Exam 8: Translation of Foreign Currency Financial

A foreign subsidiary of a U.S.corporation purchased equipment on January 4,2015. (A. )How would depreciation expense on the equipment be translated for 2018? (B. )How would depreciation expense on the equipment be remeasured for 2018?

REFERENCE: 8-10 Kennedy Company acquired all of the outstanding common stock of Hastie Company of Canada for U.S.$350,000 on January 1,2018,when the exchange rate for the Canadian dollar (CAD)was U.S.$.70.The fair value of the net assets of Hastie was equal to their book value of CAD 450,000 on the date of acquisition.Any acquisition consideration excess over fair value was attributed to an unrecorded patent with a remaining life of five years.The functional currency of Hastie is the Canadian dollar. For the year ended December 31,2018,Hastie's trial balance net income was translated at U.S.$25,000.The average exchange rate for the Canadian dollar during 2018 was U.S.$.68,and the 2018 year-end exchange rate was U.S.$.65. -Kennedy's share of Hastie's net income for 2018 would be

REFERENCE: 8-12 Ginvold Co.began operating a subsidiary in a foreign country on January 1,2018 by acquiring all of the common stock for §50,000 Stickles,the local currency.This subsidiary immediately borrowed §120,000 on a five-year note with ten percent interest payable annually beginning on January 1,2019.A building was then purchased for §170,000 on January 1,2018.This property had a ten-year anticipated life and no salvage value and was to be depreciated using the straight-line method.The building was immediately rented for three years to a group of local doctors for §6,000 per month.By year-end,payments totaling §60,000 had been received.On October 1,§5,000 were paid for a repair made on that date and it was the only transaction of this kind for the year.A cash dividend of §6,000 was transferred back to Ginvold on December 31,2018.The functional currency for the subsidiary was the Stickle (§).Currency exchange rates were as follows: January 1,2018 \S1=\ 2.40 October 1,2018 \S1=\ 2.22 Average for 2018 \S1=\ 2.28 December 31,2018 \S1=\ 2.16 -Prepare an income statement for this subsidiary in stickles and then translate these amounts into U.S.dollars.

What exchange rate should be used to translate (a)revenues and expenses that occur throughout the year and (b)a gain or loss that occurs on a specific day?

Under the current rate method,property,plant & equipment would be translated at what rate?

Under the current rate method,which accounts are translated using current exchange rates?

REFERENCE: 8-10 Kennedy Company acquired all of the outstanding common stock of Hastie Company of Canada for U.S.$350,000 on January 1,2018,when the exchange rate for the Canadian dollar (CAD)was U.S.$.70.The fair value of the net assets of Hastie was equal to their book value of CAD 450,000 on the date of acquisition.Any acquisition consideration excess over fair value was attributed to an unrecorded patent with a remaining life of five years.The functional currency of Hastie is the Canadian dollar. For the year ended December 31,2018,Hastie's trial balance net income was translated at U.S.$25,000.The average exchange rate for the Canadian dollar during 2018 was U.S.$.68,and the 2018 year-end exchange rate was U.S.$.65. -Calculate the U.S.dollar amount allocated to the patent at January 1,2018.

REFERENCE: 8-13 Boerkian Co.started 2018 with two assets: Cash of §26,000 (Stickles)and Land that originally cost §72,000 when acquired on April 4,2015.On May 1,2018,the company rendered services to a customer for §36,000,an amount immediately paid in cash.On October 1,2018,the company incurred an operating expense of §22,000 that was immediately paid.No other transactions occurred during the year so an average exchange rate is not necessary.Currency exchange rates were as follows: April 4, 2015 §1 =\ .28 January 1, 2018 \S1=\ .29 May 1, 2018 \S1=\ .30 October 1, 2018 \S1=\ .31 December 31, 2018 \S1=\ .35 -Assume that Boerkian was a foreign subsidiary of a U.S.multinational company and the U.S.dollar is the functional currency.On the December 31,2018 balance sheet,what was the remeasured value of the Land account?

REFERENCE: 8-11 Quadros Inc. ,a Portuguese firm was acquired by a U.S.company on January 1,2017.Selected account balances are available for the year ended December 31,2018,and are stated in Euro,the local currency. Sales £400,000 Inventory (bought on February 1, 2018) 20,000 Equipment (bought on January 1, 2017) 90,000 Dividends (paid on September 1, 2018) 20,000 Accumulated depreciation -Equipment 12/31/18 45,000 Depreciation expense - Equipment, 2018 9,000 $\text { Relevant exchange rates for } 1 \text { Euro are given below: }$ January 1, 2017 \ .91 January 1, 2018 .93 February 1, 2018 .94 September 1, 2018 .97 December 31, 2018 1.01 4 th quarter average, 2017 .90 4 th quarter average, 2018 .98 Average, 2018 .95 -Assume the functional currency is the U.S.Dollar;compute the U.S.income statement amount for depreciation expense for 2018.

REFERENCE: 8-10 Kennedy Company acquired all of the outstanding common stock of Hastie Company of Canada for U.S.$350,000 on January 1,2018,when the exchange rate for the Canadian dollar (CAD)was U.S.$.70.The fair value of the net assets of Hastie was equal to their book value of CAD 450,000 on the date of acquisition.Any acquisition consideration excess over fair value was attributed to an unrecorded patent with a remaining life of five years.The functional currency of Hastie is the Canadian dollar. For the year ended December 31,2018,Hastie's trial balance net income was translated at U.S.$25,000.The average exchange rate for the Canadian dollar during 2018 was U.S.$.68,and the 2018 year-end exchange rate was U.S.$.65. -Amortization of the patent,translated,for 2018 would be

Under the temporal method,retained earnings would be remeasured at what rate?

A net liability balance sheet exposure exists and the foreign currency appreciates.Which of the following statements is true?

REFERENCE: 8-01 Westmore,Ltd.is a British subsidiary of a U.S.company.Westmore's functional currency is the pound sterling (£).The following exchange rates were in effect during 2018: Jan. 1 £1=\ 1.60 June 3C £1=\ 1.64 Dec. 31 £1=\ 1.61 Weighted average rate for the year £1=\ 1.59 -On December 31,2018,Westmore had accounts receivable of £280,000.What amount (rounded)would have been included for this subsidiary in calculating consolidated accounts receivable?

REFERENCE: 8-07 A foreign subsidiary uses the first-in first-out inventory method.The following inventory balances are given at December 31,2018 in local currency units (LCU): Inventory at cost 320,000 LCU Inventory at net realizable value 420,000 LCU $\text { The following exchange rates are given for } 2018 \text { : }$ quarter average, 2018 \ 1.43=1 LCU December 31,2018 1.42=1 LCU -Compute the December 31,2018,inventory balance using the current rate method.

Where is the remeasurement gain or loss reported in the parent company's financial statements?

REFERENCE: 8-06 Esposito is an Italian subsidiary of a U.S.company. Esposito's ending inventory is valued at the average cost for the last quarter of the year. The following account balances are available for Esposito for 2018: Beginning inventory 20,000 Purchases 400,000 Ending inventory 15,000 Relevant exchange rates follow: quarter average, 2017 \ .93=1 December 31,2017 .94=1 Average for 2018 .96=1 quarter average, 2018 .99=1 December 31, 2018 1.01=1 -Compute the cost of goods sold for 2018 in U.S.dollars using the temporal method.

REFERENCE: 8-06 Esposito is an Italian subsidiary of a U.S.company. Esposito's ending inventory is valued at the average cost for the last quarter of the year. The following account balances are available for Esposito for 2018: Beginning inventory 20,000 Purchases 400,000 Ending inventory 15,000 Relevant exchange rates follow: quarter average, 2017 \ .93=1 December 31,2017 .94=1 Average for 2018 .96=1 quarter average, 2018 .99=1 December 31, 2018 1.01=1 -Compute the cost of goods sold for 2018 in U.S.dollars using the current rate method.

Which method of translating a foreign subsidiary's financial statements is correct if it is assumed that the parent's net investment is exposed to foreign exchange risk?

Perkle Co.owned a subsidiary in Belgium;the subsidiary's functional currency was the Belgian franc.During 2018,Perkle engaged in hedging transactions to offset part of the subsidiary's net asset position.How should the effects of exchange rate fluctuations on the currency hedge be accounted for?

REFERENCE: 8-11 Quadros Inc. ,a Portuguese firm was acquired by a U.S.company on January 1,2017.Selected account balances are available for the year ended December 31,2018,and are stated in Euro,the local currency. Sales £400,000 Inventory (bought on February 1, 2018) 20,000 Equipment (bought on January 1, 2017) 90,000 Dividends (paid on September 1, 2018) 20,000 Accumulated depreciation -Equipment 12/31/18 45,000 Depreciation expense - Equipment, 2018 9,000 $\text { Relevant exchange rates for } 1 \text { Euro are given below: }$ January 1, 2017 \ .91 January 1, 2018 .93 February 1, 2018 .94 September 1, 2018 .97 December 31, 2018 1.01 4 th quarter average, 2017 .90 4 th quarter average, 2018 .98 Average, 2018 .95 -Assume the functional currency is the Euro;compute the U.S.balance sheet amount for equipment for 2018.