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McGraw-Hill/Irwin The McGraw-Hill Companies, Inc.

, 2009 Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 10-1

CHAPTER 10 TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS


Answer to Discussion Question
How Do We Report This? This case represents the ongoing debate as to the proper reporting of foreign currency balances. Southwestern has invested the equivalent of $30,000 (150,000 vilseks) in each of three assets. The relative value of the vilsek has now changed. Thus, 150,000 vilseks now can be converted into $34,500. However, the subsidiary does not have vilseks--only land, inventory, and investments. Although the current exchange rate is given, the company has no apparent plans to convert its assets into dollars. Instead, these three assets are being held, each with a historical cost of 150,000 vilseks. Under the temporal method, these assets (except for the investments if carried at market value) would be reported in the parent's balance sheet at the original cost of $30,000. Unfortunately, as the Finance Director points out, an old, outdated rate is being utilized if the $30,000 figure is reported. (Of course, given that prices tend to change over time, the same can be said for any asset reported at historical cost.) Conversely, the current rate method requires that each of the three assets be reported at $34,500 based on the current exchange rate. As the controller indicates, though, $34,500 was not the original cost expended by Southwestern. In addition, using the current rate means that each of the assets will constantly report a "floating" value, one that will change with each exchange rate fluctuation. Finally, the $34,500 figure is based on the current value of the vilsek ($.23) and the historical cost in vilseks (150,000 vilseks) for the three assets. The current exchange rate is only significant if the assets are sold with the proceeds being converted into U.S. dollars. Since an imminent sale is not indicated, the validity of reporting the $34,500 might again be questioned. In addition, even if the assets were sold, $34,500 does not accurately reflect the proceeds in U.S. dollars because 150,000 vilseks is the historical cost and not the current market value of each of these assets. As a classroom exercise or written assignment, students could be required to select a reported value for each of the three assets and then defend their position. What figure is actually the fairest representation of each of the three assets? What figure is the best conveyor of information to an outside party? There is no single best answer to these questions. The purpose of this type of exercise is to force students to consider the objectives of financial reporting. Students should not just assume that the current official pronouncement is correct. One possible approach to the case is

to assign several students to represent banks or stockholders and discuss the types of information that is most needed by these users. Another group of students can take the position of the company responsible for preparing the information and discuss management's preference for providing one type of information over another. Yet another group could take a purely theoretical approach and discuss the goals that accounting has attempted to reach. Although a final resolution may not be achieved, some excellent class discussion is possible. The temporal and current rate methods of translation differ primarily with regard to the exchange rate used to translate those assets that are reported at historical cost--inventories, prepaids, fixed assets, and intangibles. The debate regarding the appropriate exchange rate for translating assets exists only because some assets are reported at historical cost. If all assets were reported at their current value, there would be no need to use the historical exchange rate for translating assets in order to maintain the asset's historical cost in U.S. dollar terms. All assets would be translated at the current exchange rate. The differences between the temporal method and current rate method would disappear.
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Answers to Questions
1. The two major issues related to the translation of foreign currency financial statements are: (a) which method should be used and (b) where should the resulting translation adjustment be reported in the consolidated financial statements. The first issue relates to determining the appropriate exchange rate (historical, current, or average for the current period) for the translation of foreign currency balances. Those items translated at the current exchange rate are exposed to translation adjustment. The second issue relates to whether the translation adjustment should be treated as a gain or loss in income, or should be deferred as a separate component of stockholders equity. 2. Balance sheet exposure arises when a foreign currency balance is translated at the current exchange rate. By translating at the current exchange rate, the foreign currency item in essence is being revalued in U.S. dollar terms on the consolidated financial statements. There will be either a net asset balance sheet exposure or net liability balance sheet exposure depending upon whether assets translated at the current rate are greater or less than liabilities translated at the current rate. Balance sheet exposure generates a translation adjustment which does not result in an inflow or outflow of cash. Transaction exposure, which results from the receipt or payment of foreign currency, generates foreign exchange gains and losses which are realized in cash. 3. Although balance sheet exposure does not result in cash inflows and outflows, it does nevertheless affect amounts reported in consolidated financial statements. If the foreign

currency is the functional currency, translation adjustments will be reported in stockholders equity. If translation adjustments are negative and therefore reduce total stockholders equity, there is an adverse (inflationary) impact on the debt to equity ratio. Companies with restrictive debt covenants requiring them to stay below a maximum debt to equity ratio, may find it necessary to hedge their balance sheet exposure so as to avoid negative translation adjustments being reported. If the U.S. dollar is the functional currency or an operation is located in a high inflation country, remeasurement gains and losses are reported in income. Companies might want to hedge their balance sheet exposure in this situation to avoid the adverse impact remeasurement losses can have on consolidated income and earnings per share. The paradox in hedging balance sheet exposure is that, by agreeing to receive or deliver foreign currency in the future under a forward contract, a transaction exposure is created. This transaction exposure is speculative in nature, given that there is no underlying inflow or outflow of foreign currency that can be used to satisfy the forward contract. By hedging balance sheet exposure, a company might incur a realized foreign exchange loss to avoid an unrealized negative translation adjustment or unrealized remeasurement loss. 4. The gains and losses arising from financial instruments used to hedge balance sheet exposure are treated in a similar manner as the item the hedge is intended to cover. If the foreign currency is the functional currency, gains and losses on hedging instruments will be taken to other comprehensive income. If the U.S. dollar is the functional currency, gains and losses on the hedging instruments will be offset against the related remeasurement gains and losses.
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009 Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 10-3

5. The major concept underlying the temporal method is that the translation process should result in a set of translated U.S. dollar financial statements as if the foreign subsidiarys transactions had actually been carried out using U.S. dollars. To achieve this objective, assets carried at historical cost and stockholders equity are translated at historical exchange rates; assets carried at current value and liabilities (carried at current value) are translated at the current exchange rate. Under this concept, the foreign subsidiarys monetary assets and liabilities are considered to be foreign currency cash, receivables, and payables of the parent which are exposed to transaction risk. For example, if the foreign currency appreciates, then the foreign currency receivables increase in U.S. dollar value and a gain is recognized. Balance sheet exposure under the temporal method is analogous to the net transaction exposure which exists from having both receivables and payables in a particular foreign currency. The major concept underlying the current rate method is that the entire foreign investment is exposed to foreign exchange risk. Therefore all assets and liabilities are translated at the current exchange rate. Balance sheet exposure under this concept is equal to the net investment. 6. The Retained Earnings balance is created by a multitude of transactions: all revenues, expenses, gains, losses, and dividends since the companys inception. Identifying each component of this account (so that a separate translation can be made) would be virtually impossible. Therefore, in the initial year that Statement 52 was applied, the ending balance calculated under Statement 8 was merely brought forward. Thereafter, the ending balance

translated each year for retained earnings becomes the beginning figure to be reported for the following year. 7. The major differences relate to non-monetary assets carried at historical cost and related expenses, i.e., inventory and cost of goods sold; property, plant, and equipment and depreciation expense; and intangible assets and amortization expense. Under the temporal method, these items are all translated at historical exchange rates. Under the current rate method, the assets are translated at the current exchange rate and the related expenses are translated at the average exchange rate for the current period. 8. The functional currency is the currency of the subsidiarys primary economic environment. It is usually identified as the currency in which the company generates and expends cash. SFAS 52 recommends that several factors such as the location of primary sales markets, sources of materials and labor, the source of financing, and the amount of intercompany transactions should be evaluated in identifying an entitys functional currency. SFAS 52 does not provide any guidance as to how these factors are to be weighted (equally or otherwise) when identifying an entitys functional currency. 9. The foreign subsidiary's net asset position in foreign currency at the beginning of the period is first determined. Changes in net assets are determined to explain the net asset balance in foreign currency at the end of the period. The beginning net asset position and changes in net assets are translated at appropriate exchange rates and the ending net asset position in dollars is determined. The ending net asset balance in foreign currency is then translated at the current rate and this result is subtracted from the ending net asset position in dollars (already calculated). The difference is the translation adjustment. It is positive if the actual dollar net asset position is less than the net asset position based on the current exchange rate. The translation adjustment is negative if the actual dollar net asset position is greater than if translated at the current rate.
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10. One theory mentioned by the FASB identifies the translation adjustment as a measure of unrealized increases and decreases that have occurred in the value of the foreign subsidiary because of exchange rate changes. A second theory argues that this adjustment is no more than a mechanically derived number that must be included to keep the balance sheet in equilibrium although the figure has no intrinsic meaning. The FASB did not indicate in Statement 52 that either theory is considered more appropriate. 11. Remeasurement is required in two situations: a. The U.S. dollar is the functional currency. b. The foreign subsidiary operates in a highly inflationary country. Translation is required when a foreign currency is the functional currency. Remeasurement is carried out using the temporal method, with remeasurement gains and losses reported in consolidated income. Translation is done using the current rate method and the resulting translation adjustment is carried as a separate component of stockholders equity. 12. The temporal method must be used to remeasure the financial statements of operations in highly inflationary countries. One reason for mandating the use of the temporal method is that it avoids the disappearing plant problem that exists when the current rate method is used. Under the current rate method, fixed assets are translated at current exchange rates. With high rates of inflation, the foreign currency will depreciate significantly. When the historical cost of fixed

assets is translated at a significantly lower current exchange rate, the dollar value of fixed assets disappears. This problem is avoided by translating at the historical exchange rate as is done under the temporal method.
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009 Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 10-5

Answers to Problems 1. C 2. C 3. C 4. B Because the peso is the functional currency, the financial statements must be translated using the current rate method. Therefore, answers a and d can be eliminated. Because the subsidiary has a net asset position and the peso has appreciated from $.16 to $.19, a positive translation adjustment will result. 5. A All asset accounts are translated at current rates. 6. A Because the foreign currency is the functional currency, a translation is required. All assets accounts are translated at current rates. 7. C Because the U.S. dollar is the functional currency, a remeasurement is required. All receivables are remeasured at current rates. Assets carried at historical cost, such as prepaid insurance and goodwill, are remeasured at historical rates. 8. B The foreign currency is the functional currency, so a translation is appropriate. All assets (including inventory) are translated at the current exchange rate [100,000 x $.17]. 9. C Cost of goods sold is translated at the exchange rate in effect at the date of accounting recognition, which is the date the goods were sold [100,000 x $.18]. 10. D The foreign currency is the functional currency, so a translation is appropriate. All assets are translated at the current exchange rate of $.19. 11. C The U.S. dollar is the functional currency, so a remeasurement is appropriate.

Inventory (carried at cost) is remeasured at the historical exchange rate of $.16. Marketable equity securities (carried at market value) are remeasured at the current exchange rate of $.19. 12. C Beginning inventory FCU 200,000 x $1.00 = $ 200,000 Purchases 10,300,000 x $0.80 = 8,240,000 Ending inventory (500,000) x $0.75 = (375,000) Cost of goods sold FCU 10,000,000 $8,065,000
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13. C Beginning net assets, 1/1.. P20,000 x $.15 = $ 3,000 Increase in net assets: Income ........................................ 10,000 x $.19 = 1,900 Ending net assets, 12/31 ................. P30,000 $ 4,900 Ending net assets at current exchange rate ................ P30,000 x $.21 = $ 6,300 Translation Adjustment (positive) . $(1,400) 14. C By translating items carried at historical cost by the historical exchange rate, the temporal method maintains the underlying valuation method used by the foreign subsidiary. 15. A Beginning net monetary assets, 1/1 P100,000 x $.16 = $16,000 Increases in net monetary assets: Sale of inventory ........................ 50,000 x $.20 = 10,000 Decreases in net monetary assets: Purchase of equipment ............. (60,000) x $.16 = (9,600) Purchase of inventory ................ (30,000) x $.18 = (5,400) Transfer to parent ...................... (10,000) x $.21 = (2,100) Ending net monetary assets, 12/31 P 50,000 $ 8,900 Ending net monetary assets at the current exchange rate ......... P 50,000 x $.22 = (11,000) Remeasurement gain ...................... $(2,100) 16. C Marketable equity securities are carried at market value and therefore translated at the current exchange rate under the temporal method. 17. B When the U.S. dollar is the functional currency, SFAS 52 requires remeasurement using the temporal method with remeasurement gains and losses reported in income. 18. B Wages payable is translated at the current exchange rate. 19. C Gains and losses on hedges of net investments (whether through a forward

contract, borrowing, or other technique) are offset against the translation adjustment being hedged. 20. D Remeasurement gains are reported in the income statement as a part of income from continuing operations. 21. (10 minutes) (Specify appropriate rates for a translation) Rent expenseuse actual (historical) rate at time of recording. Rent expense would often be recorded evenly throughout the year so that an average rate for the period is acceptable. Dividends paiduse historical rate at time of recording, the date of declaration. Equipmentas an asset, use current rate at the balance sheet date. Notes payableas a liability, use current rate at the balance sheet date. 21. (continued)
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Salesuse actual (historical) rate at time of recording. Sales often occur evenly throughout the year so that an average rate is acceptable. However, if sales are more prevalent at a particular time during the year, historical rates should be used. Depreciation expenseuse historic rate at time of recording. In most cases, average rate for the year is acceptable, because depreciation occurs evenly throughout the year. Depreciation is recorded at year-end only as a matter of convenience. Cashas an asset, use the current rate at the balance sheet date. Accumulated depreciationas a contra-asset account, use the current exchange rate at the balance sheet date. Common stockas an equity account, use historic rate at time of recording, the date of issuance. 22. (5 minutes) (Determine translated values) As a translation, both the asset (inventory) and the liability (accounts payable) utilize the current exchange rate at the balance sheet date (December 31). Thus,

the translated values are as follows: Inventory LCU120,000 x 25% left = LCU30,000 x 1/3.0 = $10,000 Accounts payable LCU120,000 x 40% unpaid = LCU48,000 x 1/3.0 = $16,000 23. (10 minutes) (Determine translation and remeasurement rates) Translation Remeasurement Accounts payable $.16 C $.16 C Accounts receivable $.16 C $.16 C Accumulated depreciation $.16 C $.26 H Advertising expense $.19 A $.19 A Amortization expense $.19 A $.25 H Buildings $.16 C $.26 H Cash $.16 C $.16 C Common stock $.28 H $.28 H Depreciation expense $.19 A $.26 H Dividends paid (10/1) $.20 H $.20 H Notes payable $.16 C $.16 C Patents (net) $.16 C $.25 H Salary expense $.19 A $.19 A Sales $.19 A $.19 A * C = current rate, H = historical rate, A = average rate
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24. (20 minutes) (Calculate translation adjustment and remeasurement gain/loss and explain their economic relevance) The translation adjustment and remeasurement gain/loss can be determined as the plug figure that keeps the dollar balance sheet in balance: Translation Remeasurement CHF Rate US$ Rate US$ Cash ........................... 500,000 $.75 C 375,000 $.75 C 375,000 Inventory .................... 1,000,000 $.75 C 750,000 $.70 H 700,000 Fixed assets............... 3,000,000 $.75 C 2,250,000 $.70 H 2,100,000 Total assets .............. 4,500,000 3,375,000 3,175,000 Notes payable ............ 800,000 $.75 C 600,000 $.75 C 600,000 Owners equity ........... 3,700,000 $.70 H 2,590,000 $.70 H 2,590,000 Translation adjustment 185,000 Retained earnings (remeasurement loss) (15,000) Total ......................... 4,500,000 3,375,000 3,175,000 Alternatively, the translation adjustment and remeasurement loss can be calculated by analyzing the subsidiarys balance sheet exposure: Translation Beginning net assets, 12/1 CHF3,700,000 x $.70 = $2,590,000

Ending net assets, 12/31 at current exchange rate CHF3,700,000 x $.75 = (2,775,000) Translation adjustment (positive) $( 185,000) Remeasurement Beginning net monetary liability position, 12/1 CHF(300,000) x $.70 = $(210,000) Ending net monetary liability position, 12/31 at current exchange rate CHF(300,000) x $.75 = (225,000) Remeasurement loss $ 15,000

Economic Relevance of Translation Adjustment The translation adjustment increases stockholders equity by $185,000. The positive translation adjustment arises because the Swiss subsidiary has a net asset position of CHF3,700,000 and the Swiss franc appreciates by $.05 [CHF3,700,000 x $.05 = $185,000]. The positive translation adjustment is not realized in terms of dollar cash flow. It would be a realized gain only if Stephanie sold this operation on December 31 for exactly CHF3,700,000 and converted the sales proceeds into dollars at the current exchange rate of $.75 per Swiss franc. Economic Relevance of Remeasurement Loss The remeasurement loss arises because the Swiss subsidiary has a net monetary liability position of CHF300,000 (Cash of CHF500,000 less Notes payable of CHF800,000) and the Swiss franc has appreciated by $.05 [CHF300,000 x $.05 = $15,000]. The loss is unrealized. It would be realized only if the Swiss subsidiary converted its Swiss franc cash into dollars at December 31, thereby realizing a transaction gain of $25,000 [CHF500,000 x ($.75-$.70)], and the parent paid off the Swiss franc note payable using U.S. dollars, thereby realizing a transaction loss of $40,000 [CHF800,000 x ($.75-$.70)]. (The note could have been paid at December 18 for $560,000 [CHF800,000 x $.70]. At December 31, it takes $600,000 to pay off the note [CHF800,000 x $.75].)
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009 Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 10-9

25. (30 minutes) (Prepare financial statements for a foreign subsidiary and then translate them into U.S. dollars) Fenwicke Company Subsidiary Income Statement

LCU U.S. Dollars Rent revenue 60,000 x $1.90 A = $114,000 Interest expense (10,000) x $1.90 A = (19,000) Depreciation expense (14,000) x $1.90 A = (26,600) Repair expense (4,000) x $1.85*H = (7,400) Net income 32,000 $ 61,000 * Repair expense is the only expense not incurred evenly throughout the year. Statement of Retained Earnings LCU U.S. Dollars Retained earnings, 1/1 -0- -0Net income 32,000 (above) $61,000 Dividends paid (5,000) x $1.80 H = (9,000) Retained earnings, 12/31 27,000 $52,000 Balance Sheet LCU U.S. Dollars Cash 41,000 x $1.80 C = $ 73,800 Accounts receivable 10,000 x $1.80 C = 18,000 Building 140,000 x $1.80 C = 252,000 Accumulated depreciation (14,000) x $1.80 C = (25,200) Total assets 177,000 $318,600 Interest payable 10,000 x $1.80 C = $ 18,000 Note payable 100,000 x $1.80 C = 180,000 Common stock 40,000 x $2.00 H = 80,000 Retained earnings 27,000 (above) 52,000 Translation adjustment (below) (11,400) Total liabilities and equities177,000 $318,600 Computation of Translation Adjustment Beginning net assets -0- -0Increase in net assets: Issued common stock 40,000 x $2.00 = $ 80,000 Net income 32,000 (above) 61,000 Decrease in net assets: Dividends paid (5,000) x $1.80 = (9,000) Ending net assets 67,000 $132,000 Ending net assets at current exchange rate 67,000 x $1.80 = 120,600 Translation adjustment (negative) $ 11,400
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26. (30 minutes) (Prepare a statement of cash flows for a foreign subsidiary and then translate it into U.S. dollars) Fenwicke Company Subsidiary Statement of Cash Flows
LCU U.S. Dollars

Operating Activities: Net income 32,000 (from prob 25) $ 61,000 plus: depreciation 14,000 x $1.9 A = 26,600 less: increase in accounts receivable (10,000) x $1.9 A = (19,000) plus: increase in interest payable 10,000 x $1.9 A = 19,000 Cash flow from operations 46,000 87,600 Investing Activities: Purchase of building (140,000) x $2.0 H = (280,000) Financing Activities: Sale of common stock 40,000 x $2.0 H = 80,000 Borrowing on note 100,000 x $2.0 H = 200,000 Dividends paid (5,000) x $1.8 H = (9,000) 135,000 271,000 Increase in cash 41,000 78,600 Effect of exchange rate change on cash (4,800) Cash, 1/1 -0- -0Cash, 12/31 41,000 x $1.80 C = $ 73,800
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27. (25 minutes) (Compute translation adjustment and remeasurement gain or loss) a. Translationonly changes in net assets have an impact on the computation of the translation adjustment. Net asset balance 1/1 KM30,000 x $.32 = $ 9,600 Increases in net assets (income): Sold inventory at a profit 5/1 5,000 x $.34 = 1,700 Sold land at a gain 6/1 1,000 x $.35 = 350 Decreases in net assets: Paid a dividend 12/1 (3,000) x $.41 = (1,230) Depreciation recorded (2,000) x $.37 = ( 740) Net asset balance 12/31 KM31,000 $ 9,680 Net asset balance 12/31 at current exchange rate KM31,000 x $.42 = (13,020) Translation adjustmentpositive $(3,340) b. Remeasurementonly changes in net monetary assets and liabilities have an impact on the computation of the remeasurement gain. Beginning net monetary liability position KM (3,000) x $.32 = $ ( 960) Increases in monetary assets: Sold inventory 5/1 15,000 x $.34 = 5,100 Sold land 6/1 5,000 x $.35 = 1,750 Decreases in monetary assets: Bought inventory 10/1 (12,000) x $.39 = (4,680) Bought land 11/1 (4,000) x $.40 = (1,600)

Paid a dividend 12/1 (3,000) x $.41 = (1,230) Ending net monetary liability position KM(2,000) $(1,620) Ending net monetary liability position at current exchange rate KM(2,000) x $.42 = (840) Remeasurement gain $ (780) Note: The purchase of land on account did not result in a decrease in monetary assets, rather an increase in monetary liabilities. Payment on the note payable and collection of accounts receivable do not affect the net monetary liability position.
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28. (20 minutes) (Compute translation adjustment and remeasurement gain or loss) a. The translation adjustment is based on changes in the net assets of the subsidiary. Net assets, 1/1 82,000 LCU x $.24 = $19,680 Changes in net assets Rendered services 30,000 LCU x $.25 = 7,500 Incurred expense (18,000) LCU x $.26 = (4,680) Net assets, 12/31 94,000 LCU 22,500 Net assets, 12/31 at current exchange rate 94,000 LCU x $.29 = 27,260 Translation adjustment (positive) $(4,760) b. The remeasurement gain or loss is based on changes in the net monetary assets of the subsidiary. Net monetary assets, 1/1 22,000 LCU x $.24 = $ 5,280 Changes in net monetary assets Rendered services 30,000 LCU x $.25 = 7,500 Incurred expense (18,000) LCU x $.26 = (4,680) Net monetary assets, 12/31 34,000 LCU $ 8,100 Net monetary assets, 12/31 at current exchange rate 34,000 LCU x $.29 = 9,860 Remeasurement gain $(1,760) c. Translated value of land 60,000 LCU x $.29 = $17,400 Remeasured value of land 60,000 LCU x $.23 = $13,800 29. (10 minutes) (Determine the appropriate exchange rate) Account (a) Translation (b) Remeasurement Sales 20 A 20 A Inventory 22 C 19 H Equipment 22 C 13 H

Rent expense 20 A 20 A Dividends 21 H 21 H Notes receivable 22 C 22 C Accumulated depreciation--equipment 22 C 13 H Salary payable 22 C 22 C Depreciation expense 20 A 13 H C = current exchange rate, A = average exchange rate, H = Historical exchange rate
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30. (30 minutes) (Hedge of balance sheet exposure) a. Net assets, 1/1 (132,000 54,000) 78,000 kites x $0.80 = $62,400 Change in net assets: Net income 26,000 kites x $0.77 = 20,020 Dividends, 3/1 (5,000) kites x $0.78 = (3,900) Dividends, 10/1 (5,000) kites x $0.76 = (3,800) Net assets, 12/31 94,000 kites $74,720 Net assets at current exchange rate, 12/31 94,000 kites x $0.75 = 70,500 Translation adjustment (negative) $ 4,220 b. Forward contract journal entries 10/1 No entry 12/31 Forward Contract ................................. 2,000 Translation Adjustment (positive) . 2,000 (To record the change in the value of the forward contract as an adjustment to the translation adjustment) Foreign Currency (kites) ...................... 150,000 Cash ................................................. 150,000 (To record the purchase of 200,000 kites at the spot rate of $.75) Cash .................................................... 152,000 Foreign Currency (kites) ................. 150,000 Forward Contract ............................ 2,000 (To record delivery of 200,000 kites, receipt of $152,000, and close the forward contract account.) c. The net negative translation adjustment (debit balance) to be reported in other comprehensive income at 12/31 is $2,220 ($4,220 $2,000).
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31. (45 minutes) (Translation and remeasurement of foreign subsidiary trial balance) a. Translation of Subsidiary Trial Balance Debits Credits Cash. 8,000 KQ x 1.62 $12,960 Accounts Receivable.. 9,000 KQ x 1.62 14,580

Equipment.. 3,000 KQ x 1.62 4,860 Accumulated Depreciation 600 KQ x 1.62 $ 972 Land 5,000 KQ x 1.62 8,100 Accounts Payable 3,000 KQ x 1.62 4,860 Notes Payable.. 5,000 KQ x 1.62 8,100 Common Stock 10,000 KQ x 1.71 17,100 Dividends Paid. 4,000 KQ x 1.66 6,640 Sales 25,000 KQ x 1.64 41,000 Salary Expense 5,000 KQ x 1.64 8,200 Depreciation Expense 600 KQ x 1.64 984 Miscellaneous Expense. 9,000 KQ x 1.64 14,760 $71,084 Translation Adjustment (negative) 948 $72,032 $72,032 Calculation of Translation Adjustment Net assets, 1/1.. -0- -0Increase in net assets: Common stock issued. 10,000 KQ x 1.71 $17,100 Sales. 25,000 KQ x 1.64 41,000 Decrease in net assets: Dividends paid.. ( 4,000) KQ x 1.66 (6,640) Salary expense.. ( 5,000) KQ x 1.64 (8,200) Depreciation expense. ( 600) KQ x 1.64 ( 984) Miscellaneous expense . ( 9,000) KQ x 1.64 (14,760) Net assets, 12/31. 16,400* KQ $27,516 Net assets, 12/31 at current exchange rate. 16,400 KQ x 1.62 26,568 Translation adjustment (negative) $ 948 * This amount can be verified as ending assets (24,400 KQ) minus ending liabilities (8,000 KQ) net assets, 12/31 = 16,400 KQ.
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31. (continued) b. Remeasurement of Subsidiary Trial Balance Debits Credits Cash 8,000 KQ x 1.62 $12,960 Accounts Receivable 9,000 KQ x 1.62 14,580 Equipment 3,000 KQ x 1.71 5,130 Accumulated Depreciation 600 KQ x 1.71 $ 1,026 Land 5,000 KQ x 1.59 7,950 Accounts Payable 3,000 KQ x 1.62 4,860 Notes Payable 5,000 KQ x 1.62 8,100 Common Stock 10,000 KQ x 1.71 17,100 Dividends Paid 4,000 KQ x 1.66 6,640 Sales 25,000 KQ x 1.64 41,000

Salary Expense 5,000 KQ x 1.64 8,200 Depreciation Expense 600 KQ x 1.71 1,026 Miscellaneous Expense 9,000 KQ x 1.64 14,760 $71,246 Remeasurement loss (debit) 840 $72,086 $72,086 Calculation of Remeasurement Loss Net monetary assets, 1/1 -0- -0Increase in net monetary assets: Common stock issued 10,000 KQ x 1.71 $17,100 Sales 25,000 KQ x 1.64 41,000 Decrease in net monetary assets: Acquired equipment (3,000) KQ x 1.71 (5,130) Acquired land (5,000) KQ x 1.59 (7,950) Dividends paid (4,000) KQ x 1.66 (6,640) Salary expense (5,000) KQ x 1.64 (8,200) Miscellaneous expense (9,000) KQ x 1.64 (14,760) Net monetary assets, 12/31 9,000* KQ $15,420 Net monetary assets, 12/31 at current exchange rate 9,000 KQ x 1.62 14,580 Remeasurement loss (debit) $ 840 * This amount can be verified as ending monetary assets (Cash + Accounts receivable) minus ending monetary liabilities (Accounts payable + Notes payable): 17,000 KQ 8,000 KQ = 9,000 KQ.
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009 10-16 Solutions Manual

32. (30 minutes) (Translate the financial statements of a foreign subsidiary) LIVINGSTON COMPANY Income Statement For Year Ending December 31, 2009 Goghs U.S. Dollars Sales 270,000 x 1/.63 = 428,571 Cost of Goods Sold (155,000) x 1/.63 = (246,032) Gross Profit 115,000 182,539 Operating Expenses (54,000) x 1/.63 = (85,714) Gain on Sale of Equipment 10,000 x 1/.58 = 17,241 Net Income 71,000 114,066 Statement of Retained Earnings For Year Ending December 31, 2009 Goghs U.S. Dollars Retained Earnings, 1/1/09 216,000 given 395,000 Net Income 71,000 above 114,066 Dividends Paid (26,000) x 1/.62 = (41,935)

Retained Earnings, 12/31/09 261,000 467,131 Balance Sheet December 31, 2009 Goghs U.S. Dollars Cash 44,000 x 1/.65 = 67,692 Receivables 116,000 x 1/.65 = 178,462 Inventory 58,000 x 1/.65 = 89,231 Fixed Assets (net) 339,000 x 1/.65 = 521,538 Total 557,000 856,923 Liabilities 176,000 x 1/.65 = 270,769 Common Stock 120,000 x 1/.48 = 250,000 Retained Earnings 261,000 above 467,131 Translation Adjustment (130,977) Total 557,000 856,923 Translation Adjustment Goghs U.S. Dollars Net assets, 1/1/09 336,000 x 1/.60 = 560,000 Net income, 2009 71,000 above 114,066 Dividends paid (26,000) above (41,935) Net assets, 12/31/09 381,000 632,131 Net assets at current exchange rate, 12/31/09 381,000 x 1/.65 = 586,154 Translation adjustment, 2009 (negative) 45,977 Cumulative translation adjustment, 1/1/09 (negative) 85,000 Cumulative translation adjustment, 12/31/09 (negative) 130,977
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009 Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 10-17

33. (35 minutes) (Compute translation adjustment and remeasurement gain or loss) a. Remeasurement Gain or Loss Net monetary assets, 1/1/09* 2,000 KR x 2.50 = $ 5,000 Increases in net monetary assets: Issued Common Stock (4/1/09) 10,000 KR x 2.60 = 26,000 Sold Building** (7/1/09) 22,000 KR x 2.80 = 61,600 Sales (2009) 80,000 KR x 2.70 = 216,000 Decreases in net monetary assets: Purchased Equipment (4/1/09) (30,000) KR x 2.60 = (78,000) Paid Dividends (10/1/09) (32,000) KR x 2.90 = (92,800) Rent Expense (2009) (14,000) KR x 2.70 = (37,800) Salary Expense (2009) (20,000) KR x 2.70 = (54,000) Utilities Expense (2009) ( 5,000) KR x 2.70 = (13,500) Net monetary assets, 12/31/09 13,000 KR $ 32,500 Net monetary assets, 12/31/09 at current exchange rate 13,000 KR x 3.00 = 39,000 Remeasurement gain (credit) $ (6,500) * Net monetary assets: (Cash + Accounts Receivable) - (Account Payable +

Bonds Payable) ** To determine cash proceeds from the sale of the building, changes in the Accumulated Depreciation and Buildings accounts must be analyzed along with Depreciation Expense and Gain on Sale of Building. Depreciation expense is KR 15,000; KR 5,000 is attributable to equipment (Accumulated DepreciationEquipment increases by KR 5,000), KR 10,000 is depreciation of buildings. Accumulated DepreciationBuildings increases by only KR 5,000 during 2009, therefore, the accumulated depreciation related to the building sold during 2009 is KR 5,000. The Buildings account is decreased by KR 21,000, thus the book value of the building sold must have been KR 16,000 (as given). The Gain on Sale of Building is KR 6,000; therefore, cash proceeds from the sale are KR 22,000.
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009 10-18 Solutions Manual

33. (continued) b. Translation Adjustment Net assets, 1/1/09* 100,000 KR x 2.50 = $250,000 Increases in net assets Issued Common Stock (4/1/09) 10,000 KR x 2.60 = 26,000 Gain on Sale of Building** (7/1/09) 6,000 KR x 2.80 = 16,800 Sales (2009) 80,000 KR x 2.70 = 216,000 Decreases in net assets Paid Dividends (10/1/09) (32,000) KR x 2.90 = (92,800) Depreciation Expense (2009) (15,000) KR x 2.70 = (40,500) Rent Expense (2009) (14,000) KR x 2.70 = (37,800) Salary Expense (2009) (20,000) KR x 2.70 = (54,000) Utilities Expense (2009) ( 5,000) KR x 2.70 = (13,500) Net assets, 12/31/09 110,000 KR $270,200 Net monetary assets, 12/31/09 at current exchange rate 110,000 KR x 3.00 = 330,000 Translation adjustment (positive) $(59,800) * Net assets: Common stock + Retained earnings ** Selling a building at a gain of KR 6,000 increases net assets by that amount. Although not required by Part b, the beginning translation adjustment as of

January 1, 2009 can be computed by translating the January 1 accounts and assuming that the translation adjustment is the balancing figure: Common Stock, 1/1/09 70,000 KR x 2.40 = $168,000 Retained Earnings, 1/1/09 30,000 KR given 62,319 Net assets, 1/1/09 100,000 KR $230,319 Net assets, 1/1/09 at current exchange rate 100,000 KR x 2.50 = 250,000 Cumulative translation adjustment (positive), 1/1/09 $ (19,681) Translation adjustment (positive), 2009 (59,800) Cumulative translation adjustment (positive), 12/31/09 $ (79,481)
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009 Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 10-19

34. (90 minutes) (Remeasure non-functional currency accounts into foreign functional currency and then translate foreign functional currency financial statements into U.S. dollars) a. Remeasurement of Mexican Operations Canadian Dollars Pesos Debit Credit Accounts payable 49,000 x .35 C 17,150 Accumulated depreciation 19,000 x .25 H 4,750 Building and equipment 40,000 x .25 H 10,000 Cash 59,000 x .35 C 20,650 Depreciation expense 2,000 x .25 H 500 Inventory (beginning income statement) 23,000 x .30 A (08) 6,900 Inventory (ending income statement) 28,000 x .34 A(09) 9,520 Inventory (endingbalance sheet) 28,000 x .34 A(09) 9,520 Purchases 68,000 x .34 A(09) 23,120 Receivables 21,000 x .35 C 7,350 Salary expense 9,000 x .34 A 3,060 Sales 124,000 x .34 A 42,160 Main office 30,000 given 7,530 Remeasurement loss Schedule One 10 Total 81,110 81,110 Canadian Schedule OneRemeasurement Loss Pesos Dollars Net monetary liabilities, 1/1/09* (16,000) x .32 (5,120) Increases in net monetary assets Sales 124,000 x .34 42,160 Decreases in net monetary assets Purchases (68,000) x .34 (23,120) Salary Expense ( 9,000) x .34 ( 3,060)

Net monetary assets, 12/31/09** 31,000 10,860 Net monetary assets, 12/31/09 at current exchange rate 31,000 x .35 10,850 Remeasurement loss 10 * Net monetary liabilities, 1/1/09, can be determined by first determining the net monetary assets at 12/31/09 and then backing out the changes in monetary assets and liabilities during 2009sales, purchases, and salary expense. ** Net monetary assets, 12/31/09: Cash + Receivables Accounts Payable
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009 10-20 Solutions Manual

34. (continued) b. The following C$ financial statements are produced by combining the figures from the main operation with the remeasured figures from the branch operation. The Branch Operation and Main Office accounts offset each other. Cost of goods sold for the Mexican branch is determined by combining beginning inventory, purchases, and ending inventory as remeasured in C$. Income Statement c. Translation into U.S. dollars For the Year Ended December 31, 2009 Current Rate Method Sales C$ 354,160 x .67 A = $ 237,287.20 Cost of goods sold (223,500) x .67 A = (149,745.00) Gross profit 130,660 87,542.20 Depreciation expense (8,500) x .67 A = (5,695.00) Salary expense (29,060) x .67 A = (19,470.20) Utility expense (9,000) x .67 A = (6,030.00) Gain on sale of equipment 5,000 x .68 H = 3,400.00 Remeasurement loss (10) x .67 A = (6.70) Net income C$ 89,090 $ 59,740.30 Statement of Retained Earnings For the Year Ended December 31, 2009 Retained earnings, 1/1/09 C$ 135,530 Given $ 70,421.00 Net income (above) 89,090 Above 59,740.30 Dividends paid ( 28,000) x .69 H = (19,320.00) Retained earnings, 12/31/09 C$ 196,620 $110,841.30
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009 Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 10-21

34. (continued) Balance Sheet

December 31, 2009 Cash C$ 46,650 x .65 C = $ 30,322.50 Receivables 75,350 x .65 C = 48,977.50 Inventory 107,520 x .65 C = 69,888.00 Buildings and equipment 177,000 x .65 C = 115,050.00 Accumulated depreciation (31,750) x .65 C = (20,637.50) Total C$ 374,770 $243,600.50 Accounts payable C$ 52,150 x .65 C = $ 33,897.50 Notes payable 76,000 x .65 C = 49,400.00 Common stock 50,000 x .45 H = 22,500.00 Retained earnings 196,620 Above 110,841.30 Cumulative translation adjustment Schedule Two 26,961.70 Total C$ 374,770 $ 243,600.50 Schedule TwoTranslation Adjustment Net assets, 1/1/09 C$ 185,530 x .70 = $129,871.00 Changes in net assets Net income 89,090 Above 59,740.30 Dividends (28,000) x .69 = (19,320.00) Net assets, 12/31/09 C$ 246,620 $170,291.30 Net assets, 12/31/09 at current exchange rate C$ 246,620 x .65 = 160,303.00 Translation adjustment, 2009 (negative) $ 9,988.30 Cumulative translation adjustment, 1/1/09 (positive) (36,950.00) Cumulative translation adjustment, 12/31/09 (positive) $(26,961.70)
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009 10-22 Solutions Manual

35. (90 minutes) (Translate foreign currency financial statements and prepare consolidation worksheet) Step One Simbel's financial statements are first translated into U.S. dollars after reclassification of the 10,000 pound expenditure for rent from rent expense to prepaid rent. Credit balances are in parentheses. Translation Worksheet Exchange Account Pounds Rate Dollars Sales (800,000) 0.274 (219,200) Cost of goods sold 420,000 0.274 115,080 Salary expense 74,000 0.274 20,276 Rent expense (adjusted) 36,000 0.274 9,864 Other expenses 59,000 0.274 16,166 Gain on sale of fixed assets, 10/1/09 (30,000) 0.273 (8,190) Net income (241,000) (66,004)

R/E, 1/1/09 (133,000) Schedule 1 (38,244) Net income (241,000) Above (66,004) Dividends paid 50,000 0.275 13,750 R/E,12/31/09 (324,000) (90,498) Cash and receivables 146,000 0.270 39,420 Inventory 297,000 0.270 80,190 Prepaid rent (adjusted) 10,000 0.270 2,700 Fixed assets 455,000 0.270 122,850 Total 908,000 245,160 Accounts payable (54,000) 0.270 (14,580) Notes payable (140,000) 0.270 (37,800) Common stock (240,000) 0.300 (72,000) Addl paid-in capital (150,000) 0.300 (45,000) Retained earnings, 12/31/09 (324,000) Above (90,498) Subtotal (259,878) Cumulative translation adjustment (negative) Schedule 2 14,718 Total (908,000) (245,160)
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009 Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 10-23

35. (continued) Schedule 1Translation of 1/1/09 Retained Earnings Pounds Dollars Retained earnings, 1/1/08 -0- -0Net income, 2008 (163,000) 0.288 (46,944) Dividends, 6/1/08 30,000 0.290 8,700 Retained earnings, 1/1/09 (133,000) (38,244) Schedule 2Calculation of Cumulative Translation Adjustment at 12/31/09 Pounds Dollars Net assets, 1/1/08 (390,000) 0.300 (117,000) Net income, 2008 (163,000) 0.288 (46,944) Dividends, 6/1/08 30,000 0.290 8,700 Net assets, 12/3/08 (523,000) (155,244) Net assets, 12/31/08 at current exchange rate (523,000) 0.280 (146,440) Translation adjustment, 2008 (negative) (8,804) Net assets, 1/1/09 (523,000) 0.280 (146,440) Net income, 2009 (241,000) Above (66,004) Dividends, 6/1/09 50,000 0.275 13,750 Net assets, 12/31/09 (714,000) (198,694) Net assets, 12/31/09 at current exchange rate (714,000) 0.270 (192,780) Translation adjustment, 2009 (negative) (5,914) Cumulative translation adjustment, 12/31/09 (negative) (14,718)
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009 10-24 Solutions Manual

35. (continued) Step Two Cayce and Simbel's U.S. dollar accounts are then consolidated. Necessary adjustments and eliminations are made. Consolidation Worksheet Adjustments and Consolidated Cayce Simbel Eliminations Balances Account Dollars Dollars Debit Credit Dollars Sales (200,000) (219,200) (419,200) Cost of goods sold 93,800 115,080 208,880 Salary expense 19,000 20,276 39,276 Rent expense 7,000 9,864 16,864 Other expenses 21,000 16,166 37,166 Dividend income (13,750) -0- (I) 13,750 -0Gain, 10/1/09 -0- (8,190) (8,190) Net income (72,950) (66,004) (125,204) Ret earn, 1/1/09 (318,000) (38,244) (S) 38,244 (*C) (38,244) (356,244) Net income (72,950) (66,004) (125,204) Dividends paid 24,000 13,750 (I) (13,750) 24,000 Ret earn, 12/31/09 (366,950) (90,498) (457,448) Cash and receivables 110,750 39,420 150,170 Inventory 98,000 80,190 178,190 Prepaid rent 30,000 2,700 32,700 Investment 126,000 -0- (*C) 38,244 (S)(164,244) -0Fixed assets 398,000 122,850 (S) 9,000 (E) (900) 528,950 Total 762,750 245,160 890,010 Accounts payable (60,800) (14,580) (75,380) Notes payable (132,000) (37,800) (169,800) Common stock (120,000) (72,000) (S) 72,000 (120,000) Additional PIC (83,000) (45,000) (S) 45,000 (83,000) Ret earn, 12/31/09 (366,950) (90,498) (457,448) Subtotal (259,878) (905,628) Cum trans adjust 14,718 (E) 900 15,618 Total (762,750) (245,160) 217,138 (217,138) (890,010)
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009 Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 10-25

35. (continued) Explanation of Adjustment and Elimination Entries Entry *C Investment in Simbel ................................................... 38,244 Retained earnings, 1/1/09 ....................................... 38,244 To accrue the 2008 increase in subsidiary book value (see Schedule 1). Entry is needed because parent is using the cost method.

Entry S Common Stock (Simbel) ................ 72,000 Add'l Paid-in-capital (Simbel) ............ 45,000 Retained earnings, 1/1/09 (Simbel) ... 38,244 Fixed assets (revaluation) ................ 9,000 Investment in Simbel ................ 164,244 To eliminate subsidiary's stockholders' equity accounts and allocate the excess of fair value over book value to land (fixed assets). The excess of fair value over book value is calculated as follows: Consideration paid (equal to fair value) ........... $126,000 E420,000
x $0.30

Book value, 1/1/08 .............................................. Common stock ................................................. (72,000) (E240,000


x $0.30) x $0.30) $0.30

Addl paid-in capital ......................................... (45,000) (E150,000 Excess of fair value over book value ............... $ 9,000 E 30,000 x The excess of fair value over book value is 30,000 pounds. The U.S. dollar equivalent at 1/1/08, the date of acquisition, is $9,000 (E30,000 x $.30). Entry I Dividend income ................................................ 13,750 Dividends paid ............................................... 13,750 To eliminate intercompany dividend payments recorded by parent as income. Entry E Cumulative translation adjustment................... 900 Fixed assets (revaluation) ........................... 900 To revalue (write-down) the excess of fair value over book value for the change in exchange rate since the date of acquisition with the counterpart recognized in the consolidated cumulative translation adjustment. The revaluation of "excess" is calculated as follows: Excess of fair value over book value U.S. dollar equivalent at 12/31/09 E30,000 x $.27 = $8,100 U.S. dollar equivalent at 1/1/08 E30,000 x $.30 = 9,000 Cumulative translation adjustment related to excess, 12/31/09 (negative) $( 900)
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009 10-26 Solutions Manual

36. (90 minutes) (Translate foreign currency financial statements using U.S. GAAP

and explain sign of translation adjustment [remeasurement gain/loss].) Part I (a). Czech koruna is the functional currencycurrent rate method Exchange KCS Rate US$ Sales 25,000,000 0.035 875,000 Cost of goods sold (12,000,000) 0.035 (420,000) Depreciation expenseequipment (2,500,000) 0.035 (87,500) Depreciation expensebuilding (1,800,000) 0.035 (63,000) Research and development expense (1,200,000) 0.035 (42,000) Other expenses (1,000,000) 0.035 (35,000) Net income 6,500,000 227,500 Retained earnings, 1/1/09 500,000 given 22,500 Dividends paid, 12/15/09 (1,500,000) 0.031 (46,500) Retained earnings, 12/31/09 5,500,000 203,500 Cash 2,000,000 0.030 60,000 Accounts receivable 3,300,000 0.030 99,000 Inventory 8,500,000 0.030 255,000 Equipment 25,000,000 0.030 750,000 Accum. deprec.equipment (8,500,000) 0.030 (255,000) Building 72,000,000 0.030 2,160,000 Accum. deprec.equipment (30,300,000) 0.030 (909,000) Land 6,000,000 0.030 180,000 Total assets 78,000,000 2,340,000 Accounts payable 2,500,000 0.030 75,000 Long-term debt 50,000,000 0.030 1,500,000 Common stock 5,000,000 0.050 250,000 Additional paid-in capital 15,000,000 0.050 750,000 Retained earnings, 12/31/09 5,500,000 above 203,500 Translation adjustment - to balance (438,500) Total liabilities and equities 78,000,000 2,340,000
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009 Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 10-27

36. (continued) Calculation of Translation Adjustment Cumulative translation adjustment, 12/31/09 (negative) 202,500 Net assets, 1/1/09 20,500,000 0.040 820,000 Net income, 2009 6,500,000 0.035 227,500 Dividends, 12/15/09 (1,500,000) 0.031 (46,500) Net assets, 12/31/09 25,500,000 1,001,000 Net assets, 12/31/09 at current exchange rate 25,500,000 0.030 765,000 Translation adjustment, 2009 (negative) 236,000 Cumulative translation adjustment, 12/31/09 (negative) 438,500
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009 10-28 Solutions Manual

36. (continued) Part I (b). U.S. dollar is the functional currencytemporal method Exchange KCS Rate US$ Sales 25,000,000 0.035 875,000 Cost of goods sold (12,000,000) Sched.A (493,500) Depreciation expenseequipment (2,500,000) Sched.B (118,000) Depreciation expensebuilding (1,800,000) Sched.C (85,200) Research and development expense (1,200,000) 0.035 (42,000) Other expenses (1,000,000) 0.035 (35,000) Income before remeasurement gain 6,500,000 101,300 Remeasurement gain, 2009 - 408,000 Net income 6,500,000 509,300 Retained earnings, 1/1/09 500,000 given 353,000 Dividends paid, 12/15/09 (1,500,000) 0.031 (46,500) Retained earnings, 12/31/09 5,500,000 815,800 Cash 2,000,000 0.030 60,000 Accounts receivable 3,300,000 0.030 99,000 Inventory 8,500,000 0.032 272,000 Equipment 25,000,000 Sched.B 1,180,000 Accum. deprec.equipment (8,500,000) Sched.B (418,000) Building 72,000,000 Sched.C 3,408,000 Accum. deprec.equipment (30,300,000) Sched.C (1,510,200) Land 6,000,000 0.050 300,000 Total assets 78,000,000 3,390,800 Accounts payable 2,500,000 0.030 75,000 Long-term debt 50,000,000 0.030 1,500,000 Common stock 5,000,000 0.050 250,000 Additional paid-in capital 15,000,000 0.050 750,000 Retained earnings, 12/31/09 5,500,000 above 815,800 Total liabilities and equities 78,000,000 3,390,800 Schedule ACost of goods sold KCS ER US$ Beginning inventory 6,000,000 0.043 258,000 Purchases 14,500,000 0.035 507,500 Ending inventory (8,500,000) 0.032 (272,000) Cost of goods sold 12,000,000 493,500
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009 Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 10-29

36. (continued) Schedule BEquipment KCS ER US$ Old Equipmentat 1/1/09 20,000,000 0.050 1,000,000 New Equipmentacquired 1/3/09 5,000,000 0.036 180,000 Total 25,000,000 1,180,000 Accum. Depr.Old Equipment 8,000,000 0.050 400,000

Accum. Depr.New Equipment 500,000 0.036 18,000 Total 8,500,000 418,000 Deprec expenseOld Equipment 2,000,000 0.050 100,000 Deprec expenseNew Equipment 500,000 0.036 18,000 Total 2,500,000 118,000 Schedule CBuilding KCS ER US$ Old Buildingat 1/1/09 60,000,000 0.050 3,000,000 New Buildingacquired 3/5/09 12,000,000 0.034 408,000 Total 72,000,000 3,408,000 Accum. Depr.Old Building 30,000,000 0.050 1,500,000 Accum. Depr.New Building 300,000 0.034 10,200 Total 30,300,000 1,510,200 Deprec. expenseOld Building 1,500,000 0.050 75,000 Deprec. expenseNew Building 300,000 0.034 10,200 Total 1,800,000 85,200 Calculation of Remeasurement Gain KCS ER US$ Net monetary liabilities, 1/1/09 (37,000,000) 0.040 (1,480,000) Increase in monetary assets: Sales 25,000,000 0.035 875,000 Decrease in monetary assets: Purchase of inventory (14,500,000) 0.035 (507,500) Research and development (1,200,000) 0.035 (42,000) Other expenses (1,000,000) 0.035 (35,000) Dividends paid, 12/15/09 (1,500,000) 0.031 (46,500) Purchase of equipment, 1/3/09 (5,000,000) 0.036 (180,000) Purchase of buildings, 3/5/09 (12,000,000) 0.034 (408,000) Net monetary liab, 12/31/09 (47,200,000) (1,824,000) Net monetary liab, 12/31/09 at current exchange rate (47,200,000) 0.030 (1,416,000) Remeasurement gain2009 (408,000)
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009 10-30 Solutions Manual

36. (continued) Part I (c). U.S. dollar is the functional currencytemporal method (no longterm debt) Exchange KCS Rate US$ Sales 25,000,000 0.035 875,000 Cost of goods sold (12,000,000) Sched.A (493,500) Depreciation expenseequipment (2,500,000) Sched.B (118,000) Depreciation expensebuilding (1,800,000) Sched.C (85,200) Research and development expense (1,200,000) 0.035 (42,000) Other expenses (1,000,000) 0.035 (35,000)

Income before remeasurement loss 6,500,000 101,300 Remeasurement loss, 2009 - (92,000) Net income 6,500,000 9,300 Retained earnings, 1/1/09 500,000 given (147,000) Dividends paid, 12/15/09 (1,500,000) 0.031 (46,500) Retained earnings, 12/31/09 5,500,000 (184,200) Cash 2,000,000 0.030 60,000 Accounts receivable 3,300,000 0.030 99,000 Inventory 8,500,000 0.032 272,000 Equipment 25,000,000 Sched.B 1,180,000 Accum. deprec.equipment (8,500,000) Sched.B (418,000) Building 72,000,000 Sched.C 3,408,000 Accum. deprec.equipment (30,300,000) Sched.C(1,510,200) Land 6,000,000 0.050 300,000 Total assets 78,000,000 3,390,800 Accounts payable 2,500,000 0.030 75,000 Long-term debt 0 0.030 0 Common stock 20,000,000 0.050 1,000,000 Additional paid in capital 50,000,000 0.050 2,500,000 Retained earnings, 12/31/09 5,500,000 above (184,200) Total liabilities and equities 78,000,000 3,390,800 Schedule ACost of goods sold - same as in Part I (b) Schedule BEquipment - same as in Part I (b) Schedule CBuilding - same as in Part I (b)
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009 Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 10-31

36. (continued) Calculation of Remeasurement Loss KCS ER US$ Net monetary assets, 1/1/09 13,000,000 0.040 520,000 Increase in monetary assets: Sales 25,000,000 0.035 875,000 Decrease in monetary assets: Purchase of inventory (14,500,000) 0.035 (507,500) Research and development (1,200,000) 0.035 (42,000) Other expenses (1,000,000) 0.035 (35,000) Dividends paid, 12/15/09 (1,500,000) 0.031 (46,500) Purchase of equipment, 1/3/09 (5,000,000) 0.036 (180,000) Purchase of buildings, 3/5/09 (12,000,000) 0.034 (408,000) Net monetary assets, 12/31/09 2,800,000 176,000 Net monetary assets, 12/31/09 at current exchange rate 2,800,000 0.030 84,000 Remeasurement loss2009 92,000 Part II. Explanation of the negative translation adjustment in Part I (a),

remeasurement gain in Part I (b), and remeasurement loss in Part I (c). The negative translation adjustment in Part I (a) arises because of two factors: (1) there is a net asset balance sheet exposure and (2) the Czech koruna has depreciated against the U.S. dollar during 2009 (from $.040 at 1/1/09 to $.030 at 12/31/09). A net asset balance sheet exposure exists because all assets are translated at the current exchange rate and exceed total liabilities which are also translated at the current exchange rate. The remeasurement gain in Part I (b) arises because of two factors: (1) there is a net monetary liability balance sheet exposure and (2) the Czech koruna has depreciated against the U.S. dollar. Under the temporal method, Cash and Accounts Receivable are the only assets translated at the current exchange rate (total KCS 5,300,000). Accounts Payable and Long-term Debt are also translated at the current exchange rate (total KCS 52,500,000). Because the Czech koruna amount of liabilities translated at the current rate exceeds the Czech koruna amount of assets translated at the current rate, a net monetary liability balance sheet exposure exists. The remeasurement loss in Part I (c) arises because of two factors: (1) there is a net monetary asset balance sheet exposure and (2) the Czech koruna has depreciated against the U.S. dollar during 2009. Cash and Accounts Receivable are the only assets translated at the current exchange rate (total KCS 5,300,000). Because there is no Long-term Debt in part 1(c), Accounts Payable is the only liability translated at the current exchange rate (total KCS 2,500,000). Because the Czech koruna amount of assets translated at the current rate exceeds the Czech koruna amount of liabilities translated at the current rate, a net monetary

asset balance sheet exposure exists.


McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009 10-32 Solutions Manual

Answers to Develop Your Skills Cases Research Case 1Foreign Currency Translation and Hedging Activities The responses to this assignment will depend upon the company selected by the student for analysis. It is unlikely that the company selected will disclose the amount of any remeasurement gains and losses. The amount of translation adjustment reported in other comprehensive income usually can be found in a statement of stockholders equity. A positive translation adjustment indicates that the foreign currency in which the company operates, on average, increased in dollar value during the year. A negative translation adjustment indicates the opposite. Research Case 2Foreign Currency Translation Disclosures in the Computer Industry a. In 2005, IBM provided information in the annual report related to foreign currency translation and hedging activities in the following locations: i. Management Discussion. ii. Note A. Significant Accounting Policies, under Translation of NonU.S Currency Amounts. iii. Note L. Derivatives and Hedging Transactions. In its Form 10-K for the year ended January 28, 2006, Dell provided information related to foreign currency translation and hedging activities in the following locations: i. Item 1A. Risk Factors. ii. Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations, under Market Risk. iii. Note 1. Description of Business and Summary of Significant Accounting Policies. iv. Note 2. Financial Instruments.

b. IBMs foreign operations do not have a predominant functional currency. The company indicates that it operates in multiple functional currencies. The majority of Dells foreign operations have the U.S. dollar as their functional currency. Most of IBMs foreign operations probably have the foreign currency as functional currency and therefore are translated into dollars using the current rate method with translation adjustments reflected in stockholders equity. Dells foreign operations, on the other hand, are remeasured into dollars using the temporal method with remeasurement gains and losses reflected in net income. These differences in translation method and disposition of the translation adjustment reduces the comparability of information provided by the two companies. c. From the Statement of Stockholders Equity, it can be seen that IBM reported translation adjustments as follows over the period 2003-2005: 2003 positive $1,768 million
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009 Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 10-33

2004 positive $1,055 million 2005 negative $1,153 million The positive signs of the translation adjustments in 2003 and 2004 indicate that, on average, the foreign currency functional currencies of IBMs foreign operations increased in value against the U.S. dollar in those years. The negative sign of the translation adjustment in 2005 indicates that, on average, the foreign currency functional currencies of IBMs foreign operations decreased in value against the U.S. dollar in that year. Dell reported translation adjustments in other comprehensive income as follows: Fiscal 2003 negative $35 million Fiscal 2004 positive $1 million Fiscal 2005 negative $8 million On average, the foreign currency functional currencies of Dells foreign

operations decreased in value against the U.S. dollar in 2003 and 2005, and increased in value in 2004. The magnitude of the translation adjustments reported in stockholders equity is much larger for IBM than for Dell. This undoubtedly occurs because Dell has a much smaller balance sheet exposure related to foreign currency functional currency operations. For Dell, the magnitude of the remeasurement gain/loss reported in net income is probably larger (unless hedged away) than the translation adjustment in stockholders equity. Dell indicates that remeasurement gains/losses are reported in Investment and Other Income, Net on the income statement but does not disclose the amount. d. In Note L. Derivatives and Hedging Transactions, IBM indicates that a significant portion of the companys foreign currency denominated debt is designated as a hedge of its foreign currency balance sheet exposures. The company also uses currency swaps and forward contracts to hedge its net investments in foreign operations. Although Dell hedges foreign currency transactions, firm commitments, and forecasted transactions, the company makes no mention of hedging its balance sheet exposures. e. The response to this requirement will vary from student to student. Much of the information provided in requirements a. d. above can be included in a formal report to satisfy this requirement.
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FARS Case 1More than One Functional Currency a. Using the advanced query function in the FARS database to search for the phrase different functional currencies returns two hits: FAS 52, paragraphs

7 and 43. Paragraph 43 is part of Appendix A: Determination of the Functional Currency. b. FAS 52, paragraph 7 indicates that if an entity has more than one distinct and separable operation, each operation may be considered a separate entity. If those operations are conducted in different economic environments, they might have different functional currencies. FARS Case 2Change in Functional Currency a. Using the advanced query function in the FARS database to search for the phrase functional currency has changed returns two hits: FAS 52, paragraphs 9 and 45. Paragraph 45 is part of Appendix A: Determination of the Functional Currency. A search for the phrase change in the functional currency returns one hit: FAS 52, paragraph 9. b. FAS 52, paragraph 9 indicates that once the functional currency for a foreign entity is determined, that determination shall be used consistently. A change in functional currency is appropriate if significant changes in economic facts and circumstances indicate clearly that the functional currency has changed. There is no restatement of previously issued financial statements for changes in the functional currency.
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009 Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 10-35

Analysis CaseBellSouth Corporation a. The Brazilian operations are equity method investments, which means that BellSouth must report investment income (loss) for its percentage ownership interest in the U.S. dollar translated income (loss) of the operations. The company states that its Brazilian operations had net U.S. dollar denominated liabilities. The U.S. dollar liabilities were revalued upward by the Brazilian operations with offsetting foreign exchange losses reported in Brazilian real (BRL) income.

The foreign exchange loss on U.S. dollar liabilities might have been large enough to cause negative net income (a net loss) in BRL terms, which when translated at the average exchange rate for the quarter (under the current rate method) resulted in a U.S. dollar loss being reported by BellSouth. Alternatively, the temporal method of translation was used, the Brazilian operations had net BRL asset exposures, and the devaluation caused a large enough remeasurement loss that a net U.S. dollar loss resulted. Given that liabilities were denominated in U.S. dollars, it is likely that BRL assets exceed BRL liabilities generating a net BRL asset exposure. b. The company appears to be saying that the exchange loss is not yet realized. If, subsequent to the January 1999 devaluation, the Brazilian real appreciates against the U.S. dollar, the unrealized loss will become smaller. On the other hand, the loss will become even larger if the real continues to depreciate. c. The objective of reporting normalized net income is to remove from net income the effect of one-time only events that do not qualify under U.S. GAAP as extraordinary items or discontinued operations, and therefore are not reported separately in the income statement. The company appears to be signaling its belief that the foreign currency loss is a nonrecurring (extraordinary) item. d. This assessment is valid if one compares normalized diluted EPS in the first quarter of 1999, which excluded a large loss, with normalized diluted EPS in the first quarter of 1998, which excluded a large gain. Whether financial analysts would use normalized EPS rather than reported EPS in making decisions about BellSouth is an empirical question.
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009 10-36 Solutions Manual

Excel CaseTranslating Foreign Currency Financial Statements

a.b. Spreadsheet for the translation (current rate method) and remeasurement (temporal method) of the FC financial statements of Charles Edward Companys foreign subsidiary.
Temporal Method Current Rate Method December 31, 2009 FC Rate USD Rate USD Sales 5,000 $0.45 A $2,250 $0.45 A $2,250 Cost of goods sold (3,000) calculation (1,360) $0.45 A (1,350) Gross profit 2,000 subtotal 890 subtotal 900 Selling expense (400) $0.45 A (180) $0.45 A (180) Depreciation expense (600) $0.50 H (300) $0.45 A (270) Remeasurement gain/loss 0 to balance 355 n/a 0 Income before tax 1,000 subtotal 765 subtotal 450 Income taxes (300) $0.45 A (135) $0.45 A (135) Net income 700 subtotal 630 subtotal 315 Retained earnings, 1/1/09 0 0 0 Retained earn, 12/31/09 700 from B/S 630 total 315 Cash 1,000 $0.38 C 380 $0.38 C 380 Inventory 2,000 $0.43 H 860 $0.38 C 760 Fixed assets 6,000 $0.50 H 3,000 $0.38 C 2,280 Less: accum/deprec (600) $0.50 H (300) $0.38 C (228) Total assets 8,400 total 3,940 total 3,192 Current liabilities 1,500 $0.38 C 570 $0.38 C 570 Long-term debt 3,000 $0.38 C 1,140 $0.38 C 1,140 Contributed capital 3,200 $0.50 H 1,600 $0.50 H 1,600 Cum. trans. adjust. 0 n/a 0 to balance (433)* Retained earnings 700 to balance 630 from I/S 315 Total liab and stock equity 8,400 A=L+SE 3,940 A=L+SE 3,192 Exchange Rates Temporal methodCOGS (on a FIFO basis) January 1-31, 2009 $0.50 BI 1,000 $0.50 H $500 Average 2009 $0.45 P 4,000 $0.43 H 1,720 December 31, 2009 $0.38 EI (2,000) $0.43 H (860) Inventory purchases $0.43 COGS 3,000 $1,360 Key: Average Exchange Rate A Current Exchange Rate C Historical Exchange Rate H
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009 Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 10-37

*Computation of Translation Adjustment FC USD Net assets, 1/1/09 3,200 $0.50 1,600 Net income, 2009 700 $0.45 315 Net assets, 12/31/09 3,900 1,915 Net assets, 12/31/09 at current exchange rate 3,900 $0.38 1,482 Translation adjustment (negative) 433 c. With the FC as functional currency, the U.S. dollar net income reflected in the

consolidated income statement is $315. If the U.S. dollar were the functional currency, the amount would be twice as much$630. The amount of total assets reported on the consolidated balance sheet is 23.4% smaller than if the U.S. dollar were functional currency [($3,940 $3,192)/$3,192]. The relations between the current ratio, the debt to equity ratio, and profit margin calculated from the FC financial statements and from the translated U.S. dollar financial statements are shown below.
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FC Temporal Current Rate Current ratio CA 3,000 1,240 1,140 CL 1,500 570 570 2.0 2.1754 2.0 Debt to equity ratio Total liabilities 4,500 1,710 1,710 Total stockholders equity 3,900 2,230 1,482 1.15385 0.76682 1.15385 Profit margin NI 700 630 315 Sales 5,000 2,250 2,250 0.14 0.28 0.14 Return on equity NI 700 630 315 Average TSE 3,550 1,915 1,541 0.19718 0.32898 0.20441 Inventory turnover COGS 3,000 1,360 1,350 Average Inventory 1,000 430 380 3 3.16279 3.55263 These results show that the temporal method distorts all ratios as calculated from the original foreign currency financial statements. The current rate method maintains all ratios that use numbers in the numerator and denominator from the balance sheet only (current ratio, debt-toequity ratio) or the income statement only (profit margin). For ratios that combine numbers

from the income statement and balance sheet (return on equity, inventory turnover), even the current rate method creates distortions. The U.S. dollar amounts reported under the temporal method for inventory and fixed assets reflect the equivalent U.S. dollar cost of those assets as if the parent had sent dollars to the subsidiary to purchase the assets. For example, to purchase FC 6,000 worth of fixed assets when the exchange rate was $.50/FC, the parent would have had to provide the subsidiary with $3,000. The U.S. dollar amounts reported under the current rate method for inventory and fixed assets reflect neither the equivalent U.S. dollar cost of those assets
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009 Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 10-39

nor their U.S. dollar current value. By multiplying the FC historical cost by the current exchange rate, these assets are reported at what they would have cost in U.S. dollars if the current exchange rate had been in effect when they were purchased. This is a hypothetical number with little, if any, meaning.
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009 10-40 Solutions Manual

Excel and Analysis CaseParker Inc. and Suffolk PLC This assignment requires translation of foreign currency financial statements under three different sets of assumptions regarding changes in the U.S. dollar value of the British pound. Under the first set of assumptions, the British pound appreciates steadily from $1.60 at 1/1/08 to $1.68 at 12/31/09. Under the second set of assumptions, the exchange rate remains $1.60 from 1/1/08 to 12/31/09. Under the third set of assumptions, the British pound depreciates steadily from $1.60 at 1/1/08 to $1.52 at 12/31/09. Part IAppreciating Foreign Currency Relevant exchange rates: January 1, 2008 $1.60 2008 Average $1.62 December 31, 2008 $1.64

January 30, 2009 $1.65 2009 Average $1.66 December 31, 2009 $1.68
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009 Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 10-41

a. Translation of Suffolks December 31, 2009 trial balance from British pounds to U.S. dollars. Suffolk PLC Trial Balance December 31, 2009 Exchange Pounds Rate Dollars Cash 1,500,000 $1.68 $ 2,520,000 Accounts receivable 5,200,000 $1.68 8,736,000 Inventory 18,000,000 $1.68 30,240,000 Property, plant, & equipment (net) 36,000,000 $1.68 60,480,000 Accounts payable (1,450,000) $1.68 (2,436,000) Long-term debt (5,000,000) $1.68 (8,400,000) Common stock (44,000,000) $1.60 (70,400,000) Retained earnings, 1/1/09 (8,000,000) Schedule A (12,840,000) Sales (28,000,000) $1.66 (46,480,000) Cost of goods sold 16,000,000 $1.66 26,560,000 Depreciation 2,000,000 $1.66 3,320,000 Other expenses 6,000,000 $1.66 9,960,000 Dividends paid (1/30/09) 1,750,000 $1.65 2,887,500 Cumulative translation adjustmentpositive (credit balance) (4,147,500) 0$0 Note: Amounts in parentheses are credit balances. Exchange Schedule A Pounds Rate Dollars Retained earnings, 1/1/08 (6,000,000) $1.60 $ (9,600,000) Net income, 2008 (2,000,000) $1.62 (3,240,000) Retained earnings, 12/31/08 (8,000,000) $(12,840,000)
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b. Schedule detailing the change in Suffolks cumulative translation adjustment for 2008 and 2009.
Determination of Cumulative Exchange Exchange Translation Adjustment Pounds Rate Rate Dollars Net assets, 1/1/08 50,000,000 $1.64 $1.60 $2,000,000 Net income, 2008 2,000,000 $1.64 $1.62 40,000 Translation adjustment, 2008 (positive) $2,040,000 Net assets, 1/1/09 52,000,000 $1.68 $1.64 2,080,000

Net income, 2009 4,000,000 $1.68 $1.66 80,000 Dividends, 2009 (1,750,000) $1.68 $1.65 (52,500) Translation adjustment, 2009 (positive) 2,107,500 Net assets, 12/31/09 54,250,000 Cumulative Translation Adjustment, 12/31/09(positive) $4,147,500 Exchange Consideration Paid Allocation Schedule Pounds Rate Dollars Consideration paid (equal to fair value) 52,000,000 $1.60 $83,200,000 Book value 50,000,000 $1.60 80,000,000 Excess of fair value over book value 2,000,000 $ 3,200,000 Translation Adjustment Related to Exchange Excess of Fair Value Over Book Value Pounds Rate Dollars Excess of fair value over book value 2,000,000 U.S. dollar value at 12/31/09 $1.68 $3,360,000 U.S. dollar value at 1/1/08 $1.60 3,200,000 Translation adjustment related to excess, 12/31/09positive $ 160,000
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009 Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 10-43

c. Consolidation WorksheetDecember 31, 2009


Parker Suffolk Adjustments & Eliminations Consolidated

Sales

($70,000,000) ($46,480,000) ($116,480,000) 34,000,000 26,560,000 60,560,000 20,000,000 3,320,000 23,320,000 6,000,000 9,960,000 15,960,000

Cost of goods sold

Depreciation

Other expenses

Dividend income
(2,887,500) 2,887,500 0

Net income
($12,887,500) ($6,640,000) ($16,640,000) ($48,000,000) ($12,840,000) 12,840,000 3,240,000 ($51,240,000)

Ret. earnings, 1/1/09

Net income

(12,887,500) (6,640,000) (16,640,000)

Dividends
4,500,000 2,887,500 2,887,500 4,500,000

Ret. earnings, 12/31/09


($56,387,500) ($16,592,500) ($63,380,000)

Cash

$3,687,500 $2,520,000 $6,207,500 10,000,000 8,736,000 18,736,000

Accounts receivable

Inventory

30,000,000 30,240,000 60,240,000 83,200,000 3,240,000 83,240,000 0 3,200,000

Investment in Suffolk

Prop, plant & eq (net)


105,000,000 60,480,000 3,200,000 168,840,000 160,000

Accounts payable
(25,500,000) (2,436,000) (27,936,000) (50,000,000) (8,400,000) (58,400,000)

Long-term debt

Common stock
(100,000,000) (70,400,000) 70,400,000 (100,000,000)

Ret. earnings, 12/31/09


(56,387,500) (16,592,500) (63,380,000) (4,147,500) 160,000 (4,307,500) $0 $0 $92,727,500 $92,727,500 $0

Cum. trans. adj.

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d. Consolidated income statement and balance sheet2009. Parker, Inc. Consolidated Income Statement

For the year ended December 31, 2009 Sales $ 116,480,000 Cost of goods sold (60,560,000) Depreciation (23,320,000) Other expenses (15,960,000) Net income $ 16,640,000 Parker, Inc. Consolidated Balance Sheet December 31, 2009 Assets Cash $ 6,207,500 Accounts receivable 18,736,000 Inventory 60,240,000 Property, plant & equipment (net) 168,840,000 Total $254,023,500 Liabilities and Shareholders' Equity Accounts payable $ 27,936,000 Long-term debt 58,400,000 Common stock 100,000,000 Retained earnings 63,380,000 Other comprehensive income 4,307,500 Total $254,023,500
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009 Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 10-45

Part IIStable Foreign Currency Relevant exchange rates: January 1, 2008 $1.60 2008 Average $1.60 December 31, 2008 $1.60 January 30, 2009 $1.60 2009 Average $1.60 December 31, 2009 $1.60 1. Translation of Suffolks December 31, 2009 trial balance from British pounds to U.S. dollars. Suffolk PLC Trial Balance December 31, 2009 Exchange Pounds Rate Dollars Cash 1,500,000 $1.60 $ 2,400,000 Accounts receivable 5,200,000 $1.60 8,320,000 Inventory 18,000,000 $1.60 28,800,000 Property, plant, & equipment (net) 36,000,000 $1.60 57,600,000 Accounts payable (1,450,000) $1.60 (2,320,000) Long-term debt (5,000,000) $1.60 (8,000,000) Common stock (44,000,000) $1.60 (70,400,000)

Retained earnings, 1/1/09 (8,000,000) Schedule A (12,800,000) Sales (28,000,000) $1.60 (44,800,000) Cost of goods sold 16,000,000 $1.60 25,600,000 Depreciation 2,000,000 $1.60 3,200,000 Other expenses 6,000,000 $1.60 9,600,000 Dividends paid, 1/30/09 1,750,000 $1.60 2,800,000 Cumulative translation adjustment 0 0$0 Note: Amounts in parentheses are credit balances. Exchange Schedule A Pounds Rate Dollars Retained earnings, 1/1/08 (6,000,000) $1.60 $ (9,600,000) Net income, 2008 (2,000,000) $1.60 (3,200,000) Retained earnings, 12/31/08 (8,000,000) $(12,800,000)
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2. Schedule detailing the change in Suffolks cumulative translation adjustment for 2008 and 2009.
Determination of Cumulative Exchange Exchange Translation Adjustment Pounds Rate Rate Dollars Net assets, 1/1/08 50,000,000 $1.60 $1.60 $0 Net income, 2008 2,000,000 $1.60 $1.60 0 Translation adjustment, 2008 $0 Net assets, 1/1/09 52,000,000 $1.60 $1.60 0 Net income, 2009 4,000,000 $1.60 $1.60 0 Dividends, 2009 (1,750,000) $1.60 $1.60 0 Translation adjustment, 2009 0 Net assets, 12/31/09 54,250,000 Cumulative Translation Adjustment, 12/31/09 $0 Exchange Consideration Paid Allocation Schedule Pounds Rate Dollars Consideration paid (equals fair value) 52,000,000 $1.60 $83,200,000 Book value 50,000,000 $1.60 80,000,000 Excess of fair value over book value 2,000,000 $ 3,200,000 Translation Adjustment Related to Exchange Excess of Fair Value Over Book Value Pounds Rate Dollars Excess of fair value over book value 2,000,000 U.S. dollar value at 12/31/09 $1.60 $3,200,000 U.S. dollar value at 1/1/08 $1.60 3,200,000 Translation adjustment related to excess, 12/31/09 $0
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009 Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 10-47

3. Consolidation WorksheetDecember 31, 2009


Parker Suffolk Adjustments & Eliminations Consolidated

Sales

($70,000,000)

($44,800,000) ($114,800,000) 34,000,000 25,600,000 59,600,000 20,000,000 3,200,000 23,200,000 6,000,000 9,600,000 15,600,000

Cost of goods sold

Depreciation

Other expenses

Dividend income
(2,800,000) 2,800,000 0

Net income
($12,800,000) ($6,400,000) ($16,400,000) ($48,000,000) ($12,800,000) 12,800,000 3,200,000 ($51,200,000)

Ret. earnings, 1/1/09

Net income

(12,800,000) (6,400,000) (16,400,000)

Dividends
4,500,000 2,800,000 2,800,000 4,500,000

Ret. earnings, 12/31/09


($56,300,000) ($16,400,000) ($63,100,000)

Cash

$3,600,000 $2,400,000 $6,000,000 10,000,000 8,320,000 18,320,000

Accounts receivable

Inventory

30,000,000 28,800,000 58,800,000 83,200,000 3,200,000 83,200,000 0 3,200,000

Investment in Suffolk

Prop, plant & eq (net)


105,000,000 57,600,000 3,200,000 165,800,000 0

Accounts payable

(25,500,000) (2,320,000) (27,820,000) (50,000,000) (8,000,000) (58,000,000)

Long-term debt

Common stock
(100,000,000) (70,400,000) 70,400,000 (100,000,000)

Ret. earnings, 12/31/08


(56,300,000) (16,400,000) (63,100,000) 0 0 0 $0 $0 $92,400,000 $92,400,000 $0

Cum. Trans. adj.

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d. Consolidated income statement and balance sheet2009. Parker, Inc. Consolidated Income Statement For the year ended December 31, 2009 Sales $114,800,000 Cost of goods sold (59,600,000) Depreciation (23,200,000) Other expenses (15,600,000) Net income $ 16,400,000 Parker, Inc. Consolidated Balance Sheet December 31, 2009 Assets Cash $ 6,000,000 Accounts receivable 18,320,000 Inventory 58,800,000 Property, plant & equipment (net) 165,800,000 Total $248,920,000 Liabilities and Shareholders' Equity Accounts payable $ 27,820,000 Long-term debt 58,000,000 Common stock 100,000,000 Retained earnings 63,100,000 Other comprehensive income 0 Total $248,920,000
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009 Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 10-49

Part IIIDepreciating Foreign Currency Relevant exchange rates: January 1, 2008 $1.60 2008 Average $1.58 December 31, 2008 $1.56 January 30, 2009 $1.55 2009 Average $1.54 December 31, 2009 $1.52 a. Translation of Suffolks December 31, 2009 trial balance from British pounds to U.S. dollars. Suffolk PLC Trial Balance December 31, 2009 Exchange Pounds Rate Dollars Cash 1,500,000 $1.52 $ 2,280,000 Accounts receivable 5,200,000 $1.52 7,904,000 Inventory 18,000,000 $1.52 27,360,000 Property, plant, & equipment (net) 36,000,000 $1.52 54,720,000 Accounts payable (1,450,000) $1.52 (2,204,000) Long-term debt (5,000,000) $1.52 (7,600,000) Common stock (44,000,000) $1.60 (70,400,000) Retained earnings, 1/1/09 (8,000,000) Schedule A (12,760,000) Sales (28,000,000) $1.54 (43,120,000) Cost of goods sold 16,000,000 $1.54 24,640,000 Depreciation 2,000,000 $1.54 3,080,000 Other expenses 6,000,000 $1.54 9,240,000 Dividends paid (1/30/09) 1,750,000 $1.55 2,712,500 Cumulative translation adjustmentnegative (debit balance) 4,147,500 0$0 Note: Amounts in parentheses are credit balances. Exchange Schedule A Pounds Rate Dollars Retained earnings, 1/1/08 (6,000,000) $1.60 $ (9,600,000) Net income, 2008 (2,000,000) $1.58 (3,160,000) Retained earnings, 12/31/08 (8,000,000) $(12,760,000)
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009 10-50 Solutions Manual

2. Schedule detailing the change in Suffolks cumulative translation adjustment for 2008 and 2009.
Determination of Cumulative Exchange Exchange Translation Adjustment Pounds Rate Rate Dollars Net assets, 1/1/08 50,000,000 $1.56 $1.60 $(2,000,000) Net income, 2008 2,000,000 $1.56 $1.58 (40,000) Translation adjustment, 2008

(negative) $(2,040,000) Net assets, 1/1/09 52,000,000 $1.52 $1.56 (2,080,000) Net income, 2009 4,000,000 $1.52 $1.54 (80,000) Dividends, 2009 (1,750,000) $1.52 $1.55 52,500 Translation adjustment, 2009 (negative) (2,107,500) Net assets, 12/31/09 54,250,000 Cumulative Translation Adjustment, 12/31/09 (negative) $(4,147,500) Exchange Consideration Paid Allocation Schedule Pounds Rate Dollars Consideration paid (equal to fair value) 52,000,000 $1.60 $83,200,000 Book value 50,000,000 $1.60 80,000,000 Excess of fair value over book value 2,000,000 $ 3,200,000 Translation Adjustment Related to Exchange Excess of Fair Value Over Book Value Pounds Rate Dollars Excess of cost over book value 2,000,000 U.S. dollar value at 12/31/09 $1.52 $3,040,000 U.S. dollar value at 1/1/08 $1.60 3,200,000 Translation adjustment related to excess, 12/31/09negative $(160,000)
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009 Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 10-51

c. Consolidation WorksheetDecember 31, 2009


Parker Suffolk Adjustments & Eliminations Consolidated

Sales

($70,000,000) ($43,120,000) ($113,120,000) 34,000,000 24,640,000 58,640,000 20,000,000 3,080,000 23,080,000 6,000,000 9,240,000 15,240,000

Cost of goods sold

Depreciation

Other expenses

Dividend income
(2,712,500) 2,712,500 0

Net income
($12,712,500) ($6,160,000) ($16,160,000) ($48,000,000) ($12,760,000) 12,760,000 3,160,000 ($51,160,000)

Ret. earnings, 1/1/09

Net income

(12,712,500) (6,160,000) (16,160,000)

Dividends
4,500,000 2,712,500 2,712,500 4,500,000

Ret. earnings, 12/31/09


($56,212,500) ($16,207,500) ($62,820,000)

Cash

$3,512,500 $2,280,000 $5,792,500 10,000,000 7,904,000 17,904,000

Accounts receivable

Inventory

30,000,000 27,360,000 57,360,000 83,200,000 3,160,000 83,160,000 0 3,200,000

Investment in Suffolk

Prop, plant & eq (net)


105,000,000 54,720,000 3,200,000 162,760,000 160,000

Accounts payable
(25,500,000) (2,204,000) (27,704,000) (50,000,000) (7,600,000) (57,600,000)

Long-term debt

Common stock
(100,000,000) (70,400,000) 70,400,000 (100,000,000)

Ret. earnings, 12/31/09


(56,212,500) (16,207,500) (62,820,000) 4,147,500 160,000 4,307,500 $0 $0 $92,392,500 $92,392,500 $0

Cum. Trans. adj.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009 10-52 Solutions Manual

d. Consolidated income statement and balance sheet2009.

Parker, Inc. Consolidated Income Statement For the year ended December 31, 2009 Sales $ 113,120,000 Cost of goods sold (58,640,000) Depreciation (23,080,000) Other expenses (15,240,000) Net income $ 16,160,000 Parker, Inc. Consolidated Balance Sheet December 31, 2009 Assets Cash $ 5,792,500 Accounts receivable 17,904,000 Inventory 57,360,000 Property, plant & equipment (net) 162,760,000 Total $243,816,500 Liabilities and Shareholders' Equity Accounts payable $ 27,704,000 Long-term debt 57,600,000 Common stock 100,000,000 Retained earnings 62,820,000 Other comprehensive income (4,307,500) Total $243,816,500
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009 Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 10-53

Part IVRisk Assessment Report and Financial Management Recommendations

December 31, 2009 Exchange Rate $1.68 $1.60 $1.52 Consolidated net income $16,640,000 $16,400,000 $16,160,000 Percentage difference 101.5% 100% 98.5% + 1.5% -- - 1.5% Cash flow from dividends $2,887,500 $2,800,000 $2,712,500 Percentage difference 103% 100% 97% + 3% -- - 3% Total Liabilities $86,336,000 $85,820,000 $85,304,000 Total Stockholders equity $167,687,500 $163,100,000 $158,512,500 Debt-to-equity ratio 51.5% 52.6% 53.8% Percentage difference 98% 100% 102% - 2% -- + 2%

Appreciation of the British pound from $1.60 to $1.68 results in consolidated net income being 1.5% higher, cash flow from dividends being 3% higher, and the debt-to-equity ratio being 2% lower than if there had been no change in exchange

rates. Depreciation of the British pound from $1.60 to $1.52 would have resulted in income being 1.5% lower, cash flow from dividends being 3% lower, and the debttoequity ratio being 2% higher than if there had been no change in exchange rates. An increase in the dollar value of the British pound results in higher profitability, greater cash inflow, and an improved debt-to-equity ratio. The opposite is true for a decrease in the dollar value of the British pound. If the British pound is expected to appreciate, Parker should not hedge its British pound exposure associated with its investment in Suffolk. However, if the British pound is expected to depreciate, Parker may wish to hedge its British pound net asset and cash flow exposure in some way. The decline in dollar value of future British pound dividend payments could be hedged by selling British pounds forward or by purchasing a British pound put option. The negative translation adjustment reported in other comprehensive income could be avoided using an option or forward contract, or by taking out a loan in British pounds.