Chapter 13 Foreign Currency Financial Statements

Chapter 13 Test Bank

FOREIGN CURRENCY FINANCIAL STATEMENTS

Multiple Choice Questions

LO11. A US firm has a Belgian subsidiary that uses the British pound

as its functional currency. Under FASB statement No. 52, the US dollar from Belgian unit’s point of view will be

a. a foreign currency.b. its local currencyc. its current rate method currency

d. its reporting currency

LO12. Selvey Inc. is a completely owned subsidiary of Parsfield

Incorporated a US firm. The country where Selvey operates is deemed to have a highly inflationary economy under FASB statement No. 52. Therefore, the functional currency is

a. its reporting currency.b. its current rate method currency.c. the US dollar.

d. its local currency.

LO13. All of the following factors would be used to define a

functional currency, except

a. high volume of intercompany transactions.b. expenses primarily driven by local factors.c. financing denominated in local currency.d. status as a local tax haven for transfer pricing purposes.

LO24. When the financial statements of a foreign subsidiary one year

after acquisition are consolidated with the parent company, Retained Earnings is

a. translated at the current exchange rate.b. remeasured at the current exchange rate.c. remeasured at the historical exchange rate.d. None of the above answers is correct.

©2009 Pearson Education, Inc. publishing as Prentice Hall13-1

LO25. Peachey has a foreign subsidiary, Schrivener Corporation of

Germany, whose functional currency is the euro. On December 31, 19X2, Schrivener has an account receivable denominated in British pounds. Which one of the following statements is true?

a. Because all accounts of the subsidiary are translated into US dollars at the current rate, the Account Receivable is not adjusted on the subsidiary’s books before translation.

b. The Account Receivable is remeasured into the functional currency and remeasurement obviates translation.

c. The Account Receivable is first adjusted to reflect the current exchange rates in euros and then translated at the current rate into dollars.

d. The Account Receivable is adjusted to euros at the current exchange rate and any resulting gain or loss is included as a translation adjustment in the stockholders’ equity section of the subsidiary’s separate balance sheet.

LO26. Paskin’s Corporation’s wholly-owned Canadian subsidiary has a

Canadian dollar functional currency. In translating its account balances into US dollars for reporting purposes, which one of the following accounts would be translated at historical exchange rates?

a. Accounts Receivable.b. Notes Payable.c. Capital Stock.d. Retained Earnings.

LO27. A foreign entity is a subsidiary of a US parent company and has

always used the current rate method to translate its foreign financial statements on behalf of its parent company. Which one of the following statements is incorrect?

a. The US dollar will be the functional currency of this company.

b. Changes in exchange rates between the subsidiary’s country and the parent’s country are not expected to affect the foreign entity’s cash flows.

c. Translation adjustments are shown in stockholders’ equity as increases or decreases in other comprehensive income.

d. Translation adjustments are not shown on the income statement.


LO28. The objective of remeasurement is to

a. produce the same results as if the books were maintained in the currency of the foreign entity’s largest customer.

b. produce the same results as if the books were maintained solely in the local currency.

c. produce the same results as if the books were maintained solely in the functional currency.

d. produce the results reflective of the entity’s economics in the local currency.

LO29. Which of the following assets and/or liabilities are considered

monetary?

a. Intangible Assets and Plant, Property, and Equipment.b. Bonds Payable and Common Stock.c. Cash and Accounts Payable.d. Notes Receivable and Inventories carried at cost.

LO210. Which one of the following accounts would be translated at the

historical exchange rate when the local currency is the functional currency?

a. Deferred Income Taxes.b. Accumulated Depreciation on Equipment.c. Prepaid Insurance.d. Additional paid-in capital.

LO211. Accounts for uncollectible accounts are converted into US

dollars at

a. historical rates when the US dollar is the functional currency.

b. current rates only when the US dollar is the functional currency.

c. historical rates regardless of the functional currency.d. current rates regardless of the functional currency.


LO312. Lorikeet Corporation has a foreign subsidiary located in a

country experiencing high rates of inflation. Information concerning this country’s inflation rate experience is given below.

Change Annual rateDate Index in index of InflationJanuary 1,20X1 90January 1,20X2 120 30 30/100 = 30.00%January 1,20X3 150 30 30/130 = 23.08%January 1,20X4 210 60 60/160 = 37.50%

The inflation rate that is used in determining if the subsidiary is operating in a highly inflationary economy is

a. 37.50%.b. 90.58%.c. 133.33%.

LO313. A US company’s foreign subsidiary has as its functional

currency the local currency. Year-end financial statements are being consolidated. The average rate would be used for which account of the foreign entity?

a. Depreciation.b. Sales.c. Deferred credits.d. Deferred tax assets.

LO514. When translating foreign subsidiary income statements using the

current rate method, why are some accounts translated at an average rate?

a. This approach improves matching.b. This approach accentuates the conservatism principle.c. This approach smoothes out highly volatile exchange rate

fluctuations.d. This approach approximates the effect of transactions which

occur continuously during the period.


LO515. The following assets of Oriole Corporation’s Romanian

subsidiary have been converted into US dollars at the following exchange rates:

CurrentRates

HistoricalRates

Accounts receivable $ 850,000 $ 875,000Trademark 600,000 575,000Property plant and equipment 1,200,000 900,000Totals $ 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. $2,325,000.b. $2,350,000.c. $2,375,000.d. $2,650,000.

LO516. Which of the following foreign subsidiary accounts will have

the same value on consolidated financials, regardless of whether the statements are remeasured or translated?

a. Trademark.b. Inventory.c. accounts receivable.d. Goodwill.

LO617. Remeasurement exchange gains or losses appear

a. in the continuing operations section of the consolidated income statement.

b. as an extraordinary item on the consolidated income statement.

c. as other comprehensive income typically reported in a statement of stockholders’ equity.

d. as an adjustment to the beginning balance of retained earnings on the consolidated Statement of retained earnings.


LO718. A US parent makes a 1,000,000 krona loan worth $108,250 to its

Swedish subsidiary in the current year. The loan is denominated in US dollars and the functional currency of the subsidiary is the krona. This intercompany transaction is a foreign currency transaction of

a. neither the subsidiary nor the parent, as it is eliminated as part of the consolidation procedure.

b. the subsidiary but not the parent.c. both the subsidiary and the parent.d. the parent but not the subsidiary.

LO819. A foreign subsidiary’s accounts receivable balance should be

translated for the consolidated financial statements at

a. the appropriate historical rate.b. the prior year’s forecast rate.c. the future rate for the next year.d. the spot rate at year-end.

LO920. If a US company wants to hedge a prospective loss in a foreign

entity from a foreign currency fluctuation, which of the following actions is recommended?

a. The US company should purchase a forward to swap currency of the foreign entity’s local country for US currency.

b. The US company should purchase a call option to buy currency of the foreign entity’s local country.

c. The US company should issue a loan the foreign entity’s local country.

d. The US company should borrow money in the foreign entity’s local country.


LO2Exercise 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 = Current exchange rateH = Historical exchange rateA = Average exchange rate

US dollar is the functional

currency

The foreigncurrency is the

functionalcurrency

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


LO5Exercise 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 Selmic’s net assets. The excess was allocated to undervalued equipment with a three-year remaining useful life. Selmic’s functional currency is the Canadian dollar. Exchange rates for Canadian dollars for 20X5 are:

January 1, 20X5 $.77 Average rate for 20X5 .75 December 31, 20X5 .73

Required:

1. Determine the depreciation expense stated in US dollars on the excess allocated to equipment for 20X5.

2. Determine the unamortized excess allocated to equipment on December 31, 20X5.

3. If Selmic’s functional currency was the US dollar, what would be the depreciation expense on the excess allocated to the equipment for 20X5?

LO5Exercise 3

Peake Corporation, a US company, formed a British subsidiary on January 1, 20X5 by investing £450,000 in exchange for all of the subsidiary’s 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 Searle’s 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 = 1£ = $1.50 April 01, 20X5 = 1£ = $1.51 December 31, 20X5 = 1£ = $1.58 20X5 average rate = 1£ = $1.56

Searle's adjusted trial balance is presented below for the year ended December 31, 20X5.


In PoundsDebits:Cash £ 220,000Accounts receivable 52,000Inventory 59,000Building 400,000Land 100,000Depreciation expense 7,500Other expenses 110,000Cost of good sold 220,000Total debits £ 1,168,500

CreditsAccumulated depreciation £ 7,500Accounts payable 111,000Common stock 450,000Retained earnings 0Equity adjustment 0Sales revenue 600,000Total credits £ 1,168,500

Required: Prepare Searle's:

1. Translation working papers;

2. Translated income statement; and

3. Translated balance sheet.

LO5Exercise 4

Note to Instructor: This exam item is a continuation of Exercise 3 and proceeds forward with Searle’s second year of operations.

Searle Corporation, a British subsidiary of Peake Corporation (a US company) was formed by Peake on January 1, 20X5 in exchange for all of the subsidiary's common stock. Searle has now ended its second year of operations on December 31, 20X6. Relevant exchange rates are:

January 01, 20X5 = 1£ = $1.50 December 31, 20X6 = 1£ = $1.65 20X6 average rate = 1£ = $1.63

Searle's adjusted trial balance is presented below for the calendar year 20X6. The amount of equity adjustment carried over from 20X5 is a credit balance of $41,250 (in dollars).


In PoundsDebits:Cash £ 75,000Accounts receivable 362,000Inventory 41,000Building 400,000Land 100,000Depreciation expense 10,000Other expenses 133,000Cost of good sold 380,000Total debits £ 1,501,000

CreditsAccumulated depreciation £ 17,500Accounts payable 154,750Common stock 450,000Retained earnings 262,500Sales revenue 616,250Total credits £ 1,501,000

Required: For Searle's second year of operations, prepare the:




LO5Exercise 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 subsidiary’s 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 Seakam’s 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:



Seakam's adjusted trial balance is presented below for the year ended December 31, 20X7.

In PoundsDebits:Cash £ 200,000Accounts receivable 72,000Notes receivable 99,000Building 400,000Land 100,000Depreciation expense 7,500Other expenses 115,000Salary expense 208,000Total debits £ 1,201,500

CreditsAccumulated depreciation £ 7,500Accounts payable 100,000Common stock 550,000Retained earnings 0Equity adjustment 0Sales revenue 544,000Total credits £ 1,201,500

Required: Prepare Seakam's:




LO5Exercise 6

Note to Instructor: This exam item is a continuation of Exercise 6 and proceeds forward with Seakam’s second year of operations.

Seakam Corporation, a British subsidiary of Pearce Corporation (a US company) was formed by Pearce on January 1, 20X7 in exchange for all of the subsidiary's common stock. Seakam has now ended its second year of operations on December 31, 20X8. Relevant exchange rates are:



Seakam's adjusted trial balance is presented below for the calendar year 20X8.

InPounds

Debits:Cash £ 172,000Accounts receivable 308,000Notes receivable 98,000Building 400,000Land 100,000Depreciation expense 10,000Other expenses 117,000Salary expense 376,000Total debits £ 1,581,000

CreditsAccumulated depreciation £ 17,500Accounts payable 200,000Common stock 550,000Retained earnings 213,500Sales revenue 600,000Total credits £ 1,581,000

Required: Prepare Seakam's:





LO7Exercise 7

On January 1, 20X4, Pearl Corporation, a US firm, acquired a 70% interest in Segar Corporation, a foreign company, for $120,000, when Segar’s stockholders’ equity consisted of 300,000 local currency units (LCU) and retained earnings of 100,000 LCU. At the time of the acquisition, Segar’s 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 Segar’s stockholders’ equity during 20X4 and the exchange rates for LCUs is as follows: LCU Rates DollarsStockholders’ equity 1/1/X4 400,000 $ .40C $ 160,000Net income 100,000 .42A 42,000Dividends 12/1/X4 ( 50,000 ) .43C ( 21,500 )Equity adjustment 17,500Stockholders’ equity 12/31/X4 450,000 .44C $ 198,000

Required: Determine the following:

1. Fair value of the patent from Pearl’s 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.

LO7Exercise 8

Peatey Corporation, a US company, acquired a 30% interest in Selby Corporation of Switzerland on January 1, 20X3 for $3,300,000 when Selby’s 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.


A summary of changes in Selby’s stockholders’ equity during 20X3 and relevant exchange rates are as follows:

In Francs

ExchangeRates

InDollars

Stockholders’ equity 1/1/X3 £ 10,000,000 $ .660C $ 6,600,000Net income 2,500,000 .650A 1,625,000Dividends 11/1/X3 ( 1,000,000 ) .645C ( 645,000 )Equity adjustment ( 220,000 )Stockholders’ equity 12/31/X3 £ 11,500,000 .64C $ 7,360,000

Required: Determine the following:

1. Fair value of the trademark from Peatey’s investment in Selby on January 1, 20X3.

2. Trademark amortization for 20X3.

3. Unamortized trademark at December 31, 20X3.

4. Equity adjustment from the trademark.

5. Income from Selby for 20X3.

6. Investment in Selby balance at December 31, 20X3.


LO7Exercise 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. 01, 20X1 1A$ = $.500 Jan. 01, 20X2 1A$ = $.530 Jul. 01, 20X1 1A$ = $.520 Jul. 01, 20X2 1A$ = $.505 Dec. 31, 20X1 1A$ = $.530 Dec. 31, 20X2 1A$ = $.490 20X1 avg. rate 1A$ = $.515 20X2 avg. rate 1A$ = $.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. 01, 20X1 1NZ$ = $.500 Jan. 01, 20X2 1NZ$ = $.530 Jul. 01, 20X1 1NZ$ = $.520 Jul. 01, 20X2 1NZ$ = $.505 Dec. 31, 20X1 1NZ$ = $.530 Dec. 31, 20X2 1NZ$ = $.490 20X1 avg. rate 1NZ$ = $.515 20X2 avg. rate 1NZ$ = $.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. d

2. c

3. d

4. d

5. c

6. c

7. a

8. c

9. c

10. d

11. d

12. c {(210 – 90)/90} x 100% = 133%

13. b

14. d

15. a Acc. Rec. $850,000 + Trademark $575,000 + Plant $900,000

16. c

17. a

18. b

19. d

20. d


Exercise 1

US dollar isthe functional

currency

The foreignCurrency is the

functionalcurrency

1. Accounts receivable C C

2. Marketable debt securities carried at cost H C

3. Inventories carried at cost H C

4. Deferred income H C

5. Goodwill H C

6. Other paid-in capital H H

7. Depreciation H C

8. Refundable deposits C C

9. Common stock H H

10. Accumulated depreciation on buildings H C

11. Deferred income tax liabilities

C C

12. Accounts payable C C


Exercise 2

Requirement 1

Depreciation expense in 20X5C$90,000/3 years x $.75/C$ = $22,500 depreciation expense

Requirement 2

Unamortized excess at December 31, 20X5C$90,000 x 2/3 x $.73/C$ = $43,800 unamortized excess on equipment

Requirement 3

Remeasured depreciation expenseC$90,000 x $.77/C$ = $69,300 excess$69,300/3 years = $23,100 depreciation expense


Exercise 3

Requirement 1

Searle CorporationTranslation Working Papers

Debits Cash 220,000 x $1.58 = $ 347,600Accounts receivable 52,000 x $1.58 = 82,160Inventory 59,000 x $1.58 = 93,220Building 400,000 x $1.58 = 632,000Land 100,000 x $1.58 = 158,000Depreciation expense 7,500 x $1.56 = 11,700Other expenses 110,000 x $1.56 = 171,600Cost of goods sold 220,000 x $1.56 = 343,200

Total debits $ 1,839,480

Credits Accumulated depreciation 7,500 x $1.58 = $ 11,850Accounts payable 111,000 x $1.58 = 175,380Common stock 450,000 x $1.50 = 675,000Sales revenue 600,000 x $1.56 = 936,000Retained earnings 0Total credits $ 1,798,230

Credit differential $ 41,250

Requirement 2

Searle CorporationTranslated Income Statement

For the Year Ended December 31, 20X5

Sales revenue $ 936,000

Expenses:Cost of goods sold ( 343,200 )Depreciation expense ( 11,700 )Other expenses ( 171,600 )

Net income $ 409,500


Requirement 3

Searle CorporationTranslated Balance Sheet

December 31, 20X5

Cash $ 347,600Accounts receivable 82,160Inventory 93,220Building-net 620,150Land 158,000Total assets $ 1,301,130

Accounts payable $ 175,380Common stock 675,000Retained earnings 409,500Accumulated comprehensive income 41,250Total liabilities & equities $ 1,301,130


Exercise 4

Requirement 1

Searle CorporationTranslation Working Papers

Debits Cash 75,000 x $1.65 = $ 123,750Accounts receivable 362,000 x $1.65 = 597,300Inventory 41,000 x $1.65 = 67,650Building 400,000 x $1.65 = 660,000Land 100,000 x $1.65 = 165,000Depreciation expense 10,000 x $1.63 = 16,300Other expenses 133,000 x $1.63 = 216,790Cost of goods sold 380,000 x $1.63 = 619,400


Credits Accumulated depreciation 17,500 x $1.65 = $ 28,875Accounts payable 154,750 x $1.65 = 255,338Common stock 450,000 x $1.50 = 675,000Sales revenue 616,250 x $1.63 = 1,004,487Retained earnings 262,500 409,500Accumulated comprehensive income 41,250Total credits $ 2,414,450


Requirement 2

Searle CorporationTranslated Income Statement

for the year ended December 31, 20X6

Sales revenue $ 1,004,487

Expenses:Cost of goods sold ( 619,400 )Depreciation expense ( 16,300 )Other expenses ( 216,790 )

Net income $ 151,997Retained earnings, January 1, 20X6 409,500Retained earnings, December 31, 20X6 $ 561,497


Requirement 3

Searle CorporationTranslated Balance Sheet

December 31, 20X6

Cash $ 123,750Accounts receivable 597,300Inventory 67,650Building-net 631,125Land 165,000Total assets $ 1,584,825

Accounts payable $ 255,338Common stock 675,000Retained earnings 561,497Accumulated comprehensive income ($41,250 + $51,740) 92,990Total liabilities & equities $ 1,584,825

Exercise 5

Requirement 1

Seakam CorporationTranslation Working Papers

Debits Cash 200,000 x $1.45 = $ 290,000Accounts receivable 72,000 x $1.45 = 104,400Notes receivable 99,000 x $1.45 = 143,550Building 400,000 x $1.42 = 568,000Land 100,000 x $1.42 = 142,000Depreciation expense 7,500 x $1.42 = 10,650Other expenses 115,000 x $1.44 = 165,600Salary expense 208,000 x $1.44 = 299,520



Credits Accumulated depreciation 7,500 x $1.42 = $ 10,650Accounts payable 100,000 x $1.45 = 145,000Common stock 550,000 x $1.40 = 770,000Sales revenue 544,000 x $1.44 = 783,360Retained earnings 0 0Total credits $ 1,709,010


Requirement 2

Seakam CorporationTranslated Income Statement



Expenses:Salary expense ( 299,520 )Depreciation expense ( 10,650 )Other expenses ( 165,600 )Income before exchange gains or losses $ 307,590Exchange gains 14,710Net income $ 322,300Retained earnings, January 1, 20X7 0Retained earnings, December 31, 20X7 $ 322,300

Requirement 3

Seakam CorporationTranslated Balance Sheet

December 31, 20X7

Cash $ 290,000Accounts receivable 104,400Notes receivable 143,550Building-net 557,350Land 142,000Total assets $ 1,237,300

Accounts payable $ 145,000Common stock 770,000Retained earnings 322,300Total liabilities & equities $ 1,237,300


Exercise 6

Seakam CorporationTranslation Working Papers

Debits Cash 172,000 x $1.37 = $ 235,640Accounts receivable 308,000 x $1.37 = 421,960Notes receivable 98,000 x $1.37 = 134,260Building 400,000 x $1.42 = 568,000Land 100,000 x $1.42 = 142,000Depreciation expense 10,000 x $1.42 = 14,200Other expenses 117,000 x $1.36 = 159,120Salary expense 376,000 x $1.36 = 511,360


CreditsAccumulated depreciation 17,500 x $1.42 = $ 24,850Accounts payable 200,000 x $1.37 = 274,000Common stock 550,000 x $1.40 = 770,000Sales revenue 600,000 x $1.36 = 816,000Retained earnings 213,500 322,300Total credits $ 2,207,150

Debit differential $ 20,610

Requirement 2

Seakam CorporationTranslated Income Statement



Expenses:Salary expense ( 511,360 )Depreciation expense ( 14,200 )Other expenses ( 159,120 )Income before exchange gains or losses $ 131,320Exchange loss ( 20,610 )Net income $ 110,710Retained earnings, January 1, 20X8 322,300Retained earnings, December 31, 20X8 $ 433,010


Requirement 3

Seakam CorporationTranslated Balance Sheet

December 31, 20X8

Cash $ 235,640Accounts receivable 421,960Notes receivable 134,260Building-net 543,150Land 142,000Total assets $ 1,477,010

Accounts payable $ 274,000Common stock 770,000Retained earnings 433,010Total liabilities & equities $ 1,477,010

Exercise 7

Requirement 1

Patent Fair Value

Cost of 70% interest $ 120,000Book value acquired 400,000 LCU x $.40 x 70% = ( 112,000 )Patent in dollars $ 8,000

Patent in LCU = $8,000/$.40 per LCU = 20,000

Requirement 2

Patent amortization for 20X4

Patent: 20,000 LCU/10 years = 2,000 LCU per year2,000 LCU per year x $.42 equals amortization of: $ 840

Requirement 3

Unamortized patent

Patent (20,000 LCU – 2,000 LCU) x $.44 = $ 7,920


Requirement 4

Equity adjustment from patent

Beginning patent (from Req. 1) $ 8,000Patent amortization (from Req. 2) ( 840 )Subtotal 7,160Ending goodwill 18,000 LCU x $.44 = 7,920Equity adjustment $ 760

Requirement 5

Income from SegarEquity in income ($42,000 x 70%) $ 29,400Less: Patent amortization ( 840 )Income from Segar $ 28,560

Requirement 6

Investment in Segar balance at December 31, 20X4

Cost, January 1, 20X4 $ 120,000Add: Income for 20X4 (from Req. 5) 28,560Less: Dividends ($21,500 x 70%) ( 15,050 )Add: Equity adjustment from patent (from Req. 4) 760Add: Equity adjustment from translation ($17,500 x 70%) 12,250Investment balance, December 31, 20X4 $ 146,520

Check:Book value: $198,000 x 70% = $ 138,600Unamortized patent (from Req. 3) 7,920Investment balance $ 146,520

Exercise 8


Requirement 1

Trademark

Cost of 30% interest $ 3,300,000Book value acquired 10,000,000 x $.66 x 30% = ( 1,980,000 )Fair value of trademark in dollars $ 1,320,000

Trademark in $1,320,000/$.66 = 2,000,000

Requirement 2

Trademark amortization for 20X3

Trademark: 2,000,000/40 yr. x $.65 average rate = $ 32,500

Requirement 3

Unamortized trademark

Trademark (2,000,000 – 50,000SF) x $.64 exchange rate $ 1,248,000

Requirement 4

Equity adjustment from trademark

Beginning trademark (from Req. 1) $ 1,320,000Trademark amortization (from Req. 2) ( 32,500 )Less: Ending trademark (1,950,000 x $.64) ( 1,248,000 )Equity adjustment $ 39,500

Requirement 5

Income from SelbyEquity in income ($1,625,000 x 30%) $ 487,500Less: Trademark amortization ( 32,500 )Income from Selby $ 455,000

Requirement 6

Investment in Segar balance at December 31, 20X3


Cost, January 1, 20X3 $ 3,300,000Add: Income from Selby (from Req. 5) 455,000Less: Dividends ($645,000 x 30%) ( 193,500 )Less: Equity adjustment from translation ($220,000 x 30%) ( 66,000 )Less: Equity adjustment from trademark (from Req. 4) ( 39,500 )Investment balance, December 31, 20X3 $ 3,456,000

Check:Share of Selby’s equity $7,360,000 x 30% $ 2,208,000Add: Unamortized trademark (from Req. 3) 1,248,000Investment balance, December 31, 20X3 $ 3,456,000


Exercise 9

Requirement 1

Equipment:Jul. 01, 20X1 (A$80,000 x $.520/A$) = $41,600

Jan. 01, 20X2 (A$50,000 x $.530/A$) = 26,500

Total $68,100

Requirement 2

Depreciation expense:

{(A$40,000 x 1/5 x .5 yr.)x ($.500/A$)} = $ 2,000

{(A$80,000 x 1/5 x 1 yr.)x($.520/A$)} = 8,320

{(A$50,000 x 1/5 x 1 yr.)x($.530/A$)} = 5,300

Total $15,620

Requirement 3

Equipment sold: (A$40,000 x $.500/A$) = $20,000

Accumulated Depreciation on equipment sold:{(A$40,000 x 1/5 x 1.5 yrs.)x($.500/A$)} = 6,000 Net book value of equipment sold $14,000

Cash received on July 1, 20X2:(A$35,000 x $.505/A$) = 17,675 Gain on sale of equipment $ 3,675


Exercise 10

Requirement 1

Equipment:Jul. 01, 20X1 (NZ$80,000 x $.490/NZ$) = $39,200

Jan. 01, 20X2 (NZ$50,000 x $.490/NZ$) = 24,500

Total $63,700

Requirement 2

Depreciation expense:

{(NZ$40,000 x 1/5 x .5 yr.)x($.510/NZ$)} = $ 2,040

{(NZ$80,000 x 1/5 x 1 yr.)x($.510/NZ$)} = 8,160

{(NZ$50,000 x 1/5 x 1 yr.)x($.510/NZ$)} = 5,100

Total $15,300

Requirement 3

Equipment sold NZ$40,000 Accumulated Depreciation on sold equipment 12,000 (NZ$40,000 x 1/5 x 1.5 yr.)

Net book value of equipment sold NZ$28,000

Cash received on July 1, 20X2 35,000 Gain on sale of equipment NZ$ 7,000

Gain in US$:(NZ$7,000 x $.510/NZ$) = $ 3,570


Documents

Chapter 13 Foreign Currency Financial Statements