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CHAPTER 11
UNDERSTANDING THE ISSUES
to weaken against the dollar (a strengthening dollar). The remeasurement loss would
be included in current-period earnings, and
the U.S. parent would want to hedge
against this loss in reporting earnings. The
U.S. company could borrow foreign currency and designate the loan as a hedge of its
net investment in the foreign subsidiary. As
the foreign currency weakened, it would
take fewer dollar equivalents to settle the
FC-denominated loan. This would result in
an exchange gain that could offset the remeasurement loss. Given a weakening FC,
an FC-denominated loan receivable would
not be an effective hedge of the net investment in the subsidiary.

1. If major cash inflows and/or outflows are
not denominated in the entity’s domestic
currency, this is a strong indicator that
another currency is the functional currency.
The company’s financing, sales, and expenditure activities should be evaluated in
order to identify the primary currency in
which the entity operates. For example, if a
French company secures most of its financing from a U.S. bank with the debt to be
serviced with dollars, this suggests that the
functional currency is the U.S. dollar.
2. Because the French company’s functional
currency is the euro, it is not exposed
to risk associated with exchange rate
changes between the euro and the U.S.

dollar (the parent’s currency). Changes in
the exchange rates will not have a current
or known economic effect on either the
parent’s or the French company’s cash
flows or equity. Therefore, the translation
adjustment should not be included as a
component of net income. Including the adjustment in net income would suggest that
exchange rate changes have an economic
effect on the constituent companies when,
in fact, they do not.

5. If a foreign entity’s functional currency is
highly inflationary, there is an assumption
that the currency has lost its utility as a
measure of a store of value and lacks stability. Therefore, the currency would not
serve as a useful functional currency. If the
functional currency were translated, rather
than remeasured, the results might be quite
unusual and not very useful. The results
will not represent reasonable dollarequivalent measures of the accounts. In
order to overcome these unusual results,
two possible approaches have been proposed. The first approach would adjust the
foreign entity’s trial balance for inflationary
changes over time and then translate the
resulting balances. A second approach is to
assume that the parent/investor (dollar)
currency should serve as the foreign entity’s functional currency. This latter approach has been adopted by the FASB and
therefore requires that the foreign entity’s
statements be remeasured into the functional currency (dollars).


3. Because the euro is the subsidiary’s functional currency, its financial statements will
be translated rather than remeasured. The
translated balance of retained earnings
consists of the following: a beginning balance represented by the translated balance
at the end of the prior year plus net income
translated at weighted-average exchange
rates less dividends declared translated at
the historical exchange rates existing at the
date of declaration.
4. In order for there to be a remeasurement
loss, the foreign currency (FC) would have

519


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Ch. 11—Exercises

EXERCISES
EXERCISE 11-1
(1) Translated trial balance:
Debit (Credit)
Current Assets .............................................
Equipment ....................................................
Accumulated Depreciation—Equipment ......
Land and Building ........................................
Accumulated Depreciation—Building ...........
Current Liabilities .........................................
Noncurrent Notes Payable ...........................

Common Stock .............................................
Retained Earnings ........................................
Sales Revenue .............................................
Cost of Sales ................................................
Operating Expenses .....................................
Subtotal ........................................................
Translation Adjustment (to balance) ............
Total .......................................................
Note A
Analysis of retained earnings:
Beginning balance—January 1, 20X5 ..........
20X5 net income ..........................................
20X5 dividend ..............................................
Ending balance—December 31, 20X5 .........
20X5 dividend ..............................................
Ending balance—December 31, 20X6 .........

Balance in
Exchange
FC
Rate
140,000 FC $1.28
400,000
1.28
(80,000)
1.28
665,000
1.28
(20,000)
1.28

(180,000)
1.28
(300,000)
1.28
(500,000)
1.25
(60,000)
Note A
(185,000)
1.32
90,000
1.32
30,000
1.32

0 FC
(100,000)
20,000
(80,000)
20,000
(60,000)

1.25
1.30
1.33
FC
1.29
FC

Translated

into U.S.$
$179,200
512,000
(102,400)
851,200
(25,600)
(230,400)
(384,000)
(625,000)
(77,600)
(244,200)
118,800
39,600
11,600
(11,600)
0

$

0
(130,000)
26,600

$(103,4
25,800
$

(2) Because the functional currency is the FC, the company is not exposed to immediate exchange rate risk between the FC and the dollar. Therefore, the translation adjustment
should not be included as a component of net income but rather as a component of other
comprehensive income. Because there is no noncontrolling interest, no allocation of the

translation adjustment between controlling and noncontrolling interests is necessary.

520

(77,600


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Ch. 11—Exercises

Exercise 11-1, Concluded
(3) Translation adjustment traceable to the current year: ..............
Net assets at beginning of year multiplied by the change
in exchange rates during the period:
580,000 FC × ($1.28 – $1.34) ........................................
500,000 FC × ($1.34 – $1.25) ........................................

20X6

$

2,600
(4,000)

Increase in net assets due to capital transactions multiplied
by the difference between the current rate and the rate a
the time of the capital transaction:
20,000 FC × ($1.28 – $1.29) ..........................................
20,000 FC × ($1.34 – $1.33) ..........................................

Cumulative translation adjustment as of December 31, 20X6

521

34,800
$(45,000)

Increase in net assets (excluding capital transactions)
multiplied by the difference between the current rate and
the average rates used to translate income:
65,000 FC × ($1.28 – $1.32) ..........................................
100,000 FC × ($1.34 – $1.30) ........................................

Current-year translation adjustment .....................................

20X5

(200)
200
$

37,200
$(11,600)

$(48,800)


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Ch. 11—Exercises


EXERCISE 11-2
Translated Value
Assuming
$ Is Functional Currency
Rate
$ Amount

In FC
Income Statement Components:
Sales revenue ...............................................
Cost of sales .................................................
Gross profit....................................................
Selling, general, and administrative ..............
Depreciation:
2,000,000 FC/10 years ............................
1,000,000 FC/10 years × 1/2...................
Subtotal .........................................................
Remeasurement gain (loss to balance) ........
Net income ....................................................
Year-End Balance Sheet Components:
Current assets (assume all cash)..................
Net depreciable assets..................................
Initial contributed capital................................
Dividend ($1,110,000/$1.11) .........................
Net income excluding remeasurement..........
Subtotal .........................................................
Translation adjustment ..................................
Remeasurement gain (loss to balance) ........


10,000,000 FC$1.06
3,700,0001.06
6,300,000 FC
1,200,0001.06

$

200,000
1.00
50,000
1.05
4,850,000 FC

$

4,850,000 FC

$

4,100,000 FC1.11
2,750,000(see Note A)
6,850,000 FC
3,000,000 FC1.00
(1,000,000)1.11
4,850,000
6,850,000 FC

6,850,000 FC

522


$
$
$

$

$

Translated Value
Assuming
FC Is Functional Currency
Rate
$ Amount

$10,600,000$1.06
3,922,0001.06
6,678,000
1,272,0001.06
200,000 1.06
52,500 1.06
5,153,500
305,000
5,458,500

4,551,0001.11
2,797,5001.11
7,348,500
3,000,0001.00
(1,110,000)1.11

5,153,500
7,043,500
305,000
7,348,500

$

$10,600,000
3,922,000
6,678,000
1,272,000

$

212,000
53,000
5,141,000

$

5,141,000

$

4,551,000
3,052,500
7,603,500
3,000,000
(1,110,000)
5,141,000

7,031,000
572,500

$
$

$

$

7,603,500


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Ch. 11—Exercises

Exercise 11-2, Concluded
Translated Value
Assuming
$ Is Functional Currency
Rate
$ Amount

In FC
Cash Flow Components:
Initial investment ...........................................
3,000,000
Purchase of equipment at beginning.............
Purchase of equipment at midyear ...............

Net income ....................................................
Add back depreciation...................................
Deduct remeasurement gain .........................
Dividend payment .........................................
(1,110,000)
Subtotal .........................................................
4,246,000
FC exchange gain (see Note B))...................
Net cash flow.................................................
4,551,000

3,000,000 FC

$1.00

(2,000,000)1.00
(1,000,000)1.05
4,850,000see above
250,000 see above
see above
(1,000,000) FC
1.11
4,100,000 FC

5,100,000 FC from operations (6,300,000 gross profit – 1,200,000 SGA*)
held since average point:
Value at midyear (5,100,000 FC × $1.06) ............................................
Value at end of year (5,100,000 FC × $1.11) .......................................

523


3,000,000 $1.00

$

$
$

$

$

(2,000,000)1.00
(2,000,000)
(1,050,000)1.05
(1,050,000)
5,458,500see above
5,141,000
252,500 see above
265,000
(305,000)
(1,110,000) 1.11
4,246,000

305,000
$
4,551,000

$
Note B: Effect of exchange rate changes on cash:

1,000,000 FC held and not spent on equipment during the first six months:
Value at beginning of year (1,000,000 FC × $1.00) .............................
Value at end of first six months (1,000,000 FC × $1.05) ......................
Exchange gain on cash ........................................................................

$

$

4,100,000 FC

Note A: Net depreciable assets:
Purchased at beginning of year (1,800,000 FC × $1.00) ...........................
Purchased at midyear (950,000 FC × $1.05) .............................................

Translated Value
Assuming
FC Is Functional Currency
Rate
$ Amount

1,800,000
997,500
2,797,500

1,000,000
1,050,000
50,000

5,406,000

5,661,000

$
305,000
$


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Ch. 11—Exercises

Exchange gain on cash ........................................................................

$

255,000

Total exchange gain on cash .....................................................................

$

305,000

*SGA for selling, general, and administrative.

524


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Ch. 11—Exercises

EXERCISE 11-3
June 30

Dec. 31

Investment in Fabinet ..................................................
Cash ......................................................................
To record purchase of 40% interest in Fabinet.

3,120,000

Cash ............................................................................
Investment to Fabinet ............................................
To record receipt of dividend (126,000 FC ×
$0.66 × 40%).

33,264

Investment in Fabinet ..................................................
Subsidiary Income .................................................
Translation Adjustment ..........................................
To record share of net income adjusted for the
amortization of excess and share of translation
(see Schedules A and B).

565,712

3,120,000


33,264

210,560
355,152

Schedule A—Calculation of Investor’s Share of Adjusted Equity Income
Price paid ($3,120,000/$0.60) ..........................................................
5,200,000 FC
Equity purchased .....................................................
10,500,000 FC
40% Interest acquired .............................................. ×
40%
4,200,000
Excess cost ......................................................................................
1,000,000 FC
Allocation of excess cost:
Equipment ($240,000/$0.60)......................................................
400,000 FC
Goodwill .....................................................................................
600,000
1,000,000 FC
Subsidiary net income (1,260,000 FC × $0.64) ...............................
Investor’s interest .............................................................................
Investor’s interest in net income ......................................................
Depreciation of excess related to equipment:
$240,000/10 years × 1/2 year ....................................................
Impairment loss on goodwill .............................................................
Investor’s adjusted income ..............................................................


$ 806,400
×
40%
$ 322,560

$

(12,000)
(100,000)
210,560

Schedule B—Recomputation of Annual Translation Adjustment
Net assets owned by the investee at the beginning of period multiplied by
the change in the exchange rates during the period [10,500,000 FC ×
($0.68 – $0.60)] ............................................................................................

$840,000

Increase in net assets (excluding capital transactions) multiplied by the
difference between the current rate and the average rate used to
translate income [1,260,000 FC × ($0.68 – $0.64)] .....................................

50,400

Increase/decrease in net assets due to capital transactions (including
investments by the domestic investor) multiplied by the difference
between the current rate and the rate at the time of the capital
transaction [126,000 FC × ($0.68 – $0.66)] .................................................
Translation adjustment.......................................................................................
Investor’s interest ...............................................................................................

Investor’s interest in translation adjustment .......................................................

(2,520)
$887,880
×
40%
$355,152

525


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Ch. 11—Exercises

EXERCISE 11-4
Translated net income:
Debit (Credit)
Sales Revenue ..............................................
Cost of Inventory Sold ...................................
Depreciation Expense ...................................
Other Operating Expenses............................
Net Income ....................................................
Note A
Cost of inventory sold per FIFO:
Second quarter 20X6 ..............................
Third quarter 20X6 ..................................
Fourth quarter 20X6 ................................

Remeasurement gain (loss):

Net assets at December 31, 20X6:
Monetary net assets ................................
Inventory .................................................
Depreciable assets (net) .........................
Land ........................................................
Total ..................................................
Shareholders' equity at December 31, 20X6:
Equity at July 1, 20X6 .............................
Net income ..............................................
Remeasurement gain (loss) ....................
Total ..................................................

Exchange
In FC
Rate
(1,022,000) FC
480,000
Note A
80,000
1.15
60,000
1.19
(402,000) FC
Rate
In FC
150,000 FC$1.15
220,000
1.18
110,000
1.20

480,000 FC

In U.S.$
$172,500
259,600
132,000
$564,100

In FC

In U.S.$

Rate

732,000 FC$1.23
100,000
1.20
870,000
1.15
500,000
1.15
2,202,000 FC
1,800,000 FC1.15
402,000
2,202,000 FC

Net investment under the sophisticated equity method:
Initial investment ...............................................................................................
Share of subsidiary net income (30% × $488,680) ...........................................
Share of remeasurement gain (30% × $37,180) ...............................................

Amortization of excess of cost over book value (Note B)..................................
Net investment as of December 31, 20X6 ........................................................
Note B
Cost ......................................................................................
Book value:
(1,800,000 × $1.15) ................................
$2,070,000
Percentage interest acquired .................
×
30%
Excess of cost over book value ............................................
Excess traceable to depreciable assets ...............................
Depreciation of excess (over 9 years) ..................................
Excess attributed to goodwill ................................................

526

In U.S.$
$1.19
564,100
92,000
71,400
$
(488,680)

$700,000

621,000
$ 79,000
$ 54,000

$ 6,000
$ 25,000

$

$(1,216

900,360
120,000
1,000,500
575,000
$2,595,860
$2,070,000
488,680
37,180
$2,595,860

$700,000
146,604
11,154
(6,000)
$851,758


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Ch. 11—Exercises

EXERCISE 11-5
Translation of Forecasted December 31, 20X4, Trial Balance

Debit (Credit)
Balance
in FC

Account
Cash....................................................................
Accounts Receivable ..........................................
Inventory .............................................................
Equipment (net of depreciation) ..........................
Accounts Payable ...............................................
6% Note Payable ................................................
Accrued Interest Payable ....................................
Common Stock ...................................................
Contributed Capital in Excess of Par Value ........
Beginning Retained Earnings .............................
Sales ...................................................................
Cost of Sales.......................................................
Selling Expenses ................................................
Administrative Expenses .....................................
Interest Expense .................................................
Subtotal ...............................................................
Cumulative Translation Adjustment (to balance)
Total ..............................................................

Rate

40,000 FC$1.20
220,000 1.20
320,000 1.20
825,000 1.20

(360,000)1.20
(400,000)1.20
(4,000)1.20
(200,000)1.45
(200,000)1.45
(140,000)
(600,000)1.28
366,000 1.28
55,000 1.28
48,000 1.28
30,000 1.28

0 FC

Debit (Credit)
Balance
In $
$

48,000
264,000
384,000
990,000
(432,000)
(480,000)
(4,800)
(290,000)
(290,000)
(200,000)
(768,000)

468,480
70,400
61,440
38,400
$(140,080)
140,080
$
0

20X4 Change in the Translation Adjustment
Cumulative translation adjustment as of December 31, 20X4 ................................
Cumulative translation adjustment as of December 31, 20X3 ................................
20X4 Increase in cumulative translation adjustment ...............................................

$140,080
120,000
$ 20,080

Calculation of necessary hedge:
20X4 Increase in cumulative translation adjustment ...............................................
Change in exchange rates:
September 30, 20X4, exchange rate ..................................................... $1.24
December 31, 20X4, exchange rate ...................................................... 1.20
Amount of loan necessary to generate a $20,080 exchange gain given
the anticipated change in exchange rates:
$20,080/$0.04 .............................................................................................
Proof: If you borrowed (versus loaned) 502,000 FC, the value at various times
would be as follows:
At September 30, 20X4 (502,000 FC × $1.24) .................................................
At December 31, 20X4 (502,000 FC × $1.20) ..................................................

Exchange gain on loan payable ........................................................................

527

$20,080

÷ $0.04

502,000 FC

$622,480
602,400
$ 20,080


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Ch. 11—Exercises

EXERCISE 11-6
Case A:
Remeasurement of Ending Inventory

October 1, 20X7 .................................................
December 15, 20X7 ...........................................
Historical cost .....................................................

Exchange
Recording
Rate

Currency
($/FC)
150,000 FC1.76
30,000 1.72
180,000 FC

Market value.......................................................

176,000 FC1.82

Balance
in Dollars
$264,000
51,600
$315,600
$320,320

Because the remeasurement into the functional currency results in the historical cost having
the least value, this amount is presented in the financial statements.

Case B:
Inventory—December 31, 20X7 (60% × 380,000 FC) .................................
Current exchange rate .................................................................................
Translated value...........................................................................................
Intercompany profit, 60% × [(380,000 FC × $2.00) – $500,000] ..................
Ending inventory after eliminating intercompany profit ................................

228,000 FC
$2.10
478,800

(156,000)
$ 322,800

×
$

Case C:
Depreciation expense:
January 1, 20X6, acquisition ......
March 1, 20X6, acquisition .........
July 1, 20X6, acquisition ............
December 1, 20X6, acquisition ..

Balance
Exchange
Rate
in FCA*
38,000 FC2.10
59,167 1.98
10,800 1.92
2.01
250
108,217 FC

Balance
Exchange
in FCB
Rate
79,800 FC$1.05
117,151 1.05

20,736 1.05
503
1.05
218,190 FC

*The 20X6 depreciation expenses in FC are calculated as follows:
380,000 ÷ 10 × 12/12 = 38,000
710,000 ÷ 10 × 10/12 = 59,167
216,000 ÷ 10 × 1/2 = 10,800
30,000 ÷ 10 × 1/12 =
250

528

Balance
in Dollars
$
83,790
123,008
21,773
528
$229,099


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Ch. 11—Exercises

EXERCISE 11-7
(1) Common stock:

Stock issuance, March 1, 20X5 (1,400,000 × $1.20) ...........
Stock issuance, October 1, 20X6 (1,500,000 × $1.32) ........
Paid-in capital in excess of par:
Stock issuance, March 1, 20X5 (600,000 × $1.20) ..............
Stock issuance, October 1, 20X6 (1,500,000 × $1.32) ........
Retained earnings:
March 1, 20X5, to December 31, 20X5
Net income (200,000 × $1.25) ........................................
20X6 Dividend (30,000 × $1.27) ..........................................
20X6 Net income (450,000 × $1.30) ....................................
20X7 Dividend (90,000 × $1.25) ..........................................
20X7 Net income (550,000 × $1.22) ....................................

$

$

$1,680,000
1,980,000

$3,660,000

720,000
1,980,000

2,700,000

250,000
(38,100)
585,000

(112,500)
671,000

Treasury stock (300,000 × $1.28) .............................................
Cumulative translation adjustment (Note A) .............................
Total stockholders’ equity .........................................................

1,355,400
(384,000)
(337,600)
$6,993,800

Note A—The total stockholders’ equity in FC is 5,780,000; therefore, the net assets are also 5,780,000 FC. These net assets are translated at the current rate as of yearend 20X7 and have a dollar equivalency of $6,993,800 (5,780,000 × $1.21). The
cumulative adjustment is needed to balance the translated value of equity to the
translated value of net assets.
(2) Net assets owned by the investor at the beginning of period multiplied
by the change in the exchange rates during the period
[5,620,000 FC × ($1.21 – $1.32)] ................................................................
Increase in net assets (excluding capital transactions) multiplied by
the difference between the current rate and the average rate
used to translate income [550,000 FC × ($1.21 – $1.22)] ...........................
Decrease in net assets due to capital transactions (including
investments by the domestic investor) multiplied by the
difference between the current rate and the rate at the time
of the capital transaction:
Treasury stock transaction [300,000 FC × ($1.21 – $1.28)] ..................
Dividend [90,000 FC × ($1.21 – $1.25)] ................................................
Translation adjustment (debit) .........................................................................

529


$(618,200)

(5,500)

21,000
3,600
$(599,100)


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Ch. 11—Problems

PROBLEMS
PROBLEM 11-1
(1) Entries to record transactions—Debit (Credit):
Cash ..........................................
Common Stock ......................
Land ...........................................
Inventory ....................................
Cash ......................................
Receivable .................................
Sales .....................................
Cost of Sales .............................
Inventory ...............................
Receivable .................................
Exchange Gain ......................

In FCA

1,250,000

In FCB
100,000
1,250,000

625,000
625,000

100,000
50,000
50,000

1,250,000
320,000

100,000
40,000

320,000
312,500

40,000
25,000

312,500

25,000

80,000

80,000

Trial balance:
Trial Balance:
Receivable...................................
40,000 ...................................... FCB
Inventory......................................
Land ............................................
Common Stock ............................
Sales ...........................................
Cost of Sales ...............................
Exchange Loss (Gain) .................
Remeasurment Loss (Gain) ........
Translation Adjustment................
Total ......................................

In FCA
400,000

In FCB
FCA

312,500
625,000
(1,250,000)
(320,000)
312,500
(80,000)
—
—

0 FCA

Net Income ..................................
(15,000) .................................... FCB

(87,500)

530

25,000
50,000
(100,000)
(40,000)
25,000
—
—
—
0 FCB
FCA


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Ch. 11—Problems

Problem 11-1, Concluded
(2) Remeasurement and translation of trial balance:
Rate
In FCA
Trial Balance:

Receivable ....................
Inventory .......................
Land ..............................
Common Stock..............
Sales .............................
Cost of Sales .................
Exchange Gain..............
Remeasurement Loss ...
Translation Adjustment .
Total ........................
Net Income (Loss) .........

FCB/FCA

400,000 FCA0.10
312,500
0.08
625,000
0.08
(1,250,000)0.08
(320,000) 0.125
312,500
0.08
(80,000) 0.10
—
—
0 FCA
87,500 FCA

Rate

In FCB

U.S.$/FCB

40,000 FCB$3.00
25,000
3.00
50,000
3.00
(100,000) 2.50
(40,000) 3.20
25,000
3.20
(8,000) 3.20
8,000
3.20
0 FCB
15,000 FCB

In U.S.$
$

$

120,000
75,000
150,000
(250,000)
(128,000)
80,000

(25,600)
25,600
(47,000)
0
48,000

(3) Translation adjustment traceable to the current year:
20X6
Net assets at beginning of year multiplied by the change in exchange rates
during the period:
100,000 FCB × ($3.00 – $2.50) .................................................................
Increase in net assets (excluding capital transactions) multiplied by the
difference between the current rate and the average rates used to translate
income:
15,000 FC × ($3.00 – $3.20) .....................................................................
Increase in net assets due to capital transactions multiplied by the difference
between the current rate and the rate at the time of the capital transaction:
0FC ............................................................................................................
Current-year translation adjustment ................................................................

$(50,000)

3,000

—
$(47,000)

(4) The remeasured FCB trial balance is the same as the trial balance that would have resulted
had the transactions been originally recorded in FCB. FCB is the functional currency in
which the company operates, and the remeasurement process should produce a trial balance that recognizes how the company would have appeared had the transactions been

originally recorded in terms of its functional currency. Furthermore, the remeasurement
process should result in a remeasurement gain or loss that reflects the fact that the company is exposed to exchange rate risk because it measures and denominates transactions in
two different currencies. The remeasurement gain or loss should therefore be included as a
component of net income. Financial statement relationships would also be the same after
remeasurement as they were before remeasurement.

531


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Ch. 11—Problems

PROBLEM 11-2
(1)
Debit (Credit)
Common Stock ..............................................
Contributed Capital in Excess of
Par Value ..................................................
Retained Earnings as of
December 31, 20X6 ..................................
Sales ..............................................................
Cost of Inventory Sold ...................................
Depreciation Expense ...................................
Patent Amortization .......................................
Other Operating Expenses ............................
Loss on Disposal of Depreciable Assets .......
Note A
Cost of inventory sold per FIFO:
Fourth quarter 20X6 ............................

First quarter 20X7................................
Second quarter 20X7 ..........................
Third quarter 20X7 ..............................
Fourth quarter 20X7 ............................

Note B
Depreciation expense:
January 1, 20X5, acquisition:
900,000 ÷ 10 .................................
160,000 ÷ 10 × 3/12 year ..............
June 30, 20X6, acquisition:
390,000 ÷ 10 .................................
60,000 ÷ 10 × 3/12 year ................
March 31, 20X7, acquisition:
600,000 ÷ 10 × 9/12 year ..............
Note C
Patent amortization:
June 30, 20X6, acquisition:
240,000 ÷ 12 .................................

532

Balance
Exchange
in FC
Rate
(1,200,000) FC
(1,800,000)1.41
(1,000,000) given
(3,100,000)1.35

2,200,000 Note A
179,500
Note B
20,000
Note C
294,500
1.35
1,500
Note D

In FC
Rate
300,000 FC$1.35
400,000
1.34
620,000
1.35
700,000
1.32
180,000
1.31
2,200,000 FC

In FC
Rate
90,000 FC$1.41
4,000
1.41
39,000
1,500


Remeasured
into U.S.$
$1.41

(2,538,000)
(1,390,000)
(4,185,000)
2,937,800
249,630
27,600
397,575
9,350

In U.S.$
$
405,000
536,000
837,000
924,000
235,800
$2,937,800

In U.S.$
$126,900
5,640

1.38
1.38


53,820
2,070

1.36
45,000
179,500 FC

61,200
$249,630

In FC
Rate
20,000 FC$1.38

$(1,692

In U.S.$
$27,600


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Ch. 11—Problems

Problem 11-2, Concluded
Note D
Loss on disposal of asset:
Disposition of January 1, 20X5, acquisition:
Original cost ........................................
Accumulated depreciation ...................

Book value...........................................
Sales proceeds....................................
Gain (loss) on disposal ........................
Disposition of June 30, 20X6, acquisition:
Original cost ........................................
Accumulated depreciation ...................
Book value...........................................
Sales proceeds....................................
Gain (loss) on disposal ........................
Total gain (loss) on disposal .....................

In FC
Rate
160,000 FC$1.41
(36,000)
1.41
124,000
120,000
1.36
(4,000)

In U.S.$
$225,600
(50,760)
174,840
163,200
(11,640)

In FC
Rate

60,000 FC$1.38
(4,500)
1.38
55,500
58,000
1.36
2,500

In U.S.$
$82,800
(6,210)
76,590
78,880
2,290

(1,500)

(9,350)

(2) Consolidated income traceable to noncontrolling interest:
Income as remeasured ..............................................................................
20X7 depreciation of excess (see Note E) ................................................
Adjusted income ........................................................................................
Noncontrolling interest ...............................................................................
Noncontrolling interest in income...............................................................

×

Note E
Distribution of excess of cost over book value:

Cost at date of acquisition .....................................................................
Book value at date of acquisition:
Book value ....................................................
3,800,000 FC
Interest acquired ...........................................
×
80%
Excess ...................................................................................................
Excess allocated to:
Equipment .......................................................................................
Goodwill ...........................................................................................
Annual depreciation of above equipment:
Allocated excess ...................................................................................
Remaining useful life .............................................................................
Annual depreciation...............................................................................
Exchange rate .......................................................................................
Remeasured depreciation .....................................................................

533

$556,835
(16,920)
539,915
20%
$107,983

3,600,000 FC

3,040,000
560,000 FC

100,000 FC
460,000
560,000 FC

100,000 FC
÷ 8 1/3 years
12,000 FC
×
$1.41
$
16,920


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Ch. 11—Problems

PROBLEM 11-3
Sorenson Company
Trial Balance Translation
December 31, 20X8
Relevant
Exchange
Rate

Balance
in FC

Account
Cash......................................................................

Accounts Receivable ............................................
Inventory ...............................................................
Fixed Assets .........................................................
Accumulated Depreciation ....................................
Accounts Payable .................................................
Long-Term Debt ....................................................
Common Stock .....................................................
Paid-In Capital in Excess of Par ...........................
Retained Earnings, January 1, 20X8 ....................
Sales .....................................................................
Cost of Goods Sold ..............................................
Operating Expenses .............................................
Cumulative Translation Adjustment ......................
Totals ..............................................................

2,840,000 FC
3,990,0001.31
5,800,0001.31
15,000,0001.31
(6,800,000)1.31
(1,580,000)1.31
(5,000,000)1.31
(3,000,000)1.20
(2,000,000)1.20
(7,950,000)Note A
(10,000,000)1.33
7,500,0001.33
1,200,0001.33
0 FC


Note A—The translated balance of Retained Earnings is as follows:
Balance on January 1, 20X6 (4,200,000 FC × $1.20) .......
20X6 Income (1,750,000 FC × $1.28) ...............................
20X7 Income (2,000,000 FC × $1.30) ...............................
Total ............................................................................

534

Balance
in Dollars
$1.31

$

$5,040,000
2,240,000
2,600,000
$9,880,000

$
3,720,4
5,226,900
7,598,000
19,650,000
(8,908,000)
(2,069,800)
(6,550,000)
(3,600,000)
(2,400,000)
(9,880,000)

(13,300,000)
9,975,000
1,596,000
(1,058,500)
0


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Ch. 11—Problems

Problem 11-3, Continued
Pueblo Corporation and Sorenson Company
Worksheet for Consolidated Financial Statements (in dollars)
For Year Ended December 31, 20X8

Cash......................................................................
Accounts Receivable.............................................
Inventory ...............................................................
Investment in Sorenson ........................................

Fixed Assets .........................................................
Accumulated Depreciation ....................................
Additional Equipment ............................................
Accounts Payable .................................................
Long-Term Debt ....................................................
Common Stock—Parent .......................................
Common Stock—Subsidiary .................................
Paid-In Capital in Excess of Par—Parent ..............
Paid-In Capital in Excess of Par—Subsidiary .......

Retained Earnings, January 1, 20X8—Parent ......
Retained Earnings, January 1, 20X8—Subsidiary
Sales .....................................................................
......................................................... (39,300,000)
Cost of Goods Sold ...............................................
Operating Expenses ..............................................
Subsidiary Income.................................................
Cumulative Translation Adjustment.......................

Eliminations
Consolidated
Consolidated
Trial Balance
and Adjustments
Income
Balance
Pueblo
Sorenson
Dr.
Cr.
Statement
Sheet
4,050,000
3,720,400 ............
.................
...................
5,270,000
5,226,900 ............
.................
...................

5,540,000
7,598,000 ............
.................
...................
20,969,000 ................
.................
(CY1)
1,729,000 ...
...................
..................
...................
.................
(EL)
15,880,000 ..............
...................
..................
...................
.................
(D)
3,360,000 ..............
...................
21,000,000
19,650,000
(D)
655,000....
...................
(12,560,000)
(8,908,000) .........
(A)
............. 196,500

..................
...................
(D)
3,013,000
(A)
451,950 ......
2,561,050
(3,450,000)
(2,069,800) .........
.................
...................
(10,000,000)
(6,550,000) .........
.................
...................
(4,000,000) ...............
.................
.................
...................
(4,000,00
..................
(3,600,000)
(EL)
3,600,000 ...........
...................
...................
(6,500,000) ...............
.................
...................
(6,500,00

..................
(2,400,000)
(EL)
2,400,000 ...........
...................
...................
(12,180,000) ...............
(A)
425,700 ..............
...................
..................
(9,880,000)
(EL)
9,880,000 ...........
...................
...................
(26,000,000)
(13,300,000)
.................
.................

16,380,000
9,975,000 ............
.................
3,210,000
1,596,000
(A)
219,450....
(1,729,000) ...............
(CY1)

1,729,000 ...........
..................
(1,058,500)
(A)
3,300 (D)
0
0
21,925,450
Combined Net Income .................................................................................................................................................................................
.....................................................................................................................................................................................................................

............... 26,355,000
................. 5,025,450
...................
(1,363,20

...................
308,000 ......
21,925,450 .
(7,919,550)
(7,919,550)

0

535


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Ch. 11—Problems


Problem 11-3, Concluded
Eliminations and Adjustments:
(CY1) Eliminate the subsidiary income account ($1,729,000) against the investment account.
(EL)

Eliminate the subsidiary’s January 1, 20X8, equity balances against the investment
account.

(D)

Distribute the excess of cost over book value.
Cost to acquire subsidiary ................................................................
Book value of subsidiary ..................................................................
Excess of cost over book value ........................................................
Less: Adjustment to equipment ........................................................
Additional equipment ........................................................................
Excess of cost over book value in dollars at:
January 1, 20X6 (2,800,000 FC × $1.20) ...................................
December 31, 20X8:
Equipment (500,000 FC × $1.31) .........................................
Additional equipment (2,300,000 FC × $1.31)......................
Cumulative translation adjustment .......................................

(A)

12,000,000 FC
9,200,000
2,800,000 FC
500,000

2,300,000 FC
$3,360,000

$

655,000
3,013,000
308,000

Record appropriate depreciation of excess.
Annual depreciation of excess:
Equipment (500,000 FC ÷ 10) ....................................................
Additional equipment (2,300,000 FC ÷ 20) .................................
Total .....................................................................................

50,000 FC
115,000
165,000 FC

Accumulated depreciation at December 31, 20X8, in dollars:
Equipment (50,000 × 3 years × $1.31) .......................................
Additional equipment (115,000 × 3 years × $1.31) ....................
Total .....................................................................................

$196,500
451,950
$648,450

Current-year depreciation at December 31, 20X8, in dollars
(165,000 FC × $1.33) .................................................................


$219,450

Prior years’ depreciation expense in dollars:
20X6 (165,000 FC × $1.28) ........................................................
20X7 (165,000 FC × $1.30) ........................................................
Total .....................................................................................

$211,200
214,500
$425,700

Cumulative translation adjustment
($648,450 – $219,450 – $425,700) ............................................

$3,300

536


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Ch. 11—Problems

PROBLEM 11-4
Stone Corporation
Trial Balance Translation
December 31, 20X8
Relevant
Exchange

Rate

Balance
in FC

Account
Cash..............................................................
Net Accounts Receivable ..............................
Inventory (Note A) .........................................
Depreciable Assets (Notes B & C) ................
Accumulated Depreciation (Notes B & C) .....
Accounts Payable .........................................
Unearned Revenue .......................................
Bonds Payable ..............................................
Accrued Expenses ........................................
Common Stock .............................................
Paid-In Capital in Excess of Par ...................
Retained Earnings, January 1, 20X8
(Notes B & C) ..........................................
Sales .............................................................
Cost of Goods Sold (Note A) ........................
Operating Expenses (Notes B & C) ..............
Cumulative Translation Adjustment ..............
Totals ......................................................

2,253,000 FC
5,580,0001.42
6,200,0001.42
23,650,0001.42
(7,265,000)1.42

(3,290,000)1.42
(2,437,000)1.42
(10,200,000)1.42
(2,180,000)1.42
(5,000,000)1.10
(1,600,000)1.10

Balance
in Dollars
$1.42

(4,550,000)Note D
(24,000,000)1.40
18,010,0001.40
4,829,0001.40
0 FC

$

$
3,199,2
7,923,600
8,804,000
33,583,000
(10,316,300)
(4,671,800)
(3,460,540)
(14,484,000)
(3,095,600)
(5,500,000)

(1,760,000)
(5,339,500)
(33,600,000)
25,214,000
6,760,600
(3,256,720)
0

Note A—The journal entry to adjust Inventory and Cost of Goods Sold to U.S. GAAP is as follows:
Gain on the Appreciation of Inventory ...............................
Inventory ...................................................................
Cost of Goods Sold ..................................................

650,000
200,000
450,000

Inventory = 6,400,000 – 200,000 = 6,200,000
Cost of Goods Sold = 18,460,000 – 450,000 = 18,010,000
Gain on the Appreciation of Inventory = 650,000 – 650,000 = 0
Note B—The journal entries to adjust Property, Plant, and Equipment and related accounts to
U.S. GAAP are as follows:
Accumulated Depreciation ................................................
Retained Earnings.............................................................
Depreciable Assets ..................................................

180,000
720,000

Gain on Appreciation of Equipment ..................................

Accumulated Depreciation ................................................
Depreciable Assets ..................................................
Operating Expenses .................................................

200,000
55,000

537

900,000

200,000
55,000


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Ch. 11—Problems

Problem 11-4, Concluded
Note C—The journal entry to adjust Research and Development to U.S. GAAP is as follows:
Accumulated Depreciation ................................................
Retained Earnings.............................................................
Depreciable Assets ..................................................
Operating Expenses .................................................

700,000
600,000
1,000,000
300,000


Depreciable Assets = 25,750,000 – 900,000 – 200,000 – 1,000,000 = 23,650,000
Accumulated Depreciation = 8,200,000 – 180,000 – 55,000 – 700,000 = 7,265,000
Operating Expenses = 5,184,000 – 55,000 – 300,000 = 4,829,000
Gain on the Appreciation of Equipment = 200,000 – 200,000 = 0
Retained Earnings = 5,870,000 – 720,000 – 600,000 = 4,550,000
Note D—The translated balance of Retained Earnings is as follows:
Balance on January 1, 20X5 (2,000,000 FC × $1.10) .......
20X5 Income (1,000,000 FC × $1.15) ...............................
20X6 Income (1,200,000 FC × $1.27) ...............................
20X7 Income (350,000 FC × $1.33) ..................................
Total .........................................................................

538

$2,200,000
1,150,000
1,524,000
465,500
$5,339,500


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Ch. 11—Problems

PROBLEM 11-5
(1)

Foreign Subsidiary

Trial Balance
For the First Year

Account
Accounts Receivable ...................................
Inventory ......................................................
Other Current Assets ...................................
Land ............................................................
Building ........................................................
Accumulated Depreciation (see Note A) ......
Furnishings ..................................................
Accumulated Depreciation (see Note A) ......
Accounts Payable ........................................
Long-Term Debt ..........................................
Contributed Capital ......................................
Sales Revenue ............................................
Cost of Sales ...............................................
Other Expenses ...........................................
Depreciation (see Note A) ...........................
Interest (see Note B) ...................................
Cumulative Translation Adjustment .............
Remeasurement Gain .................................
Totals ......................................................

Dr. (Cr.)
Balance
in FCA

If FCA Is the Functional Currency
Exchange

Balance in
Rate
Dollars

210,000 FCA$1.040
140,000 1.040
50,000 1.040
1,600,0001.040
2,200,0001.040
(55,000) 1.040
720,000 1.040
(60,000) 1.040
(130,000) 1.040
(3,292,344)1.040
(1,000,000)1.000
(2,200,000)1.025
1,320,0001.025
158,068 1.025
115,000 1.025
224,276 1.025

0 FCA

Building (2,200,000 FCA ÷ 40 years) .....................
Furnishings (720,000 FCA ÷ 12 years) ..................

$218,400 $1.040
145,600
Note C
52,000

1.040
1,664,0001.000
2,288,0001.000
(57,200) 1.000
748,800
1.000
(62,400) 1.000
(135,200) 1.040
(3,424,038)1.000
(1,000,000)1.000
(2,255,000)1.025
1,353,000 Note C
162,020
1.025
117,875
1.000
229,883
1.025
(25,470)
$

Note A—Accumulated depreciation:
In FCA
55,000 FCA
60,000
115,000 FCA

539

If U.S.$ Is the Functional Currency

Exchange
Balance in
Rate
Dollars

0

$218,400
142,800
52,000
1,600,000
2,200,000
(55,000)
720,000
(60,000)
(135,200)
(3,292,344)
(1,000,000)
(2,255,000)
1,368,300
162,020
115,000
229,883

$

(10,859)
0



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Ch. 11—Problems

Problem 11-5, Concluded
Note B: Interest expense:
In FCA
Total payments (4 × 232,983 FCA) ........................
931,932 FCA
Change in principal balance:
Beginning..........................
4,000,000 FCA
707,656
Ending ..............................
3,292,344
Interest expense ....................................................
224,276 FCA
Note C: Cost of sales and ending inventory:
Exchange Rate
In FCA
365,000 FCA $1.020
365,000
1.030
365,000
1.050
1.040
365,000
1,460,000 FCA
1.020
140,000

FCA
1,320,000

First quarter purchase ............................................
Second quarter purchase ......................................
Third quarter purchase ..........................................
Fourth quarter purchase ........................................
Total available........................................................
Ending inventory ....................................................
Cost of sales ..........................................................

$

In U.S.$
372,300
375,950
383,250
379,600
$1,511,100
142,800
$1,368,300

(2) Both the translation adjustment and the remeasurement gain/loss have a positive effect on the parent’s equity. Therefore, the parent
would not have wanted to hedge its investment.
(3) Value of 600,000 FCA loan payable at:
End of year (600,000 FCA × $1.04) .......................
End of first quarter (600,000 FCA × $1.02) ............
Exchange loss .......................................................

$


$624,000
612,000
12,000

None of the hedge would have been considered ineffective against the translation adjustment. However, $1,141 ($12,000 versus $10,859)
would be considered ineffective relative to the remeasurement gain.

540


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Ch. 11—Problems

PROBLEM 11-6
(1)

Quatro Corporation
Trial Balance Remeasurement
December 31, 20X7
Balance in
Books of
Relevant
Balance in
Record (BR)
Exchange
Functional
Account
Currency

Rate ($/FC) Currency ($)
Cash and Receivables ...................................
2,200,000 BR$0.54 $
1,188,000
Inventory ........................................................
3,700,000 Note A
2,050,000
Machinery and Equipment .............................
22,950,000 Sch. A
13,880,000
Accumulated Depreciation—Machinery and
Equipment .................................................
(5,922,500) Sch. A
(3,567,250)
Tooling ...........................................................
6,000,000 Sch. B
3,632,000
Accumulated Depreciation—Tooling .............
(1,520,000) Sch. B
(916,000)
Licensing Agreements ...................................
500,000
0.60
300,000
Accumulated Amortization—Licensing
Agreements ...............................................
(325,000)
0.60
(195,000)
Cost of Sales (excluding depreciation) ..........

12,700,000 Note B
7,393,000
Depreciation Expense ...................................
2,895,000Sch. A & B
1,751,200
Amortization Expense ....................................
50,000
0.60
30,000
Other Expenses .............................................
3,000,0000.57
1,710,000
Totals ........................................................
46,227,500 BR
$27,255,950
Accounts and Notes Payable ........................
Due to Spencer ..............................................
Common Stock ..............................................
Paid-In Capital in Excess of Par Value ..........
Retained Earnings .........................................
Sales Revenue ..............................................
Remeasurement Gain (to balance) ...............
Totals ........................................................

2,000,000 BR0.54
11,000,0000.54
8,000,0000.60
1,000,0000.60
3,700,000 Note C
20,527,5000.57

46,227,500 BR

$ 1,080,000
5,940,000
4,800,000
600,000
2,258,000
11,700,675
877,275
$27,255,950

Note A—The historical cost of the ending inventory must be remeasured into the functional
currency.
Historical cost:
(2,200,000 FC × $0.55) .........................................
$1,210,000
(1,500,000 FC × $0.56) .........................................
840,000
$2,050,000

541


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Ch. 11—Problems

Problem 11-6, Continued
Note B—Cost of Sales is remeasured as follows:
Balance

Exchange
in BR
Rate ($/FC)
Third quarter, 20X6 acquisition .................
800,000 BR$0.61
Fourth quarter, 20X6 acquisition ...............
1,200,0000.62
First quarter, 20X7 acquisition ..................
3,200,0000.60
Second quarter, 20X7 acquisition .............
4,100,0000.57
Third quarter, 20X7 acquisition .................
3,400,0000.56
Totals ........................................................
12,700,000 BR

Functional
Currency ($)
$
488,000
744,000
1,920,000
2,337,000
1,904,000
$7,393,000

Note C—Retained Earnings is remeasured as follows:
Balance
Exchange
in BR

Rate ($/FC)
Balance, July 1, 20X6 ...............................
3,000,000 BR$0.60
Income from July 1 to December 31, 20X6
1,300,0000.62
Dividends declared August 1, 20X6 ..........
(300,000)
0.61
0.55
Dividends declared August 1, 20X7 ..........
(300,000)
Totals ........................................................
3,700,000 BR

Functional
Currency ($)
$1,800,000
806,000
(183,000)
(165,000)
$2,258,000

Schedule A
Remeasurement of Machinery and Equipment
Depreciation Expense and Accumulated Depreciation
Balance in
Books of
Relevant
Record (BR)
Exchange

Currency
Rate ($/FC)
Depreciable machinery and equipment:
July 1, 20X6, acquisition ...........................
17,450,000 BR$0.60*
October 1, 20X6, acquisition .....................
5,500,0000.62
Totals ........................................................
22,950,000 BR

Balance in
Functional
Currency ($)
$10,470,000
3,410,000
$13,880,000

Depreciation expense:
July 1, 20X6, acquisition ...........................
October 1, 20X6, acquisition .....................
Totals ........................................................

1,745,000 BR0.60*
550,000
0.62
2,295,000 BR

$1,047,000
341,000
$1,388,000


Accumulated depreciation:
20X5 (2,617,500/3 × 2) .............................
20X6 ..........................................................
October 1, 20X6, acquisition .....................
20X7 ..........................................................
20X7 ..........................................................
Totals ........................................................

1,745,000 BR0.60*
1,745,0000.60*
137,500
0.62
550,000
0.62
1,745,0000.60*
5,922,500 BR

$1,047,000
1,047,000
85,250
341,000
1,047,000
$3,567,250

*Note that the exchange rate at the parent’s date of acquisition is used rather than earlier historical exchange rates.

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Ch. 11—Problems

Problem 11-6, Concluded
Schedule B
Remeasurement of Tooling
Depreciation Expense and Accumulated Depreciation
Balance in
Books of
Relevant
Balance in
Record (BR)
Exchange
Functional
Currency
Rate ($/FC) Currency ($)
Depreciable tooling:
July 1, 20X6, acquisition ...........................
4,400,000 BR$0.60**
$2,640,000
October 1, 20X6, acquisition .....................
1,600,0000.62
992,000
Totals ........................................................
6,000,000 BR
$3,632,000
Depreciation expense:
July 1, 20X6, acquisition ...........................
October 1, 20X6, acquisition .....................

Totals ........................................................

440,000 BR 0.60**
160,000
0.62
600,000 BR

Accumulated depreciation:
20X5 (660,000/3 × 2) ................................
20X6 ..........................................................
October 1, 20X6, acquisition .....................
20X7 ..........................................................
20X7 ..........................................................
Totals ........................................................

440,000 BR 0.60**
440,000
0.60**
40,000
0.62
160,000
0.62
440,000
0.60**
1,520,000 BR

$
$
$


$

264,000
99,200
363,200
264,000
264,000
24,800
99,200
264,000
916,000

**Note that the exchange rate at the parent’s date of acquisition is used rather than earlier
historical exchange rates.
(2) December 31, 20X7
Licensing Agreement ................................................................
Investment in Subsidiary ...................................................
Retained Earnings—Subsidiary ........................................
Amortization Expense ...............................................................
Retained Earnings—Parent ......................................................
Retained Earnings—Subsidiary ................................................
Accumulated Amortization.................................................

625,000*
500,000
125,000
125,000
50,000
12,500
187,500


*The dollar equivalent of the net assets at the date of acquisition was $5,760,000
(12,000,000 × 80% × $0.60). Therefore, the excess price of $500,000 paid is to be allocated to the licensing agreement. The $500,000 represents 80% of the total value attributed to the licensing agreement. The total value is $625,000 ($500,000 divided by 80%)
of which $125,000 is traceable to the noncontrolling interest. The licensing agreement is
amortized over a 5-year remaining useful life.

543