a.
Use an electronic spreadsheet to translate the foreign subsidiary’s FC financial statements into U.S. dollars at December 31, 2017, in accordance with U.S. GAAP. Insert a row in the spreadsheet after
a.
Explanation of Solution
Translation of the foreign subsidiary’s FC financial statements into U.S. dollars at December 31, 2017, in accordance with U.S. GAAP:
Temporal Method | Current Rate Method | ||||||
December 31, 2017 | FC | Rate | USD | Rate | USD | ||
Sales | 5000 | $0.45 | A | $2,250.00 | $0.45 | A | $2,250.00 |
Cost of goods sold | -3000 | ($1,360.00) | $0.45 | A | ($1,350.00) | ||
Gross profit | 2000 | $890.00 | $900.00 | ||||
Selling expenses | -400 | $0.45 | A | ($180.00) | $0.45 | ($180.00) | |
-600 | $0.50 | H | ($300.00) | $0.45 | A | ($270.00) | |
Re-measurement gain/loss | 0 | $355.00 | $0.00 | ||||
Income before tax | 1000 | $765.00 | $450.00 | ||||
Income taxes | -300 | $0.45 | A | ($135.00) | $0.45 | A | ($135.00) |
Net income | 700 | $630.00 | $315.00 | ||||
Retained earnings, 01/01/17 | 0 | $0.00 | $0.00 | ||||
Retained earnings, 12/31/17 | 700 | $630.00 | $315.00 | ||||
Cash | 1000 | $0.38 | C | $380.00 | $0.38 | C | $380.00 |
Inventory | 2000 | $0.43 | H | $860.00 | $0.38 | C | $760.00 |
Fixed assets | 6000 | $0.50 | H | $3,000.00 | $0.38 | C | $2,280.00 |
Less: Accumulated Depreciation | -600 | $0.50 | H | ($300.00) | $0.38 | C | ($228.00) |
Total assets | 8400 | $3,940.00 | $3,192.00 | ||||
Current Liabilities | 1500 | $0.38 | C | $570.00 | $0.38 | C | $570.00 |
Long-term debt | 3000 | $0.38 | C | $1,140.00 | $0.38 | C | $1,140.00 |
Contributed Capital | 3200 | $0.50 | H | $1,600.00 | $0.50 | H | $1,600.00 |
Cumulative transaction adjustment | 0 | $0.00 | ($433.00) | ||||
Retained earnings | 700 | $630.00 | $315.00 | ||||
Total liability and stock equity | 8400 | $3,940.00 | $3,192.00 |
Table: (1)
Exchange Rates | Temporal method cost of goods sold | ||||||
0/01/2017 | $0.50 | B1 | $1,000.00 | $0.50 | H | $500.00 | |
Average 2017 | $0.45 | P | $4,000.00 | $0.43 | H | $1,720.00 | |
December 31, 2017 | $0.38 | E1 | ($2,000.00) | $0.43 | H | ($860.00) | |
Inventory Purchases | $0.43 | $3,000.00 | $1,360.00 |
Table: (2)
Computation of translation adjustment:
FC | USD | ||
Net assets on 01/01/17 | $ 3,200 | $ 0.50 | $ 1,600 |
Net income: 2017 | $ 700 | $ 0.45 | $ 315 |
Net assets on 12/31/17 | $ 3,900 | $ 1,915 | |
Net assets on 12/31/17 | |||
at current exchange rate | $ 3,900 | $ 0.38 | $ 1,482 |
Translation adjustment (negative) | $ 433 |
Table: (3)
Working note:
- A stands for Average Exchange Rate
- C stands for Current Exchange Rate
- H stands for Historical Exchange Rate
b.
Use an electronic spreadsheet to re-measure the foreign subsidiary’s FC financial statements in U.S. dollars at December 31, 2017, assuming that the U.S. dollar is the subsidiary’s functional currency. Insert a row in the spreadsheet after depreciation expense and before income before taxes for the re-measurement gain (loss).
b.
Explanation of Solution
Computation of translation adjustment:
FC | USD | ||
Net assets on 01/01/17 | $ 3,200 | $ 0.50 | $ 1,600 |
Net income: 2017 | $ 700 | $ 0.45 | $ 315 |
Net assets on 12/31/17 | $ 3,900 | $ 1,915 | |
Net assets on 12/31/17 | |||
at current exchange rate | $ 3,900 | $ 0.38 | $ 1,482 |
Translation adjustment (negative) | $ 433 |
Table: (4)
c.
Prepare a report for James Benjamin, CEO of Charles Edward, summarizing the differences that will be reported in the company’s 2017 consolidated financial statements because the FC, rather than the U.S. dollar, is the foreign subsidiary’s functional currency. In your report, discuss the relationship between the
c.
Explanation of Solution
The report summarizing the differences that will be reported in the company’s 2017 consolidated financial statements because the FC, rather than the U.S. dollar, is the foreign subsidiary’s functional currency:
FC | Temporal | Current Rate | |
Current ratio | |||
Current assets | $ 3,000 | $ 1,240 | $ 1,140 |
Current Liabilities | $ 1,500 | $ 570 | $ 570 |
2 | 2.1754 | 2 | |
Debt-equity ratio | |||
Total stockholder’s equity | $ 4,500 | $ 1,710 | $ 1,710 |
$ 3,900 | $ 2,230 | $ 1,482 | |
1.15385 | 0.766816 | 1.15385 | |
Profit Margin | |||
Net income | $ 700 | $ 630 | $ 315 |
Sales | $ 5,000 | $ 2,250 | $ 2,250 |
0.14 | 0.28 | 0.14 | |
Return on Equity | |||
Net income | $ 700 | $ 630 | $ 315 |
Average Stockholder’s equity | $ 3,550 | $ 1,915 | $ 1,541 |
0.19718 | 0.328982 | 0.20441 | |
Inventory Turnover | |||
Cost of goods sold | $ 3,000 | $ 1,360 | $ 1,350 |
Average inventory | $ 1,000 | $ 430 | $ 380 |
3 | 3.162791 | 3.55263 |
Table: (5)
Translated U.S. dollar amounts for inventory and for fixed assets:
The temoral method represent the amounts in U.S. dollar for the inventory and the fixed assets which shows the cost of these assets in U.S. dollar if the parent company purchased the assets from the subsidiary company in dollars.
The current rate method does not reprsent the U.S. dollar value of the assets. The current method shows the amount in U.S dollars when the current exchenge rate is used.
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Chapter 10 Solutions
EBK ADVANCED ACCOUNTING
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