Chapter 8, Problem 37P

Part I.

To determine

Translate the Czech koruna financial statement when functional currency is Czech koruna.

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)
Depreciation Expenses-equipment	(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
Retained earnings 1/1/15	500,000	(given)	22,500
Dividend paid 12/15/2015	(1,500,000)	0.031	(46,500)
Retained earnings 12/15/15	5500000		203,500

Table: (1)

Balance sheet as on 12/31/2015:

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	0.030	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 12/31/2015	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 1/1/2015	20,500,000	0.040	820,000
Net income, 2015	6,500,000	0.035	227,500
Dividends 12/15/2015	(1,500,000)	0.031	(46,500)
Net assets 12/31/2015	25,500,000		1,001,000
Net assets at current rate 12/31/2015	25500000	0.030	765,000
Translation adjustment , 2015 ( negative)			236,000
Cumulative Translation adjustment , 2015 ( 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, 2015			408,000
Net income	6,500,000		509,300
Retained earnings 1/1/15	500,000	Given	353,000
Dividend paid 12/15/2015	(1,500,000)	0.031	(46,500)
Retained earnings 1/1/15	(5,500,000)		815,800

Table: (4)

Balance sheet as on 12/31/2015:

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 12/31/2015	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 (1/1/2015)	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 (1/1/2015)	20,000,000	0.050	1,000,000
New Equipment-acquired (1/3/2015)	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 (1/1/2015)	60,000,000	0.050	3,000,000
New Building-acquired (3/5/2015)	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 (1/1/2015)	(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 12/15/2015	(1,500,000)	0.031	(46,500)
Purchase of equipment 1/1/2015	(5,000,000)	0.036	(180,000)
Purchase of building 3/5/2015	(12,000,000)	0.034	408,000
Net monetary liabilities	(47,200,000)		(1,824,000)
Net monetary liabilities at current rate 12/31/2015	47,200,000	0.030	(1,416,000)
Re-measurement gain -2015			(408,000)

Table: (9)

c.

Calculation as Re-measurement loss:

Income Statement	Czech koruna	Exchange Rate	US Dollars
Net monetary assets(1/1/2015)	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 12/15/2015	(1,500,000)	0.031	(46,500)
Purchase of equipment 1/1/2015	(5,000,000)	0.036	(180,000)
Purchase of building 3/5/2015	(12,000,000)	0.034	408,000
Net monetary assets	2,800,000		176,000
Net monetary assets at current rate 12/31/2015	2,800,000	0.030	84,000
Re-measurement loss -2015			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).

Explanation of Solution

The negative translation adjustment in part 1(a) arises because of two factors:

• The Czech koruna has depreciated from $\$0.40$ to $\$0.30$ from beginning as the year to ending of year.
• 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 2015.
• 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.