Exam 9: Reporting Foreign Operations

All of the following statements are stated in Brazil reals (R$). Bralta Ltd. Statement of Financial Position Iune $30,20X5$ Cash 60,000 Current liabilities 500,000 Accounts receivable 740,000 Bonds payable Inventories 300,000 2,500,000 Machinery (net) 850,000 Common shares 1,000,000 Land and building (net) Retained earnings Additional information: Selected exchange rates: June 30,20X4 R \ 1=\ 0.5906 June 30,20X5 R \ 1=\ 0.5623 Average for 20X5 R \ 1=\ 0.5744 $\text { Date of purchase of inventory on hand at year-end } \quad \text { R } \$ 1 = \$ .05688$ Dividends were declared on June 30, 20X5 Opening inventory = R$130,000 Inventory purchases for the year = R$1,570,000 Machinery, land, and buildings were purchased on June 30, 20X4 Bralta is the Brazilian subsidiary of Altapro Co., a Canadian company. - Machinery, land, and buildings were purchased on June 30, 20X4 Bralta is the Brazilian subsidiary of Altapro Co., a Canadian company. Under the current-rate method, what is the balance of the total assets?

Olin Ltd. is a foreign subsidiary of Rainier Ltd., a Canadian corporation. Rainier translated Olin's financial statements to Canadian dollars using the temporal method, which resulted in a cumulative translation gain of $15,500. How should the $15,500 be treated on Rainier's consolidated financial statements?

DNA was incorporated on January 2, 20X0, and commenced active operations immediately. Common shares were issued on the date of incorporation and no new common shares have been issued since then. On December 31, 20X3, INT purchased 70% of the outstanding common shares of DNA for 800,000 Swedish Krona (SEK). DNA's main operations are located in Switzerland. For the year ending December 31, 20X6, the income statement (in 000s)for DNA was as follows: Sales SEK 1,625 Cost of goods sold (1,200) Depreciation expense (75) Income tax expense-current Net income SEK The comparative and condensed statements of financial position (in 000s)for DNA were as follows: 20X6 20X5 Accounts receivable SEK 400 SEK 385 Inventory 200 90 Property, plant, and equipment - net Total SEK SEK Accounts payable SEK 90 SEK 85 Other current monetary liabilities 200 250 Common shares 1,250 1,250 Retained earnings (Note 3) SEK Total SEK SEK OTHER INFORMATION: • Purchases and sales of merchandise inventory occurred evenly throughout the year. • The ending inventory was purchased evenly throughout the last month of the year. • DNA purchased the property, plant, and equipment on hand at the end of 20X6 on March 17, 20X1. There were no purchases or sales of these assets from 20X3 to 20X6. • Dividends were paid on June 30, 20X6. Assume that foreign exchange rates were as follows: January 2,20\times0 \ 1= SEK 2.30 March 17,20\times1 \ 1= SEK 2.60 December 31,20\times3 \ 1= SEK 2.70 Average for 20\times5 \ 1= SEK 2.90 Average for quarter 4 for 20\times5 \ 1= SEK 3.00 Average for December 20\times5 \ 1= SEK 3.10 December 31,20\times5 \ 1= SEK 3.30 June 30,20\times6 \ 1= SEK 3.60 Average for 20\times6 \ 1= SEK 3.50 Average for quarter 4 for 20\times6 \ 1= SEK 3.70 Average for December 20\times6 \ 1= SEK 3.80 December 31.20\times6 \ 1= SEK 3.90 - DNA's financial statements need to be translated into Canadian dollars for consolidation with INT's financial statements. Required: Calculate the exchange gain/loss on current monetary items for 20X6 under the temporal method.

Under the temporal method, at what exchange rate is depreciation expense translated?

Which of the following accounts would be translated to the reporting currency at the current rate of exchange for an integrated subsidiary?

Water Bottling Inc. (WBI)is a 100% wholly owned subsidiary with operations in France. WBI was purchased by a Canadian parent on January 1, 20X5, and the FVA was €375,000, all allocated to goodwill. The financial records of WBI are maintained in euros and provide the following information with respect to equipment and goodwill. Equipment: Purchased on January 1, 20X5, for €250,000, and depreciated over five years on a straight-line basis. Equipment: Purchased on January 1, 20X6, for €175,000, and depreciated over five years on a straight-line basis. Goodwill had a balance of €375,000. Foreign exchange rates were as follows: Jantuary 1,20X5 1=1.50 Average for 20X5 1=1.48 January 1,20X6 1=1.46 Average for 20X6 1=1.45 January 1,20X7 1=1.51 Average for 20X7 1=1.58 December 31,20X7 1=1.62 - Required: Assume that WBC's functional currency is the euro. Calculate the translated Canadian dollar balances for the following accounts for December 31, 20X7. a. Equipment b. Accumulated depreciation-equipment c. Depreciation expense d. Goodwill

Which of the following is an indication that a parent company and a foreign subsidiary are integrated?

Water Bottling Inc. (WBI)is a 100% wholly owned subsidiary with operations in France. WBI was purchased by a Canadian parent on January 1, 20X5, and the FVA was €375,000, all allocated to goodwill. The financial records of WBI are maintained in euros and provide the following information with respect to equipment and goodwill. Equipment: Purchased on January 1, 20X5, for €250,000, and depreciated over five years on a straight-line basis. Equipment: Purchased on January 1, 20X6, for €175,000, and depreciated over five years on a straight-line basis. Goodwill had a balance of €375,000. Foreign exchange rates were as follows: Jantuary 1,20X5 1=1.50 Average for 20X5 1=1.48 January 1,20X6 1=1.46 Average for 20X6 1=1.45 January 1,20X7 1=1.51 Average for 20X7 1=1.58 December 31,20X7 1=1.62 - Required: Assume that WBC's functional currency is the Canadian dollar. Calculate the translated Canadian dollar balances for the following accounts for December 31, 20X7: a. Equipment b. Accumulated depreciation-equipment c. Depreciation expense d. Investment property e. Goodwill

Liverpool Company operates retail stores in Canada and an exporting business in London that specializes in buying and selling British tweeds. The London subsidiary, which was acquired on January 1, 1986, provided the following financial statements in pounds sterling to the Canadian parent company. $\text { LIVERPOOL COMPANY, London Branch }$ $\text {Statement of Comprehensive Income}$ $\text { Year Ended December 31. 20X5}$ Sales £2,300,000 Cost of goods sold (1,200,000) Depreciation expense (300,000) Other expenses Comprehensive income £ $\text { LIVERPOOL COMPANY, Landan Branch }$ Statement of Changes in Equity-Partial-Retained Earnings section $\text { Year Ended Derember } 31,20X5$ Retained earnings-January 1 £850,000 Comprehensive income for the year 500,000 Less: Dividends declared and paid, December 31 Retained earnings-December 31 £ $\text { LIVERPOOL COMPANY, London Branch }$ $\text {Statement of Financial Position}$ $\text {December 31,20X5 }$ Assets 20X5 20X4 Cash and receivables £1,150,000 £520,000 Merchandise inventory 450,000 380,000 Property, plant, and equipment Total £ £ Current liabilities £700,000 £600,000 Capital stock 1,200,000 1,200,000 Retained earnings 2,000,000 2,000,000 Total Liverpool Company was incorporated on January 1, 1984, at which time an amount of property, plant, and equipment with a present (December 31, 20X5)net book value of £3,000,000 was purchased. Additional equipment was purchased December 31, 20X4 (20% of depreciation expense relates to this new equipment). The long-term notes were issued, to replace financing provided by the parent, on January 1, 20X4. Direct exchange rates for the pound sterling are: January 1, 1984 £\ 1=\ 1.9180 January 1, 1986 1.8365 January 1,20X4 1.6000 Average for quarter 4,20X4 1.5612 December 31,20X4 / January 1, 20X5 1.5426 December 31,20X5 1.4730 Average for 20X5 1.5093 Average for quarter 4,20X5 1.4950 - The January 1, 20X5, retained earnings balance of the London Branch of the Liverpool Company correctly translated to Canadian dollars was $1,783,774. The beginning inventory of £380,000 was acquired during the last quarter of 20X4 and the ending inventory was acquired during the last quarter of 20X5. Sales and purchases were made, and other expenses were incurred, evenly throughout the year. Required: Translate the December 31, 20X5, statement of financial position of Liverpool Company into dollars assuming the London branch has a functional currency of C$s and a presentation currency of C$s. Explain how it might be determined that the London branch had a function currency of Canadian $s.

Which translation method should be used for the following subsidiaries?

On January 1, 20X6, Clock Inc. of Vancouver purchased 75% of the outstanding shares of Time Limited in London, England. Time Limited's statements of financial position and statements of comprehensive income and changes in equity-retained earnings section for the year ended December 31, 20X7, are below. \begin{array}{c}\text { Time Limited}\\\text { Statement of Financial Position}\\\text { December 31, 20X7}\\\text { (in thousands of £^{\prime} s )}\\\\\begin{array}{|l|r|r|}\hline \text { Assets } & 20X7 & 20X6 \\\hline \text { Cash } & 50 & 20 \\\hline \text { Accounts receivable } & 575 & 280 \\\hline \text { Inventories } & 825 & 650 \\\hline \text { Equipment, net } & 2,670 & 2,937 \\\hline \text { Total assets } & 4,120 & 3,887 \\\hline\\\hline \text { Liabilities } & & \\\hline \text { Accounts payable } & 465 & 395 \\\hline \text { Bonds payable } & 1,290 & 1,290 \\\hline \text { Common shares } & 1,200 & 1,200 \\\hline \text { Retained earnings } & \underline{1,165} & \underline{1,002} \\\hline \text { Total liabilities and shareholders' equity } & \underline{4,120} & \underline{\underline{4}, 887} \\\hline \end{array}\end{array} \begin{array}{c}\text { Time Limited}\\\text { Statement of Comprehensive Income}\\ \text { Year Ended December 31, 20X7}\\\text { (in thousands of £^{\prime} s )}\\\\\begin{array}{|l|r|}\hline & £ \\\hline \text { Sales } & \underline{2,170} \\\hline \text { Cost of goods sold } & 1,203 \\\hline \text { Depreciation expense } & 267 \\\hline \text { Interest expense } & 80 \\\hline \text { Other expenses } & 407 \\\hline & \underline{1,957} \\\hline \text { Comprehensive income } & 213\\\hline\end{array}\end{array} \begin{array}{c}\text {Time Limited}\\\text {Statement of Changes in Equity-Partial-Retained earnings section}\\\text {Year Ended December 31, 20X7}\\\text {(in thousands of £ ^{\prime} s )}\\\\\begin{array}{|l|r|}\hline & £ \\\hline \text { Retained earnings-January } 1,20X7 & 1,002 \\\hline \text { Comprehensive income for the year } & 213 \\\hline \text { Dividends paid } & (50) \\\hline \text { Retained earnings - December } 31,20X7 & 1,165\\\hline\end{array}\end{array} Additional information: 1. Time was incorporated on January 1, 20X3, when it acquired all its equipment for £4,005,000 and issued its 10-year bonds payable. 2. Time's purchases and sales occurred evenly over the year. Inventories on hand at December 31, 20X6, and December 20X7 were purchased evenly over the last quarter of 20X6 and 20X7, respectively. Inventories as at December 31, 20X7, were £650,000. 3. Dividends were paid on March 31, 20X7. 4. Foreign exchange rates are as follows: January 1,20X3 £1=C\ 1.95 January 1, 20X6 £1=C\ 1.85 Average for Oct to Dec, 20X6 £1=C\ 1.64 Average for 20X6 £1=\ 1.73 December 31,20X6/ January 1,20X7 £1=C\ 1.67 March 31,20X7 £1=C\ 1.61 Average for Oct to Dec, 20X7 £1=C\ 1.55 Average for 20X7 £1=C\ 1.57 December 31.20X7 £1=C\ 1.52 Required: Translate Time's statement of financial position at December 31, 20X7, into Canadian dollars, assuming its functional currency is Canadian dollars. Calculate the translation gain or loss arising in 20X7.

IQ has a wholly owned subsidiary in China. This subsidiary is dependent on IQ for financing and sales. How should foreign exchange gains on translation of the subsidiary's statements to Canadian dollars be reported on IQ's consolidated financial statements?

Liverpool Company operates retail stores in Canada and an exporting business in London that specializes in buying and selling British tweeds. The London subsidiary provided the following financial statements in pounds sterling to the Canadian parent company. $\text { LIVERPOOL COMPANY, London Branch }$ $\text { Statement of Comprehensive Income }$ $\text { Year Ended December 31. 20X5}$ Sales £2,300,000 Cost of goods sold (1,200,000) Depreciation expense (300,000) Other expenses Comprehensive income £ $\text {LIVERPOOL COMPANY, London Branch}$ $\text {Statement of Changes in Equity-Partial-Retained Earnings section}$ $\text {Year Ended December 31, 20X5}$ Retained earnings-Janulary 1 £850,000 Comprehensive income for the year 500,000 Less: Dividends declared and paid, December 31 Retained earnings-December 31 £ $\text {LIVERPOOL COMPANY, London Branch}$ $\text {Staternent of Financial Position}$ $\text {Derember 31, 20X5}$ Assets 20X5 20X4 Cash and receivables £1,150,000 £520,000 Merchandise inventory 450,000 380,000 Property, plant, and equipment Total £ £ Current liabilities £700,000 £600,000 Long-term notes payable, due December 31, 20X9 1,200,000 1,200,000 Capital stock 2,000,000 2,000,000 Retained earnings Total £ £ Liverpool Company was incorporated on January 1, 1984, at which time an amount of property, plant, and equipment with a present (December 31, 20X5)net book value of £3,000,000 was purchased. Additional equipment was purchased December 31, 20X4 (20% of depreciation expense relates to this new equipment). The long-term notes were issued, to replace financing provided by the parent, on January 1, 20X4. Direct exchange rates for the pound sterling are: January 1, 1984 £1=\ 1.9180 January 1, 1986 1.8365 January 1, 20X4 1.6000 Average for quarter 4,20X4 1.5612 December 31,20X4 / January 1, 20X5 1.5426 December 31,20X5 1.4730 Average for 20X5 1.5093 Average for quarter 4,20X5 1.4950 The January 1, 20X5, retained earnings balance of the London Branch of the Liverpool Company correctly translated to Canadian dollars was $1,783,774. The beginning inventory of £380,000 was acquired during the last quarter of 20X4 and the ending inventory was acquired during the last quarter of 20X5. Sales and purchases were made, and other expenses were incurred, evenly throughout the year. Required: Compute the gain or loss on holding net monetary items for the Liverpool Company for the year ending December 31, 20X5.

All of the following statements are stated in Brazil reals (R$). Bralta Ltd. Statement of Financial Position Iune $30,20X5$ Cash 60,000 Current liabilities 500,000 Accounts receivable 740,000 Bonds payable Inventories 300,000 2,500,000 Machinery (net) 850,000 Common shares 1,000,000 Land and building (net) Retained earnings Additional information: Selected exchange rates: June 30,20X4 R \ 1=\ 0.5906 June 30,20X5 R \ 1=\ 0.5623 Average for 20X5 R \ 1=\ 0.5744 $\text { Date of purchase of inventory on hand at year-end } \quad \text { R } \$ 1 = \$ .05688$ Dividends were declared on June 30, 20X5 Opening inventory = R$130,000 Inventory purchases for the year = R$1,570,000 Machinery, land, and buildings were purchased on June 30, 20X4 Bralta is the Brazilian subsidiary of Altapro Co., a Canadian company. - Machinery, land, and buildings were purchased on June 30, 20X4 Bralta is the Brazilian subsidiary of Altapro Co., a Canadian company. Under the temporal method, what is the total of the non-monetary assets?

What gives rise to accounting exposure to changes in the foreign exchange rate?

Which of the following factors is a secondary indicator used to choose a functional currency?

What is the risk of an apparent gain or loss arising from the restatement of financial statements prepared in one currency to another currency called?

Cho Co., a public Canadian corporation, has a subsidiary in South Africa. It has been determined that the functional currency of the foreign operations is the South African rand. Which of the following statements is true?

Which of the following factors is a primary indicator used to choose a functional currency?

Which of the following statements about the temporal method is true?