Professional Documents
Culture Documents
Advanced Accounting 13th Edition Hoyle Solutions Manual Download
Advanced Accounting 13th Edition Hoyle Solutions Manual Download
10-1
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
10-2
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
CHAPTER 10
TRANSLATION OF FOREIGN
CURRENCY FINANCIAL STATEMENTS
Chapter Outline
I. In today's global economy, many companies have invested in operations in foreign countries.
A. In preparing consolidated financial statements on a worldwide basis, the foreign currency
accounts prepared by foreign operations must be restated into the parent company's
reporting currency.
B. There are two major issues related to the translation of foreign currency financial
statements.
1. Which method should be used?
2. How should the resulting translation adjustment be reported on the consolidated
financial statements?
C. Translation methods differ on the basis of which accounts are translated at the current
exchange rate and which are translated at a historical exchange rate. Translating
accounts at the current exchange rate creates a translation adjustment.
D. Historically, accountants have experimented with a number of different translation
methods. The dominant methods currently in use are the temporal method and the current
rate method.
E. Translation adjustments can be either (1) reported as a gain or loss in income or (2)
deferred in the stockholders' equity section of the balance sheet.
II. The primary objective of the temporal method is to maintain the underlying valuation method
used by the foreign entity to account for its assets and liabilities.
A. Assets and liabilities carried at current or future value are translated at the current
exchange rate. Assets and liabilities carried at cost and stockholders' equity items are
translated at a historical exchange rate.
B. By translating some assets at the current exchange rate and others at historical rates the
temporal method distorts financial ratios calculated in the foreign currency.
C. Most income statement items are translated at average-for-the-period rates. However,
cost-of-goods-sold, depreciation, and amortization expense are translated at relevant
historical exchange rates.
D. Balance sheet exposure under the temporal method is defined as cash, marketable
securities, and receivables minus total liabilities. A net liability exposure often exists.
1. When a liability balance sheet exposure exists, depreciation of the foreign currency
results in a positive translation adjustment (gain) and appreciation of the foreign
currency results in a negative translation adjustment (loss).
2. Reporting a translation loss when the foreign currency appreciates is thought to be
inconsistent with economic reality.
10-3
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
III. With the current rate method, the net investment in a foreign operation is considered to be
exposed to foreign exchange risk.
A. Assets and liabilities are translated at the current exchange rate; equity is translated at
historical rates.
B. Translating assets which are carried at cost using the current exchange rate results in a
translated value which is not readily interpretable; it is neither a current value nor a
historical cost.
C. However, translating all assets at the current rate does maintain underlying ratios and
relationships that exist in the foreign currency statements.
D. Revenues and expenses which occur evenly throughout the period are translated at the
average-for-the-period exchange rate. Income items, such as gains and losses, which
are the result of a discrete event, are translated at the actual exchange rate on the date
of occurrence.
E. Balance sheet exposure under the current rate method is equal to the foreign entity's net
assets (stockholders' equity).
1. Appreciation in the foreign currency results in a positive translation adjustment (gain);
depreciation results in a negative translation adjustment (loss).
IV. FASB ASC 830, Foreign Currency Matters, provides guidelines for the translation of foreign
currency financial statements by U.S.-based multinational corporations. The appropriate
translation method and disposition of translation adjustment depends upon the functional
currency of the foreign entity.
A. The functional currency is the primary currency of the foreign entity's operating
environment. It can be either the U.S. dollar or a foreign currency.
1. U.S. GAAP lists six indicators that are to be used in determining an entity's functional
currency. There are no guidelines as to how these indicators are to be weighted.
B. If a foreign currency is the functional currency, the foreign entity's financial statements are
"translated" using the current rate method and the resulting translation adjustment is
reported as a separate component of equity. The average-for-the-period exchange rate
is used to translate the foreign entity's income statement.
1. Upon the sale or liquidation of a specific foreign entity, the cumulative translation
adjustment related to that entity is taken to income as an adjustment to the gain or
loss on sale or liquidation.
C. If the U.S. dollar is the functional currency, foreign currency financial statements are
"remeasured" using the temporal method with "remeasurement" gains and losses reported
in operating income.
D. If a foreign entity operates in a highly inflationary economy (cumulative three-year inflation
greater than 100%), its financial statements are remeasured into U.S. dollars using the
temporal method and remeasurement gains and losses are reported in income.
V. Some companies hedge the balance sheet exposures of their foreign entities so as to avoid
adverse effects on income and/or stockholders' equity.
A. FASB ASC Topic 815, Derivatives and Hedging, refers to this as a hedge of a net
investment in a foreign operation and stipulates that gains and losses on hedging
instruments used in this manner should be treated in the same fashion as the translation
adjustment (remeasurement gain/loss) being hedged.
B. The paradox of hedging balance sheet exposure is that by avoiding a translation
adjustment (remeasurement gain/loss), which are not immediately realized in cash,
realized foreign exchange gains and losses can arise.
10-4
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
Conversely, the current rate method requires that each of the three assets be reported at $34,500
based on the current exchange rate. As the controller indicates, though, $34,500 was not the
original cost expended by Southwestern. In addition, using the current rate means that each of
the assets will constantly report a "floating" value, one that will change with each exchange rate
fluctuation. Finally, the $34,500 figure is based on the current value of the vilsek ($.23) and the
historical cost in vilseks (150,000 vilseks) for the three assets. The current exchange rate is only
significant if the assets are sold with the proceeds being converted into U.S. dollars. Since an
imminent sale is not indicated, the validity of reporting the $34,500 might again be questioned. In
addition, even if the assets were sold, $34,500 does not accurately reflect the proceeds in U.S.
dollars because 150,000 vilseks is the historical cost and not the current market value of each of
these assets.
The temporal and current rate methods of translation differ primarily with regard to the exchange
rate used to translate those assets that are reported at historical cost--inventories, prepaids, fixed
assets, and intangibles. The debate regarding the appropriate exchange rate for translating
assets exists only because some assets are reported at historical cost. If all assets were reported
at their current value, there would be no need to use the historical exchange rate for translating
assets in order to maintain the asset's historical cost in U.S. dollar terms. All assets would be
translated at the current exchange rate. The differences between the temporal method and
current rate method would disappear.
10-5
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
Answers to Questions
1. The two major issues related to the translation of foreign currency financial statements are:
(a) which method should be used and (b) where should the resulting translation adjustment
be reported in the consolidated financial statements. The first issue relates to determining the
appropriate exchange rate (historical, current, or average for the current period) for the
translation of foreign currency balances. Those items translated at the current exchange rate
are exposed to translation adjustment. The second issue relates to whether the translation
adjustment should be treated as a gain or loss in income, or should be deferred as a separate
component of stockholders’ equity.
2. Balance sheet exposure arises when a foreign currency balance is translated at the current
exchange rate. By translating at the current exchange rate, the foreign currency item in
essence is being revalued in U.S. dollar terms on the consolidated financial statements. There
will be either a net asset balance sheet exposure or net liability balance sheet exposure
depending upon whether assets translated at the current rate are greater or less than liabilities
translated at the current rate. Balance sheet exposure generates a translation adjustment
which does not result in an inflow or outflow of cash. Transaction exposure, which results
from the receipt or payment of foreign currency, generates foreign exchange gains and losses
which are realized in cash.
3. Although balance sheet exposure does not result in cash inflows and outflows, it does
nevertheless affect amounts reported in consolidated financial statements. If the foreign
currency is the functional currency, translation adjustments will be reported in stockholders’
equity. If translation adjustments are negative and therefore reduce total stockholders’ equity,
there is an adverse (inflationary) impact on the debt to equity ratio. Companies with restrictive
debt covenants requiring them to stay below a maximum debt to equity ratio, may find it
necessary to hedge their balance sheet exposure so as to avoid negative translation
adjustments being reported. If the U.S. dollar is the functional currency or an operation is
located in a high inflation country, remeasurement gains and losses are reported in income.
Companies might want to hedge their balance sheet exposure in this situation to avoid the
adverse impact remeasurement losses can have on consolidated income and earnings per
share.
The paradox in hedging balance sheet exposure is that, by agreeing to receive or deliver
foreign currency in the future under a forward contract, a transaction exposure is created.
This transaction exposure is speculative in nature, given that there is no underlying inflow or
outflow of foreign currency that can be used to satisfy the forward contract. By hedging
balance sheet exposure, a company might incur a realized foreign exchange loss to avoid an
unrealized negative translation adjustment or unrealized remeasurement loss.
4. The gains and losses arising from financial instruments used to hedge balance sheet
exposure are treated in a similar manner as the item the hedge is intended to cover. If the
foreign currency is the functional currency, gains and losses on hedging instruments will be
taken to accumulated other comprehensive income. If the U.S. dollar is the functional
currency, gains and losses on the hedging instruments will be offset against the related
remeasurement gains and losses.
10-6
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
5. The major concept underlying the temporal method is that the translation process should
result in a set of translated U.S. dollar financial statements as if the foreign subsidiary’s
transactions had actually been carried out using U.S. dollars. To achieve this objective, assets
carried at historical cost and stockholders’ equity are translated at historical exchange rates;
assets carried at current value and liabilities (carried at current value) are translated at the
current exchange rate. Under this concept, the foreign subsidiary’s monetary assets and
liabilities are considered to be foreign currency cash, receivables, and payables of the parent
which are exposed to transaction risk. For example, if the foreign currency appreciates, then
the foreign currency receivables increase in U.S. dollar value and a gain is recognized.
Balance sheet exposure under the temporal method is analogous to the net transaction
exposure which exists from having both receivables and payables in a particular foreign
currency.
The major concept underlying the current rate method is that the entire foreign investment is
exposed to foreign exchange risk. Therefore all assets and liabilities are translated at the
current exchange rate. Balance sheet exposure under this concept is equal to the net
investment.
7. The major differences relate to non-monetary assets carried at historical cost and related
expenses, i.e., inventory and cost of goods sold; property, plant, and equipment and
depreciation expense; and intangible assets and amortization expense. Under the temporal
method, these items are all translated at historical exchange rates. Under the current rate
method, the assets are translated at the current exchange rate and the related expenses are
translated at the average exchange rate for the current period.
8. The functional currency is the currency of the subsidiary’s primary economic environment. It
is usually identified as the currency in which the company generates and expends cash.
FASB ASC 830 recommends that several factors such as the location of primary sales
markets, sources of materials and labor, the source of financing, and the amount of
intercompany transactions should be evaluated in identifying an entity’s functional currency.
FASB ASC 830 does not provide any guidance as to how these factors are to be weighted
(equally or otherwise) when identifying an entity’s functional currency.
9. The foreign subsidiary's net asset position in foreign currency at the beginning of the period
is first determined. Changes in net assets are determined to explain the net asset balance in
foreign currency at the end of the period. The beginning net asset position and changes in
net assets are translated at appropriate exchange rates and the ending net asset position in
dollars is determined.
The ending net asset balance in foreign currency is then translated at the current rate and this
result is subtracted from the ending net asset position in dollars (already calculated). The
difference is the translation adjustment. It is positive if the actual dollar net asset position is
less than the net asset position based on the current exchange rate. The translation
adjustment is negative if the actual dollar net asset position is greater than if translated at the
current rate.
The cumulative translation adjustment is reported on the U.S. dollar Balance Sheet in the
Stockholders’ Equity Section as a part of Accumulated Other Comprehensive Income.
10-7
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
10. Application of the equity method to a foreign subsidiary results in the cumulative translation
adjustment (CTA) related to that foreign subsidiary being included in the parent’s Investment
in Subsidiary account and also as a separate component of the parent’s equity (reported in a
separate line in the parent company’s column on the consolidation worksheet). In addition,
translation of a foreign subsidiary’s foreign currency financial statements results in the CTA
related to that foreign subsidiary being included as a separate component of the subsidiary’s
equity (reported as a separate line item in the foreign subsidiary’s column on the consolidation
worksheet). Thus, the CTA is reflected in both the parent and subsidiary columns of the
consolidation worksheet and therefore would be double-counted if no adjustment is made. As
is true for other subsidiary stockholders’ equity accounts (i.e., contributed capital and
beginning retained earnings), the balance in the subsidiary’s CTA account must be eliminated
against the Investment in Subsidiary account through a consolidation entry on the
consolidation worksheet. As a result of this consolidation entry, the Investment in Subsidiary
balance is fully eliminated and double-counting the CTA is avoided.
A second consolidation entry related to the CTA is required to revalue the excess of fair value
over book value for the change in exchange rates since the date of acquisition. Because the
excess of fair value over book value is not carried in either the parent’s or the subsidiary’s
books, but only on the consolidation worksheet, the CTA related to the excess also is not
included in the CTA amount reflected in the parent and subsidiary columns of the
consolidation worksheet.
11. Translation is required when a foreign currency is the functional currency. Remeasurement
is required in two situations:
Remeasurement is carried out using the temporal method, with remeasurement gains and
losses reported in consolidated income. Translation is done using the current rate method
and the resulting translation adjustment is carried in accumulated other comprehensive
income as a separate component of stockholders’ equity.
12. The temporal method must be used to remeasure the financial statements of operations in
highly inflationary countries. One reason for mandating the use of the temporal method is that
it avoids the disappearing plant problem that exists when the current rate method is used.
Under the current rate method, fixed assets are translated at current exchange rates. With
high rates of inflation, the foreign currency will depreciate significantly. When the historical
cost of fixed assets is translated at a significantly lower current exchange rate, the dollar value
of fixed assets “disappears.” This problem is avoided by translating at the historical exchange
rate as is done under the temporal method.
13. Differences exist between IFRS and U.S. GAAP with regard to (a) the hierarchy of factors
used to determine the functional currency and (b) the method used to translate the financial
statements of a subsidiary located in a hyperinflationary country.
IAS 21 establishes primary factors and other factors to be considered in determining an
entity’s functional currency. When the indicators are mixed and the functional currency is not
obvious, the parent must give priority to the primary indicators in determining the foreign
entity’s functional currency. U.S. GAAP does not have a similar hierarchy.
In translating the foreign currency financial statements of a subsidiary located in a highly
inflationary economy, IAS 21 requires financial statements to first be restated for local inflation
and then translated into the parent’s currency using the current exchange rate for all financial
statement items. In contrast, U.S. GAAP requires use of the temporal method with no
adjustment for inflation in this situation.
10-8
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
Answers to Problems
Because the yuan is the functional currency, the financial statements must
be translated using the current rate method. Therefore, answers a. and d.
can be eliminated. Because the subsidiary has a net asset position and the
yuan has depreciated from $.16 to $.12, a negative translation adjustment
will result.
10-9
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
Long-term debt is translated at the current exchange rate under the temporal
method.
10-10
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
When the U.S. dollar is the functional currency, U.S. GAAP requires
remeasurement using the temporal method with remeasurement gains and
losses reported in income.
The BRL 460,000 note payable is then translated into US$ using the
December 31, 2017 US$ per BRL exchange rate as follows: BRL 460,000 x
$0.20 = $92,000.
The BRL 40,000 foreign exchange loss is translated into US$ using the
average 2017 US$ per BRL exchange rate as follows: BRL 40,000 x $0.25 =
$10,000.
10-11
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
22. (5 minutes) Determine Translated Values under the Current Rate Method
As a translation, both the asset (inventory) and the liability (accounts payable)
utilize the current exchange rate at the balance sheet date (December 31).
Thus, the translated values are as follows:
23. (10 minutes) (Determine appropriate exchange rates under the current rate
method [translation] and temporal method [remeasurement])
Translation Remeasurement
Accounts payable $.16 C $.16 C
Accounts receivable $.16 C $.16 C
Accumulated depreciation $.16 C $.26 H
Advertising expense $.19 A $.19 A
Amortization expense $.19 A $.25 H
Buildings $.16 C $.26 H
Cash $.16 C $.16 C
Common stock $.28 H $.28 H
Depreciation expense $.19 A $.26 H
Dividends (10/1) $.20 H $.20 H
Notes payable $.16 C $.16 C
Patents (net) $.16 C $.25 H
Salary expense $.19 A $.19 A
Sales $.19 A $.19 A
Translation Remeasure-
CHF Rate US$ ment Rate US$
Cash 800,000 $1.10 880,000 $1.10 880,000
Inventory 1,300,000 $1.10 1,430,000 $1.00 1,300,000
Property, plant & equip. 4,000,000 $1.10 4,400,000 $1.00 4,000,000
Total 6,100,000 6,710,000 6,180,000
10-12
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
24. (continued)
The remeasurement loss arises because the Swiss subsidiary has a net
monetary liability position of CHF1,300,000 (Cash of CHF800,000 less Notes
payable of CHF2,100,000) and the Swiss franc has appreciated by $.10
[CHF1,300,000 x $.10 = $130,000]. The loss is unrealized. It would be realized
only if the Swiss subsidiary converted its Swiss franc cash into dollars at
December 31, thereby realizing a transaction gain of $80,000 [CHF800,000 x
($1.10-$1.00)], and the parent paid off the Swiss franc note payable using U.S.
dollars, thereby realizing a transaction loss of $210,000 [CHF2,100,000 x
($1.10-$1.00)]. (The note could have been paid at December 1 for $2,100,000
[CHF2,100,000 x $1.00]. At December 31, it takes $2,310,000 to pay off the note
[CHF2,100,000 x $1.10].)
10-13
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
25. (15 minutes) (Determine the amounts at which foreign currency balances are
reported on a foreign subsidiary’s trial balance and in the parent’s
consolidated financial statements)
* Amounts at which the CHF balances are carried on the ILS trial balance
** Amounts at which the CHF balances are reported in the USD financial
statements
10-14
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
26. (30 minutes) (Prepare financial statements for a foreign subsidiary and then
translate them into U.S. dollars)
* Repair expense is the only expense not incurred evenly throughout the year.
10-15
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
26. (continued)
27. (30 minutes) (Prepare a statement of cash flows for a foreign subsidiary and
then translate it into U.S. dollars)
10-16
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
Note: The purchase of land on account did not result in a decrease in monetary
assets, rather an increase in monetary liabilities. Payment on the note payable
and collection of accounts receivable do not affect the net monetary liability
position.
10-17
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
10-18
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
30. (10 minutes) (Determine the appropriate exchange rate under the current rate
method [translation] and temporal method [remeasurement])
10-19
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
31. (30 minutes) (Determine translation adjustment; prepare journal entries for
forward contract hedge of balance sheet exposure; determine amount to be
reported in accumulated other comprehensive income)
10-20
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
* This amount can be verified as ending assets (24,400 KQ) minus ending
liabilities (8,000 KQ) – net assets, 12/31 = 16,400 KQ.
10-21
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
32. (continued)
b. Remeasurement of Subsidiary Trial Balance
Debits Credits
Cash 8,000 KQ x 1.62 $12,960
Accounts Receivable 9,000 KQ x 1.62 14,580
Equipment 3,000 KQ x 1.71 5,130
Accumulated Depreciation 600 KQ x 1.71 $ 1,026
Land 5,000 KQ x 1.59 7,950
Accounts Payable 3,000 KQ x 1.62 4,860
Notes Payable 5,000 KQ x 1.62 8,100
Common Stock 10,000 KQ x 1.71 17,100
Dividends 4,000 KQ x 1.66 6,640
Sales 25,000 KQ x 1.64 41,000
Salary Expense 5,000 KQ x 1.64 8,200
Depreciation Expense 600 KQ x 1.71 1,026
Miscellaneous Expense 9,000 KQ x 1.64 14,760
$71,246
Remeasurement loss (debit) 840
$72,086 $72,086
Calculation of Remeasurement Loss
Net monetary assets, 1/1 -0- -0-
Increase in net monetary assets:
Common stock issued 10,000 KQ x 1.71 $17,100
Sales 25,000 KQ x 1.64 41,000
Decrease in net monetary assets:
Acquired equipment (3,000) KQ x 1.71 (5,130)
Acquired land (5,000) KQ x 1.59 (7,950)
Dividends (4,000) KQ x 1.66 (6,640)
Salary expense (5,000) KQ x 1.64 (8,200)
Miscellaneous expense (9,000) KQ x 1.64 (14,760)
Net monetary assets, 12/31 9,000* KQ $15,420
Net monetary assets, 12/31
at current exchange rate 9,000 KQ x 1.62 14,580
Remeasurement loss (debit) $ 840
* This amount can be verified as ending assets (17,000 KQ) minus ending
liabilities (8,000 KQ) – net assets, 12/31 = 9,000 KQ.
10-22
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
LIVINGSTON COMPANY
Income Statement
For the Year Ending December 31, 2017
Balance Sheet
December 31, 2017
10-23
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
33. (continued)
10-24
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
Exchange
KR Rate US$
Net monetary assets, 1/1/17* 35,000 x $3.00 = $105,000
Increases in net monetary assets:
Issued Common Stock (4/1/17) 13,000 x $3.10 = 40,300
Sold Building** (7/1/17) 10,000 x $3.30 = 33,000
Sales (2017) 162,000 x $3.20 = 518,400
Decreases in net monetary assets:
Purchased Equipment (4/1/17) (64,000) x $3.10 = (198,400)
Paid Dividends (10/1/17) (57,000) x $3.40 = (193,800)
Rent Expense (2017) (21,500) x $3.20 = (68,800)
Salary Expense (2017) (45,000) x $3.20 = (144,000)
Utilities Expense (2017) (7,000) x $3.20 = (22,400)
Net monetary assets, 12/31/17 25,500 $69,300
Net monetary assets, 12/31/17 at
current exchange rate 25,500 x $3.50 = 89,250
Remeasurement gain (credit) $(19,950)
b. Translation Adjustment
Exchange
KR Rate US$
Net assets, 1/1/17* 124,000 x $3.00 = $372,000
Increases in net assets:
Issued Common Stock (4/1/17) 13,000 x $3.10 = 40,300
Gain on Sale of Building** (7/1/17) 8,500 x $3.30 = 28,050
Sales (2017) 162,000 x $3.20 = 518,400
Decreases in net assets:
Paid Dividends (10/1/17) (57,000) x $3.40 = (193,800)
Depreciation expense (2017) (40,000) x $3.20 = (128,000)
Rent Expense (2017) (21,500) x $3.20 = (68,800)
Salary Expense (2017) (45,000) x $3.20 = (144,000)
Utilities Expense (2017) (7,000) x $3.20 = (22,400)
Net assets, 12/31/17 137,000 $401,750
Net assets, 12/31/17 at
current exchange rate 137,000 x $3.50 = 479,500
Translation adjustment (credit) $ (77,750)
10-25
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
10-26
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
35. (continued)
b. and c.
10-27
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
35. (continued)
b. and c.
Balance Sheet
December 31, 2017
10-28
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
36. (90 minutes) (Translate foreign currency financial statements and prepare
consolidation worksheet)
Step One
Simbel's financial statements are first translated into U.S. dollars after
reclassification of the 10,000 pound expenditure for rent from rent expense to
prepaid rent. Credit balances are in parentheses.
Translation Worksheet
Exchange
Account Pounds Rate Dollars
Sales (800,000) 0.274 (219,200)
Cost of goods sold 420,000 0.274 115,080
Salary expense 74,000 0.274 20,276
Rent expense (adjusted) 36,000 0.274 9,864
Other expenses 59,000 0.274 16,166
Gain on sale of building, 10/1/17 (30,000) 0.273 (8,190)
Net income (241,000) (66,004)
10-29
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
36. (continued)
Pounds Dollars
Retained earnings, 1/1/16 -0- -0-
Net income, 2016 (163,000) 0.288 (46,944)
Dividends, 6/1/16 30,000 0.290 8,700
Retained earnings, 1/1/17 (133,000) (38,244)
Pounds Dollars
10-30
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
36. (continued)
Step Two
Cayce and Simbel's U.S. dollar accounts are then consolidated. Necessary
adjustments and eliminations are made.
Consolidation Worksheet
Adjustments and Consolidated
Cayce Simbel Eliminations Balances
Account Dollars Dollars Debit Credit Dollars
Sales (200,000) (219,200) (419,200)
Cost of goods sold 93,800 115,080 208,880
Salary expense 19,000 20,276 39,276
Rent expense 7,000 9,864 16,864
Other expenses 21,000 16,166 37,166
Dividend income (13,750) -0- (I) 13,750 -0-
Gain, 10/1/17 -0- (8,190) (8,190)
Net income (72,950) (66,004) (125,204)
Ret earn, 1/1/17 (318,000) (38,244) (S) 38,244 (*C) 38,244 (356,244)
Net income (72,950) (66,004) (125,204)
Dividends 24,000 13,750 (I) 13,750 24,000
Ret earn, 12/31/17 (366,950) (90,498) (457,448)
10-31
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
36. (continued)
Entry *C
Investment in Simbel ................................................... 38,244
Retained earnings, 1/1/17 ....................................... 38,244
To accrue 2017 increase in subsidiary book value (see Schedule 1). Entry is
needed because parent is using the cost method.
Entry S
Common stock (Simbel) .......................................... 72,000
Add'l paid-in-capital (Simbel) ...................................... 45,000
Retained earnings, 1/1/17 (Simbel) ............................. 38,244
Property, plant & equipment (revaluation) ................. 9,000
Investment in Simbel .......................................... 164,244
To eliminate subsidiary's stockholders' equity accounts and allocate the
excess of acquisition consideration over book value to land (Property, plant &
equipment).
The excess of acquisition consideration over book value is calculated as
follows:
Acquisition consideration ...................................................... $126,000
Book value, 1/1/17 ...................................................................
Common stock ...................................................................... (72,000)
Add’l paid-in capital .............................................................. (45,000)
Excess of acquisition consideration over book value $ 9,000
The excess of acquisition consideration over book value is 30,000 pounds.
The U.S. dollar equivalent at 1/1/17, the date of acquisition, is $9,000 (£E30,000
x $.30).
Entry I
Dividend income .......................................................... 13,750
Dividends ................................................................. 13,750
To eliminate intra-entity dividend payments recorded by parent as income.
Entry E
Cumulative translation adjustment............................. 900
Property, plant & equipment (revaluation) ........... 900
To revalue (write-down) the excess of acquisition consideration over book
value for the change in exchange rate since the date of acquisition with the
counterpart recognized in the consolidated cumulative translation
adjustment.
The revaluation of "excess" is calculated as follows:
Excess of acquisition consideration over book value
U.S. dollar equivalent at 12/31/17 £E30,000 x $.27 = $8,100
U.S. dollar equivalent at 1/1/17 £E30,000 x $.30 = 9,000
Cumulative translation adjustment
related to excess, 12/31/17 (negative) $( 900)
10-32
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
10-33
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
37. (continued)
10-34
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
37. (continued)
Exchange
KčS Rate US$
Sales 25,000,000 0.035 875,000
Cost of goods sold (12,000,000) Sched. A (493,500)
Depreciation expense—equipment (2,500,000) Sched. B (118,000)
Depreciation expense—buildings (1,800,000) Sched. C (85,200)
Research and development expense (1,200,000) 0.035 (42,000)
Other expenses (1,000,000) 0.035 (35,000)
Income before remeasurement gain 6,500,000 101,300
Remeasurement gain, 2017 - 408,000
Net income 6,500,000 509,300
Retained earnings, 1/1/17 500,000 given 353,000
Dividends, 12/17/17 (1,500,000) 0.031 (46,500)
Retained earnings, 12/31/17 5,500,000 815,800
KčS ER US$
Beginning inventory 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
10-35
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
37. (continued)
Schedule B—Equipment
KčS ER US$
Old Equipment—at 1/1/16 20,000,000 0.050 1,000,000
New Equipment—acquired 1/3/17 5,000,000 0.036 180,000
Total 25,000,000 1,180,000
Schedule C—Buildings
KčS ER US$
Old Buildings—at 1/1/16 60,000,000 0.050 3,000,000
New Buildings—acquired 3/5/17 12,000,000 0.034 408,000
Total 72,000,000 3,408,000
Accum. Depr.—Old Buildings 30,000,000 0.050 1,500,000
Accum. Depr.—New Buildings 300,000 0.034 10,200
Total 30,300,000 1,510,200
Deprec. expense—Old Buildings 1,500,000 0.050 75,000
Deprec. expense—New Buildings 300,000 0.034 10,200
Total 1,800,000 85,200
10-36
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
37. (continued)
Part I (c). U.S. dollar is the functional currency—temporal method (no long-
term debt)
Exchange
KčS Rate US$
Sales 25,000,000 0.035 875,000
Cost of goods sold (12,000,000) Sched. A (493,500)
Depreciation expense—equipment (2,500,000) Sched. B (118,000)
Depreciation expense—buildings (1,800,000) Sched. C (85,200)
Research and development expense (1,200,000) 0.035 (42,000)
Other expenses (1,000,000) 0.035 (35,000)
Income before remeasurement loss 6,500,000 101,300
Remeasurement loss, 2017 - (92,000)
Net income 6,500,000 9,300
Retained earnings, 1/1/17 500,000 given (147,000)
Dividends, 12/15/17 (1,500,000) 0.031 (46,500)
Retained earnings, 12/31/17 5,500,000 (184,200)
10-37
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
37. (continued)
Calculation of Remeasurement Loss
KčS ER US$
Net monetary assets, 1/1/17 13,000,000 0.040 520,000
Increase in monetary assets:
Sales 25,000,000 0.035 875,000
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)
Dividends, 12/15/17 (1,500,000) 0.031 (46,500)
Purchase of equipment, 1/3/17 (5,000,000) 0.036 (180,000)
Purchase of buildings, 3/5/17 (12,000,000) 0.034 (408,000)
Net monetary assets, 12/31/17 2,800,000 176,000
Net monetary assets, 12/31/17
at current exchange rate 2,800,000 0.030 84,000
Remeasurement loss—2017 92,000
10-38
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
37. (continued)
10-39
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
a.
Remeasurement of Brazilian Real (BRL) Trial Balance into Mexican Pesos (MXN)
BRL Exchange MXN
Debit Credit Rate Debit Credit
Cash 5,500 6.30 C 34,650
Accounts Receivable 28,000 6.30 C 176,400
Notes Payable 5,000 6.30 C 31,500
Sales 35,000 6.20 A 217,000
Rent Expense 6,000 6.20 A 37,200
Interest Expense 500 6.20 A 3,100
40,000 40,000 251,350 248,500
Remeasurement Gain 2,850
Total 251,350 251,350
10-40
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
38. (continued)
b.
10-41
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
38. (continued)
10-42
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
The responses to this assignment will depend upon the company selected by
the student for analysis. It is unlikely that the company selected will disclose
the amount of any remeasurement gains and losses. The amount of
translation adjustment reported in accumulated other comprehensive income
usually can be found in a statement of stockholders’ equity. A positive
translation adjustment indicates that the foreign currency in which the
company operates, on average, increased in dollar value during the year. A
negative translation adjustment indicates the opposite.
The responses to requirements in this case will depend upon the annual
reports used by students to complete the case. The solution provided here is
based upon 2014 annual reports.
In its Form 10-K for the year ended December 27, 2014, Intel provided
information related to foreign currency hedging activities in the following
locations:
i. Item 1A. Risk Factors, p. 17.
ii. Item 7A. Quantitative and Qualitative Disclosures about Market Risk, p.
45.
iii. Note 2. Accounting Policies, under Foreign Currency Translation and
Hedging Instruments, p. 65, and Derivative Financial Instruments, p. 57-
58.
iv. Note 6. Derivative Financial Instruments, p. 70-75.
10-43
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
The negative sign of the translation adjustment in each year indicates that,
on average, the foreign currency functional currencies of IBM’s foreign
operations decreased in value against the U.S. dollar in that year.
10-44
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
Intel reports that it hedges foreign currency loans receivable, and has
established “balance sheet and forecasted transaction currency risk
management programs” (p. 45). It is unclear, however, whether the
“balance sheet” currency risk management program refers to the hedging
of foreign currency receivables and payables that are reported on the
balances sheet, or relates to the hedging of net investments in foreign
operations. There is no specific mention of “net investment in foreign
operation” hedging.
10-45
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
ASC 830-10-55-6 states: “In some instances, a foreign entity might have more
than one distinct and separable operation. For example, a foreign entity might
have one operation that sells parent-entity-produced products and another
operation that manufactures and sells foreign-entity-produced products. If
they are conducted in different economic environments, those two operations
might have different functional currencies. Similarly, a single subsidiary of a
financial institution might have relatively self-contained and integrated
operations in each of several different countries. In those circumstances,
each operation may be considered to be an entity as that term is used in this
Subtopic, and, based on the facts and circumstances, each operation might
have a different functional currency.”
10-46
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
ASC 830-10-45-10 states: “If the functional currency changes from a foreign
currency to the reporting currency, translation adjustments for prior periods
shall not be removed from equity and the translated amounts for
nonmonetary assets at the end of the prior period become the accounting
basis for those assets in the period of the change and subsequent periods.”
10-47
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
Key:
Average Exchange Rate A
Current Exchange Rate C
Historical Exchange Rate H
10-48
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
FC USD
Net assets, 1/1/17 3,200 $0.50 1,600
Net income, 2017 700 $0.45 315
Net assets, 12/31/17 3,900 1,915
Net assets, 12/31/17
at current exchange rate 3,900 $0.38 1,482
Translation adjustment (negative) 433
c. With the FC as functional currency, the U.S. dollar net income reflected in the
consolidated income statement is $315. If the U.S. dollar were the functional
currency, the amount would be twice as much—$630. With the FC as functional
currency, the amount of total assets reported on the consolidated balance sheet
is 19% [($3,192 – $3,940)/$3,940] smaller than if the U.S. dollar were functional
currency.
The relations between the current ratio, the debt to equity ratio, and profit
margin calculated from the FC financial statements and from the translated U.S.
dollar financial statements are shown below.
10-49
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
These results show that the temporal method distorts all ratios as calculated
from the original foreign currency financial statements. The current rate
method maintains all ratios that use numbers in the numerator and
denominator from the balance sheet only (current ratio, debt-to-equity ratio)
or the income statement only (profit margin). For ratios that combine numbers
from the income statement and balance sheet (return on equity, inventory
turnover), even the current rate method creates distortions.
The U.S. dollar amounts reported under the temporal method for inventory and
fixed assets reflect the equivalent U.S. dollar cost of those assets as if the
parent had sent dollars to the subsidiary to purchase the assets. For example,
to purchase FC 6,000 worth of fixed assets when the exchange rate was
$.50/FC, the parent would have had to provide the subsidiary with $3,000.
10-50
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
The U.S. dollar amounts reported under the current rate method for inventory
and fixed assets reflect neither the equivalent U.S. dollar cost of those assets
nor their U.S. dollar current value. By multiplying the FC historical cost by the
current exchange rate, these assets are reported at what they would have cost
in U.S. dollars if the current exchange rate had been in effect when they were
purchased. This is a hypothetical number with little, if any, meaning.
10-51
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
10-52
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
a. Translation of Suffolk’s December 31, 2017 trial balance from British pounds
to U.S. dollars.
Suffolk PLC
Trial Balance
December 31, 2017
Exchange
Pounds Rate Dollars
Cash £ 1,500,000 $1.68 $ 2,520,000
Accounts receivable 5,200,000 $1.68 8,736,000
Inventory 18,000,000 $1.68 30,240,000
Property, plant, & equipment (net) 36,000,000 $1.68 60,480,000
Accounts payable (1,450,000) $1.68 (2,436,000)
Long-term debt (5,000,000) $1.68 (8,400,000)
Common stock (44,000,000) $1.60 (70,400,000)
Retained earnings, 1/1/17 (8,000,000) Schedule A (12,840,000)
Sales (28,000,000) $1.66 (46,480,000)
Cost of goods sold 16,000,000 $1.66 26,560,000
Depreciation 2,000,000 $1.66 3,320,000
Other expenses 6,000,000 $1.66 9,960,000
Dividends, 1/30/17 1,750,000 $1.65 2,887,500
Cumulative translation
adjustment—positive (credit balance) (4,147,500)
£ 0 $ 0
Note: Amounts in parentheses are credit balances.
Exchange
Schedule A Pounds Rate Dollars
Retained earnings, 1/1/16 £(6,000,000) $1.60 $ (9,600,000)
Net income, 2016 (2,000,000) $1.62 (3,240,000)
Retained earnings, 12/31/16 £(8,000,000) $(12,840,000)
10-53
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
Exchange
Cost Allocation Schedule Pounds Rate Dollars
Cost £52,000,000 $1.60 $83,200,000
Book value 50,000,000 $1.60 80,000,000
Excess of cost over book value £ 2,000,000 $ 3,200,000
10-54
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
3,200,000
160,000
$0 $0 $92,727,500 $92,727,500 $0
10-55
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
Parker, Inc.
Consolidated Income Statement
For the year ended December 31, 2017
Sales $ 116,480,000
Cost of goods sold (60,560,000)
Depreciation (23,320,000)
Other expenses (15,960,000)
Net income $ 16,640,000
Parker, Inc.
Consolidated Balance Sheet
December 31, 2017
Assets
Cash $ 6,207,500
Accounts receivable 18,736,000
Inventory 60,240,000
Property, plant & equipment (net) 168,840,000
Total $254,023,500
10-56
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
a. Translation of Suffolk’s December 31, 2017 trial balance from British pounds
to U.S. dollars.
Suffolk PLC
Trial Balance
December 31, 2017
Exchange
Pounds Rate Dollars
Cash £ 1,500,000 $1.60 $ 2,400,000
Accounts receivable 5,200,000 $1.60 8,320,000
Inventory 18,000,000 $1.60 28,800,000
Property, plant, & equipment (net) 36,000,000 $1.60 57,600,000
Accounts payable (1,450,000) $1.60 (2,320,000)
Long-term debt (5,000,000) $1.60 (8,000,000)
Common stock (44,000,000) $1.60 (70,400,000)
Retained earnings, 1/1/17 (8,000,000) Schedule A (12,800,000)
Sales (28,000,000) $1.60 (44,800,000)
Cost of goods sold 16,000,000 $1.60 25,600,000
Depreciation 2,000,000 $1.60 3,200,000
Other expenses 6,000,000 $1.60 9,600,000
Dividends, 1/30/17 1,750,000 $1.60 2,800,000
Cumulative translation
adjustment 0
£ 0 $ 0
Note: Amounts in parentheses are credit balances.
Exchange
Schedule A Pounds Rate Dollars
Retained earnings, 1/1/16 £(6,000,000) $1.60 $ (9,600,000)
Net income, 2016 (2,000,000) $1.60 (3,200,000)
Retained earnings, 12/31/16 £(8,000,000) $(12,800,000)
10-57
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
Exchange
Cost Allocation Schedule Pounds Rate Dollars
Cost £52,000,000 $1.60 $83,200,000
Book value 50,000,000 $1.60 80,000,000
Excess of cost over book value £ 2,000,000 $ 3,200,000
10-58
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
3,200,000
$0 $0 $92,400,000 $92,400,000 $0
10-59
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
Parker, Inc.
Consolidated Income Statement
For the year ended December 31, 2017
Sales $114,800,000
Cost of goods sold (59,600,000)
Depreciation (23,200,000)
Other expenses (15,600,000)
Net income $ 16,400,000
Parker, Inc.
Consolidated Balance Sheet
December 31, 2017
Assets
Cash $ 6,000,000
Accounts receivable 18,320,000
Inventory 58,800,000
Property, plant & equipment (net) 165,800,000
Total $248,920,000
10-60
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
a. Translation of Suffolk’s December 31, 2017 trial balance from British pounds to
U.S. dollars.
Suffolk PLC
Trial Balance
December 31, 2017
Exchange
Pounds Rate Dollars
Cash £ 1,500,000 $1.52 $ 2,280,000
Accounts receivable 5,200,000 $1.52 7,904,000
Inventory 18,000,000 $1.52 27,360,000
Property, plant, & equipment (net) 36,000,000 $1.52 54,720,000
Accounts payable (1,450,000) $1.52 (2,204,000)
Long-term debt (5,000,000) $1.52 (7,600,000)
Common stock (44,000,000) $1.60 (70,400,000)
Retained earnings, 1/1/17 (8,000,000) Schedule A (12,760,000)
Sales (28,000,000) $1.54 (43,120,000)
Cost of goods sold 16,000,000 $1.54 24,640,000
Depreciation 2,000,000 $1.54 3,080,000
Other expenses 6,000,000 $1.54 9,240,000
Dividends, 1/30/17 1,750,000 $1.55 2,712,500
Cumulative translation
adjustment—negative (debit balance) 4,147,500
£ 0 $ 0
Note: Amounts in parentheses are credit balances.
Exchange
Schedule A Pounds Rate Dollars
Retained earnings, 1/1/16 £(6,000,000) $1.60 $ (9,600,000)
Net income, 2016 (2,000,000) $1.58 (3,160,000)
Retained earnings, 12/31/16 £(8,000,000) $(12,760,000)
10-61
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
Exchange
Cost Allocation Schedule Pounds Rate Dollars
Cost £52,000,000 $1.60 $83,200,000
Book value 50,000,000 $1.60 80,000,000
Excess of cost over book value £ 2,000,000 $ 3,200,000
10-62
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
3,200,000
160,000
$0 $0 $92,392,500 $92,392,500 $0
10-63
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
Parker, Inc.
Consolidated Income Statement
For the year ended December 31, 2017
Sales $ 113,120,000
Cost of goods sold (58,640,000)
Depreciation (23,080,000)
Other expenses (15,240,000)
Net income $ 16,160,000
Parker, Inc.
Consolidated Balance Sheet
December 31, 2017
Assets
Cash $ 5,792,500
Accounts receivable 17,904,000
Inventory 57,360,000
Property, plant & equipment (net) 162,760,000
Total $243,816,500
10-64
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 10 – Translation of Foreign Currency Financial Statements – Hoyle, Schaefer, Doupnik, 13e
Appreciation of the British pound from $1.60 to $1.68 results in consolidated net
income being 1.5% higher, cash flow from dividends being 3% higher, and the
debt-to-equity ratio being 2% lower than if there had been no change in
exchange rates.
Depreciation of the British pound from $1.60 to $1.52 would have resulted in
income being 1.5% lower, cash flow from dividends being 3% lower, and the
debt-to-equity ratio being 2% higher than if there had been no change in
exchange rates.
An increase in the dollar value of the British pound results in higher profitability,
greater cash inflow, and an improved debt-to-equity ratio. The opposite is true
for a decrease in the dollar value of the British pound.
If the British pound is expected to appreciate, Parker should not hedge its
British pound exposure associated with its investment in Suffolk. However, if
the British pound is expected to depreciate, Parker may wish to hedge its British
pound net asset and cash flow exposure in some way. The decline in dollar
value of future British pound dividend payments could be hedged by selling
British pounds forward or by purchasing a British pound put option. The
negative translation adjustment reported in accumulated other comprehensive
income could be avoided using an option or forward contract, or by taking out
a loan in British pounds.
10-65
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.