CHAPTER 10

TRANSLATION OF FOREIGN
CURRENCY FINANCIAL STATEMENTS

ANSWERS TO PROBLEMS

1. C
2. C
3. C
4. B Since the peso is the functional currency, the financial statements must be
translated. 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 Since the foreign currency is the functional currency, a translation is
required. All assets accounts are translated at current rates.
7. C Since 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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Advanced Accounting, 6/e 10-1
13. C Beginning net assets, 1/1/01........... P20,000 x $.15 = $3,000
Increase in net assets:
Income, 2001.................................... 10,000 x $.19 = 1,900
Ending net assets, 12/31/01............ 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.

Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2000

10-2 Solutions Manual
21. (10 minutes) Specify appropriate rates for a translation
Rent expense--use 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 paid--use historical rate at time of recording, the date of
declaration.
Equipment--as an asset, use current rate at the balance sheet date.
Notes payable--as a liability, use current rate at the balance sheet date
Sales--use 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 expense--use 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.
Cash--as an asset, use the current rate at the balance sheet date.
Accumulated depreciation--as a contra-asset account, use the current
exchange rate at the balance sheet date.
Common stock--as an equity, 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, 2001). 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

Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2000

Advanced Accounting, 6/e 10-3
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 (10/1/97) $.20 H $.20 H
Notes payable--due in 1999 $.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

Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2000

10-4 Solutions Manual
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
Sfr 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 can be calculated by analyzing the
subsidiarys balance sheet exposure:
Translation
Beginning net assets, 12/1/01 Sfr3,700,000 x $.70 = $2,590,000
Ending net assets, 12/31/01 at
current exchange rate Sfr3,700,000 x $.75 = (2,775,000)
Translation adjustment (positive) $ ( 185,000)
Remeasurement
Beginning net monetary
liability position, 12/1/01 Sfr(300,000) x $.70 = $(210,000)
Ending net monetary liability
position, 12/31/01 at current
exchange rate Sfr(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 Sfr3,700,000 and the Swiss franc appreciates by $.05 [Sfr3,700,000 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, 2001 for exactly Sfr3,700,000 and converted the sales proceeds into
dollars at the current exchange rate of $.75 per Sfr.
Economic Relevance of Remeasurement Loss
The remeasurement loss arises because the Swiss subsidiary has a net monetary
liability position of Sfr300,000 (Cash of Sfr500,000 less Notes payable of Sfr800,000)
and the Swiss franc has appreciated by $.05 [Sfr300,000 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, 2001, thereby realizing a transaction gain of
$25,000 [Sfr500,000 x ($.75-$.70)], and the parent paid off the Swiss franc note
payable using U.S. dollars, thereby realizing a transaction loss of $40,000
[Sfr800,000 x ($.75-$.70)]. (The note could have been paid at December 1, 2001 for
$560,000 [Sfr800,000 x $.70]. At December 31, 2001, it takes $600,000 to pay off the
note [Sfr800,000 x $.75].)

Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2000

Advanced Accounting, 6/e 10-5
25. (30 minutes) (Prepare financial statements for a foreign subsidiary and then
translate them into U.S. dollars)
Fenwicke Company Subsidiary
Income Statement
2001
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
* Repairs is the only expense which is not incurred evenly throughout the
year.
Statement of Retained Earnings
2001
LCU U.S. Dollars

Retained earnings, 1/1/01 ---0--- ---0---

Net income 32,000 (above) $61,000
Dividends paid (5,000) x $1.80 H = (9,000)
Retained earnings, 12/31/01 27,000 $52,000
Balance Sheet
December 31, 2001
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 equities 177,000 $318,600
Computation of Translation Adjustment
Beginning net assets ---0--- ---0---
Increase 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

Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2000

10-6 Solutions Manual
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
2001
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)

35,000 271,000
Increase in cash 41,000 $ 78,600
Effect of exchange rate change on cash (4,800)
Cash, 1/1/01 --0-- --0--
Cash 12/31/01 41,000 x $1.80 H = $ 73,800

Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2000

Advanced Accounting, 6/e 10-7
27. (25 minutes) (Compute translation adjustment and remeasurement gain or
loss.)
a. Translation--only changes in net assets have an impact on the computation
of the translation adjustment.
1/1/01 Net asset balance KM30,000 x $.32 = $ 9,600
Increases in net assets (income):
5/1/01 Sold inventory at a profit 5,000 x $.34 = 1,700
6/1/01 Sold land at a gain 1,000 x $.35 = 350
Decreases in net assets:
12/1/01 Paid a dividend (3,000) x $.41 = (1,230)
Average 1997 Depreciation recorded (2,000) x $.37 = ( 740)
12/31/01 Net asset balance KM 31,000 $ 9,680
12/31/01 Net asset balance
at current exchange rate KM31,000 x $.42 = (13,020)
2001 Translation adjustmentpositive $(3,340)
b. Remeasurement--only 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:
5/1/01 Sold inventory 15,000 x $.34 = 5,100
6/1/01 Sold land 5,000 x $.35 = 1,750
Decreases in monetary assets:
10/1/01 Bought inventory (12,000) x $.39 = (4,680)
11/1/01 Bought land (4,000) x $.40 = (1,600)
12/1/01 Paid a dividend (3,000) x $.42 = (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)
2001 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.

Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2000

10-8 Solutions Manual
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, 1/1/01 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, 12/31/01 94,000 LCU 22,500
Net assets, 12/31/01 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, 1/1/01 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, 12/31/01 34,000 LCU $ 8,100
Net monetary assets, 12/31/01 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

Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2000

Advanced Accounting, 6/e 10-9
30. (30 minutes) (Hedge of balance sheet exposure.)
a. Net assets, 1/1/01 (132,000 - 54,000) 78,000 kites x $0.80 = $62,400
Change in net assets, 2001:
Net income, 2001 26,000 kites x $0.78 = 20,280
Dividends, 3/1/01 (5,000) kites x $0.77 = (3,850)
Dividends, 10/1/01 (5,000) kites x $0.76 = (3,800)
Net assets, 12/31/01 94,000 kites $75,030
Net assets at current
exchange rate, 12/31/01 94,000 kites x $0.75 = 70,500
Translation adjustment--negative (debit) $ 4,530
b. Forward contract journal entries
10/1/01 No entry
12/31/01 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.)
The net negative translation adjustment (debit balance) to be reported in
other comprehensive income at 12/31/01 is $2,530 ($4,530 - $2,000).
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, 1/1/01 -0- -0-
Increase 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, 12/31/01 16,400* KQ $27,516
Net assets, 12/31/01 at
current exchange rate 16,400 KQ x 1.62 26,568
Translation adjustment--negative (debit) $ 948
* Can be verified as ending assets (24,400 KQ) minus ending liabilities
(8,000 KQ).
31. (continued)
b. Remeasurement of Subsidiary Trial Balance
Debits Credits
Cash 8,000 KQx 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 840
$72,086 $72,086
Calculation of Remeasurement Loss
Net monetary assets, 1/1/01 -0- -0-
Increase in net monetary assets:
Common stock issued 10,000 KQ x 1.71 $17,100
Sales 25,000 KQ x 1.64 41,000
Decrease in net monetary assets:
Acquired equipment 3,000 KQ x 1.71 (5,130)
Acquired land 5,000 KQ x 1.59 (7,950)
Dividends 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, 12/31/01 9,000* KQ $15,420
Net monetary assets, 12/31/01
at current exchange rate 9,000 KQ x 1.62 14,580
Remeasurement loss (debit) $ 840
* Can be verified as cash and accounts receivable (17,000 KQ) less accounts
payable and notes payable (8,000 KQ).
32. (30 minutes) (Translate the financial statements of a foreign subsidiary)
LIVINGSTON COMPANY
Income Statement
For Year Ending December 31, 2001
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, 2001
Goghs U.S. Dollars
Retained Earnings, 1/1/01 216,000 given 395,000*
Net Income 71,000 above 114,066
Dividends Paid ( 26,000) x 1/.62 = ( 41,935)
Retained Earnings, 12/31/01 261,000 467,131
*Note to instructor: Text incorrectly reads $397,000; $395,000 is the correct number.

Balance Sheet
December 31, 2001
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, 1/1/97 336,000 x 1/.60 = 560,000
Net income, 1997 71,000 above 114,066
Dividends paid ( 26,000) above ( 41,935)
Net assets, 12/31/97 381,000 632,131
Net assets at current exchange rate,
12/31/97 381,000 x 1/.65 = 586,154
Translation adjustment, 2001negative (debit) 45,977
Cumulative translation adjustment, 1/1/01negative (debit) 85,000
Cumulative translation adjustment, 12/31/01negative (debit) 130,977
33. (35 minutes) (Compute translation adjustment and remeasurement gain or
loss)
a. Remeasurement Gain or Loss
Net monetary assets, 1/1/01* 2,000 KR x 2.50 = $ 5,000
 Increases in net monetary assets
-- issued Common Stock (4/1/01) 10,000 KR x 2.60 = 26,000
-- sold Building** (7/1/01) 22,000 KR x 2.80 = 61,600
-- Sales (2001) 80,000 KR x 2.70 = 216,000
Decreases in net monetary assets
-- purchased Equipment (4/1/01) (30,000) KR x 2.60 = (78,000)
-- paid Dividends (10/1/01) (32,000) KR x 2.90 = (92,800)
-- Rent Expense (2001) (14,000) KR x 2.70 = (37,800)
-- Salary Expense (2001) (20,000) KR x 2.70 = (54,000)
-- Utilities Expense (2001) ( 5,000) KR x 2.70 = (13,500)
Net monetary assets, 12/31/01 13,000 KR $ 32,500
Net monetary assets, 12/31/01 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 Depreciation--Equipment increases by KR 5,000), KR
10,000 is depreciation of buildings. Accumulated Depreciation--Buildings
increases by only KR 5,000 during 1997, therefore, the accumulated
depreciation related to the building sold during 1997 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. The Gain on Sale of Building is
KR 6,000; therefore, cash proceeds from the sale is KR 22,000.
b. Translation Adjustment
Net assets, 1/1/01* 100,000 KR x 2.50 = $250,000
Increases in net assets
-- issued Common Stock (4/1/01) 10,000 KR x 2.60 = 26,000
-- Gain on Sale of Building** (7/1/01) 6,000 KR x 2.80 = 16,800
-- Sales (2001) 80,000 KR x 2.70 = 216,000
Decreases in net assets
-- paid Dividends (10/1/01) (32,000) KR x 2.90 = (92,800)
-- Depreciation Expense (2001) (15,000) KR x 2.70 = (40,500)
-- Rent Expense (2001) (14,000) KR x 2.70 = (37,800)
-- Salary Expense (2001) (20,000) KR x 2.70 = (54,000)
-- Utilities Expense (2001) ( 5,000) KR x 2.70 = (13,500)
Net assets, 12/31/01 110,000 KR $270,200
Net monetary assets, 12/31/01 at
current exchange rate 110,000 KR x 3.00
Translation adjustmentpositive (credit) $(59,800)
33. (continued)
* 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, 2001 can be computed by translating the January 1 accounts and
assuming that the translation adjustment is the balancing figure:
Common Stock, 1/1/01 70,000 KR x 2.40 = $168,000
Retained Earnings, 1/1/01 30,000 KR given 62,319
 Net assets, 1/1/01 100,000 KR $230,319
Net assets, 1/1/01 at current
exchange rate 100,000 KR x 2.50 = 250,000
Cumulative translation adjustment--positive, 1/1/01 $ (19,681)
Translation adjustment--positive, 2001 (59,800)
Cumulative translation adjustment--positive, 12/31/01 $ (79,481)
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 French Operations
Deutschemarks
Francs Debit Credit
Accounts payable 49,000 x .35 C 17,150
Accumulated depreciation 19,000 x .250435H 4,750
Building and equipment 40,000 x .250435H 10,000
Cash 59,000 x .35 C 20,650
Depreciation expense 2,000 x .250435H 500
Inventory (beginning
--income statement) 23,000 x .30 A(00) 6,900
Inventory (ending
--income statement) 28,000 x .34 A(01) 9,520
Inventory (ending--balance sheet) 28,000 x .34 A(01) 9,520
Purchases 68,000 x .34 A(01) 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
34. (continued)
Schedule One--Remeasurement Loss Francs Deutschemarks
Net monetary liabilities, 1/1/01* (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, 12/31/01** 31,000 10,860
Net monetary assets, 12/31/01 at
current exchange rate 31,000 x .35 10,850
Remeasurement loss 10

* Net monetary liabilities, 1/1/01, can be determined by first determining the

net monetary assets at 12/31/01 and then backing out the changes in
monetary assets and liabilities during 2001--sales, purchases, and salary
expense.
** Net monetary assets, 12/31/01: Cash + Receivables - Accounts Payable
b. The following DM 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 French branch is determined by
combining beginning inventory, purchases, and ending inventory as
remeasured in DM.
Income Statement c. Translation into U.S. dollars--
For the Year Ended December 31,1997 Current Rate Method
Sales DM 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 DM 89,090 $ 59,740.30

Statement of Retained Earnings
2001
Retained earnings, 1/1/01 DM 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, 12/31/01 DM 196,620 $ 110,841.30
34. (continued)
Balance Sheet
December 31, 2001
Cash DM 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 DM 374,770 $ 243,600.50
Accounts payable DM 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 DM 374,770 $ 243,600.50
Schedule Two--Translation Adjustment
Net assets, 1/1/01 DM 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, 12/31/01 DM 246,620 $170,291.30
Net assets, 12/31/01 at
current exchange rate DM 246,620 x .65 = 160,303.00
Translation adjustment, 2001negative $ 9,988.30
Cumulative translation adjustment, 1/1/01positive (36,950.00)
Cumulative translation adjustment, 12/31/01positive $(26,961.70)
35. (90 minutes) (Translate foreign currency financial statements and prepare
consolidated financial statements.)
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, 10/1/02 (30,000) 0.273 (8,190)
Net income (241,000) (66,004)
R/E, 1/1/02 (133,000) Schedule 1 (38,244)
Net income (241,000) Above (66,004)
Dividends paid 50,000 0.275 13,750
R/E,12/31/02 (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, 12/31/02 (324,000) Above (90,498)
Subtotal (259,878)
Cumulative translation adjustmentnegative Schedule 2 14,718
Total (908,000) (245,160)
Schedule 1--Translation of 1/1/02 Retained Earnings
Pounds Dollars
Retained earnings, 1/1/01 -0- -0-
Net income, 2001 (163,000) 0.288 (46,944)
Dividends, 6/1/01 30,000 0.290 8,700
Retained earnings, 12/31/01 (133,000) (38,244)
35. (continued)
Schedule 2--Calculation of Cumulative Translation Adjustment at 12/31/98
Pounds Dollars

Net assets, 1/1/01 (390,000) 0.300 (117,000)

Net income, 2001 (163,000) 0.288 (46,944)
Dividends, 6/1/01 30,000 0.290 8,700
Net assets, 12/3/01 (523,000) (155,244)
Net assets, 12/31/01 at
current exchange rate (523,000) 0.280 (146,440)
Translation adjustment, 2001--negative (8,804)
Net assets, 1/1/02 (523,000) 0.280 (146,440)
Net income, 2002 (241,000)Above (66,004)
Dividends, 6/1/02 50,000 0.275 13,750
Net assets, 12/31/02 (714,000) (198,694)
Net assets, 12/31/02 at
current exchange rate (714,000) 0.270 (192,780)
Translation adjustment, 2002--negative (5,914)
Cumulative translation adjustment, 12/31/02--negative (14,718)
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 0
Gain, 10/1/02 ---0--- (8,190) (8,190)
Net income (72,950) (66,004) (125,204)
Ret earn, 1/1/02 (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, 12/31/02 (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) 0
Fixed 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
paid-in capital (83,000) (45,000) (S) 45,000 (83,000)
Ret earn, 12/31/02 (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)
Explanation of Adjustment and Elimination Entries
Entry C
Investment in Simbel..................................................... 38,244
Retained earnings, 1/1/02......................................... 38,244
To accrue 2001 increase in subsidiary book value (see Schedule 1). Entry is
needed because parent is using the cost method.
35. (continued)
Entry S
Common Stock (Simbel) ................ 72,000
Add'l Paid-in-capital (Simbel)............ 45,000
Retained earnings, 1/1/02 (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 purchase price over book value to land (fixed assets).
The excess of cost over book value is calculated as follows:
Purchase price..................................................... $126,000
Book value, 1/1/01...............................................

Common stock.................................................. (72,000)

A'ddl paid-in capital.......................................... (45,000)
Excess of purchase price over book value...... $ 9,000
The excess of cost over book value is 30,000 pounds. The U.S. dollar
equivalent at 1/1/01, the date of purchase, is $9,000 (P30,000 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 cost 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 cost over book value
U.S. dollar equivalent at 12/31/02 P30,000 x $.27 = $8,100
U.S. dollar equivalent at 1/1/01 P30,000 x $.30 = 9,000
Cumulative translation adjustment
related to excess, 12/31/02negative $( 900)
36. (90 minutes) (Translate foreign currency financial statements using U.S.
GAAP and explain sign of translation adjustment [remeasurement
gain/loss])
Part I (a). Czech crown is the functional currency--current rate method
Exchange
KCS Rate US$
Sales 25,000,000 0.035 875,000
Cost of goods sold (12,000,000) 0.035 (420,000)
Depreciation expenseequipment (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, 1/1/02 500,000 given 22,500
Dividends paid, 12/15/02 (1,500,000) 0.031 (46,500)
Retained earnings, 12/31/02 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, 12/31/02 5,500,000 above 203,500
Translation adjustment --- plug (438,500)
Total liabilities and equities 78,000,000 2,340,000
36. (continued)
Calculation of Translation Adjustment
The cumulative translation adjustment at 12/31/02 is derived as a plug figure.
The 2002 translation adjustment can be calculated directly. Information
regarding the average exchange rate for the year and the payment of
dividends is needed to calculate the 2001 translation adjustment. Assuming
no dividends in 2001 and an average exchange rate of $.045, the cumulative
translation adjustment can be calculated as follows:
KCS ER US$
Net assets, 1/1/01 20,000,000 0.050 1,000,000
Net income, 2001 500,000 0.045 22,500
Net assets, 12/31/01 20,500,000 1,022,500
Net assets, 12/31/01 at current
exchange rate 20,500,000 0.040820,000
Translation adjustment, 2001negative 202,500
Net assets, 1/1/02 20,500,000 0.040 820,000
Net income, 2002 6,500,000 0.035 227,500
Dividends, 12/15/02 (1,500,000) 0.031 (46,500)
Net assets, 12/31/02 25,500,000 1,001,000
Net assets, 12/31/02 at current
exchange rate 25,500,000 0.030765,000
Translation adjustment, 2002negative 236,000
Cumulative translation adjustment, 12/31/02negative 438,500
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 (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, 2002 --- plug 408,000
Net income 6,500,000 509,300
Retained earnings, 1/1/02 500,000 given 353,000
Dividends paid, 12/15/02 (1,500,000) 0.031 (46,500)
Retained earnings, 12/31/02 5,500,000 815,800
Cash 2,000,000 0.030 60,000
Accounts receivable 3,300,000 0.03099,000
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, 12/31/02 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
36. (continued)
Schedule BEquipment
KCS ER US$
Old Equipment--at 1/1/02 20,000,000 0.050 1,000,000
New Equipment--acquired 1/3/02 5,000,000 0.036 180,000
Total 25,000,000 1,180,000
Acc/DepOld Equipment 8,000,000 0.050 400,000
Acc/DepNew 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 1/1/01 60,000,000 0.050 3,000,000
New Buildingacquired 3/5/02 12,000,000 0.034 408,000
Total 72,000,000 3,408,000
Acc/DepOld Building 30,000,000 0.050 1,500,000
Acc/DepNew 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 10,000
Total 1,800,000 85,200
Calculation of Remeasurement Gain
KCS ER US$
Net mon liab, 1/1/02 (37,000,000) 0.040 (1,480,000)
Increase in mon assets:
Sales 25,000,000 0.035 875,000
Decrease in mon assets:
Purch 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, 12/15/02 (1,500,000) 0.031 (46,500)
Purchase of equipment, 1/3/02 (5,000,000) 0.036 (180,000)
Purchase of buildings, 3/5/02 (12,000,000) 0.034 (408,000)
Net mon liab, 12/31/02 (47,200,000) (1,824,000)
Net mon liab, 12/31/02 at
current exchange rate (47,200,000) 0.030 (1,416,000)
Remeasurement gain2002 (408,000)
36. (continued)

Part I (c). U.S. dollar is the functional currency--temporal method (no long-
term 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 expense--equipment (2,500,000) Sched.B (118,000)
Depreciation expense--building (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, 2002 --- plug (92,000)
Net income 6,500,000 9,300
Retained earnings, 1/1/02 500,000 given (147,000)
Dividends paid, 12/15/02 (1,500,000) 0.031 (46,500)
Retained earnings, 12/31/02 5,500,000 below (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, 12/31/02 5,500,000 plug (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)

36. (continued)
Calculation of Remeasurement Loss
KCS ER US$
Net monetary assets, 1/1/02 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, 12/15/02 (1,500,000) 0.031 (46,500)
Purchase of equipment, 1/3/02 (5,000,000) 0.036 (180,000)
Purchase of buildings, 3/5/02 (12,000,000) 0.034 (408,000)
Net monetary assets, 12/31/02 2,800,000 176,000
Net monetary assets, 12/31/02
at current exchange rate 2,800,000 0.030 84,000
Remeasurement loss--2002 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
crown has depreciated against the U.S. dollar during 2002 (from $.040 at
1/1/02 to $.030 at 12/31/02). A net asset balance sheet exposure exists
because all assets are translated at the current exchange rate and exceeds
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 liability balance sheet exposure and (2) the Czech crown 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 crown amount of liabilities translated at the current rate exceeds the
Czech crown amount of assets translated at the current rate, a net liability
balance sheet exposure exists.
The remeasurement loss in Part I (c) arises because of two factors: (1) there
is a net asset balance sheet exposure and (2) the Czech crown has
depreciated against the U.S. dollar during 2002. 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 crown amount of assets translated at the
current rate exceeds the Czech crown amount of liabilities translated at the
current rate, a net asset balance sheet exposure exists.
37. (75-90 minutes) (Translate foreign subsidiary trial balance, prepare
consolidation worksheet for parent and subsidiary, and prepare consolidated
financial statements under three different exchange rate scenarios)
This problem 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 1/1/01 to $1.68 at 12/31/02. Under the second
set of assumptions, the exchange rate remains $1.60 from 1/1/01 to 12/31/02.
Under the third set of assumptions, the British pound depreciates steadily from
$1.60 at 1/1/01 to $1.52 at 12/31/02.

Part 1--Appreciating Foreign Currency

Relevant exchange rates: January 1, 2001 $1.60

2001 Average $1.62
December 31, 2001 $1.64
January 30, 2002 $1.65
2002 Average $1.66
December 31, 2002 $1.68

a. Translation of Suffolks December 31, 2002 trial balance from British pounds
to U.S. dollars.

Suffolk PLC
Trial Balance Exchange
December 31, 2002 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, & equip (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/l/02 (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 (1/30/02) 1,750,000 $1.65 2,887,500
Cumulative translation
adjustment--positive (credit balance) (4,147,500 )
0 $ 0
Note: Amounts in parentheses are credit balances.
37. (continued)
Exchange
Schedule A Pounds Rate Dollars
Retained earnings, 1/1/01 (6,000,000) $1.60 $ (9,600,000)
Net income, 2001 (2,000,000) $1.62 (3,240,000)
Retained earnings, 12/31/01 (8,000,000) $(12,840,000)

b. Schedule detailing the change in Suffolks cumulative translation adjustment

for 2001 and 2002.

Determination of Cumulative ExchangeExchange

Translation Adjustment Pounds Rate Rate Dollars
Net assets, 1/1/01 (50,000,000) $1.64 $1.60$(2,000,000)
Net income, 2001 (2,000,000) $1.64 $1.62 (40,000)
Translation adjustment, 2001
($2,040,000)
Net assets, 1/1/02 (52,000,000) $1.68 $1.64 (2,080,000)
Net income, 2002 (4,000,000) $1.68 $1.66 (80,000)
Dividends, 2002 1,750,000 $1.68 $1.65 52,500
Translation adjustment, 2002
(2,107,500)
Net assets, 12/31/02 54,250,000
Cumulative Translation
Adjustment, 12/31/02
($4,147,500)

Exchange
Cost Allocation Schedule Pounds Rate Dollars
Cost 52,000,000 $1.60 $83,200,000
Book value 50,000,000 $1.60 80,000,000
Excess of cost over book value 2,000,000 $ 3,200,000

Translation Adjustment Related to Exchange

Excess of Cost Over Book Value Pounds Rate Dollars
Excess of cost over book value 2,000,000
U.S. dollar value at 12/31/02 $1.68 $3,360,000
U.S. dollar value at 1/l/01 $1.60 3,200,000
Translation adjustment related
to excess, 12/31/02--positive $ 160,000
37. (continued)
c. Consolidation Worksheet--December 31, 2002

Parker Suffolk Adjustments & Eliminations Consolidated

Sales ($70,000,000) ($46,480,000) ($116,480,000)

Cost of goods sold 34,000,000 26,560,000 60,560,000

Depreciation 20,000,000 3,320,000 23,320,000

Other expenses 6,000,000 9,960,000 15,960,000

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

Net income ($12,887,500) ($6,640,000) ($16,640,000)

Ret. earnings, 1/1/02 ($48,000,000) ($12,840,000) 12,840,000 3,240,000 ($51,240,000)

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, 12/31/02 ($56,387,500) ($16,592,500) ($63,380,000)

Cash $3,687,500 $2,520,000 $6,207,500

Accounts receivable 10,000,000 8,736,000 18,736,000

Inventory 30,000,000 30,240,000 60,240,000

Investment in Suffolk 83,200,000 3,240,000 83,240,000 0

3,200,000

Plant, prop, & 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)

Long-term debt (50,000,000) (8,400,000) (58,400,000)

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

Ret. earnings, 12/31/02 (56,387,500) (16,592,500) (63,380,000)

Cum. trans. adj. (4,147,500) 160,000 (4,307,500)

$0 $0 $92,727,500 $92,727,500 $0
37. (continued)
d. Consolidated income statement and balance sheet--2002.

Parker, Inc.
Consolidated Income Statement
For the year ending December 31, 2002

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, 2002

Assets
Cash $ 6,207,500
Accounts receivable 18,736,000
Inventory 60,240,000
Plant, property, & equip (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
37. (continued)
Part 2--Stable Foreign Currency

Relevant exchange rates: January 1, 2001 $1.60

2001 Average $1.60
December 31, 2001 $1.60
January 30, 2002 $1.60
2002 Average $1.60
December 31, 2002 $1.60

a. Translation of Suffolks December 31, 2002 trial balance from British pounds to
U.S. dollars.

Suffolk PLC
Trial Balance Exchange
December 31, 2002 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, & equip (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/l/02 (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 (1/30/02) 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, 1/1/01 (6,000,000) $1.60 $ (9,600,000)
Net income, 2001 (2,000,000) $1.60 (3,200,000)
Retained earnings, 12/31/01 (8,000,000) $(12,800,000 )
37. (continued)
b. Schedule detailing the change in Suffolks cumulative translation adjustment
for 2001 and 2002.

Determination of Cumulative ExchangeExchange

Translation Adjustment Pounds Rate Rate Dollars
Net assets, 1/1/01 (50,000,000) $1.60 $1.60 $0
Net income, 2001 (2,000,000) $1.60 $1.60 0
Translation adjustment, 2001 $0
Net assets, 1/1/02 (52,000,000) $1.60 $1.60 0
Net income, 2002 (4,000,000) $1.60 $1.60 0
Dividends, 2002 1,750,000 $1.60 $1.60 0
Translation adjustment, 2002 0
Net assets, 12/31/02 54,250,000
Cumulative Translation
Adjustment, 12/31/02 $0

Exchange
Cost Allocation Schedule Pounds Rate Dollars
Cost 52,000,000 $1.60 $83,200,000
Book value 50,000,000 $1.60 80,000,000
Excess of cost over book value 2,000,000 $ 3,200,000

Translation Adjustment Related to Exchange

Excess of Cost Over Book Value Pounds Rate Dollars
Excess of cost over book value 2,000,000
U.S. dollar value at 12/31/02 $1.60 $3,200,000
U.S. dollar value at 1/l/01 $1.60 3,200,000
Translation adjustment related
to excess, 12/31/02 $0
37. (continued)
c. Consolidation Worksheet--December 31, 2002

Parker Suffolk Adjustments & Eliminations Consolidated

Sales ($70,000,000) ($44,800,000) ($114,800,000)

Cost of goods sold 34,000,000 25,600,000 59,600,000

Depreciation 20,000,000 3,200,000 23,200,000

Other expenses 6,000,000 9,600,000 15,600,000

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

Net income ($12,800,000) ($6,400,000) ($16,400,000)

Ret. earnings, 1/1/02 ($48,000,000) ($12,800,000) 12,800,000 3,200,000 ($51,200,000)

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, 12/31/02 ($56,300,000) ($16,400,000) ($63,100,000)

Cash $3,600,000 $2,400,000 $6,000,000

Accounts receivable 10,000,000 8,320,000 18,320,000

Inventory 30,000,000 28,800,000 58,800,000

Investment in Suffolk 83,200,000 3,200,000 83,200,000 0

3,200,000

Plant, prop, & eq (net) 105,000,000 57,600,000 3,200,000 165,800,000

Accounts payable (25,500,000) (2,320,000) (27,820,000)

Long-term debt (50,000,000) (8,000,000) (58,000,000)

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

Ret. earnings, 12/31/02 (56,300,000) (16,400,000) (63,100,000)

Cum. trans. adj. 0 0 0

$0 $0 $92,400,000 $92,400,000 $0
37. (continued)
d. Consolidated income statement and balance sheet--2002.

Parker, Inc.
Consolidated Income Statement
For the year ending December 31, 2002

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, 2002

Assets
Cash $ 6,000,000
Accounts receivable 18,320,000
Inventory 58,800,000
Plant, property, & equip (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
37. (continued)
Part 3--Depreciating Foreign Currency

Relevant exchange rates: January 1, 2001 $1.60

2001 Average $1.58
December 31, 2001 $1.56
January 30, 2002 $1.55
2002 Average $1.54
December 31, 2002 $1.52

a. Translation of Suffolks December 31, 2002 trial balance from British pounds to
U.S. dollars.

Suffolk PLC
Trial Balance Exchange
December 31, 2002 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, & equip (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/l/02 (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 (1/30/02) 1,750,000 $1.55 2,712,500
Cumulative translation
adjustment--negative (debit balance) 4,147,500
0 $ 0
Note: Amounts in parentheses are credit balances.

Exchange
Schedule A Pounds Rate Dollars
Retained earnings, 1/1/01 (6,000,000) $1.60 $ (9,600,000)
Net income, 2001 (2,000,000) $1.58 (3,160,000)
Retained earnings, 12/31/01 (8,000,000) $(12,760,000 )
37. (continued)
b. Schedule detailing the change in Suffolks cumulative translation adjustment
for 2001 and 2002.

Determination of Cumulative ExchangeExchange

Translation Adjustment Pounds Rate Rate Dollars
Net assets, 1/1/01 (50,000,000) $1.56 $1.60 $2,000,000
Net income, 2001 (2,000,000) $1.56 $1.58 40,000
Translation adjustment, 2001
$2,040,000
Net assets, 1/1/02 (52,000,000) $1.52 $1.56 2,080,000
Net income, 2002 (4,000,000) $1.52 $1.54 80,000
Dividends, 2002 1,750,000 $1.52 $1.55 (52,500)
Translation adjustment, 2002 2,107,500
Net assets, 12/31/02 54,250,000
Cumulative Translation
Adjustment, 12/31/02
$4,147,500

Exchange
Cost Allocation Schedule Pounds Rate Dollars
Cost 52,000,000 $1.60 $83,200,000
Book value 50,000,000 $1.60 80,000,000
Excess of cost over book value 2,000,000 $ 3,200,000

Translation Adjustment Related to Exchange

Excess of Cost Over Book Value Pounds Rate Dollars
Excess of cost over book value 2,000,000
U.S. dollar value at 12/31/02 $1.52 $3,040,000
U.S. dollar value at 1/l/01 $1.60 3,200,000
Translation adjustment related
to excess, 12/31/02--negative $(160,000)
37. (continued)
c. Consolidation Worksheet--December 31, 2002

Parker Suffolk Adjustments & Eliminations Consolidated

Sales ($70,000,000) ($43,120,000) ($113,120,000)

Cost of goods sold 34,000,000 24,640,000 58,640,000

Depreciation 20,000,000 3,080,000 23,080,000

Other expenses 6,000,000 9,240,000 15,240,000

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

Net income ($12,712,500) ($6,160,000) ($16,160,000)

Ret. earnings, 1/1/02 ($48,000,000) ($12,760,000) 12,760,000 3,160,000 ($51,160,000)

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, 12/31/02 ($56,212,500) ($16,207,500) ($62,820,000)

Cash $3,512,500 $2,280,000 $5,792,500

Accounts receivable 10,000,000 7,904,000 17,904,000

Inventory 30,000,000 27,360,000 57,360,000

Investment in Suffolk 83,200,000 3,160,000 83,160,000 0

3,200,000

Plant, prop, & 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)

Long-term debt (50,000,000) (7,600,000) (57,600,000)

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

Ret. earnings, 12/31/02 (56,212,500) (16,207,500) (62,820,000)

Cum. trans. adj. 4,147,500 160,000 4,307,500

$0 $0 $92,392,500 $92,392,500 $0
37. (continued)
d. Consolidated income statement and balance sheet--2002.

Parker, Inc.
Consolidated Income Statement
For the year ending December 31, 2002

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, 2002

Assets
Cash $ 5,792,500
Accounts receivable 17,904,000
Inventory 57,360,000
Plant, property, & equip (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
37. (continued)
Part 4Risk Assessment Report and Financial Management Recommendations

December 31,
2002 Exchange Rate
$1.68 $1.60 $1.52
Net income $12,887,500 $12,800,000 $12,712,500
Percentage difference 100.7% 100% 99.3%
Cash flow--dividends $2,887,500 $2,800,000 $2,712,500
Percentage difference 103% 100% 97%

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%

An appreciation in the British pound from $1.60 to $1.68 results in income

being .7% higher, cash flow from dividends being 3% greater, and the debt-to-
equity ratio being 2% lower than if there had been no change in exchange
rates.

A depreciation in the British pound from $1.60 to $1.52 would have resulted in
income being .7% lower, cash flow from dividends being 3% smaller, and the
debt-to-equity ratio being 2% higher than if there had been no change in
exchange rates.

An increase in the dollar value of the British pound results in higher

profitability, greater cash inflow, and an improved debt-to-equity ratio. The
opposite is true for a decrease in the dollar value of the British pound.

If the British pound is expected to appreciate, Parker should not hedge its
British pound exposure associated with its investment in Suffolk. However, if
the British pound is expected to depreciate, Parker may wish to hedge its
British pound net asset and cash flow exposure in some way. The decline in
dollar value of future British pound dividend payments could be hedged by
selling British pounds forward or by purchasing a British pound put option.
The negative translation adjustment reported in other comprehensive income
could be avoided using an option or forward contract, or by taking out a loan
in British pounds.