreign Currency Translation Kiner Company's Foreign Subsidiary Translation of Selected Captions into United States Dollars December 31, 20X2, and December 31, 20X1 Balance in LCUs December 31, 20X1 Accounts Receivable (net) Inventories, at cost Property, Plant, and Equipment (net) Long-Term Debt Common Stock December 31, 20X2 Accounts Receivable (net) Inventories, at cost Property, Plant, and Equipment (net) Long-Term Debt Common Stock 35,000 LCU 75,000 Indirect Exchange Rate Translated into U.S. Dollars 1.7 LCU = $1 1.7 LCU = $1 $ 20,588 44,118 150,000 120,000 50,000 1.7 LCU = $1 1.7 LCU = $1 2.0 LCU = $1 88,235 70,588 25,000 40,000 80,000 1.5 LCU = $1 1.5 LCU = $1 26,667 53,333 163,000 100,000 50,000 1.5 LCU = $1 1.5 LCU = $1 2.0 LCU = $1 108,667 66,667 25,000 P12-31 Matching Key Terms 1. E 2. I 3. K 4. H 5. A 6. F 7. J 8. B 9. L 10. C 12-75 20X4: DER = $1 / LCU .2048 During 20X4.80 LCU .Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements P12-32 Translation Choices Requirement 1: a. Direct exchange rate (DER) for January 1. (7) e.83 December 31.Chapter 12 . Alternatively. (1) h.25 b. (5) c.83 December 31. (8) j. the indirect exchange rate has increased indicating it costs more in LCU to acquire $1 at December 31.S. 20X4. 20X4 Indirect Exchange Rate (LCU / $1) LCU .85 Average for year 20X4 for expenses Requirement 2: a. 20X4: end of current year Balance computed at end of December 31.83 December 31. k.85 Average for year 20X4 for expenses LCU . 20X4: declaration date LCU .83 Direct Exchange Rate ($ / LCU 1) $1.83 December 31.25 $1.74 June 16. 20X1: date foreign company purchased LCU .83 December 31. (7) i.80 DER = $1.S.84 November 1. (7) b. 20X4 Exchange rates on December 31. (5) g. U. the U. currency for one foreign currency unit at the end of the year as compared with the beginning of the year. (7) f. includes carry forward from prior periods LCU . 20X4: end of current year LCU . 12-76 . (6) d. than at January 1. 20X4: end of current year LCU . 20X4: end of current year LCU . 20X4: end of current year LCU . (7) (5) LCU . dollar versus LCU in 20X4: Exchange rates on January 1. 20X4.85 Average for year 20X4 for revenues LCU . 20X4.S. Therefore. the direct exchange rate has decreased reflecting that it costs less U. dollar has strengthened during the year 20X4. currency cost of one Mexican peso at the beginning of the year ($. A mnemonic here is to remember that the debits must equal the credits. Proof of Translation Adjustment Year Ended December 31 Translation MXP Net assets at beginning of year Adjustment for changes in net assets position during year: Net income for year Dividends Net assets translated at: Rates during year Rates at end of year Rate $ 575. MaMi Co. 12/31 (credit) 7. The proof shows the change in the other comprehensive income during the year of $4. dollar weakened against the Mexican peso during the year shown by the increase in the direct exchange rate indicating it costs more U.285. the change in this year of $4.250 Accumulated other comprehensive income-translation adjustment.000 $.300 (13. and other changes in net assets over the years since acquisition.250.093 60.S. 1/1 (credit) 3.725) 695. 12-77 .087 50.025 270. The U.035.285 Note that the proof begins with the net assets at the beginning of the year. It is a credit or net increase in AOCI because it must offset an increase (debit) in the net assets from $60. dividends. then the proof should begin with the net assets at the time the subsidiary was acquired and then make the adjustments in net income.635 during the year.635 Change in other comprehensive income-translation adjustment during year (net increase) 4.093) as opposed to the U.025 credit can simply be added to the beginning of the period AOCI credit balance of $3.035 Accumulated other comprehensive income-translation adjustment.0915 24.S.600 64. Ltd. at the appropriate exchange rates. b. If you were to prove the total AOCI of $7.000 (150.S.600 to $64.087). currency to acquire one Mexican peso at the end of the year ($.Chapter 12 .000 $.000) $.090 $.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements P12-33 Proof of Translation Adjustment a. Or. 575 AOCI (plug) 7.635 12-78 .285 $64. 12/31 Net assets $64.300 – $13.775 (from 1/1) Retained earnings change: ($24.025 Translated Balance Sheet.725) 10.025 Total $50. 1/1 Net assets $50.250 $50.635 Stock and RE $46.025 Stock and RE AOCI (given) $46.635 Total $64.775 (plug) 3.Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements P12-33 (continued) Another way of viewing the proof of the ending balance in AOCI is: Translated Balance Sheet.Chapter 12 .
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