a
Introduction: Translation adjustment is the method used to convert the local currency into the parents’ functional currency when the local currency is the foreign entity’s functional currency. The current rate is used to translate the financial statements that are the exchange rate on the balance sheet date. The average rate is used to translate revenue and expenses as it is assumed that it occurs uniformly over the period. Any gain or loss on account of translation adjustment is recognized in the comprehensive income statement.
The strengthening or weakening of currency in 20X6 and 20X7 by presenting both direct and indirect exchange rate for the rupees for the given dates.
a
Answer to Problem 12.13E
The dollar strengthened both during 20X6 and 20X7
Explanation of Solution
Direct $/R 1 | Indirect R/$1 | |
January 1, 20X6 | $.03333 = R 1 | R 30 = $1 |
December 31, 20X6 | $.02857 = R 1 | R 35 = $1 |
December 31, 20X7 | $.025 = R 1 | R40 = $1 |
The dollar appreciated against rupees during 20X6 because the amount of rupees required to buy one U.S dollar at the end of the year is R35 which is greater than the amount of rupees required to buy one dollar at the beginning of the year that is R 30. The dollar value continued its upward trend during the year 20X7 to R40.
b
Introduction: Translation adjustment is the method used to convert the local currency into the parents' functional currency when the local currency is the foreign entity’s functional currency. The current rate is used to translate the financial statements that are the exchange rate on the balance sheet date. The average rate is used to translate revenue and expenses as it is assumed that occurs uniformly over the period. Any gain or loss on account of translation adjustment is recognized in the comprehensive income statement.
The subsidiary’s translated balance sheet of December 31, 20X6 assuming rupee is the subsidiary’s functional currency.
b
Answer to Problem 12.13E
The dollar strengthened both during 20X6 and 20X7
Explanation of Solution
Translated balance sheet for December 31, 20X6
Details | Subsidiary balancesIn Rupees | Direct exchange rate | Translated balances$ |
Cash | 100,000 | $.02857 | $2,857 |
Receivables | 450,000 | $.02857 | 12,857 |
Inventory | 680,000 | $.02857 | 19,428 |
Fixed assets | 1,000,000 | $.02857 | 28,570 |
Total assets | 2,230,000 | 63,712 | |
Accumulated other comprehensive income: | |||
Translation adjustment debit | 2,903 | ||
Total Assets | 66,615 | ||
Current payables | 260,000 | $.02857 | 7,428 |
Long term debts | 1,250,000 | $.02857 | 35,713 |
Common stock | 500,000 | $.03333 | 16,665 |
220,000 | $03095 | 6,809 | |
Total Liabilities and Equity | 2,230,000 | 66,615 |
Exchange rate for retained earnings will be average of beginning and ending exchange rate
Working note: Proof of translation adjustment
Details | In Rupees | translation rate | $ |
Net assets 1/1/X6 | 500,000 | $.03333 | 16,665 |
Adjustment for changes in net assets during year | |||
Net income | 220,000 | $.03095 | 6,809 |
Net assets translated at: | |||
Rates during the year | 23,474 | ||
Rates at end of the year | 720,000 | $.02857 | (20,570) |
Change in translation adjustment during year | 2,904 |
c
Introduction: Translation adjustment is the method used to convert the local currency into the parents' functional currency when the local currency is the foreign entity’s functional currency. The current rate is used to translate the financial statements that are the exchange rate on the balance sheet date. The average rate is used to translate revenue and expenses as it is assumed that occurs uniformly over the period. Any gain or loss on account of translation adjustment is recognized in the comprehensive income statement.
The subsidiary translated balance sheet as of December 31, 20X7 assuming the rupee is the subsidiary functional currency
c
Answer to Problem 12.13E
Balance sheet total after translation adjustment $61,885
Explanation of Solution
Details | Subsidiary balancesIn Rupees | Direct exchange rate | Translated balances$ |
Cash | 80,000 | $.025 | $2,000 |
Receivables | 550,000 | $.025 | 13,750 |
Inventory | 720,000 | $.025 | 18,000 |
Fixed assets | 900,000 | $.025 | 22,500 |
Total assets | 2,250,000 | 56,250 | |
Accumulated other comprehensive income: | |||
Translation adjustment debit | 5,635 | ||
Total Assets | 61,885 | ||
Current payables | 340,000 | $.025 | 8,500 |
Long term debts | 1,100,000 | $.025 | 27,500 |
Common stock | 500,000 | $.03333 | 16,665 |
Retained earnings | 310,000 | A | 6,809 |
Total Liabilities and Equity | 2,250,000 | 61,885 |
Determination of retained earnings
Retained earnings December 31, 20X6 | $6,809 |
2,411 | |
$9,220 |
Working note: Proof of translation adjustment
Details | In Rupees | translation rate | $ |
Net assets 1/1/X6 | 720,000 | $.02857 | 20,570 |
Adjustment for changes in net assets during year | |||
Net income | 90,000 | $.02679 | 2,411 |
Net assets translated at: | |||
Rates during the year | 22,981 | ||
Rates at end of the year | 810,000 | $.025 | (20,250) |
Income translation | 2,731 | ||
Translation adjustment 1/1/X7 | 2,904 | ||
Accumulated other comprehensive | |||
Translation adjustment 12.31.X7 | 5,635 |
d
Introduction: Translation adjustment is the method used to convert the local currency into the parents' functional currency when the local currency is the foreign entity’s functional currency. The current rate is used to translate the financial statements that are the exchange rate on the balance sheet date. The average rate is used to translate revenue and expenses as it is assumed that occurs uniformly over the period. Any gain or loss on account of translation adjustment is recognized in the comprehensive income statement.
The comprehensive income for 20X7 would include as a result of the translation
d
Answer to Problem 12.13E
The comprehensive income for 20X7 would include as a result of the translation $2,731
Explanation of Solution
Income to be reported in 20X7
Details | In Rupees | translation rate | $ |
Net assets 1/1/X6 | 720,000 | $.02857 | 20,570 |
Adjustment for changes in net assets during year | |||
Net income | 90,000 | $.02679 | 2,411 |
Net assets translated at: | |||
Rates during the year | 22,981 | ||
Rates at end of the year | 810,000 | $.025 | (20,250) |
Income translation | 2,731 |
Want to see more full solutions like this?
Chapter 12 Solutions
ADVANCED FIN. ACCT. LL W/ACCESS>CUSTOM<
- FOREIGN INVESTMENT ANALYSIS After all foreign and U.S. taxes, a U.S. corporation expects to receive 2 pounds of dividends per share from a British subsidiary this year. The exchange rate at the end of the year is expected to be 1.30 per pound, and the pound is expected to depreciate 5% against the dollar each year for an indefinite period. The dividend (in pounds) is expected to grow at 10% a year indefinitely. The parent U.S. corporation owns 10 million shares of the subsidiary. What is the present value in dollars of its equity ownership of the subsidiary? Assume a cost of equity capital of 11% for the subsidiary.arrow_forwardKingsfield establishes a subsidiary operation in a foreign country on January 1, 2020. The country’s currency is the rial (R). To start this business, Kingsfield invests 10,000 rials. Of this amount, it spends 3,000 rials immediately to acquire equipment. Later, on April 1, 2020, it also purchases land. All subsidiary operational activities occur at an even rate throughout the year. Kingsfield uses the U.S. dollar as its reporting currency. The U.S. dollar ($) exchange rates for the rial for 2020 follow: January 1 $ 1.71 April 1 1.59 June 1 1.66 Weighted average 1.64 December 31 1.62 As of December 31, 2020, the subsidiary reports the following trial balance: Debits Credits Cash R 8,000 Accounts receivable 9,000 Equipment 3,000 Accumulated depreciation R 600 Land 5,000 Accounts payable 3,000 Notes payable (due 2028) 5,000 Common stock 10,000 Dividends declared…arrow_forwardA subsidiary of Cadbury Corp. located in a foreign country whose functional currency is the foreign currency. The subsidiary acquires inventory on credit on November 1, 2015, for 100,000 foreign currencies (F) that is sold on January 17, 2016 for 130,000 foreign currencies (FC). The subsidiary pays for the inventory on January 31, 2016. Currency exchange rates for 1 foreign currency (FC) are as follows:November 1, 2015 P 0.16 = 1 FCNovember 31, 2015 0.17 = 1November 17, 2016 0.18 = 1January 31, 2016 0.19 = 1Average for 2016 0.20 = 14. What amount does Cadbury’s consolidated balance sheet report for this inventory at December 31, 2015?A. P 16,000 B. P 17,000 C. P 18,000 D. P 19,0005. What amount does Cadbury’s consolidated income statement report for cost of goods sold for the year ending December 31, 2016?A. P 16,000 B. P 17,000 C. P 18,000 D. P 19,000arrow_forward
- A U.S. firm has total assets valued at €827,000 located in Germany. This valuation did not change from last year. Last year, the exchange rate was €.9473/$. Today, the exchange rate is €.8997/$. By what amount did these assets change in value on the firm's U.S. financial statements? Multiple Choice −$46,187.79 −$39,365.20 $39,365.20 $46,187.79 $0arrow_forwardAccounting for Business Combinations: Honesty Company accepted a sales order from a Singaporean Company on October 9, 2022. The contract price was S$100,000. The merchandise was delivered on November 19, 2022. The invoice was dated November 15, 2022, FOB Shipping Point. Full payment was received on January 15, 2023. The spot rate for the Singaporean Dollar on the respective dates is as follows (see image below). Answer the follwing subquestions: a. How much is Foreign Exchange Gain (Loss) to be reported in 2022? b. How much is the Sales to be reported in 2022? __________________arrow_forwardKingsfield establishes a subsidiary operation in a foreign country on January 1, 2017. The country’s currency is the kumquat (KQ). To start this business, Kingsfield invests 10,000 kumquats. Of this amount, it spends 3,000 kumquats immediately to acquire equipment. Later, on April 1, 2017, it also purchases land. All subsidiary operational activities occur at an even rate throughout the year. The U.S. dollar ($) exchange rates for the kumquat for 2017 follow:As of December 31, 2017, the subsidiary reports the following trial balance:A corporation based in East Lansing, Michigan, Kingsfield uses the U.S. dollar as its reporting currency.a. Assume that the subsidiary’s functional currency is the kumquat. Prepare a trial balance for it in U.S. dollars so that 2017 consolidated financial statements can be prepared.b. Assume that the subsidiary’s functional currency is the U.S. dollar. Prepare a trial balance for it in U.S. dollars so that 2017 consolidated financial statements can be…arrow_forward
- Fundamentals Of Financial Management, Concise Edi...FinanceISBN:9781337902571Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningFinancial Reporting, Financial Statement Analysis...FinanceISBN:9781285190907Author:James M. Wahlen, Stephen P. Baginski, Mark BradshawPublisher:Cengage Learning