ADVANCED ACCOUNTING W/CONNECT>CUSTOM<
18th Edition
ISBN: 9781307126402
Author: Hoyle
Publisher: MCG/CREATE
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Question
Chapter 10, Problem 37P
Part I.
To determine
Translate the Czech koruna financial statement when functional currency is Czech koruna.
Part I.
Expert Solution
Explanation of Solution
Translate (remeasure) foreign currency financial statements using US GAAP and explain the translation adjustments.
When Czech koruna is the functional currency the translation adjustment should be determined using current rate method.
a.
| Income Statement | Czech koruna | Exchange Rate | US Dollars |
| Sale | 25,000,000 | 0.035 | 875,000 |
| Cost of goods sold | (12,000,000) | 0.035 | (420,000) |
| (2,500,000) | 0.035 | (87,500) | |
| Depreciation Expenses-Building | (20,000) | 0.035 | (63,000) |
| Research and development Expenses | (1,200,000) | 0.035 | (42,000) |
| Other Expenses | (1,000,000) | 0.035 | (35,000) |
| Net income | 6,500,000 | 227,500 | |
| 500,000 | (given) | 22,500 | |
| Dividend paid 12/15/2017 | (1,500,000) | 0.031 | (46,500) |
| Retained earnings 12/15/17 | 5500000 | 203,500 |
Table: (1)
Balance sheet as on 12/31/2017:
| Income Statement | Czech koruna | Exchange Rate | US Dollars |
| Cash | 2,000,000 | 0.030 | 60,000 |
| 3,300,000 | 0.030 | 99,000 | |
| Inventory | 8,500,000 | 0.030 | 255,000 |
| Equipment | 25,000,000 | 0.030 | 750,000 |
| Accumulative depreciation- Equipment | (8,500,000) | 0.030 | (255,000) |
| Building | 72,000,000 | 0.030 | 2,160,000 |
| Accumulative depreciation- Equipment | (30,300,000) | 0.030 | (909,000) |
| Land | 6,000,000 | 0.030 | 180,000 |
| Total assets | 78,000,000 | 2,340,000 | |
| Accounts Payable | 2500000 | 0.030 | 75,000 |
| Long term debt | 50,000,000 | 0.030 | 1,500,000 |
| Common stock | 5,000,000 | 0.050 | 250,000 |
| Additional paid in capital | 15,000,000 | 0.050 | 750,000 |
| Retained earnings 12/31/2017 | 5,500,000 | 203,500 | |
| Translation adjustment | (438,500) | ||
| Total liabilities and equities | 78,000,000 | 2,340,000 |
Table: (2)
Calculation of translation adjustment:
| Income Statement | Czech koruna | Exchange Rate | US Dollars |
| Net asset 1/1/2017 | 20,500,000 | 0.040 | 820,000 |
| Net income, 2017 | 6,500,000 | 0.035 | 227,500 |
| Dividends 12/15/2017 | (1,500,000) | 0.031 | (46,500) |
| Net assets 12/31/2017 | 25,500,000 | 1,001,000 | |
| Net assets at current rate 12/31/2017 | 25500000 | 0.030 | 765,000 |
|
Translation adjustment , 2017 ( negative) | 236,000 | ||
| Cumulative Translation adjustment , 2017 ( negative) | 438,500 |
Table: (3)
b.
The translation should be done as per temporal method as US Dollar is functional currency:
| Income Statement | Czech koruna | Exchange Rate | US Dollars |
| Sale | 25,000,000 | 0.035 | 875,000 |
| Cost of goods sold | (12,000,000) | Section-A | (493,500) |
| Depreciation Expenses-equipment | (2,500,000) | Section-B | (118,000) |
| Depreciation Expenses-Building | (1800,000) | 0.035 | (63,000) |
| Research and development Expenses | (1,200,000) | 0.035 | (42,000) |
| Other Expenses | (1,000,000) | 0.035 | (35,000) |
| Income before re-measurement gain | 6,500,000 | 101,300 | |
| Re-measurement gain, 2017 | 408,000 | ||
| Net income | 6,500,000 | 509,300 | |
| Retained earnings 1/1/17 | 500,000 | Given | 353,000 |
| Dividend paid 12/15/2107 | (1,500,000) | 0.031 | (46,500) |
| Retained earnings 1/1/17 | (5,500,000) | 815,800 |
Table: (4)
Balance sheet as on 12/31/2017:
| Income Statement | Czech koruna | Exchange Rate | US Dollars |
| Cash | 2,000,000 | 0.030 | 60,000 |
| Accounts Receivable | 3,300,000 | 0.030 | 99,000 |
| Inventory | 8,500,000 | 0.032 | 272,000 |
| Equipment | 25,000,000 | Section-B | 1,180,000 |
| Accumulative depreciation- Equipment | (8,500,000) | Section-B | 418,000 |
| Building | 72,000,000 | Section-C | 3,408,000 |
| Accumulative depreciation- Equipment | (30,300,000) | Section-C | (1,510,200) |
| Land | 6,000,000 | 0.050 | 300,000 |
| Total assets | 78,000,000 | 3,390,800 | |
| Accounts Payable | 2500000 | 0.030 | 75,000 |
| Long term debt | 50,000,000 | 0.030 | 1,500,000 |
| Common stock | 5,000,000 | 0.050 | 250,000 |
| Additional paid in capital | 15,000,000 | 0.050 | 750,000 |
| Retained earnings 12/31/2017 | 5,500,000 | Above | 815,800 |
| To balance | (438,500) | ||
| Total liabilities and equities | 78,000,000 | 3,390,800 |
Table: (5)
Section –A: Cost of goods sold:
| Income Statement | Czech koruna | Exchange Rate | US Dollars |
| Beginning inventory (1/1/2017) | 6,000,000 | 0.043 | 258,000 |
| Purchases | 14,500,000 | 0.035 | 507,500 |
| Ending inventory | (8,500,000) | 0.032 | 272,000 |
| Cost of goods sold | 12,000,000 | 493,500 |
Table: (6)
Section –B: Equipment:
| Income Statement | Czech koruna | Exchange Rate | US Dollars |
| Old Equipment (1/1/2017) | 20,000,000 | 0.050 | 1,000,000 |
| New Equipment-acquired (1/3/2017) | 5,000,000 | 0.036 | 180,000 |
| Total | 500,000 | 1,180,000 | |
| Accumulated depreciation-old equipment | 8,000,000 | 0.050 | 4,000,000 |
| Accumulated depreciation-new equipment | 500,000 | 0.036 | 18,000 |
| Total | 8500000 | 4,018,000 | |
| Depreciation expenses-old equipment | 2,000,000 | 0.050 | 100,000 |
| Depreciation expenses-new equipment | 500,000 | 0.036 | 18000 |
| Total | 2500,000 | 118,000 |
Table: (7)
Section –C: Building:
| Income Statement | Czech koruna | Exchange Rate | US Dollars |
| Old Building (1/1/2017) | 60,000,000 | 0.050 | 3,000,000 |
| New Building-acquired (3/5/2017) | 5,000,000 | 0.034 | 408,000 |
| Total | 72,000,000 | 3,408,000 | |
| Accumulated depreciation-old Building | 30,000,000 | 0.050 | 1,500,000 |
| Accumulated depreciation-new Building | 300,000 | 0.034 | 10,200 |
| Total | 30,300,000 | 1,510,200 | |
| Depreciation expenses-old Building | 1500,000 | 0.050 | 75,000 |
| Depreciation expenses-new Building | 300,000 | 0.034 | 10,200 |
| Total | 1,800,000 | 85,200 |
Table: (8)
Calculation of Re-measurement gain:
| Income Statement | Czech koruna | Exchange Rate | US Dollars |
| Net monetary liabilities (1/1/2017) | (37,000,000) | 0.040 | (1480000) |
| Increase in monetary assets: | |||
| Sales | 2,500,000 | 0.035 | 87,500 |
| Decrease in monetary assets: | |||
| Purchase of inventory | (14,500,000) | 0.035 | (507,500) |
| Research and development | (1,200,000) | 0.035 | (42,000) |
| Other expenses | (1,000,000) | 0.035 | (35,000) |
| Dividend paid 12/15/2017 | (1,500,000) | 0.031 | (46,500) |
| Purchase of equipment 1/1/2017 | (5,000,000) | 0.036 | (180,000) |
| Purchase of building 3/5/2017 | (12,000,000) | 0.034 | 408,000 |
| Net monetary liabilities | (47,200,000) | (1,824,000) | |
| Net monetary liabilities at current rate 12/31/2017 | 47,200,000 | 0.030 | (1,416,000) |
| Re-measurement gain -2017 | (408,000) |
Table: (9)
c.
Calculation as Re-measurement loss:
| Income Statement | Czech koruna | Exchange Rate | US Dollars |
| Net monetary assets(1/1/2017) | 13,000,000 | 0.040 | 520,000 |
| Increase in monetary assets: | |||
| Sales | 2,500,000 | 0.035 | 87,500 |
| Decrease in monetary assets: | |||
| Purchase of inventory | (14,500,000) | 0.035 | (507,500) |
| Research and development | (1,200,000) | 0.035 | (42,000) |
| Other expenses | (1,000,000) | 0.035 | (35,000) |
| Dividend paid 12/15/2017 | (1,500,000) | 0.031 | (46,500) |
| Purchase of equipment 1/1/2017 | (5,000,000) | 0.036 | (180,000) |
| Purchase of building 3/5/2017 | (12,000,000) | 0.034 | 408,000 |
| Net monetary assets | 2,800,000 | 176,000 | |
| Net monetary assets at current rate 12/31/2017 | 2,800,000 | 0.030 | 84,000 |
| Re-measurement loss -2017 | 92,000 |
Table: (10)
Part II.
To determine
Explain the positive or negative sign as the translation adjustment in part (a) and explain why a re-measurement gain or loss exists in part 1(b) and 1(c).
Part II.
Expert Solution
Explanation of Solution
The negative translation adjustment in part 1(a) arises because of two factors:
- The Czech koruna has depreciated from
- Arises because there is a net asset balance sheet exposure.
A net asset balance sheet exposure exists because all assets are translated at current exchange rate that excesses all liabilities at current rate.
Re-measurement gain in part 1 (b):
It arises because of two factors:
- The Czech koruna has depreciated against US Dollar.
- There is net monetary liability balance sheet exposure.
Under the temporal method accounts receivables and cash are translated at current rate then accounts payable, long term debt are also translated at current rate that results in net monetary liability balance sheet exposure.
Re-measurement gain in part 1 (c):
It arises because of two factors:
- The Czech koruna has depreciated against the US Dollar during 2017.
- There is a net monetary asset balance sheet exposure.
Accounts receivable and cash are translated at current rate and account payables are also translated at current rate.
Because the Czech koruna amount of asset translate at current rate exceeds the Czech koruna amount of liabilities which are translated at the current rate and net monetary assets exposure in balance sheet exists.
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