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LO1
2.
LO1
3.
its
its
the
its
reporting currency.
current rate method currency.
US dollar.
local currency.
LO2
4.
a foreign currency.
its local currency
its current rate method currency
its reporting currency
would
be
used
to
define
translated at the
remeasured at the
remeasured at the
None of the above
LO2
5.
LO2
6.
LO2
7.
Accounts Receivable.
Notes Payable.
Capital Stock.
Retained Earnings.
LO2
8.
LO2
9.
LO2
10.
LO2
11.
Accounts for
dollars at
uncollectible
accounts
are
converted
into
US
LO3
12.
Date
January
January
January
January
1,20X1
1,20X2
1,20X3
1,20X4
Index
90
120
150
210
Change
in index
30
30
60
Annual rate
of Inflation
30/100 = 30.00%
30/130 = 23.08%
60/160 = 37.50%
LO5
14.
Depreciation.
Sales.
Deferred credits.
Deferred tax assets.
LO5
15.
The
following
assets
of
Oriole
Corporations
Romanian
subsidiary have been converted into US dollars at the following
exchange rates:
Current
Historical
Rates
Rates
Accounts receivable
$
850,000 $
875,000
Trademark
600,000
575,000
Property plant and equipment
1,200,000
900,000
Totals
$
2,650,000 $
2,350,000
If the functional currency of the subsidiary is the US dollar, the
assets should be reported in the consolidated financial statements of
Oriole Corporation and Subsidiary in the total amount of
a.
b.
c.
d.
LO5
16.
LO6
17.
$2,325,000.
$2,350,000.
$2,375,000.
$2,650,000.
Trademark.
Inventory.
accounts receivable.
Goodwill.
LO7
18.
LO8
19.
LO9
20.
the
the
the
the
LO2
Exercise 1
For each of the 12 accounts listed in the table below, select the correct
exchange rate to use when either remeasuring or translating a foreign
subsidiary for its US parent company.
Codes
C
H
A
=
=
=
US dollar is
the functional
currency
The foreign
currency is the
functional
currency
1. Accounts receivable
2. Marketable debt securities
carried at cost
3. Inventories carried at cost
4. Deferred income
5. Goodwill
6. Other paid-in capital
7. Depreciation
8. Refundable deposits
9. Common stock
10. Accumulated depreciation on
buildings
11. Deferred income tax
liabilities
12. Accounts payable
2009 Pearson Education, Inc. publishing as Prentice Hall
13-7
LO5
Exercise 2
On January 1, 20X5, Pegler Corporation, a US company, acquired 100%
of Selmic Corporation of Canada, paying an excess of 90,000 Canadian
dollars over the book value of Selmics net assets. The excess was
allocated to undervalued equipment with a three-year remaining useful
life. Selmics functional currency is the Canadian dollar. Exchange
rates for Canadian dollars for 20X5 are:
January 1, 20X5
Average rate for 20X5
December 31, 20X5
$.77
.75
.73
Required:
1. Determine the depreciation expense stated in US dollars on the
excess allocated to equipment for 20X5.
2. Determine the unamortized
December 31, 20X5.
excess
allocated
to
equipment
on
LO5
Exercise 3
Peake Corporation, a US company, formed a British subsidiary on
January 1, 20X5 by investing 450,000 in exchange for all of the
subsidiarys no-par common stock. The British subsidiary, Searle
Corporation, purchased real property on April 1, 20X5 at a cost of
500,000, with 100,000 allocated to land and 400,000 allocated to a
building. The building is depreciated over a 40-year estimated useful
life on a straight-line basis with no salvage value. The British
pound is Searles functional currency and its reporting currency. The
British economy does not have high rates of inflation. Exchange rates
for the pound on various dates were:
January 01, 20X5
April 01, 20X5
December 31, 20X5
20X5 average rate
=
=
=
=
1
1
1
1
=
=
=
=
$1.50
$1.51
$1.58
$1.56
Searle's adjusted trial balance is presented below for the year ended
December 31, 20X5.
2009 Pearson Education, Inc. publishing as Prentice Hall
13-8
In Pounds
Debits:
Cash
Accounts receivable
Inventory
Building
Land
Depreciation expense
Other expenses
Cost of good sold
Total debits
Credits
Accumulated depreciation
Accounts payable
Common stock
Retained earnings
Equity adjustment
Sales revenue
Total credits
220,000
52,000
59,000
400,000
100,000
7,500
110,000
220,000
1,168,500
7,500
111,000
450,000
0
0
600,000
1,168,500
In Pounds
Debits:
Cash
Accounts receivable
Inventory
Building
Land
Depreciation expense
Other expenses
Cost of good sold
Total debits
Credits
Accumulated depreciation
Accounts payable
Common stock
Retained earnings
Sales revenue
Total credits
75,000
362,000
41,000
400,000
100,000
10,000
133,000
380,000
1,501,000
17,500
154,750
450,000
262,500
616,250
1,501,000
LO5
Exercise 5
Note to Instructor: This exam item is similar to Exercise 3 except
that the exchange rates have been changed and the temporal method is
used instead of the current rate method.
The Pearce Corporation, a US corporation, formed a British subsidiary
on January 1, 20X7 by investing 550,000 in exchange for all of the
subsidiarys no-par common stock. The British subsidiary, Seakam
Corporation, purchased real property on April 1, 20X7 at a cost of
500,000, with 100,000 allocated to land and 400,000 allocated to
the building. The building is depreciated over a 40-year estimated
useful life on a straight-line basis with no salvage value. The US
dollar is Seakams functional currency, but it keeps its records in
pounds. The British economy does not experience high rates of
inflation. Exchange rates for the pound on various dates are:
2009 Pearson Education, Inc. publishing as Prentice Hall
13-10
=
=
=
=
1
1
1
1
=
=
=
=
$1.40
$1.42
$1.45
$1.44
Seakam's adjusted trial balance is presented below for the year ended
December 31, 20X7.
In Pounds
Debits:
Cash
Accounts receivable
Notes receivable
Building
Land
Depreciation expense
Other expenses
Salary expense
Total debits
Credits
Accumulated depreciation
Accounts payable
Common stock
Retained earnings
Equity adjustment
Sales revenue
Total credits
200,000
72,000
99,000
400,000
100,000
7,500
115,000
208,000
1,201,500
7,500
100,000
550,000
0
0
544,000
1,201,500
=
=
=
=
1
1
1
1
=
=
=
=
$1.40
$1.42
$1.37
$1.36
172,000
308,000
98,000
400,000
100,000
10,000
117,000
376,000
1,581,000
17,500
200,000
550,000
213,500
600,000
1,581,000
LO7
Exercise 7
On January 1, 20X4, Pearl Corporation, a US firm, acquired a 70%
interest in Segar Corporation, a foreign company, for $120,000, when
Segars stockholders equity consisted of 300,000 local currency
units (LCU) and retained earnings of 100,000 LCU. At the time of the
acquisition, Segars assets and liabilities were fairly valued except
for a patent that did not have any recorded book value. All excess
purchase cost was attributed to the patent, which had an estimated
economic life of 10 years at the date of acquisition. The exchange
rate for LCUs on January 1, 20X4 was $.40.
A summary of changes in Segars stockholders equity during 20X4 and
the exchange rates for LCUs is as follows:
LCU
Rates
Dollars
Stockholders equity
1/1/X4
400,000
$
.40C
$
160,000
Net income
100,000
.42A
42,000
Dividends 12/1/X4
(
50,000 )
.43C
(
21,500 )
Equity adjustment
17,500
Stockholders equity
12/31/X4
450,000
.44C
$
198,000
Required: Determine the following:
1. Fair value of the patent from Pearls investment in Segar on
January 1, 20X4.
2. Patent amortization for 20X4.
3. Unamortized patent at December 31, 20X4.
4. Equity adjustment from the patent.
5. Income from Segar for 20X4.
6. Investment in Segar balance at December 31, 20X4.
LO7
Exercise 8
Peatey Corporation, a US company, acquired a 30% interest in Selby
Corporation of Switzerland on January 1, 20X3 for $3,300,000 when
Selbys stockholders equity in Swiss francs (SF) consisted of
7,000,000 SF Capital Stock and 3,000,000 SF Retained Earnings. The
exchange rate for Swiss francs was $.66 on January 1. All excess
purchase cost was attributed to a trademark that did not have a
recorded book value. Peatey will amortize the trademark over 40
years.
2009 Pearson Education, Inc. publishing as Prentice Hall
13-13
10,000,000
$
2,500,000
1,000,000 )
11,500,000
Exchange
Rates
.660C $
.650A
.645C
(
(
.64C $
In
Dollars
6,600,000
1,625,000
645,000 )
220,000 )
7,360,000
LO7
Exercise 9
Pelican Corporation, a US company, owns 100% of Swiftlet Corporation, an
Australian company. Swiftlet's equipment was acquired on the following
dates (amounts are stated in Australian dollars):
Jan. 01, 20X1 Purchased equipment for A$40,000
Jul. 01, 20X1 Purchased equipment for A$80,000
Jan. 01, 20X2 Purchased equipment for A$50,000
Jul. 01, 20X2 Sold equipment purchased on Jan. 01, 20X1 for A$35,000
Exchange rates for the Australian dollar on various dates are:
Jan.
Jul.
Dec.
20X1
01, 20X1
1A$ = $.500
01, 20X1
1A$ = $.520
31, 20X1
1A$ = $.530
avg. rate 1A$ = $.515
Jan. 01,
Jul. 01,
Dec. 31,
20X2 avg.
20X2
1A$
20X2
1A$
20X2
1A$
rate 1A$ =
= $.530
= $.505
= $.490
$.510
Swiftlet's equipment has an estimated 5-year life with no salvage value and
is depreciated using the straight-line method. Swiftlet's functional
currency is the US dollar, but the company uses the Australian dollar as
its reporting currency.
Required:
1. Determine the value of Swiftlet's equipment account on December 31, 20X2
in US dollars.
2. Determine Swiftlet's depreciation expense for 20X2 in US dollars.
3. Determine the gain or loss from the sale of equipment on July 1, 20X2 in
US dollars.
LO7
Exercise 10
Peregrine Falcon Inc., a US company, owns 100% of Starling Corporation, a
New Zealand company. Starling's equipment was acquired on the following
dates (amounts are stated in New Zealand dollars):
Jan. 01, 20X1 Purchased equipment for NZ$40,000
Jul. 01, 20X1 Purchased equipment for NZ$80,000
Jan. 01, 20X2 Purchased equipment for NZ$50,000
Jul. 01, 20X2 Sold equipment purchased on Jan. 01, 20X1 for NZ$35,000
Exchange rates for the New Zealand dollar on various dates are:
Jan.
Jul.
Dec.
20X1
01, 20X1
1NZ$ = $.500
01, 20X1
1NZ$ = $.520
31, 20X1
1NZ$ = $.530
avg. rate 1NZ$ = $.515
Jan. 01,
Jul. 01,
Dec. 31,
20X2 avg.
20X2
1NZ$
20X2
1NZ$
20X2
1NZ$
rate 1NZ$ =
= $.530
= $.505
= $.490
$.510
Starling's equipment has an estimated 5-year life with no salvage value and
is depreciated using the straight-line method. Starling's functional
currency and reporting currency are the New Zealand dollar.
Required:
1. Determine the value of Starling's equipment account on December 31, 20X2
in US dollars.
2. Determine Starling's depreciation expense for 20X2 in US dollars.
3. Determine the gain or loss from the sale of equipment on July 1, 20X2 in
US dollars.
SOLUTIONS
Multiple Choice Questions
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
Exercise 1
US dollar is
the functional
currency
The foreign
Currency is the
functional
currency
1. Accounts receivable
4. Deferred income
5. Goodwill
7. Depreciation
8. Refundable deposits
9. Common stock
Exercise 2
Requirement 1
Depreciation expense in 20X5
C$90,000/3 years x $.75/C$ = $22,500 depreciation expense
Requirement 2
Unamortized excess at December 31, 20X5
C$90,000 x 2/3 x $.73/C$ = $43,800 unamortized excess on equipment
Requirement 3
Remeasured depreciation expense
C$90,000 x $.77/C$ = $69,300 excess
$69,300/3 years = $23,100 depreciation expense
Exercise 3
Requirement 1
Searle Corporation
Translation Working Papers
Debits
Cash
Accounts receivable
Inventory
Building
Land
Depreciation expense
Other expenses
Cost of goods sold
220,000
52,000
59,000
400,000
100,000
7,500
110,000
220,000
x
x
x
x
x
x
x
x
$1.58
$1.58
$1.58
$1.58
$1.58
$1.56
$1.56
$1.56
=
=
=
=
=
=
=
=
Total debits
Credits
Accumulated depreciation
Accounts payable
Common stock
Sales revenue
Retained earnings
Total credits
7,500
111,000
450,000
600,000
x
x
x
x
$1.58
$1.58
$1.50
$1.56
=
=
=
=
Credit differential
347,600
82,160
93,220
632,000
158,000
11,700
171,600
343,200
1,839,480
11,850
175,380
675,000
936,000
0
1,798,230
41,250
936,000
Requirement 2
Searle Corporation
Translated Income Statement
For the Year Ended December 31, 20X5
Sales revenue
Expenses:
Cost of goods sold
Depreciation expense
Other expenses
Net income
(
(
(
$
343,200 )
11,700 )
171,600 )
409,500
Requirement 3
Searle Corporation
Translated Balance Sheet
December 31, 20X5
Cash
Accounts receivable
Inventory
Building-net
Land
Total assets
Accounts payable
Common stock
Retained earnings
Accumulated comprehensive income
Total liabilities & equities
347,600
82,160
93,220
620,150
158,000
1,301,130
175,380
675,000
409,500
41,250
1,301,130
Exercise 4
Requirement 1
Searle Corporation
Translation Working Papers
Debits
Cash
Accounts receivable
Inventory
Building
Land
Depreciation expense
Other expenses
Cost of goods sold
75,000
362,000
41,000
400,000
100,000
10,000
133,000
380,000
x
x
x
x
x
x
x
x
$1.65
$1.65
$1.65
$1.65
$1.65
$1.63
$1.63
$1.63
=
=
=
=
=
=
=
=
Total debits
Credits
Accumulated depreciation
Accounts payable
Common stock
Sales revenue
Retained earnings
Accumulated comprehensive
income
Total credits
17,500
154,750
450,000
616,250
262,500
x
x
x
x
$1.65
$1.65
$1.50
$1.63
=
=
=
=
Credit differential
123,750
597,300
67,650
660,000
165,000
16,300
216,790
619,400
2,466,190
28,875
255,338
675,000
1,004,487
409,500
41,250
2,414,450
51,740
1,004,487
Requirement 2
Searle Corporation
Translated Income Statement
for the year ended December 31, 20X6
Sales revenue
Expenses:
Cost of goods sold
Depreciation expense
Other expenses
Net income
Retained earnings, January 1, 20X6
Retained earnings, December 31, 20X6
(
(
(
$
$
619,400 )
16,300 )
216,790 )
151,997
409,500
561,497
Requirement 3
Searle Corporation
Translated Balance Sheet
December 31, 20X6
Cash
Accounts receivable
Inventory
Building-net
Land
Total assets
123,750
597,300
67,650
631,125
165,000
1,584,825
Accounts payable
$
Common stock
Retained earnings
Accumulated comprehensive income ($41,250 + $51,740)
Total liabilities & equities
$
255,338
675,000
561,497
92,990
1,584,825
Exercise 5
Requirement 1
Seakam Corporation
Translation Working Papers
Debits
Cash
Accounts receivable
Notes receivable
Building
Land
Depreciation expense
Other expenses
Salary expense
Total debits
200,000
72,000
99,000
400,000
100,000
7,500
115,000
208,000
x
x
x
x
x
x
x
x
$1.45
$1.45
$1.45
$1.42
$1.42
$1.42
$1.44
$1.44
=
=
=
=
=
=
=
=
290,000
104,400
143,550
568,000
142,000
10,650
165,600
299,520
1,723,720
Credits
Accumulated depreciation
Accounts payable
Common stock
Sales revenue
Retained earnings
Total credits
7,500
100,000
550,000
544,000
0
x
x
x
x
$1.42
$1.45
$1.40
$1.44
=
=
=
=
Credit differential
10,650
145,000
770,000
783,360
0
1,709,010
14,710
783,360
Requirement 2
Seakam Corporation
Translated Income Statement
For the Year Ended December 31, 20X7
Sales revenue
Expenses:
Salary expense
Depreciation expense
Other expenses
Income before exchange gains or losses
Exchange gains
Net income
Retained earnings, January 1, 20X7
Retained earnings, December 31, 20X7
(
(
(
$
$
$
299,520 )
10,650 )
165,600 )
307,590
14,710
322,300
0
322,300
Requirement 3
Seakam Corporation
Translated Balance Sheet
December 31, 20X7
Cash
Accounts receivable
Notes receivable
Building-net
Land
Total assets
Accounts payable
Common stock
Retained earnings
Total liabilities & equities
290,000
104,400
143,550
557,350
142,000
1,237,300
145,000
770,000
322,300
1,237,300
Exercise 6
Seakam Corporation
Translation Working Papers
Debits
Cash
Accounts receivable
Notes receivable
Building
Land
Depreciation expense
Other expenses
Salary expense
172,000
308,000
98,000
400,000
100,000
10,000
117,000
376,000
x
x
x
x
x
x
x
x
$1.37
$1.37
$1.37
$1.42
$1.42
$1.42
$1.36
$1.36
=
=
=
=
=
=
=
=
Total debits
Credits
Accumulated depreciation
Accounts payable
Common stock
Sales revenue
Retained earnings
Total credits
17,500
200,000
550,000
600,000
213,500
x
x
x
x
$1.42
$1.37
$1.40
$1.36
=
=
=
=
Debit differential
235,640
421,960
134,260
568,000
142,000
14,200
159,120
511,360
2,186,540
24,850
274,000
770,000
816,000
322,300
2,207,150
20,610
816,000
Requirement 2
Seakam Corporation
Translated Income Statement
For the Year Ended December 31, 20X8
Sales revenue
Expenses:
Salary expense
Depreciation expense
Other expenses
Income before exchange gains or losses
Exchange loss
Net income
Retained earnings, January 1, 20X8
Retained earnings, December 31, 20X8
(
(
(
$
$
$
511,360
14,200
159,120
131,320
20,610
110,710
322,300
433,010
)
)
)
)
Requirement 3
Seakam Corporation
Translated Balance Sheet
December 31, 20X8
Cash
Accounts receivable
Notes receivable
Building-net
Land
Total assets
Accounts payable
Common stock
Retained earnings
Total liabilities & equities
235,640
421,960
134,260
543,150
142,000
1,477,010
274,000
770,000
433,010
1,477,010
Exercise 7
Requirement 1
Patent Fair Value
Cost of 70% interest
Book value acquired 400,000 LCU x $.40 x 70% =
Patent in dollars
$
$
120,000
112,000 )
8,000
20,000
Requirement 2
Patent amortization for 20X4
Patent: 20,000 LCU/10 years = 2,000 LCU per year
2,000 LCU per year x $.42 equals amortization of:
840
7,920
Requirement 3
Unamortized patent
Patent (20,000 LCU 2,000 LCU) x $.44 =
Requirement 4
Equity adjustment from patent
$
(
8,000
840 )
7,160
7,920
760
Requirement 5
Income from Segar
Equity in income ($42,000 x 70%)
Less: Patent amortization
Income from Segar
29,400
840 )
28,560
Requirement 6
Investment in Segar balance at December 31, 20X4
Cost, January 1, 20X4
Add: Income for 20X4 (from Req. 5)
Less: Dividends ($21,500 x 70%)
Add: Equity adjustment from patent (from Req. 4)
Add: Equity adjustment from translation
($17,500 x 70%)
Investment balance, December 31, 20X4
Check:
Book value: $198,000 x 70% =
Unamortized patent (from Req. 3)
Investment balance
$
(
$
$
120,000
28,560
15,050 )
760
12,250
146,520
138,600
7,920
146,520
Exercise 8
2009 Pearson Education, Inc. publishing as Prentice Hall
13-27
Requirement 1
Trademark
Cost of 30% interest
Book value acquired 10,000,000 x $.66 x 30% =
Fair value of trademark in dollars
Trademark in $1,320,000/$.66 =
3,300,000
1,980,000 )
1,320,000
2,000,000
Requirement 2
Trademark amortization for 20X3
Trademark: 2,000,000/40 yr. x $.65 average rate =
32,500
1,248,000
Requirement 3
Unamortized trademark
Trademark (2,000,000 50,000SF) x $.64 exchange
rate
Requirement 4
Equity adjustment from trademark
Beginning trademark (from Req. 1)
Trademark amortization (from Req. 2)
Less: Ending trademark (1,950,000 x $.64)
Equity adjustment
$
(
(
1,320,000
32,500 )
1,248,000 )
39,500
487,500
32,500 )
455,000
Requirement 5
Income from Selby
Equity in income ($1,625,000 x 30%)
Less: Trademark amortization
Income from Selby
$
$
Requirement 6
Investment in Segar balance at December 31, 20X3
2009 Pearson Education, Inc. publishing as Prentice Hall
13-28
$
$
3,300,000
455,000
193,500 )
66,000 )
39,500 )
3,456,000
2,208,000
1,248,000
3,456,000
Exercise 9
Requirement 1
Equipment:
Jul. 01, 20X1 (A$80,000 x $.520/A$) =
$41,600
26,500
Total
$68,100
Requirement 2
Depreciation expense:
{(A$40,000 x 1/5 x .5 yr.)x ($.500/A$)} =
2,000
8,320
5,300
Total
$15,620
Requirement 3
Equipment sold:
(A$40,000 x $.500/A$)
$20,000
6,000
$14,000
17,675
$ 3,675
Exercise 10
Requirement 1
Equipment:
Jul. 01, 20X1 (NZ$80,000 x $.490/NZ$) =
$39,200
24,500
Total
$63,700
Requirement 2
Depreciation expense:
{(NZ$40,000 x 1/5 x .5 yr.)x($.510/NZ$)} =
2,040
8,160
5,100
Total
$15,300
Requirement 3
Equipment sold
Accumulated Depreciation on sold equipment
(NZ$40,000 x 1/5 x 1.5 yr.)
Net book value of equipment sold
Cash received on July 1, 20X2
Gain on sale of equipment
Gain in US$:
(NZ$7,000 x $.510/NZ$) =
NZ$40,000
12,000
NZ$28,000
35,000
NZ$ 7,000
$ 3,570