Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity

Statements

CHAPTER 12

MULTINATIONAL ACCOUNTING: ISSUES IN FINANCIAL REPORTING AND

TRANSLATION OF FOREIGN ENTITY STATEMENTS

ANSWERS TO QUESTIONS

Q12-1   Expected benefits of adopting a single set of high-quality accounting

standards include:

1. Continued expansion of capital markets across national borders.

2. Faster availability of financial statements that provide needed information to
investors in countries where standards have not previously focused on
information needs of investors.
3. More rapid development of stable, liquid capital markets.
4. Increased economic growth.
5. Improve ability of investors to evaluate opportunities across national borders.
6. Improve the efficient use of global capital.
7. Reduce reporting costs for corporations that wish to access capital in markets
outside of their home country.
8. Increase confidence of financial statement users in the quality of financial
reporting.

Q12-2   The IASB is an independent, privately funded accounting standards-setting

body. the mission of the IASB is to develop a single set of high-quality,
understandable, and enforceable global accounting standards. The IASB is
composed of 14 members who each serve a five-year term subject to one
reappointment. Members are required to sever all employment relationships that
might compromise their independent judgement in setting accounting standards. The
IASB is based in London.

Q12-3   The IASB solicits input from the public when evaluating potential standards
and publishes a discussion paper and/or an exposure draft which are subject to
comment before issuing a final standard.

Q12-4   IFRS are already mandated or permitted in over 100 countries around the
world. Beginning with 2005, the European Union mandated the use of IFRS for
companies listing on stock exchanges in the EU, although the EU also continues to
accept statements prepared according to US GAAP. Beginning in 2008, foreign
private issuers who list their shares on US stock exchanges may use IFRS in their
financial statements without reconciliation to US GAAP.

Q12-5   The SEC is considering allowing US companies to use IFRS in their financial

reports. The SEC held roundtable discussions in December 2007. Among those
participating in the roundtable, there was overwhelming support for adopting for the
use of a single of global standards, and the majority of the panellists agreed that
IFRS ultimately will be the standard. There was general agreement among
roundtable participants that the SEC should specify a date by which US issuers would
be required to prepare financial statements in accordance with IFRS. The target date
most often mentioned should conversion be required is 2011, to coincide with the
adoption of IFRS by a number of other countries including Canada and India.

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Q12-6   
 Improve global competitive position of US corporations.
 Increase the quality of information available to investors.
 Reduce costs of compliance for companies that are currently using multiple
reporting frameworks.
 Enhance global capital markets.
 Companies would have easier access to raising capital in the global markets.
 Because SEC now permits foreign private issuers to file their financial reports
using IFRS without reconciliation, not allowing US companies to report under
IFRS could result in US companies bearing costs not incurred by foreign
private issuers.
 Enhance comparability across companies for users. SEC chairman Cox
noted that two-thirds of US investors own securities of foreign companies, a
30 percent increase in the last five years.

Q12-7   a. Local currency unit. The local currency unit (LCU) is the currency used
locally; that is, the currency used in the country in which the company is located.

b.  Recording currency. The recording currency is the currency used to record the
economic activities in the journals and ledger of the business entity. The recording
currency is typically the local currency, but may be some other currency.

c.  Reporting currency. The reporting currency is the currency used on the financial
statements of the business entity. Typically, the reporting currency is the same as the
recording currency.

Q12-8   The functional currency is normally the currency in which the foreign entity
performs most of its cash functions. However, for entities operating in highly
inflationary economies, the functional currency is designated as the U.S. dollar
regardless of the actual currency used for cash functions. The definition of a highly
inflationary economy is one that has a cumulative inflation of approximately 100
percent or more over a 3-year period. FASB 52 provides six indicators to be used to
determine a foreign entity's functional currency: (1) cash flows, (2) sales prices, (3)
sales markets, (4) expenses, (5) financing, and (6) intercompany transactions and
arrangements. If most of these indicators take place in the foreign currency unit, then
the FCU is the functional currency. If most take place in the U.S. dollar, then the
dollar is the functional currency.

Q12-9   Harmonization means to standardize the accounting principles used around

the world. For example, the U.S. does not allow a company to revalue its own assets
for the effects of inflation. Several countries do, however, allow for this revaluation
and subsequent depreciation on the revaluation. Differences in accounting principles
from country to country make it difficult to compare business entities doing business
in different countries. The harmonization of accounting principles around the world
would eliminate many of the problems of combining and consolidating multinational
entities. A U.S. company with international investments could then be assured of
essentially the same accounting principles being applied; therefore, revenues, profits,
and investments in these foreign investments could effectively be compared and
contrasted.

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Q12-10   When the local currency is the foreign entity's functional currency, the
translation method is used to convert the foreign entity's financial statements into U.S.
dollars, the parent company's reporting currency. The translation method uses the
current exchange rate for converting all assets and liabilities. The appropriate
historical exchange rate is used to convert the Canadian entity's stockholders' equity
accounts. The weighted average exchange rate is used to convert the Canadian
entity's income statement accounts. The change in the translation adjustment during
the period is reported as an element of other comprehensive income on the
Statement of Comprehensive Income, and is then accumulated with the other
elements of comprehensive income and reported within the stockholders’ equity
section of the consolidated balance sheet. The translation adjustment may have a
debit or credit balance, depending on the relative change in the exchange rate since
the parent acquired the subsidiary.

Q12-11   Remeasurement is used when the U.S. dollar is the functional currency of

the foreign entity. Furthermore, FASB 52 requires that the financial statements of
foreign entities operating in highly inflationary economies be remeasured as if the
functional currency were the reporting currency. Remeasurement requires the use of
the current exchange rate to convert all monetary assets and liabilities. The historical
exchange rate is used to convert nonmonetary assets and the stockholders' equity
accounts. The appropriate historical rate is the rate on the later of the two following
dates: (1) the day the foreign entity obtained the asset or the day the foreign entity
made a transaction affecting the stockholders' equity section such as selling
additional stock or declaring dividends, or (2) the day the U.S. parent company
purchased the foreign affiliate. In the case of a pooling of interests, the appropriate
historical rate is the rate for the day the foreign affiliate transacted to obtain the asset
or transacted in a stockholders' equity item.

The weighted average exchange rate for the period covered by the income statement
is used for revenues or expenses incurred evenly over the period except for those
expenses that are allocations of balance sheet items, such as depreciation, cost of
goods sold (inventories), or write-offs of goodwill. For cost allocations, the same rate
used on the balance sheet to convert the items to U.S. dollars is used on the income
statement.

Q12-12   Translation adjustments are the balancing items to make the debit and
credit items equal in the translated trial balance measured in U.S. dollars. The parent
company records its share of the translation adjustment in its books through an
adjusting entry. The change during the period in the translation adjustment is reported
as a component of other comprehensive income in the Statement of Comprehensive
Income. The accumulated other comprehensive income is reported as a separate
item of stockholders’ equity in the balance sheet. The cumulative translation
adjustment may have a debit balance or credit balance. A debit balance usually
means that the current exchange rate is less than the historical rate used to translate
the stockholders’ equity accounts. This means the dollar is strengthening relative to
the foreign currency. A credit balance usually results when the dollar is weakening
relative to the foreign currency, and the current exchange rate is higher than the
historical exchange rate.

Q12-13   The remeasurement gain or loss first appears as the trial balance balancing
item in the income statement section of the foreign affiliate's trial balance. The parent
company recognizes its share of the remeasurement gain through an adjusting entry.
Typically, the remeasurement gain is shown in the "Other Income" section of the
consolidated income statement.

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Q12-14   The stockholders' equity accounts are translated at the historical rate in

effect the date the parent company acquired the foreign affiliate because this aids in
the elimination entry process used to prepare the consolidated statements. The
investment account on the parent company's books includes the initial investment
measured in terms of the exchange rate on the date the parent purchased the foreign
affiliate. Thus, the basic eliminating entry to eliminate the investment account against
the capital stock and additional paid-in capital includes accounts with the same
currency measurement rate. The retained earnings include the effects of revenue and
expense transactions, all measured at different rates over time. The beginning
translated retained earnings, as measured in U.S. dollars, is taken from last year's
ending retained earnings. Net income is obtained from the income statement and
dividends are translated using the exchange rate in effect the date the dividends are
declared.

Q12-15   The current rate method uses the current exchange rate to translate the
foreign affiliate's assets and liabilities. The weighted-average exchange rate is used
to translate the foreign affiliate's revenues and expenses. This means that the
relationships within the assets and liabilities of the foreign affiliate's balance sheet are
not changed in the translation process. For example, the current ratio in U.S. dollar
statements will be the same as in the foreign currency statements. This results from
the use of a constant translation multiplier within the financial statements. However,
this relationship does not hold when computing ratios using a balance sheet account
and an income statement account: for example, return on equity. These ratios include
accounts with different translation exchange rates.

Q12-16  The excess of cost over book value has two effects: (1) the portion
amortized for the period is reported in the income statement, and (2) the unamortized
balance is reported in the balance sheet. When the local currency unit is the
functional currency, the translation method is used to convert the foreign entity's
financial statements into U.S. dollars. FASB 52 requires that the differential be
evaluated in terms of the foreign currency unit. Therefore, the period's amortization,
measured in the foreign currency, is translated at the weighted average exchange
rate. The remaining unamortized differential is translated at the current exchange rate
at the end of the period. The different exchange rates used typically result in a
difference when measured in U.S. dollars. This difference becomes part of the
translation adjustment.

Q12-17  The change during the period in the translation adjustment is reported as a

component of other comprehensive income. The translation adjustment is part of the
accumulated other comprehensive income that is reported in the stockholders’ equity
section of the consolidated balance sheet.

Q12-18  Not all foreign subsidiaries are consolidated. The parent must be able to
exercise control over the foreign subsidiary's operating and financial policies before
consolidation is proper. This may not be the case if the foreign subsidiary is located in
a country in which the government places significant restrictions on dividend
declarations, input from non-local management, or other operating or financing
aspects of the business.

Q12-19  A recent Accounting Trends and Techniques indicated that approximately

one-quarter of the foreign subsidiaries of U.S. companies are not consolidated;
instead, they are reported as a long-term investment on the U.S. company's financial

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statements, usually under the equity method. The cost method is used to account for
the foreign investment, however, if the U.S. investor is not able to exercise significant
influence over the foreign investee's operating and financial policies.

Q12-20* The issue with intercompany transactions is with regard to the amount of

unrealized profit. The unrealized profit determined at the time of the initial
intercompany transaction is a function of the currency exchange rate at that time. As
the rate changes, the underlying accounts may be translated at different exchange
rates, thus affecting the computation of unrealized intercompany profit. FASB 52
states that the intercompany profit should be eliminated based on the exchange rate
at the date the intercompany transaction occurred. This eliminates any potential
problems from subsequent changes in exchange rates.

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SOLUTIONS TO CASES

C12-1 Comparison of US GAAP and IFRS

Research PricewaterhouseCoopers offers a publication on its Web site,

Similarities and differences: A comparison of IFRS and US GAAP, that
provides a topic-based comparison. Access this publication on the
Web at
http://www.pwc.com/gx/eng/about/svcs/corporatereporting/SandD_07.
pdf. On pages 4-11, there is a table of differences between US GAAP
and IFRS by reporting issue. There is also a reference to the pages in
the document where each of these items is explained in more detail.
Select any three of the items and read about the nature of the
differences. Prepare a short paper approximately two to three pages
long that defines the nature of the differences and discusses what you
have learned.

Solutions will vary by student depending on the particular items he or she

selects.

C12-2 Structure of the IASB

Research The IASB Web site is www.iasb.org. At the top of the page, click on
the link About Us. Briefly describe the structure of the IASB.

Solution The International Accounting Standards Committee (IASC) Foundation

is the parent entity of the IASB. The IASC Foundation is an
independent organization. The IASC Foundation trustees appoint the
IASB members, exercise oversight, and raise funds to support the
organization. The IASC Foundation also appoints the Standards
Advisory Council, which advises the IASB and the International
financial Reporting Interpretations Committee. The IASB has the sole
responsibility for setting accounting standards. These standards are
called International Financial Reporting Standards (IFRS).

C12-3 IASB Deliberations

Research The IASB Web site is www.iasb.org. Access the Web site and click on
the link at the top of the page for Current Projects. On the Current
Projects page, click on the IASB link. You may also access this page
directly at
http://www.iasb.org/Current+Projects/IASB+Projects/IASB+Work+Plan.htm .
What are three projects on the active agenda that are being addressed
by the IASB? What is the timetable identified for milestones on each
of the projects? What is the status of the Conceptual Framework
project?

Solutions will vary by student depending on the particular items he or she

selects.

C12-4 Determining a Functional Currency

The choice of a functional currency is based on the currency used for six criteria

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provided in FASB Statement No. 52, as follows: (1) cash flows, (2) sales prices, (3)
sales markets, (4) expenses, (5) financing, and (6) intercompany transactions and
arrangements. The choice of a functional currency is made by management after a
subjective evaluation of these criteria. However, the U.S. dollar is specified as the
functional currency in cases in which the foreign affiliate of a U.S. company is located
in a country experiencing high inflation (approximately 100 percent or more over a
three-year period).

     Process of
   Foreign Entity's Foreign Entity's Restatement into
Reporting Currency Functional Currency     U.S. Dollars    

1. Argentinean peso U.S. dollar       Remeasurement

Note: This case shows that the U.S. dollar is the specified functional currency
for foreign subsidiaries located in countries with highly inflationary economies.

2. Mexican pesos Either peso or       Either

dollar, management
may select either.

Note: This case indicates that the criteria are not always absolute. Management
probably would select the specific functional currency on the basis of financial
effects, such as effect on earnings per share.

3. British pound British pound       Translation

4. Swiss franc European euro       Remeasurement

from franc to
euro; then
translation
from euro
to dollars

Note: This case shows that the local currency of the country in which the
foreign affiliate is located may not be the foreign affiliate's functional currency;
instead, a third currency presents the functional currency.

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C12-5 Principles of Consolidating and Translating Foreign Accounts
[AICPA Adapted]

a.  The rules for consolidating a foreign subsidiary are essentially the same as for a
domestic subsidiary. The key element is the degree of control Petie Products has
over the financial and operating policies of Cream, Ltd. Typically, a 90 percent stock
ownership level would assure the parent company's control of the subsidiary. It is
possible, however, that the country of Kolay may have severe restrictions on the
decision-making abilities of non-Kolay investors, or that Kolay may have restrictive
laws regulating commerce within Kolay. Petie Products' management must evaluate
their ability to control the foreign subsidiary. If they do possess the necessary level of
control, the foreign subsidiary should be consolidated. If not, then the foreign
subsidiary is reported as an investment on the parent company's financial statements.

b.  Translation means that the local currency unit is functional. The foreign
subsidiary's assets and liabilities are translated using the current exchange rate at the
end of 20X7. The stockholders' equity accounts are translated at appropriate
historical rates. The income statement accounts are translated at the weighted
average exchange rate during 20X7.

The appropriate exchange rates for each of the 10 items are presented below:

1. Current exchange rate at December 31, 20X7

2. Current exchange rate at December 31, 20X7

3. Current exchange rate at December 31, 20X7

4. Current exchange rate at December 31, 20X7

5. Current exchange rate at December 31, 20X7

6. Historical exchange rate at January, 20X4

7.  Beginning Retained Earnings is carried forward as a composite from prior

years' operations. The beginning Retained Earnings is the prior period's ending
Retained Earnings.

8.  Average exchange rate for 20X7 (assumes revenues earned evenly throughout
year)

9. Average exchange rate for 20X7

10. Average exchange rate for 20X7

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C12-6 Translating and Remeasuring Financial Statements of Foreign
Subsidiaries [AICPA Adapted]

a.  The objectives of translating a foreign subsidiary's financial statements are to:

1. Provide information that is generally compatible with the expected economic

effects of a rate change on a subsidiary's cash flows and equity.

2. Reflect the subsidiary's financial results and relationships in single currency

financial statements, as measured in its functional currency and in conformity
with generally accepted accounting principles.

b.  Applying different exchange rates to the various financial statement accounts

causes the restated financial statements to be unbalanced. ‘Unbalanced’ means that
the debits will not equal the credits in the subsidiary's trial balance prepared in U.S.
dollars. The amount required to bring the restated financial statements into balance is
termed the gain or loss from the translation or remeasurement. The gain or loss from
remeasuring Wahl A's financial statements is reported in the consolidated income
statement. The gain or loss arising from translating Wahl F's financial statements
(described as a translation adjustment) is reported as a component of comprehensive
income and then accumulated with other comprehensive income items and reported
under stockholders' equity in the consolidated balance sheet.

c.  The functional currency is the foreign currency or the parent's currency that most
closely correlates with the following economic indicators:
1. Cash flow indicators
2. Sales price indicators
3. Sales market indicators
4. Expense indicators
5. Financing indicators
6. Intercompany transactions and arrangement indicators

d.  All accounts relating to Wahl A's equipment — the equipment, accumulated

depreciation, and depreciation expense accounts — are remeasured by using the
exchange rate prevailing between the U.S. and Australian dollars at the later of the
two following dates: (1) the date at which Wahl Co. acquired its investment in Wahl A,
or (2) the date(s) the equipment was purchased by Wahl A. This exchange rate is
referred to as the historical rate.

All accounts relating to Wahl F's equipment are translated by using the current
exchange rates prevailing between the U.S. dollar and the European euro. For the
equipment cost and the accumulated depreciation, the current exchange rate at
December 31, 20X5, should be used for translation. Depreciation expense is
translated at an appropriate weighted average exchange rate for 20X5.

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C12-7 Translation Adjustment and Comprehensive Income

a. Statement of income for the year, for the subsidiary

Subsidiary
Statement of Income
Year Ended December 31, 20XX

Sales $ 560,000 
Cost of Sales  (285,000)
Gross Profit $ 275,000 
Operating Expenses  (140,000)
Income from Operations $ 135,000 
Consolidated Net Income to Controlling Interest $ 135,000 

b. Statement of comprehensive income for the year, for the subsidiary

Subsidiary
Statement of Comprehensive Income
Year Ended December 31, 20XX

Consolidated Net Income to Controlling Interest $ 135,000 

Other Comprehensive Income:
Translation Adjustment (12,000)
Comprehensive Income $ 123,000 

c. Balance sheet as of December 31, for the subsidiary

Subsidiary
Balance Sheet
December 31, 20XX
Assets
Cash $   50,000 
Receivables 24,700 
Inventories 60,300 
Property, Plant, and Equipment (net)  328,000 
Total Assets $ 463,000 

Liabilities and Stockholders’ Equity

Current Payables $   16,000 
Long-Term Payables 181,000 
Capital Stock 100,000 
Retained Earnings 258,000 
Accumulated Other Comprehensive Income:
Translation Adjustment    (92,000)
Total Liabilities and Stockholders’ Equity $ 463,000 

Note: The end-of-year retained earnings ($258,000) is comprised of the January 1

balance of $135,000, plus net income of $135,000, less dividends of $12,000.

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C12-7 (continued)

d. FASB Statement No. 130 allows for either the one-statement format for the
combined statement of income and comprehensive income, or the two-statement
format for a statement of income and a separate statement of comprehensive
income. Both formats must include all the elements of comprehensive income.
The one-statement format presents the other comprehensive income elements
immediately below net income.

The two-statement format presents a separate statement of income as was done

prior to FASB 130. The statement of income ends with net income. Then, a
separate statement of comprehensive income begins with net income, followed
with the elements of other comprehensive income, and ends with comprehensive
income.

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C12-8 Changes in the Cumulative Translation Adjustment Account

Johnson & Johnson Company applied the concepts presented in the chapter for
translating the trial balances of its foreign subsidiaries. The resulting cumulative
translation adjustment has changed dramatically from a credit balance of $134 million
at the end of 20X1 to a debit balance of $338 million at the end of 20X3.

The translation adjustment is related to the translated net asset balance (assets
minus liabilities) of the foreign subsidiaries. Several factors could account for the
decrease in the net assets of Johnson & Johnson's foreign subsidiaries, as follows:
1. The foreign subsidiaries could be increasing their local liabilities, i.e., taking out
more local debt.
2. The foreign subsidiaries could be decreasing their local assets, i.e., not
maintaining their physical capital through reinvestment.
3. The direct exchange rate of the dollar versus the local currency units of the
countries in which the company has foreign subsidiaries has been decreasing
over time (i.e., the dollar had strengthened versus the local currency units).

Question d. can be used to demonstrate these factors. Remember that it is assumed

that the translated stockholders' equity, other than the accumulated other
comprehensive income (AOCI) from the translation adjustment, remained constant at
$500 million for each of the three years. The following condensed balance sheets can
be presented:

20X1 Translated Balance Sheets of All Foreign Subsidiaries

Net assets $634
Stockholders’ equity:
Other than AOCI $ 500 
AOCI Translation
Adjustment 134 

20X2 Translated Balance Sheets of All Foreign Subsidiaries

Net assets $354
Stockholders’ equity:
Other than AOCI $ 500 
AOCI Translation
Adjustment (146)

20X3 Translated Balance Sheets of All Foreign Subsidiaries

Net assets $162
Stockholders’ equity:
Other than AOCI $ 500 
AOCI Translation
Adjustment (338)

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C12-8 (continued)

If the direct exchange rate decreased over the two-year period, the translated net
assets would decrease, thus causing a decrease (debit change) in the translation
adjustment. The direct exchange rate would decrease if the dollar were strengthening
versus the local currency units of the countries in which the company had foreign
subsidiaries. Other causes for the decrease in the translated net assets would be a
decrease in local assets, or an increase in local liabilities.

Johnson & Johnson Company did make several changes in its foreign investment
portfolio during 20X2 and 20X3 that would have resulted in a change in the combined
stockholders' equity of the company's foreign investments. During 20X3, the company
acquired approximately $266 million in European companies. In 20X2, the company
acquired approximately $47 million in Japanese companies. The company completed
relatively minor sales of foreign subsidiaries and operations during 20X2 and 20X3.

Thus, it appears that the major reasons for the significant debit change in the
accumulated other comprehensive income — translation adjustment account over the
two-year period was that the foreign subsidiaries were increasing their local debt, and
that the U.S. dollar was strengthening versus the local currency units of the foreign
countries in which Johnson & Johnson Company had subsidiaries. A more specific
analysis would require knowledge of the amount of the foreign investments in each
country, the balance of the local assets and local liabilities of each of the foreign
subsidiaries, and the knowledge of the exchange rates for the dollar versus the
foreign currencies of the countries in which the company has invested.

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C12-9 Pros and Cons of Foreign Investment

The focus of this case is to consider the variables involved with the business decision
of expanding a company's production and/or marketing investment in a foreign
country. Many of the variables would be similar to those considered in the decision to
increase a company's physical capital in the U.S. But, some additional variables
should be considered for the foreign country such as: home-country laws, the political
and economic environment, the accounting and tax laws, the status of labor
organization, the cost-of-living and prevailing wages, the supply of trained labor
forces (including local management personnel), and the different cultural aspects that
might impact on obtaining the factors of production or on the markets for the
company's goods. Some companies make investment in foreign production facilities
in order to have a production capability closer to a foreign market. Thus transportation
costs of the finished goods are decreased, while the company is able to increase
overall revenue and income.

Many companies go to non-U.S. production sources because of the lower costs for
labor. Thus, if the company produces a labor-intensive product, the economics of the
decision may favor foreign production. In addition, as tariffs are reduced, U.S.
companies may find it more advantageous to move their production facilities to non-
U.S. locations. One possible outcome is that the costs of the finished goods to U.S.
consumers would be lower for goods manufactured outside the U.S. However, an
argument often raised in the political arena is that unemployed U.S. consumers would
not be able to purchase the products.

The U.S. government has proposed retraining programs for dislocated workers who
lose their jobs because the company has closed the U.S. production facility. Students
should be encouraged to develop some new and novel approaches to solving the
problem of the general change in the types of new jobs being created in the U.S.
economy.

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C12-10 Determining an Entity’s Functional Currency

MEMO

To: Garry Parise, CFO, Maxima Corporation

From: _______________ ____________________, CPA, Controller’s

Department

Re: Functional Currency of Luz Maxima

According to FASB Statement No. 52, the functional currency for a company is the
primary currency that is generated by cash inflows and used for cash outflows.
Further, it is the currency the country that is primary economic environment of the
company’s business operations as indicated by items such as sales, and expense,
and financing activities.

Because Luz Maxima initially did business exclusively with Maxima Corporation and
these transactions were denominated in the U.S. dollar, its functional currency was
originally determined to be the U.S. dollar. However, it appears that changes in Luz
Maxima’s operation over the past five years may result in a change in the functional
currency from the U.S. dollar to the Mexican peso.

Appendix A of FASB 52 provides indicators that should be considered in determining

a foreign subsidiary’s functional currency. Among the indicators that may be relevant
for evaluating the functional currency of Luz Maxima are sales, expense, and
financing indicators.

 Sales market indicators – Luz Maxima now sells a significant amount of product
in Mexico and South America. These transactions are denominated in the peso.

 Expense indicators – Luz Maxima obtains a significant amount of materials from

local suppliers.

 Financing indicators – Luz Maxima obtained long-term debt financing and a line of
credit from banks in Mexico.

To the extent indicators are mixed and Luz Maxima also has sales, expenses, and
financing transactions denominated in the U.S. dollar, FASB 52 states that
management should make the final determination as to the functional currency.
FASB 52 also indicates that, while it is desirable for the functional currency to be
used consistently, if economic facts change, it may be appropriate to change the
determination of the functional currency.

Management should assess all aspects of Luz Maxima’s operation to determine the
most appropriate and relevant functional currency for this subsidiary. If a decision is
made to change the functional currency from the U. S. dollar to the Mexican peso,
Luz Maxima’s current financial statements should be converted to U.S. dollars using
the current rate translation method. Any adjustment that occurs as a result of
translating nonmonetary assets using the current rate method should be reported as
a component of other comprehensive income.

12-15
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

C12-10 (continued)

Authoritative support for the above memo can be found in the following references:

FASB 52, Par. 5, Par. 9, Par. 41, Par. 42, Par. 46

Suggested Query:
functional currency*

C12-11 Accounting for the Translation Adjustment

MEMO

To: Renee Voll, Controller

From: ___________ _______________, CPA

Re: Translation Adjustment for Valencia subsidiary

Since Sonoma has sold 30% of the investment in our Spanish subsidiary, the balance
of the cumulative translation adjustment, included in consolidated stockholders’
equity, should be reduced proportionately.

FASB Statement No. 52 normally does not require that changes in the translation
adjustment be included in earnings. Prior to the liquidation of an investment in a
subsidiary, the FASB believes that the effects of such translation adjustments are
uncertain and should not be included in income. However, when there is a sale or
liquidation of a subsidiary, the amount of the translation adjustment that is included in
equity should be removed from equity and should be reported as part of the gain or
loss in the period in which the transaction occurs.

Although Sonoma has not completely liquidated the investment in Valencia, the
company is still required to recognize a portion of the translation adjustment in
computing the gain or loss. According to FIN 37, a pro rata portion of the
accumulated translation adjustment that is attributable to the subsidiary must be
included in the calculation of the gain or loss on the sale of a portion of the subsidiary.

Therefore, the gain on the sale of the Valencia investment should be reduced by 30%
of the (debit balance) cumulative translation adjustment related to this investment.
Sonoma should disclose the amount by which the gain is decreased because of the
adjustment for the cumulative translation adjustment.

In the presentation of comprehensive income, the adjustment to the translation

adjustment should be identified as a reclassification adjustment so that the same
amount is not included in both net income and in comprehensive income.

12-16
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
C12-11 (continued)

Authoritative support for the above memo can be found in the following references:

FASB 52, Par. 14, Par. 31, Par. 111

FASB 130, Par. 19
FIN 37, Par. 2

Suggested Query:
translation adjustment* sale

12-17
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
SOLUTIONS TO EXERCISES

E12-1 Multiple-Choice Translation and Remeasurement [AICPA Adapted]

Foreign Currency U.S. Dollar

is Functional Currency is Functional Currency

1. a. $215,000 b. $225,000

($100,000 + $50,000 + $30,000

+ $45,000)

2. c. 400,000 LCU x $.44 = $176,000 d. 120,000 LCU x $.50 = $  60,000

  80,000 LCU x $.44 =    35,200
200,000 LCU x $.44 =   88,000
$183,200

3. a. Indirect rates used c. 170,000 LCU / 1.5 LCU = $113,333

  90,000 LCU / 1.6 LCU =     56,250
260,000 LCU / 1.8 LCU = $144,444 $169,583

4. d. 25,000 LCU / 2 LCU = $12,500 b.   25,000 LCU / 2.2 LCU = $  11,364

5. a. d.

6. a. c.

7. a. $755,000 d. $880,000

(All assets are translated ($85,000 + $700,000 + $25,000

at current rate) + $70,000)

12-18
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
E12-2Multiple-Choice Questions on Translation and Foreign Currency
Transactions [AICPA Adapted]

Foreign Currency U.S. Dollar

is Functional Currency is Functional Currency

1. b. $10,000  d. $40,000 

$120,000  = 2/15/X2 $ value $10,000  = Foreign currency

(110,000) = 12/31/X1 $ value transaction gain
$ 10,000  = Foreign exchange 30,000  = Remeasurement gain
gain $40,000  = Foreign exchange
gain

2. d. $17,000  b. $10,000 

$13,000  = Preadjusted foreign $13,000  = Preadjusted foreign

exchange loss exchange loss
4,000  = Foreign currency 4,000  = Foreign currency
transaction loss transaction loss
        ($60,000 - $64,000) (7,000) = Remeasurement gain
$17,000  = Foreign exchange $10,000  = Net foreign
loss exchange loss

3. c. $21,000  a. $41,000 

$15,000  = Preadjusted foreign $15,000  = Preadjusted foreign

exchange loss exchange loss
6,000  = Foreign currency 6,000  = Foreign currency
transaction loss transaction loss
        ($100,000 - $106,000) 20,000  = Remeasurement gain
$21,000  = Foreign exchange $41,000  = Net foreign
loss exchange loss

4. a. When the remeasurement method is used, monetary accounts are restated at

the exchange rate at the balance sheet date, while nonmonetary accounts are
restated using the exchange rate(s) at the date(s) the transaction(s) occurred
which are reflected in the account balance. In this question, bonds payable and
accrued liabilities are both monetary accounts and would be restated using the
balance sheet exchange rate. Trading securities represent a nonmonetary
account. Trading securities would be restated using the balance sheet rate
because the account balance is stated at the market values at the balance
sheet date. Inventories are also a nonmonetary asset. Since they are stated at
cost, a historical exchange rate would be used to restate inventories.

12-19
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
E12-2 (continued)

5. b. The current rate method of translation allows the use of a weighted average
exchange rate for revenues and expenses that occur throughout the year. Since
both sales and wages expense occur throughout the year, a weighted average
exchange rate can be used for translation.

6. a. For hedges of net investments in a foreign entity, the amount of the change in
fair value of the hedging instrument is recorded to other comprehensive income
that then becomes part of the accumulated other comprehensive income. The
change in the translation adjustment during the period is reported as a
component of other comprehensive income and then carried forward to be
accumulated in the stockholders’ equity section of the balance sheet with the
other components of other comprehensive income. Therefore, in this case in
which a hedge of a net investment in a foreign entity is used, the exchange gain
on the hedge is reported along with the change in the translation adjustment.

E12-3 Matching Key Terms

1. H

2. G

3. F

4. D

5. E

6. B

7. C

8. B

9. D

10. E

11. J

12. C

12-20
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
E12-4 Multiple-Choice Questions on Translation and Remeasurement

1. B Investment cost $160,000

Less:
Book and fair values of sub's net assets
680,000 ringitts x $.21 x .90 = 128,520
Goodwill $ 31,480

2. C
          Dollars                          Ringitts                 
Goodwill $10,500 RM 50,000 ($10,500 / $.21)
Impairment 1,100 (RM 5,000 x $.22) 5,000 (RM 50,000 / 10)

3. A Impairment loss = $10,500 / 10 = $1,050

4. A € 25,000 x $1.24 = $31,000

5. D € 5,000 x $1.30 = $6,500

6. C Investment cost on January 1, 20X5 $402,000

Less:
Book and fair values of sub’s net assets:
€ 300,000 x $1.20 360,000
Goodwill $  42,000

       Dollars                        Euros            

Goodwill $42,000 € 35,000 ($ 42,000 / $1.20)
 
Impairment    4,340 (€ 3,500 x $1.24)  3,500 (€ 35,000 / 10)
Balance $37,660 € 31,500

Translated
balance $41,580 (€ 31,500 x $1.32)

Translation adjustment: $41,580 minus $37,660 = $3,920 – use for

question 7.

7. B Translation adjustment from

translating the trial balance $12,000cr
Translation adjustment from
translating goodwill   3,920cr
Total translation adjustment $15,920cr

12-21
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
E12-5 Translation

RoadTime Company
Trial Balance Translation
December 31, 20X1

Swiss     Translation     U.S.     

   Francs          Rate            Dollars   

Cash SFr    7,000 .80 $ 5,600

Accounts Receivable (net) 20,000 .80 16,000
Receivable from Popular Creek 5,000 .80 4,000
Inventory 25,000 .80 20,000
Plant and Equipment 100,000 .80 80,000
Cost of Goods Sold 70,000 .75 52,500
Depreciation Expense 10,000 .75 7,500
Operating Expense 30,000 .75 22,500
Dividends Paid         15,000 .77     11,550
Total Debits SFr 282,000 $219,650

Accumulated Depreciation SFr 10,000 .80 $ 8,000

Accounts Payable 12,000 .80 9,600
Bonds Payable 50,000 .80 40,000
Common Stock 60,000 .73 43,800
        
Sales 150,000 .75  112,500
Total SFr 282,000 $213,900
Accumulated Other Comprehensive
   Income — Translation
   Adjustment (credit)      5,750
Total Credits $219,650

12-22
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
E12-6 Proof of Translation Adjustment

a. Popular Creek Corporation and Subsidiary

Proof of Translation Adjustment
Year Ended December 31, 20X1

Translation U.S.   
     SFr             Rate          Dollars 

Net assets at beginning of year SFr 60,000  .73 $ 43,800 

Adjustment for changes in net

asset position during year:
Net income for year 40,000  .75 30,000 
Dividends paid    (15,000) .77  (11,550)
Net assets translated at:
Rates during year $ 62,250 
Rates at end of year SFr 85,000  .80   68,000 

Change in other comprehensive

income -
translation adjustment during year -
net increase $  5,750 
Accumulated other comprehensive
income — translation adjustment —
January 1      -0- 

Change in other comprehensive income —

translation adjustment
December 31 (credit) $ 5,750 

b. The change in the translation adjustment of $5,750 is included as a credit in the

other comprehensive income on the Statement of Comprehensive Income. The
other comprehensive income is then accumulated and reported in the
stockholders’ equity section of the consolidated balance sheet.

Supporting computations:

Net income:

Balance Sheet, 12/31/X1

Sales SFr 150,000  Net Assets $68,000 Common Stock $
43,800 
CGS (70,000) Ret. Earn.* 18,450 
Depreciation (10,000)               AOCI    5,750 
Oper. Expenses (30,000) Total $68,000 Total $ 68,000 
Net Income SFr   40,000 
 Retained earnings, 1/1/X1 $        -0- 
 Net income 30,000 
 Dividends  (11,550)
*Retained earnings, $ 18,450 
12/31/X1

12-23
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

E12-7 Remeasurement

RoadTime Company
Trial Balance Remeasurement
December 31, 20X1

Swiss       U.S.   
   Francs      Rate   Dollars 

Cash SFr     7,000  .80 $ 5,600 

Accounts Receivable (net) 20,000  .80 16,000 
Receivables from Popular Creek 5,000  .80 4,000 
Inventory 25,000  .77 19,250 
Plant and Equipment 100,000  .74 74,000 
Cost of Goods Sold 70,000  (a) 52,000 
Depreciation Expense 10,000  .74 7,400 
Operating Expense 30,000  .75 22,500 
Dividends Paid    15,000  .77     11,550 
Total SFr 282,000  $212,300 
Remeasurement Loss     1,000 
Total Debits $213,300 

Accumulated Depreciation SFr  10,000  .74 $    7,400 

Accounts Payable 12,000  .80 9,600 
Bonds Payable 50,000  .80 40,000 
Common Stock 60,000  .73 43,800 
Sales    150,000  .75   112,500 
Total Credits SFr 282,000  $213,300 

Swiss  U.S. 
(a) Cost of Goods Sold:        Francs  Rate Dollars 

Beginning Inventory SFr      -0-  .75 $      -0- 

Purchases     95,000  .75   71,250 
Goods Available for Sale SFr 95,000  $ 71,250 
Less: Ending Inventory    (25,000) .77  (19,250)
Cost of Goods Sold SFr 70,000  $ 52,000 

12-24
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
E12-8* Proof of Remeasurement Gain (Loss)

a. Popular Creek Corporation and Subsidiary

Proof of Remeasurement Loss
Year Ended Dec. 31, 20X1

Schedule 1
Statement of Net Monetary Position

End of     Beginning  

     Year          of Year    
Monetary Assets:
Cash SFr   7,000  SFr  60,000 
Accounts Receivable (net) 20,000 
Receivables from Popular Creek      5,000                     
Total SFr 32,000  SFr  60,000 

Less Monetary Liabilities:

Accounts Payable SFr  12,000  SFr       -0- 
Bonds Payable    50,000          -0- 
Total SFr(62,000) SFr        -0- 
Net Monetary Assets SFr  60,000 

Net Monetary Liabilities SFr  30,000 

Change in net monetary investment during 20X1 SFr (90,000)

Schedule 2
Analysis of Changes in Monetary Accounts

Exchange U.S.   
      SFr           Rate     Dollars 
Exposed net monetary asset
Position – January 1 SFr 60,000  .73 $  43,800 
Adjustments for changes in the net
monetary position during the year:
Increases:
From operations:
Sales 150,000  .75 112,500 
From other sources -0-  -0- 
Decreases:
From operations:
Purchases (95,000) .75 (71,250)
Cash expenses (30,000) .75 (22,500)
From dividends (15,000) .77 (11,550)
From purchase of
plant and equipment     (100,000) .74   (74,000)
Net monetary position prior to
remeasurement at year-end rates $(23,000)
Exposed net monetary liability
Position – December 31 SFr(30,000) .80  (24,000)
Remeasurement loss $  (1,000)

12-25
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
E12-8* (continued)

Note: The issuance of the bonds payable has no effect on net monetary assets.
Cash, a monetary asset, is increased and bonds payable, a monetary liability, is
increased.

The Remeasurement Loss results from the decrease in the net monetary asset
position during a period in which the exchange rate has increased. The end-of-
period remeasured net liability position of $24,000 is more than the net monetary
liability position of $23,000 remeasured using the rates in effect at the times of
the transactions.

b. The remeasurement loss is included in the period's consolidated statement of

income.

12-26
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
E12-9 Translation with Strengthening U.S. Dollar

a. RoadTime Company
Trial Balance Translation
December 31, 20X1

Swiss      U.S.     
    Francs     Rate  Dollars   

Cash SFr    7,000  .73 $    5,110 

Accounts Receivable (net) 20,000  .73 14,600 
Receivable from Popular Creek 5,000  .73 3,650 
Inventory 25,000  .73 18,250 
Plant and Equipment 100,000  .73 73,000 
Cost of Goods Sold 70,000  .75 52,500 
Depreciation Expense 10,000  .75 7,500 
Operating Expense 30,000  .75 22,500 
Dividends Paid      15,000  .74   11,100 
Total SFr 282,000  $208,210 
Accumulated Other Comprehensive
Income — Translation Adjustment
(debit)                          4,850 
Total Debits SFr 282,000  $213,060 

Accumulated Depreciation SFr   10,000  .73 $   7,300 

Accounts Payable 12,000  .73 8,760 
Bonds Payable 50,000  .73 36,500 
Common Stock 60,000  .80 48,000 
         
Sales 150,000  .75   112,500 
Total Credits SFr 282,000  $213,060 

NOT REQUIRED: Proof of Translation Adjustment

Translation U.S.   
      SFr             Rate         Dollars 

Net assets at beginning of year SFr   60,000  .80 $  48,000 

Adjustment for changes in net asset
position during year:
Net income for year 40,000  .75 30,000 
Dividends paid        (15,000) .74   (11,100)
Net assets translated at:
Rates during year $  66,900 
Rates at end of year   SFr 85,000  .73   (62,050)
Change in other comprehensive
Income — translation adjustment
during year — net decrease $   4,850 
Accumulated other comprehensive income —
translation adjustment — January 1       -0- 
Accumulated other comprehensive income —
translation adjustment — December 31
(debit) $    4,850 

12-27
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
E12-9 (continued)

b.  In Exercise 12-5, the U.S. dollar weakened against the Swiss franc; i.e., the direct
exchange rate increased during the 20X1 year. Thus, the $11,000 credit
translation adjustment was the balancing item because the translated net assets
of the foreign subsidiary were higher at the end of the year than the net assets at
the beginning of the year adjusted for changes in the net assets that occurred
during the year (income less dividends).

In Exercise 12-9, the U.S. dollar strengthened against the Swiss franc during the
year; i.e., the direct exchange rate decreased during the year. Thus, the $4,850
debit translation adjustment was the balancing item in Exercise 12-9 because
the translated net assets at the end of the year were lower than the translated
net assets at the beginning of the year as adjusted for changes during the year.
The periodic change in the translation adjustment of $4,850 is reported as a
component of other comprehensive income on the Statement of Comprehensive
Income, and is then accumulated with other comprehensive income items and
reported in the stockholders’ equity section of the consolidated balance sheet.

12-28
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
E12-10 Remeasurement with Strengthening U.S. Dollar

a.
RoadTime Company
Trial Balance Remeasurement
December 31, 20X1

Swiss      U.S.    
    Francs     Rate  Dollars   

Cash SFr    7,000  .73 $    5,110 

Accounts Receivable (net) 20,000  .73 14,600 
Receivable from Popular Creek 5,000  .73 3,650 
Inventory 25,000  .74 18,500 
Plant and Equipment 100,000  .77 77,000 
Cost of Goods Sold 70,000  (a) 52,750 
Depreciation Expense 10,000  .77 7,700 
Operating Expense 30,000  .75 22,500 
         
Dividends Paid 15,000  .74     11,100 
Total SFr 282,000  $212,910 
Remeasurement Loss       550 
Total Debits $213,460 

Accumulated Depreciation SFr 10,000  .77 $    7,700 

Accounts Payable 12,000  .73 8,760 
Bonds Payable 50,000  .73 36,500 
Common Stock 60,000  .80 48,000 
Sales     150,000  .75   112,500 
Total Credits SFr 282,000  $213,460 

Swiss      U.S.    
(a) Cost of Goods Sold:     Francs     Rate  Dollars   

Beginning Inventory SFr      -0-  .80 $      -0- 

     
Purchases 95,000  .75 71,250 
Goods Available for Sale SFr 95,000  $ 71,250 
Less: Ending Inventory      (25,000) .74 (18,500)
Cost of Goods Sold SFr 70,000  $ 52,750 

12-29
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
E12-10 (continued)

b. In Exercise 12-5, the U.S. dollar weakened against the Swiss franc; i.e., the
direct exchange rate increased during the 20X1 year. The $1,000
remeasurement loss resulted from the decrease in the net monetary items during
a period in which the exchange rate increased.

In Exercise 12-10, the U.S. dollar strengthened against the Swiss franc during
the year. Note that the remeasurement gain or loss is computed only on
monetary items. In E12-10, the net monetary items decreased during the year.
Thus, the $550 remeasurement loss in E12-10 results from the fact that the
remeasured net monetary liability position at the end of the year is greater than
the net monetary position prior to remeasurement at year-end rates. This is
shown in the proof below which was not required for the exercise.

NOT REQUIRED: Proof of Remeasurement Loss

Schedule 1
Statement of Net Monetary Position

End of      Beginning  

      Year          of Year    
Monetary Assets:
Cash SFr    7,000  SFr 60,000 
Accounts Receivable (net) 20,000 
Receivables from Popular Creek         5,000                    
Total SFr  32,000  SFr 60,000 

Less Monetary Liabilities:

Accounts Payable SFr 12,000  SFr      -0- 
Bonds Payable     50,000          -0- 
Total SFr(62,000) SFr      -0- 
Net Monetary Assets 1/1/X1 SFr  60,000 

Net Monetary Liabilities 12/31/X1 SFr  30,000 

Change in net monetary

investment during 20X1 SFr (90,000)

12-30
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
E12-10 (continued)

NOT REQUIRED: Proof of Remeasurement Loss (continued)

Schedule 2
Analysis of Changes in Monetary Accounts

Exchange  U.S.    
      SFr          Rate       Dollars  
Exposed net monetary asset
Position — January 1 SFr 60,000  .80 $  48,000 
Adjustments for changes in the net
monetary position during the year:
Increases:
From operations:
Sales 150,000  .75 112,500 
From other sources -0-  -0- 
Decreases:
From operations:
Purchases (95,000) .75 (71,250)
Cash expenses (30,000) .75 (22,500)
From dividends (15,000) .74 (11,100)
From purchase of
plant and equipment     (100,000) .77 (77,000)
Net monetary position prior to
remeasurement at year-end rates $(21,350)
Exposed net monetary liability
Position--December 31 SFr (30,000) .73  (21,900)
Remeasurement loss $    (550)

E12-11 Remeasurement and Translation of Cost of Goods Sold

a. Remeasurement:
Spanish     U.S.   
   Pesetas       Rate     Dollars 
Beginning Inventory P 220,000  $0.0070 $ 1,540 
Purchases       846,000  $0.0080    6,768 
Goods Available P 1,066,000  $ 8,308 
Less Ending Inventory (180,000) $0.0082   (1,476)
Cost of Goods Sold P   886,000 $ 6,832 

b. Translation:
Spanish     U.S.   
  Pesetas       Rate     Dollars 
Cost of Goods Sold P 886,000  $0.0080 $ 7,088 

12-31
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
E12-12 Equity-Method Entries for a Foreign Subsidiary

a. Cash 19,680
Investment in Thames Company 19,680 
Receive dividend:
$19,680 = £15,000 x $1.64 x .80

b. Investment in Thames Company 48,000

Income from Subsidiary 48,000 
Record equity accrual:
$48,000 = $60,000 x .80

Other Comprehensive Income —

Translation Adjustment 5,120
Investment in Thames Company 5,120 
Parent's share of subsidiary's
translation adjustment:
$5,120 = $6,400 x .80

c. British    Exchange U.S.    

Pounds      Rate     Dollars  
Income Statement:
Differential Jan. 1, 20X8 £30,000  1.60     $48,000 
(10-year life)
Amortization for 20X8 (3,000) 1.63       (4,890)
Remaining balance £27,000  $43,110 

Balance Sheet:
Remaining balance on Dec. 31
translated at year-end rate £27,000  1.65     44,550 

Difference to translation adjustment $ 1,440 

Note that the amount of the differential necessary for the balance sheet is $44,550,
while the amount, without any adjustment, would be $43,110. Therefore, the differential
portion of the parent company’s investment must be increased by $1,440 through a
debit to the Investment in Thames Company account and a corresponding credit to the
Other Comprehensive Income — Translation Adjustment account. The differential
adjustment adjusts to the amount needed for the balance sheet.

Investment in Thames Company 1,440

Other Comprehensive Income —
Translation Adjustment 1,440
Recognize translation adjustment
for increase in differential.

d. Income from Subsidiary 4,890

Investment in Thames Company 4,890
Amortization of trademark for 20X1:
$4,890 = £3,000 x $1.63

12-32
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
E12-12 (continued)

e. Other comprehensive income reports the periodic change in the translation

adjustment. For 20X8, this would be the sum of a debit of $5,120 which is the
parent company’s portion of the translation adjustment resulting from translating
the subsidiary’s trial balance, less the $1,440 translation adjustment that is made
only by the parent company due to the adjustment of the differential. Therefore,
other comprehensive income would report $3,680 ($3,680 = $5,120 - $1,440)
due to foreign translations.

12-33
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
E12-13 Effects of a Change in the Exchange Rate — Translation and
Other Comprehensive Income
a. Direct and indirect exchange rates:

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 R 40 = $1    

The dollar strengthened during 20X6 because the number of rupees one U.S. dollar
could acquire at the end of the year (35) is greater than the number of rupees that could
be acquired at the beginning of the year (30); therefore, the value of the dollar has
increased relative to the rupee during 20X6. The dollar continued to strengthen during
20X7.

b. Translated December 31, 20X6, balance sheet:

Subsidiary’s  Direct     Translated  

Trial Balance Exchange Trial Balance
(in rupees)     Rate       (in $)     
Cash R   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 R 2,230,000 $63,712 
Accumulated other
comprehensive income —
translation adjustment (debit)    2,903 
Total debits $66,615 

Current payables R   260,000 $.02857   $  7,428 

Long-term debt 1,250,000 $.02857   35,713 
Common stock 500,000 $.03333   16,665 
Retained earnings      220,000 $.03095*   6,809 
Total credits R 2,230,000 $66,615 

*$.03095 = average of beginning and ending exchange rates, rounded

to 4 decimal points: $.030945 = [($.03333 + $.02857) / 2]
(Not required: Proof of translation adjustment (debit) of $2,903)

Translation
Rupees      Rate      Dollars 
Net assets, 1/1/X6 R 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 year $23,474 
Rate at end of year R 720,000 $.02857 (20,570)
Change in translation
adjustment during year (debit) $ 2,904*

*Difference of $1 ($2,904 - $2,903) due to rounding of exchange rates.

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

E12-13 (continued)

c. Translated December 31, 20X7, balance sheet:

Subsidiary’s Direct     Translated   

Trial Balance Exchange  Trial Balance
 (in rupees)       Rate         (in $)      
Cash R    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 R 2,250,000 $56,250
Accumulated other
comprehensive income —
translation adjustment (debit)   5,635
Total debits $61,885

Current payables R   340,000 $.025     $  8,500

Long-term debt 1,100,000 $.025     27,500
Common stock 500,000 $.03333 16,665
Retained earnings    310,000 (a)       9,220
Total credits R 2,250,000 $61,885

(a) The retained earnings in dollars would begin with the December 31, 20X6's,
dollar balance ($6,809) that would be carried forward. To this would be
added 20X7's net income of R 90,000, which is the change in retained
earnings in rupees multiplied by the average 20X7 exchange rate of $.02679
[($.02857 + $.025)/2] which equals $2,411. Therefore, translated retained
earnings on December 31, 20X7, is $9,220 ($9,220 = $6,809 + $2,411).

(Not required: Proof of translation adjustment (debit) of $5,635)

Translation
Rupees      Rate       Dollars  
Net assets, 1/1/X7 R 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 year $22,981 
Other comprehensive income
—
Rate at end of year R 810,000 $.025     (20,250)
Change in other
comprehensive
Income — translation
adjustment during year $ 2,731 
(debit)
Accumulated other comprehensive
Income — translation adjustment, 1/1/X7   2,904 

12-35
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

Accumulated other
comprehensive
Income — translation adjustment,12/31/X7 (debit) $ 5,635 
E12-13 (continued)

d. The $2,731 change in the accumulated other comprehensive income —

translation adjustment during 20X7 would be reported as a component of other
comprehensive income on 20X7's statement of other comprehensive income.

12-36
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
E12-14 Computation of Gain or Loss on Sale of Asset by Foreign Subsidiary

a. Journal entries, in pesos, regarding the land:

1/1/X1 Land P 2,000,000

Cash P 2,000,000

12/31/X2 Cash P 3,000,000

Land P 2,000,000
Gain on Sale of Land P 1,000,000

b. Amount of transaction gain ($83,333), and remeasurement loss ($33,333):

Note that under remeasurement the nonmonetary items are not adjusted for
changes in the exchange rate. Therefore, land will be based on its historical cost of
P 2,000,000 x $.10, the direct exchange rate on 1/1/X1, which equals a remeasured
basis for the land of $200,000.

The direct exchange rate on 1/1/X1 is $.10 ($1 = P 10); on 12/31/X1 is $.090909 ($1
= P 11); and on 12/31/X2 is $.083333 ($1 = P 12). The appropriate exchange rate to
use to remeasure the gain on the sale of the land is $.83333 because the
transaction is significant to the subsidiary, solitary to the operations, and occurred
on a specific date, the last day of the year.

Remeasured December 31, 20X2 balance sheet:

Subsidiary’s   Direct    Remeasured

Trial Balance Exchange Trial Balance
  (in pesos)     Rate         (in $)      
Cash P 3,000,000 $.083333 $250,000
Total P 3,000,000 $250,000
Remeasurement loss     33,333
Total debits $283,333

Common stock P 2,000,000 $.10         $200,000

Gain on sale of land P 1,000,000 $.083333   83,333
Total credits P 3,000,000 $283,333

The effect on the parent company’s net income ($50,000 = $83,333 – $33,333) is
the same as if the transactions had been transacted in U.S. dollars, which is an
objective of the remeasurement method. The equivalent journal entries to those in
part a. of the problem, if transacted in U.S. dollars, would be:

1/1/X1 Land (P 2,000,000 x $.10) $200,000

Cash $200,000

12/31/X2 Cash (P 3,000,000 x $.08333) $250,000

Land $200,000
Gain on Sale of Land $  50,000

12-37
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
E12-14 (continued)

c. Amount of transaction gain ($83,333), and other comprehensive income effect

in 20X2 ($15,151):

To compute the change in the translation adjustment for 20X2, which is an

element of other comprehensive income for 20X2, it is necessary to prepare the
translated trial balance as of the end of 20X1, as follows:

Translated December 31, 20X1, balance sheet:

Subsidiary’s   Direct    Translated  

Trial Balance Exchange Trial Balance
 (in pesos)      Rate        (in $)      
Land P 2,000,000 $.090909 $181,818
Total P 2,000,000 $181,818
Accumulated other
comprehensive income —
translation
adjustment (debit)     18,182
Total debits $200,000

Common stock P 2,000,000 $.10         $200,000

Total credits P 2,000,000 $200,000

Note that the translation adjustment account has a debit balance of $18,182 as of
the end of 20X1. The next step is to translate the subsidiary’s 12/31/X2 trial
balance.

Translated December 31, 20X2, balance sheet:

Subsidiary’s   Direct    Translated  

Trial Balance Exchange Trial Balance
 (in pesos)      Rate        (in $)     
Cash P 3,000,000 $.083333 $250,000
Total P 3,000,000 $250,000
Accumulated other
comprehensive income–
translation
adjustment (debit)     33,333
Total debits $283,333

Common stock P 2,000,000 $.10         $200,000

Gain on sale of land P 1,000,000 $.083333   83,333
Total credits P 3,000,000 $283,333

The change in the translation adjustment during 20X2 is $15,151 ($15,151 =

$33,333 - $18,182), which is reported on 20X2's statement of comprehensive
income. The stockholders’ equity section of the 12/31/X2 consolidated balance
sheet would report the accumulated other comprehensive income which includes
the accumulated translation adjustment, as of 12/31/X2, in the amount of $33,333

12-38
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
E12-15* Intercompany Transactions

Measured in Measured in
U.S. Dollars British Pounds
Initial inventory transfer
date ($1.60 = £1):
Selling price
(£7,500 = $12,000 / $1.60) $12,000    £7,500
Cost to parent   (8,000)  
Intercompany profit $  4,000   

Balance sheet date

($1.70 = £1):
Inventory translation
($12,750 = £7,500 x $1.70) $12,750    £7,500

a. $12,750 Inventory of United, Ltd., reported in U.S. dollar

trial balance of consolidation workpaper.
($12,750 = £7,500 x $1.70)

b. $ 8,750 ($8,750 = $12,750 - $4,000 intercompany profit)

12-39
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
SOLUTIONS TO PROBLEMS

P12-16 Parent Company Journal Entries and Translation

a. Canadian  Exchange U.S.    

P    Dollars       Rate      Dollars  

Investment cost C$150,000 .80 $120,000

1/1/X1 Book value of investment
100% on January 1, 20X1     90,000 .80  72,000
NB  Differential C$  60,000 $  48,000

Canadian Exchange U.S.

          Dollars                Rate              
Dollars           

Income Statement:
Differential at date of
acquisition:
Plant and equipment C$10,000  .80 $8,000 
Trademark C$50,000  .80 $40,000 
Amortization this period:
Plant and equipment
(10 years) (1,000) .75 (750)
Trademark (10 years)                       (5,000) .75               (3,750)
Remaining balance:
Plant and equipment C$  9,000  $7,250 
Trademark C$45,000  $36,250 

Balance Sheet:
Remaining balance on
12/31/X1 translated
at year-end
exchange rates:
Plant and equipment C$  9,000  .70 $6,300 
Trademark C$45,000  .70             $31,500 

Difference to OCI—
translation
adjustment:
Plant and equipment $  950 
Trademark $  4,750 

Note that the differential adjustment is from the amounts of $7,250 for plant and
equipment and from $36,250 for trademark. The required amounts for the
consolidated balance sheet are $6,300 for plant and equipment, and $31,500 for
trademark. Therefore, in each of these cases, the differential adjustment will reduce
the amount of the differential component in the investment account, requiring a credit
to the Investment in North Bay Company account with a corresponding debit to the
Other Comprehensive Income — Translation Adjustment account. The differential
adjustment adjusts to the correct amount necessary to prepare the consolidated
balance sheet.

12-40
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
P12-16 (continued)

b. Entries on Par Company's books during 20X1:

(1) Investment in North Bay Company 120,000

Cash 120,000
Acquire North Bay Company.

(2) Investment in North Bay Company 15,000

Income from Subsidiary 15,000
Equity in income of subsidiary:
$15,000 = C$20,000 x .75 average exchange rate

(3) Foreign Currency Units (C$) 6,000

Investment in North Bay Company 6,000
Dividend from foreign subsidiary:
$6,000 = C$8,000 x .75

(4) Income from Subsidiary 4,500

Investment in North Bay Company 4,500
Amortization of differential:
Plant and equipment $  750
Trademark   3,750
Total $4,500

(5) Other Comprehensive Income –

Translation Adjustment 5,700
Investment in North Bay Company 5,700
Recognize translation adjustment on
differential:
Plant and equipment $  950
Trademark   4,750
Total $5,700

Note: The amount of the differential is being decreased as a result of the

translation adjustment. Therefore, the investment account must be credited
to reflect this decrease in the portion allocated to the differential.

12-41
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
P12-16 (continued)

c. Par Company and North Bay Company

Proof of Translation Adjustment
Year Ended December 31, 20X1

Canadian   Exchange U.S.     

   Dollars         Rate       Dollars   
Net assets at beginning of
year, 1/1/X1 C$  90,000  .80 $72,000 

Adjustment for changes in

assets position during year:
Net income for year 20,000  .75 15,000 
Dividends paid       (8,000) .75   (6,000)

Net assets translated at rates

in effect for those items $81,000 

Net assets at end of year C$102,000  .70   71,400 

Change in other comprehensive income —

translation adjustment during
year — net decrease (debit) $  9,600 

December 31, 20X1

(6) Other Comprehensive Income —
Translation Adjustment 9,600
Investment in North Bay Company 9,600
Parent's share (100%) of translation
adjustment from translation
of subsidiary's accounts.

d. Equivalent U.S. dollar value of C$8,000

on December 31, 20X1:
C$8,000 x $.70 $5,600
Equivalent U.S. dollar value of C$8,000
at date of receipt:
C$8,000 x $.75  6,000
Foreign Currency Transaction Loss $ 400

December 31, 20X1

(7) Foreign Currency Transaction Loss 400
Foreign Currency Units (C$) 400
Recognize exchange loss on foreign
currency units held.

12-42
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
P12-17 Translation, Journal Entries, Consolidated Comprehensive Income,
and Stockholders' Equity

a. Vikix Inc.
Trial Balance Translation
December 31, 20X5

Balance     Exchange Balance  

           Item                             Kroner         Rate       Dollars   
Cash NKr 150,000 .21 $   31,500
Accounts Receivable (net) 200,000 .21 42,000
Inventory 270,000 .21 56,700
Property, Plant, and Equipment 600,000 .21 126,000
Cost of Goods Sold 410,000 .20 82,000
Operating Expenses 100,000 .20 20,000
Depreciation Expense 50,000 .20 10,000
Dividends Paid         40,000 .19    7,600
Total Debits NKr 1,820,000 $375,800

Accumulated Depreciation NKr 150,000 .21 $ 31,500

Accounts Payable 90,000 .21 18,900
Notes Payable 190,000 .21 39,900
Common Stock 450,000 .18 81,000
Retained Earnings 250,000 .18 45,000
Sales           690,000 .20   138,000
Total NKr 1,820,000 $354,300
Accumulated Other Comprehensive
Income — Translation Adjustment
(credit)     21,500
Total Credits $375,800

12-43
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
P12-17 (continued)

b. Entries for 20X5:

January 1
Investment in Vikix Company Common 151,200
Cash 151,200
Purchase of Vikix Inc.

July 1
Cash 7,600
Investment in Vikix Company 7,600
Common
Dividend received from foreign subsidiary:
$7,600 = NKr40,000 x $.19

December 31
Investment in Vikix Company Common 26,000
Income from Subsidiary 26,000
Equity in net income of foreign subsidiary:
$26,000 = Income of NKr130,000 x
$.20

Investment in Vikix Company Common 21,500

Other Comprehensive Income —
Translation Adjustment 21,500
Parent's share of translation adjustment
from translation of subsidiary's accounts:
$21,500 x 1.00

Income from Subsidiary 3,600

Investment in Vikix Company 3,600
Common
Amortization of differential:
Property, plant, and equipment $2,000
Patent   1,600
Total — see supporting schedule 2 $3,600

Investment in Vikix Company Common 4,020

Other Comprehensive Income —
Translation Adjustment 4,020
Translation adjustment applicable
to the differential:
Property, plant, and equipment $2,900
Patent   1,120
Total — see supporting schedule 2 $4,020

12-44
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
P12-17 (continued)

Schedule 1: Determining the differential for 20X5:

Investment cost at January 1, 20X5 $ 151,200 

Less: Book value of net assets acquired on
January 1, 20X5 (NKr700,000 x $.18) (126,000)
Differential $   25,200 

Differential allocated to:

Property, plant, and equipment $   18,000 
Patent      7,200 
Total $   25,200 

Schedule 2: Determining the differential amortization for 20X5:

Norwegian   Translation U.S.    

     Kroner        Rate       Dollars  
Property, plant, and equipment:
Income statement:
Difference at beginning of year NKr 100,000  .18 $18,000 
Amortization for 20X5
  
(NKr100,000 / 10 years)     (10,000) .20   (2,000)
Remaining balances NKr   90,000  $16,000 

Balance sheet:
Remaining balance on
December 31, 20X5, translated
at year-end exchange rate NKr   90,000  .21   18,900 
Difference to other comprehensive
income — translation adjustment $  2,900 

Patent:
Income statement:
Difference at beginning of year NKr   40,000  .18 $  7,200 
Amortization for 20X5
(NKr40,000 / 5 years)         (8,000) .20   (1,600)
Remaining balances NKr   32,000  $  5,600 

Balance sheet:
Remaining balance on
December 31, 20X5, translated
at year-end exchange rate NKr   32,000  .21     6,720 
Difference to other comprehensive
income — translation adjustment $  1,120 

Note that the property, plant, and equipment portion of the differential must be
increased from $16,000 to $19,000, requiring a debit of $2,900 to the investment
account. The portion of the differential attributable to patent must be increased from
$5,600 to $6,720, requiring a debit of $1,120 to the investment account. The
corresponding credit is to the Other Comprehensive Income – Translation
Adjustment account ($4,020 = $2,900 + $1,120).

12-45
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
P12-17 (continued)

c. Taft’s consolidated comprehensive income for 20X5:

1. Income from Taft’s operations for 20X5, exclusive

of income from the Norwegian subsidiary $  275,000 
2. Add: Income from the Norwegian subsidiary for 20X5 26,000 
3. Deduct: Amortization of differential for 20X5        (3,600)
Taft’s Net Income $  297,400 
4. Add: Translation Adjustment ($21,500 + $4,020)      25,520 
Taft’s Consolidated Comprehensive Income $  322,920 

d. Taft’s consolidated stockholders’ equity at December 31, 20X5:

1. Taft’s stockholders’ equity at Jan. 1, 20X5 $3,500,000 

2. Add: Net income for 20X5 297,400 
3. Deduct: Dividends declared by Taft during 20X5 (100,000)
4. Add: Accumulated other comprehensive income:
Foreign currency translation adjustment     25,520 
Consolidated Stockholders’ Equity at Dec. 31, 20X5 $3,722,920 

12-46
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
P12-18 Remeasurement, Journal Entries, Consolidated Net Income, and
Stockholders' Equity

a. Schedule remeasuring the trial balance into U.S. dollars:

Balance      Exchange Balance  

Item      Kroner          Rate       Dollars  
Cash NKr     150,000  .21 $  31,500 
Accounts Receivable (net) 200,000  .21 42,000 
Inventory 270,000  .205 55,350 
Property, Plant, and Equipment 600,000  .18* 108,000 
Cost of Goods Sold 410,000  (a) 75,450 
Operating Expenses 100,000  .20 20,000 
Depreciation Expense 50,000  .18* 9,000 
Dividends Paid        40,000  .19    7,600 
Total NKr 1,820,000  $348,900 
Remeasurement Loss      900 
Total Debits $349,800 

Accumulated Depreciation NKr  150,000  .18* $  27,000 

Accounts Payable 90,000  .21 18,900 
Notes Payable 190,000  .21 39,900 
Common Stock 450,000  .18* 81,000 
Retained Earnings 250,000  .18* 45,000 
Sales     690,000  .20   138,000 
Total Credits NKr 1,820,000  $349,800 

* .18 = exchange rate at January 1, 20X5, the date the subsidiary

was acquired by Taft Company

(a) Norwegian    Exchange U.S.    

    Kroner         Rate       Dollar   
Cost of goods sold:
Beginning inventory
(CGS of NKr410,000 + ending
inventory of NKr270,000
minus purchases of
NKr420,000 = Beg. Inv.) NKr 260,000  .18 $  46,800 
Purchases     420,000  .20     84,000 
Cost of goods available NKr 680,000  $130,800 
Less ending inventory    (270,000) .205   (55,350)
Cost of goods sold NKr 410,000  $  75,450 

12-47
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
P12-18 (continued)

b. Journal entries for 20X5:

January 1
Investment in Vikix Company Common 151,200
Cash 151,200 
Purchase of Vikix, Inc.

July 1
Cash 7,600
Investment in Vikix Company Common 7,600 
Dividend received from foreign subsidiary:
$7,600 = NKr40,000 x $.19

December 31
Investment in Vikix Company Common 32,650
Income from Subsidiary 32,650 
Equity in net income of foreign subsidiary:
Income from the Norwegian sub:
Sales $138,000 
Less:
Cost of goods sold (75,450)
Operating expenses (20,000)
Depreciation expense    (9,000)
Income $  33,550 
Less: Remeasurement loss      (900)
Income recorded by Taft $  32,650 

Income from Subsidiary 3,240

Investment in Vikix Company Common 3,240 
Amortization of the differential
(See Schedule 1 below).

Schedule 1: Determining and amortizing the differential for 20X5:

Investment cost at January 1, 20X5 $151,200 

Book value of net assets acquired
on January 1, 20X5 (NKr700,000 x $.18) (126,000)
Differential $  25,200 

Differential allocated to:

Property, plant, and equipment $  18,000 
Patent    7,200 
Total $  25,200 

Amortization for 20X5:

Property, plant, and equipment
($18,000 / 10 years) $    1,800 
Patent ($7,200 / 5 years)    1,440 
Total $    3,240 

12-48
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
P12-18 (continued)

c. Consolidated net income for 20X5:

1. Income from Taft's operations for 20X5,

exclusive of income from the Norwegian subsidiary $275,000 
2. Add: Income from the Norwegian subsidiary 32,650 
3. Deduct: Amortization of differential for 20X5     (3,240)
Consolidated net income for 20X5 $304,410 

d. Consolidated stockholders' equity at December 31, 20X5:

1. Taft's stockholders' equity at January 1, 20X5 $3,500,000 

2. Add: Consolidated net income for 20X5 304,410 
3. Deduct: Dividends declared by Taft during 20X5    (100,000)
Consolidated stockholders' equity at December 31, 20X5 $3,704,410 

P12-19 Proof of Translation Adjustment

Norwegian   Exchange U.S.     

    Kroner        Rate       Dollars   

Net assets at beginning of year NKr 700,000  .18 $126,000 

Adjustments for changes
in net assets position during
20X5:
Net income 130,000  .20 26,000 
Dividends paid        (40,000) .19      (7,600)

Net assets translated at:

Rates during year $144,400 
Rates at end of year NKr 790,000  .21   165,900 

Change in other comprehensive income —

translation adjustment during year $  21,500 
Accumulated other comprehensive income —
translation adjustment — January 1       -0- 
Accumulated other comprehensive income —
translation adjustment — December 31 (credit) $  21,500 

12-49
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
P12-20* Remeasurement Gain or Loss

Proof of remeasurement loss for 20X5:

Norwegian   Exchange U.S.     

   Kroner        Rate       Dollars   

Exposed net monetary liability

position at January 1 NKr (60,000) .18 $(10,800)

Adjustments for changes in

net monetary position
during 20X5:

Increases:
From operations:
Sales NKr 690,000  .20 138,000 

Decreases:
From operations:
Purchases (420,000) .20 (84,000)
Operating expenses (100,000) .20 (20,000)
From dividends        (40,000) .19    (7,600)

Net monetary asset position

prior to remeasurement at
year-end rates $ 15,600 

Exposed net monetary asset

position at December 31 NKr   70,000  .21  (14,700)

Remeasurement loss $     900 

12-50
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
P12-21 Translation and Calculation of Translation Adjustment

a.
DaSilva Company
Trial Balance Translation
December 31, 20X4

Exchange U.S.    
    Reals          Rate        Dollars  

Cash BRL    57,700 .20 $   11,540

Accounts Receivable (net) 82,000 .20 16,400
Inventory 95,000 .20 19,000
Prepaid Insurance 2,400 .20 480
Plant and Equipment 350,000 .20 70,000
Intangible Assets 30,000 .20 6,000
Cost of Goods Sold 230,000 .25 57,500
Insurance Expense 3,200 .25 800
Depreciation Expense 32,500 .25 8,125
Amortization Expense 12,000 .25 3,000
Operating Expense 152,300 .25 38,075
Dividends Paid            25,000 Sch. A       6,250
Total BRL 1,072,100 $237,170

Accumulated Other
Comprehensive Income —
Translation Adjustment (debit)     30,250
Total Debits $ 267,420

Accumulated Depreciation BRL   100,000 .20 $   20,000

Accounts Payable 24,000 .20 4,800
Income Tax Payable 27,000 .20 5,400
Interest Payable 1,100 .20 220
Notes Payable 20,000 .20 4,000
Bonds Payable 120,000 .20 24,000
Common Stock 80,000 .30 24,000
Additional Paid-In Capital 150,000 .30 45,000
Retained Earnings 50,000 .30 15,000
Sales         500,000 .25   125,000
Total Credits BRL 1,072,100 $267,420

Schedule A
Dividends April 7 BRL    10,000 .28 $   2,800
Dividends October 9        15,000 .23     3,450
BRL    25,000 $   6,250

12-51
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
P12-21 (continued)

b. Schedule to compute the accumulated other comprehensive income – translation

adjustment as of December 31, 20X4.

Exchange U.S.   
  Reals          Rate      Dollars  

Net assets at beginning of year BRL 280,000  .30 $84,000 

Adjustment for changes:

Net income for year 70,000  .25 17,500 
Dividends paid: April 7 (10,000) .28 (2,800)
October 9        (15,000) .23   (3,450)
Net assets translated at:
Rates during year $95,250 
Rates at end of year BRL 325,000  .20  65,000 

Accumulated other comprehensive

Income — translation adjustment (debit) $30,250 

Another way of interpreting the direction (debit or credit) of the translation adjustment is
to consider the translated balance sheets, as follows:

Translated balance sheet, 1/1/X4

Net assets $84,000 Stockholders’ equity
$84,000 

The translated balance sheet at the end of the year would be:

Translated balance sheet, 12/31/X4

Net assets $65,000 Stockholders’ equity
(from 1/1/X4) $84,000 

20X4 Income $17,500 

Less dividends (6,250) 11,250 

Accumulated other
comprehensive income —
      translation adjustment (30,250)

Total $65,000 Total $65,000 

The debit balance of $30,250 in the accumulated other comprehensive income –

translation adjustment, is necessary to “balance” the translated balance sheet.

12-52
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
P12-22* Remeasurement and Proof of Remeasurement Gain or Loss

a.
DaSilva Company
Trial Balance Remeasurement
December 31, 20X4

Exchange U.S.     
    Reals          Rate       Dollars   

Cash BRL    57,700 .20 $ 11,540

Accounts Receivable (net) 82,000 .20 16,400
Inventory 95,000 .25 23,750
Prepaid Insurance 2,400 .30 720
Plant and Equipment 350,000 Sch. A 103,000
Intangible Assets 30,000 .30 9,000
Cost of Goods Sold 230,000 Sch. B 62,250
Insurance Expense 3,200 .30 960
Depreciation Expense 32,500 Sch. C 9,600
Amortization Expense 12,000 .30 3,600
Operating Expense 152,300 .25 38,075
Dividends Paid            25,000 Sch. D     6,250
Total Debits BRL 1,072,100 $285,145

Accumulated Depreciation BRL   100,000 Sch. E $ 29,850

Accounts Payable 24,000 .20 4,800
Income Tax Payable 27,000 .20 5,400
Interest Payable 1,100 .20 220
Notes Payable 20,000 .20 4,000
Bonds Payable 120,000 .20 24,000
Common Stock 80,000 .30 24,000
Additional Paid-In Capital 150,000 .30 45,000
Retained Earnings 50,000 .30 15,000
Sales          500,000 .25   125,000
Total BRL 1,072,100 $277,270

Remeasurement Gain     7,875

Total Credits $285,145

12-53
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
P12-22* (continued)

Exchange U.S.
   Reals          Rate     Dollars
Schedule A
Plant and Equipment
Before January 1, 20X4 BRL 250,000 .30 $  75,000 
April 7, 20X4     100,000 .28    28,000 
BRL 350,000 $103,000 

Schedule B
Cost of Goods Sold
Beginning Inventory* BRL  95,000 .30 $  28,500 
Purchases      230,000 .25    57,500 
Goods Available BRL 325,000 $  86,000 
Less Ending Inventory          (95,000)  .25  (23,750)
BRL 230,000 $  62,250 

*Acquired before January 1, 20X4; use the exchange rate at date parent acquired
subsidiary.

Schedule C
Depreciation Expense
Before January 1, 20X4 BRL  25,000 .30 $    7,500 
April 7, 20X4         7,500 .28     2,100 
BRL   32,500 $    9,600 

Schedule D
Dividends
April 7, 20X4 BRL   10,000 .28 $    2,800 
Oct. 9, 20X4        15,000 .23     3,450 
BRL   25,000 $    6,250 

Schedule E
Accumulated Depreciation
Before January 1, 20X4:
January 1, 20X1 BRL   80,000 .30 $  24,000 
July 10, 20X2 12,500 .30 3,750 
April 7, 20X4        7,500 .28     2,100 
BRL 100,000 $  29,850 

12-54
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
P12-22* (continued)

b. Proof of Remeasurement Gain

Schedule 1: Statement of Net Monetary Position:

End of Beginning
Year of Year
Monetary Assets:
Cash BRL   57,700   BRL    62,000 
Accounts Receivable (net)       82,000          83,900 
Total BRL 139,700   BRL  145,900 

Monetary Liabilities:
Accounts Payable BRL   24,000   BRL    20,000 
Income Taxes Payable 27,000   30,000 
Interest Payable 1,100   1,000 
Notes Payable 20,000   20,000 
Bonds Payable      120,000        120,000 
Total BRL (192,100) BRL (191,000)

Net Monetary Liabilities BRL  (52,400) BRL  (45,100)

Increase in net monetary liabilities during 20X4 BRL   (7,300)

Schedule 2: Analysis of Changes in Monetary Accounts:

Exchange U.S.          

    Reals         Rate           Dollars   
Exposed net monetary liability
position-January 1, 20X4 BRL (45,100) .30  $(13,530)

Increases
From operations:
Sales 500,000  .25  125,000 

Decreases
From operations: .25  (57,500)
Purchases (230,000) .25  (38,075)
Operating expenses (152,300) 10,000 x .28 
From dividends (25,000) 15,000 x .23  (6,250)

From purchases of plant

and equipment     (100,000) .28   (28,000)

Net monetary position prior

to remeasurement at year- end
rates $(18,355)

Exposed net monetary liability

Position-December 31, 20X4 BRL (52,400) .20   (10,480)
Remeasurement gain $   7,875 

12-55
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

P12-23 Translation

a. Western Ranching Company

Trial Balance Translation
December 31, 20X3

Australian  Exchange U.S.   

   Dollars        Rate        Dollars 

Cash A$  44,100 .60 $   26,460

Accounts Receivable (net) 72,000 .60 43,200
Inventory 86,000 .60 51,600
Plant and Equipment 240,000 .60 144,000
Cost of Goods Sold 330,000 .65 214,500
Depreciation Expense 24,000 .65 15,600
Operating Expense 131,500 .65 85,475
Interest Expense 5,700 .65 3,705
Dividends Declared        9,000 .67       6,030
Total $590,570
Accumulated Other Comprehensive
Income — Translation Adjustment
(debit)     16,760
Total Debits A$942,300 $607,330

Accumulated Depreciation A$  60,000 .60 $  36,000

Accounts Payable 53,800 .60 32,280
Payable to Alamo, Inc. 10,800 .60 6,480
Interest Payable 3,000 .60 1,800
12% Bonds Payable 100,000 .60 60,000
Premium on Bonds 5,700 .60 3,420
Common Stock 90,000 .70 63,000
Retained Earnings 40,000 .70 28,000
Sales   579,000 .65   376,350
Total Credits A$942,300 $607,330

12-56
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
P12-23 (continued)

b. Schedule to prove translation adjustment:

Australian   Exchange U.S.

   Dollars        Rate      Dollars  

Net assets at beginning of year A$130,000  .70 $  91,000 

Adjustments for changes:

Net income for year 87,800  .65 57,070 
Dividends paid       (9,000) .67     (6,030)
Net assets translated:
Rates during year $142,040 
Rates at end of year A$208,800  .60 (125,280)

Change in other comprehensive

Income — translation adjustment (debit) $ 16,760 
Accumulated other comprehensive
Income — translation adjustment, 1/1      -0- 
Accumulated other comprehensive
Income — translation adjustment, 12/31 $  16,760

12-57
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
P12-24 Parent Company Journal Entries and Translation

P Investment cost A$200,000 x $.70 $140,000

=

1/1/x3
Fair value $140,000
80%
> Revaluation: PPE: A$40,000 x $.70 > $28,000
Patent: A$56,000 x $.70 > $39,200

S Book value (A$130,000 x .80) x $.70 = $ 72,800

Australian  Exchange U.S.              

   Dollars       Rate                 Dollars            
Balance Jan. 1, 20X3
Differential:
Buildings and Equipment A$40,000  .70 $28,000 
Patent 56,000  .70 $39,200 

Amortization:
Buildings and Equipment
(10 years) (4,000) .65 (2,600)
Patent (10 years)      (5,600) .65                 (3,640)
Remaining Balance A$86,400  $25,400  $35,560 

Adjusted balance Dec. 31, 20X3

Buildings and Equipment A$36,000  .60 (21,600)
Patent A$50,400  .60               (30,240)

Differential Translation
Adjustment:
Patent $  5,320 
Buildings and Equipment  3,800 

Total Differential
Translation Adjustment $  9,120 

(Note: The differential translation adjustment is necessary to decrease the buildings and
equipment component of the parent company’s differential from $25,400 to $21,600, and
to decrease the patent component from $35,560 to $30,240. Thus, a credit will be made
to the parent company’s investment account for the total of $9,120 ($3,800 + $5,320)
with a corresponding debit to the parent company’s Other Comprehensive Income –
Translation Adjustment account.)

12-58
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
P12-24 (continued)

Parent company journal entries 20X3:

(1) Investment in Subsidiary 140,000

Cash 140,000
Acquire foreign investment.

(2) Cash 4,824

Investment in Subsidiary 4,824
Receive dividend:
A$9,000 x .80 x $.67

(3) Investment in Subsidiary 45,656

Income from Subsidiary 45,656
Equity accrual for percentage of
subsidiary's income:
   A$          U.S.$   
Sales A$579,000  $376,350 
Cost of goods sold (330,000) (214,500)
Depreciation expense (24,000) (15,600)
Operating expense (131,500) (85,475)
Interest expense      (5,700)    (3,705)
Income A$  87,800  $  57,070 
Average exchange rate x       .65                  
U.S. dollar equivalent $    57,070  $  57,070 
Parent's percent x       .80  x      .80 
Equity accrual $    45,656  $  45,656 

(4) Income from Subsidiary 6,240

Investment in Subsidiary 6,240
Amortization of differential:
Buildings and equipment = $2,600
Patent =   3,640
$6,240

(5) Other Comprehensive Income —

Translation Adjustment 9,120
Investment in Subsidiary 9,120
Translation adjustment related to
decrease in differential:
Buildings and equipment = $3,800
Patent =   5,320
$9,120

(6) Other Comprehensive Income —

Translation Adjustment 13,408
Investment in Subsidiary 13,408
Parent company's share of translation
adjustment from subsidiary:
$13,408 = $16,760 x .80

12-59
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
P12-24 (continued)

Entries posted to T-accounts (not required):

Investment in Subsidiary
Original cost (1) 140,000 Dividends (2) 4,824

Equity accrual (3) 45,656 Amortization (4) 6,240

Translation adjustment
related to
differential (5) 9,120

Parent’s share of
subsidiary’s
translation
_______
adjustment (6) 13,408
Balance, Dec. 31, 20X3 152,064

Income from Subsidiary

Amortization (4)    6,240 Equity accrual (3) 45,656

Balance, December 31, 20X3 39,416

12-60
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
P12-25 Consolidation Workpaper after Translation

Workpaper elimination entries:

E(1) Income from Subsidiary 39,416

Dividends Declared 4,824
Investment in Subsidiary 34,592
Eliminate income from subsidiary.

E(2) Income to Noncontrolling Interest 11,414

Dividends Declared 1,206
Noncontrolling Interest 10,208
Assign income to noncontrolling interest:
$11,414 = $57,070 x .20
$1,206 = $6,030 x .20

E(3) Investment in Western Ranching 13,408

Other Comprehensive Income –
Translation Adjustment 13,408
Eliminate other comprehensive income
from the subsidiary that had been
recorded by the parent:
$13,408 = $16,760 x .80

E(4) Noncontrolling Interest 3,352

Other Comprehensive Income to
Noncontrolling Interest 3,352
Assign a proportionate share of the
subsidiary’s other comprehensive income
to the noncontrolling interest:
$3,352 = $16,760 x .20

E(5) Common Stock 63,000

Retained Earnings, January 1 28,000
Accumulated Other
Comprehensive Income, (1/1) 0
Differential 67,200
Investment in Subsidiary 140,000
Noncontrolling Interest 18,200
Eliminate investment and establish
noncontrolling interest's share of
beginning equity of subsidiary:
$18,200 = $91,000 x .20

E(6) Investment in Subsidiary 9,120

Differential 9,120
Eliminate differential translation adjustment.

12-61
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
P12-25 (continued)

E(7) Plant and Equipment 24,200

Patent 33,880
Differential 58,080
Assign differential, net of
differential adjustment:
$24,200 = $28,000 - $3,800
$33,880 = $39,200 - $5,320

E(8) Depreciation Expense 2,600

Amortization Expense 3,640
Accumulated Depreciation 2,600
Patent 3,640
Amortization of differential.

E(9) Payable to Alamo 6,480

Receivable from Western Ranching 6,480
Eliminate intercompany payable/receivable.

12-62
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
P12-25 (continued)
Alamo, Inc. and Subsidiary
Consolidation Workpaper
For the Year Ending December 31, 20X3
(after translation)

Western           Eliminations              Consol-  

                   Item                        Alamo    Ranching       Debit         Credit        idated    

Sales 1,000,000  376,350  1,376,350 

Income from
Subsidiary     39,416                  (1) 39,416                  
Credits 1,039,416   376,350  1,376,350 
Cost of Goods Sold 600,000  214,500  814,500 
Depreciation
Expense 28,000  15,600  (8) 2,600 46,200 
Amortization
Expense (8) 3,640 3,640 
Operating Expense 204,000  85,475  289,475 
Interest Expense       2,000     3,705       5,705 
Debits (834,000) (319,280) (1,159,520)
216,830 
Income to Noncon-
trolling Interest                                                   (2) 11,414                       (11,414)
Net Income,
carry forward    205,416  57,070    57,070 -0-  205,416 

Retained Earnings,
January 1 179,656  28,000  (5) 28,000 179,656 
Net Income, from
above    205,416     57,070  57,070   205,416 
385,072  85,070  385,072 
Dividends Declared (50,000) (6,030) (1) 4,824
                                                   (2)     1,206   (50,000)
Retained Earnings,
carry forward  335,072  79,040    85,070       6,030   335,072 

Cash 38,000  26,460  64,460 

Accounts
Receivable (net) 140,000  43,200  183,200 
Receivable from
Western Ranching 6,480  (9) 6,480
Inventory 128,000  51,600  179,600 
Plant and Equipment 500,000  144,000  (7) 24,200 668,200 
Investment in
Subsidiary 152,064  (3) 13,408 (1) 34,592
(6) 9,120 (5)140,000
Differential (5) 67,200 (6) 9,120
(7) 58,080
Patent (7) 33,880 (8) 3,640 30,240 
Accumulated Other
Comp. Income,
(from below)    22,528   16,760  16,760    22,528 
Total Debits  987,072   282,020  1,148,228 

12-63
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
P12-25 (continued)

Western           Eliminations              Consol-  

                   Item                        Alamo  Ranching       Debit         Credit       idated   

Accumulated
Depreciation 90,000  36,000  (8) 2,600 128,600 
Accounts Payable 60,000  32,280  92,280 
Payable to Alamo 6,480  (9) 6,480 
Interest Payable 2,000  1,800  3,800 
12% Bonds Payable 60,000  60,000 
Premium on Bonds 3,420  3,420 
Common Stock 500,000  63,000  (5)63,000  500,000 
Retained Earnings 335,072  79,040  85,070  6,030 335,072 
Noncontrolling
Interest (4) 3,352  (2)10,208
                                             (5)18,200      25,056 
Credits 987,072  282,020  305,710    305,710 1,148,228 

Accumulated Other
Comp. Income, 1/1 -0-  -0-  (5) -0-  -0- 
Other Comp. Income –
Translation Adj.(dr) (22,528) (16,760) (3)13,408 (25,880)
Other Comp. Income
to Noncon. Int.                                             (4) 3,352     3,352 
Accumulated Other
Comp. Income, 12/31,
(debit) carry up (22,528) (16,760)     -0-    16,760    (22,528)

Proof of noncontrolling interest's percentage of subsidiary's stockholders' equity:

Subsidiary's Stockholders' Equity:

Common Stock $  63,000 
Retained Earnings 79,040 
Accumulated Other Comprehensive
Income — Translation Adjustment   (16,760)
Subsidiary's Stockholders' Equity $125,280 
Noncontrolling Percent x      .20 
Noncontrolling Interest $  25,056 

12-64
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
P12-25 (continued)

Optional, alternate workpaper placement of accumulated other comprehensive income below the
income section

Alamo, Inc. and Subsidiary

Consolidation Workpaper
For the Year Ending December 31, 20X3
(after translation)

Western           Eliminations             Consol-  

                   Item                        Alamo    Ranching       Debit         Credit        idated    

Sales 1,000,000  376,350  1,376,350 

Income from
Subsidiary     39,416                 (1)39,416
Credits 1,039,416  376,350  1,376,350 
Cost of Goods Sold 600,000  214,500  814,500 
Depreciation
Expense 28,000  15,600  (8) 2,600 46,200 
Amortization
Expense (8) 3,640 3,640 
Operating Expense 204,000  85,475  289,475 
Interest Expense      2,000      3,705       5,705 
Debits (834,000) (319,280) (1,159,520)
216,830 
Income to Noncon-
trolling Interest                                 (2)11,414                    (11,414)
Net Income,
carry forward   205,416  57,070     57,070      -0-  205,416 

Accumulated Other
Comp. Income, 1/1 -0-  -0-  (5) -0- -0- 
Other Comp. Income-
Translation Adj.(dr) (22,528) (16,760) (3)13,408 (25,880)
Other Comp. Income
to NCI                                                 (4) 3,352      3,352 
Accumulated Other
Comp. Income, 12/31,
(debit) carry dwn.    (22,528) (16,760)      -0-   16,760     (22,528)

Retained Earnings,
January 1 179,656  28,000  (5)28,000 179,656 
Net Income, from
above    205,416    57,070  57,070 -0-  205,416 
385,072  85,070  385,072 
Dividends Declared (50,000) (6,030) (1) 4,824
                                                (2) 1,206    (50,000)
Retained Earnings,
carry forward    335,072  79,040    85,070    6,030    335,072 

12-65
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
P12-25 (continued)

Optional format

Western         Eliminations               Consol-  

                   Item                      Alamo  Ranching      Debit         Credit        idated   
Cash 38,000 26,460 64,460
Accounts
Receivable (net) 140,000 43,200 183,200
Receivable from
Western Ranching 6,480 (9) 6,480
Inventory 128,000 51,600 179,600
Plant and Equipment 500,000 144,000 (7)24,200 668,200
Investment in
Subsidiary 152,064 (3)13,408 (1) 34,592
(6) 9,120 (5)140,000
Differential (5)67,200 (6) 9,120
(7) 58,080
Patent (7)33,880 (8) 3,640 30,240
Accumulated Other
Comp. Income,
(from above)  22,528   16,760 -0- 16,760    22,528
Total Debits 987,072 282,020 1,148,228

Accumulated
Depreciation 90,000 36,000 (8) 2,600 128,600
Accounts Payable 60,000 32,280 92,280
Payable to Alamo 6,480 (9) 6,480
Interest Payable 2,000 1,800 3,800
12% Bonds Payable 60,000 60,000
Premium on Bonds 3,420 3,420
Common Stock 500,000 63,000 (5)63,000 500,000
Retained Earnings 335,072 79,040 85,070 6,030 335,072
Noncontrolling
Interest (4) 3,352 (2) 10,208
                                            (5) 18,200    25,056
Total Credits 987,072 282,020 305,710   305,710 1,148,228

Note: This optional presentation shows the accumulated other comprehensive income section of
the worksheet immediately below the computation of net income. Thus, the placement of the
accumulated other comprehensive income section does not affect the computation of any worksheet
amounts. It is just a preference as to the organization of the consolidation worksheet. This alternate
presentation also shows students that the consolidating worksheet is a means to the end of
computing the amounts that will be reported on the consolidated financial statements, and that
alternate worksheet formats will be found in practice.

12-66
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
P12-26* Remeasurement

a. Western Ranching Company

Trial Balance Remeasurement
December 31, 20X3

Australian  Exchange U.S.    

   Dollars         Rate        Dollars  

Cash A$  44,100  .60 $  26,460 

Accounts Receivable (net) 72,000  .60 43,200 
Inventory 86,000  .65 55,900 
Plant and Equipment 240,000  180,000 x .70
60,000 x .70 168,000 
Cost of Goods Sold 330,000  (a) 217,800 
Depreciation Expense 24,000  .70 16,800 
Operating Expense 131,500  .65 85,475 
Interest Expense 5,700  .65 3,705 
Dividends Declared      9,000  .67     6,030 
Total Debits A$942,300  $623,370 

Accumulated Depreciation A$ 60,000  .70 $  42,000 

Accounts Payable 53,800  .60 32,280 
Payable to Alamo, Inc. 10,800  .60 6,480 
Interest Payable 3,000  .60 1,800 
12% Bonds Payable 100,000  .60 60,000 
Premium on Bonds 5,700  .60 3,420 
Common Stock 90,000  .70 63,000 
Retained Earnings 40,000  .70 28,000 
Sales    579,000  .65   376,350 
Total $613,330 
Remeasurement Gain    10,040 
Total Credits A$942,300  $623,370 

Australian  Exchange U.S.    

(a) Cost of Goods Sold:    Dollars         Rate        Dollars  
Beginning Inventory A$  66,000  .70 $  46,200 
Purchases   350,000  .65   227,500 
Goods Available A$416,000  $273,700 
Minus Ending Inventory     (86,000) .65    (55,900)
Cost of Goods Sold A$330,000  $217,800 

12-67
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
P12-26* (continued)

b. Proof of Remeasurement Gain:

Schedule 1: Statement of Net Monetary Position

End of     Beginning   

    Year           of Year    
Monetary Assets:
Cash A$  44,100 
Accounts Receivable (net)     72,000 
Total A$116,100 

Monetary Equities:
Accounts Payable A$  53,800 
Payable to Parent Company 10,800 
Interest Payable 3,000 
12% Bonds Payable 100,000 
Premium on Bonds       5,700 
Total A$173,300 

Net Monetary Equities A$(57,200) A$(80,000)

Decrease in net monetary equities
during year A$(22,800)

Schedule 2: Analysis of Changes in Monetary Accounts

Australian   Exchange U.S.     

   Dollars          Rate       Dollars   
Exposed Net Monetary Liability
Position — January 1 A$ (80,000) .70 $ (56,000)

Increases:
From Operations:
Sales 579,000  .65 376,350 

Decreases:
From Operations:
Purchases (350,000) .65 (227,500)
Cash Expense (131,500) .65 (85,475)
Interest Expense (5,700) .65 (3,705)
From Dividends (9,000) .67 (6,030)
From Purchase of Plant and
Equipment       (60,000) .70    (42,000)

Net Monetary Position Prior to

Remeasurement at Year-End Rate $ (44,360)

Exposed Net Monetary Liability

Position — December 31 A$ (57,200) .60    (34,320)

Remeasurement Gain $ 10,040 

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
P12-27 Parent Company Journal Entries and Remeasurement

P Investment cost A$200,000 x $.70 = $140,000

1/1/x3
Fair value $140,000
80%
> Revaluation: PPE: A$40,000 x $.70 > $28,000
Patent: A$56,000 x $.70 > $39,200

S Book value (A$130,000 x .80) x $.70 = $  72,800

Parent company journal entries – 20X3:

(1) Investment in Subsidiary 140,000

Cash 140,000
Acquire foreign investment.

(2) Cash 4,824

Investment in Subsidiary 4,824
Receive dividend:
$4,824 = A$9,000 x .80 x $.67

(3) Investment in Subsidiary 50,088

Income from Subsidiary 50,088
Equity accrual for percentage of
subsidiary's income:
    U.S.$    
Sales $ 376,350 
Cost of goods sold (217,800)
Depreciation expense (16,800)
Operating expense (85,475)
Interest expense (3,705)
Remeasurement gain      10,040 
Subsidiary's income $   62,610 
Parent's percent x      .80 
Equity accrual $   50,088 

(4) Income from Subsidiary 6,720

Investment in Subsidiary 6,720
Amortization of differential:
Buildings and Equipment = $2,800 ($28,000 / 10)
Patent =  3,920 ($39,200 / 10)
   $6,720

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements

P12-27 (continued)

NOT REQUIRED: Entries posted to T-accounts

Investment in Subsidiary
Original cost   (1) 140,000 Dividends (2) 4,824
Equity accrual (3) 50,088 Amortization (4) 6,720

Balance,
December 31, 20X3 178,544

Income From Subsidiary

Amortization (4) 6,720 Equity accrual (3) 50,088

Balance, December 31, 20X3 43,368

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements

P12-28* Consolidation Workpaper after Remeasurement

Workpaper elimination entries:

E(1) Income from Subsidiary 43,368

Dividends Declared 4,824
Investment in Subsidiary 38,544
Eliminate income from subsidiary.

E(2) Income to Noncontrolling Interest 12,522

Dividends Declared 1,206
Noncontrolling Interest 11,316
Assign income to noncontrolling interest:
$12,522 = $62,610 x .20
$1,206 = $6,030 x .20

E(3) Common Stock 63,000

Retained Earnings, January 1 28,000
Differential 67,200
Investment in Subsidiary 140,000
Noncontrolling Interest 18,200
Eliminate beginning-of-period investment
balance and establish noncontrolling interest's
share of beginning equity of subsidiary:
$18,200 = $91,000 x .20

E(4) Plant and Equipment 28,000

Patent 39,200
Differential 67,200
Assign differential.

E(5) Depreciation Expense 2,800

Amortization Expense 3,920
Accumulated Depreciation 2,800
Patent 3,920
Amortize differential.

E(6) Payable to Alamo 6,480

Receivable from Western Ranching 6,480
Eliminate intercompany payable/receivable.

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements

P12-28* (continued)
Alamo, Inc. and Subsidiary
Consolidation Workpaper
For the Year Ending December 31, 20X3
(after translation)

Western         Eliminations               Consol-  

                   Item                        Alamo     Ranching       Debit         Credit        idated    

Sales 1,000,000  376,350  1,376,350 

Income from
Subsidiary 43,368  (1)43,368
Remeasurement
Gain                    10,040       10,040 
Credits 1,043,368  386,390  1,386,390 
Cost of Goods
Sold 600,000  217,800  817,800 
Depreciation
Expense 28,000  16,800  (5) 2,800 47,600 
Amortization
Expense (5) 3,920 3,920 
Operating Expense 204,000  85,475  289,475 
Interest Expense        2,000      3,705          5,705 
Debits (834,000) (323,780) (1,164,500)
221,890 
Income to Noncon-
trolling Interest                                 (2)12,522                      (12,522)
Net Income,
carry forward    209,368  62,610    62,610        -0-    209,368 

Retained Earnings,
January 1 179,656  28,000  (3)28,000 179,656 
Net Income, from
above   209,368    62,610  62,610 -0-    209,368 
389,024  90,610  389,024 
Dividends Declared (50,000) (6,030) (1) 4,824
                                                (2) 1,206     (50,000)
Retained Earnings,
carry forward    339,024  84,580  90,610 6,030    339,024 

Cash 38,000  26,460  64,460 

Accounts Receivable
(net) 140,000  43,200  183,200 
Receivable from
Western Ranching 6,480  (6) 6,480
Inventory 128,000  55,900  183,900 
Plant and Equipment 500,000  168,000  (4)28,000 696,000 
Investment in
Subsidiary 178,544  (1) 38,544
(3)140,000
Differential (3)67,200 (4) 67,200
Patent                                  (4)39,200 (5) 3,920   35,280 
Total Debits    991,024  293,560  1,162,840 

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements

P12-28* (continued)

Western        Eliminations                Consol-  

                   Item                      Alamo   Ranching      Debit         Credit        idated    

Accumulated
Depreciation 90,000 42,000 (5) 2,800 134,800
Accounts Payable 60,000 32,280 92,280
Payable to Alamo 6,480 (6) 6,480
Interest Payable 2,000 1,800 3,800
12% Bonds Payable 60,000 60,000
Premium on Bonds 3,420 3,420
Common Stock 500,000 63,000 (3)63,000 500,000
Retained Earnings 339,024 84,580 90,610 6,030 339,024
Noncontrolling
Interest (2)11,316
                                            (3)18,200 29,516
Total Credits 991,024 293,560 294,490 294,490 1,162,840

Proof of noncontrolling interest's percentage of subsidiary's

stockholders' equity:

Subsidiary's Stockholders' Equity:

Common Stock $  63,000
Retained Earnings    84,580
Subsidiary's Stockholders' Equity $147,580
Noncontrolling Percent x      .20
Noncontrolling Interest $  29,516

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements

P12-29 Foreign Currency Remeasurement [AICPA Adapted]

Kiner Company's Foreign Subsidiary

Remeasurement of Selected Captions into United States Dollars
December 31, 20X2, and December 31, 20X1

Indirect      Remeasured 
Balance       Exchange    into U.S.   
   in LCUs              Rate          Dollars     

December 31, 20X1

Accounts Receivable (net) 35,000 LCU 1.7 LCU = $1 $20,588 
Inventories, at cost 75,000 2.0 LCU = $1 37,500 
Property, Plant, and
Equipment (net) 150,000 2.0 LCU = $1 75,000 
Long-Term Debt 120,000 1.7 LCU = $1 70,588 
Common Stock 50,000 2.0 LCU = $1 25,000 

December 31, 20X2

Accounts Receivable (net) 40,000 1.5 LCU = $1 26,667 
Inventories, at cost 80,000 1.7 LCU = $1 47,059 
Property, Plant, and
Equipment (net) 163,000 Schedule 1 86,000 
Long-Term Debt 100,000 1.5 LCU = $1 66,667 
Common Stock 50,000 2.0 LCU = $1 25,000 

Schedule 1: Computation of Translation of Property, Plant and Equipment

(Net) into United States Dollars on December 31, 20X2

Indirect      Remeasured 
Balance       Exchange    into U.S.   
   in LCUs              Rate           Dollars     

Land purchased on
January 1, 20X1  24,000 LCU 2.0 LCU = $1 $12,000 
Plant and equipment
purchased on January 1, 20X1:
Original cost 140,000 LCU 2.0 LCU = $1 $70,000 
Depreciation for 20X1 (14,000)        2.0 LCU = $1 (7,000)
Depreciation for 20X2 (14,000)        2.0 LCU = $1   (7,000)
112,000 LCU 2.0 LCU = $1 $56,000 
Plant and equipment
purchased on July 4, 20X2:
Original cost 30,000 LCU 1.5 LCU = $1 $20,000 
Depreciation for 20X2   (3,000)        1.5 LCU = $1  (2,000)
 27,000 LCU 1.5 LCU = $1 $18,000 
163,000 LCU $86,000 

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements

P12-30 Foreign Currency Translation

Kiner Company's Foreign Subsidiary

Translation of Selected Captions into United States Dollars
December 31, 20X2, and December 31, 20X1

Indirect      Translated 
Balance       Exchange    into U.S.  
     in LCUs            Rate          Dollars    

December 31, 20X1

Accounts Receivable (net) 35,000 LCU 1.7 LCU = $1 $ 20,588
Inventories, at cost 75,000 1.7 LCU = $1 44,118
Property, Plant, and
Equipment (net) 150,000 1.7 LCU = $1 88,235
Long-Term Debt 120,000 1.7 LCU = $1 70,588
Common Stock 50,000 2.0 LCU = $1 25,000

December 31, 20X2

Accounts Receivable (net) 40,000 1.5 LCU = $1 26,667
Inventories, at cost 80,000 1.5 LCU = $1 53,333
Property, Plant, and
Equipment (net) 163,000 1.5 LCU = $1 108,667
Long-Term Debt 100,000 1.5 LCU = $1 66,667
Common Stock 50,000 2.0 LCU = $1 25,000

P12-31 Matching Key Terms

1. E

2. I

3. K

4. H

5. A

6. F

7. J

8. B

9. L

10. C

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements

P12-32 Translation Choices

Requirement 1:
a. (7) LCU .83 December 31, 20X4: end of current year
b. (5) LCU .85 Average for year 20X4 for revenues
c. (6) LCU .84 November 1, 20X4: declaration date
d. (7) LCU .83 December 31, 20X4: end of current year
e. (7) LCU .83 December 31, 20X4: end of current year
f. (5) LCU .85 Average for year 20X4 for expenses
g. (1) LCU .74 June 16, 20X1: date foreign company purchased
h. (7) LCU .83 December 31, 20X4: end of current year
i. (8) Balance computed at end of December 31, 20X4, includes
carry forward from prior periods
j. (7) LCU .83 December 31, 20X4: end of current year
k. (5) LCU .85 Average for year 20X4 for expenses

Requirement 2:
a. Direct exchange rate (DER) for January 1, 20X4:
DER = $1 / LCU .80
DER = $1.25

b. U.S. dollar versus LCU in 20X4:

Indirect Direct
Exchange Rate Exchange Rate
(LCU / $1) ($ / LCU 1)
Exchange rates on January 1, 20X4 LCU .80 $1.25
Exchange rates on December 31, 20X4 LCU .83 $1.2048

During 20X4, the direct exchange rate has decreased reflecting that it costs
less U.S. currency for one foreign currency unit at the end of the year as
compared with the beginning of the year. Therefore, the U.S. dollar has
strengthened during the year 20X4. Alternatively, the indirect exchange rate
has increased indicating it costs more in LCU to acquire $1 at December 31,
20X4, than at January 1, 20X4.

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements

P12-33 Proof of Translation Adjustment

a.
MaMi Co. Ltd.
Proof of Translation Adjustment
Year Ended December 31

Translation
MXP Rate         $     
Net assets at beginning of year 575,000  $.087 50,025 
Adjustment for changes in net
assets position during year:
Net income for year 270,000  $.090 24,300 
Dividends (150,000) $.0915 (13,725)

Net assets translated at:

Rates during year 60,600 
Rates at end of year 695,000  $.093 64,635 

Change in other comprehensive

income-translation adjustment
during year (net increase) 4,035 

Accumulated other comprehensive

income-translation adjustment, 1/1 (credit) 3,250 

Accumulated other comprehensive

income-translation adjustment, 12/31 (credit) 7,285 

Note that the proof begins with the net assets at the beginning of the year. The proof
shows the change in the other comprehensive income during the year of $4,035. It is a
credit or net increase in AOCI because it must offset an increase (debit) in the net
assets from $60,600 to $64,635 during the year. A mnemonic here is to remember that
the debits must equal the credits.

If you were to prove the total AOCI of $7,285, then the proof should begin with the net
assets at the time the subsidiary was acquired and then make the adjustments in net
income, dividends, and other changes in net assets over the years since acquisition, at
the appropriate exchange rates. Or, the change in this year of $4,025 credit can simply
be added to the beginning of the period AOCI credit balance of $3,250.

b. The U.S. dollar weakened against the Mexican peso during the year shown by the
increase in the direct exchange rate indicating it costs more U.S. currency to acquire
one Mexican peso at the end of the year ($.093) as opposed to the U.S. currency cost
of one Mexican peso at the beginning of the year ($.087).

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements

P12-33 (continued)

Another way of viewing the proof of the ending balance in AOCI is:

Translated Balance Sheet, 1/1

Net assets $50,025 Stock and RE $46,775 (plug)

              AOCI (given)   3,250
Total $50,025 $50,025

Translated Balance Sheet, 12/31

Net assets $64,635 Stock and RE $46,775 (from 1/1)

Retained earnings change:
($24,300 – $13,725)   10,575
              AOCI (plug)     7,285
Total $64,635 $64,635

12-80