To download more slides, ebook, solutions and test bank, visit

CHAPTER 22
QUESTIONS
1.

Globalization of business has forced investors, creditors, and other stakeholders to
perform an increasing number of crossborder financial statement comparisons.
This has created the need for a common
set of global accounting standards.

2.

Initially, the IASC was a consortium of national CPA organizations, and committee
members served part time while maintaining their connections with their firms and
their clients.

3.

The early IASC standards were a compilation of the diverse accounting practices
from around the world with some expression of a preferred alternative but no coherent conceptual foundation.

4.

During the 1990s, the IASC sought the
stamp of approval from the International
Organization of Securities Commissions
(IOSCO). The IASC worked to eliminate the
large number of alternative accounting
treatments allowable under IAS and also to
improve the overall quality of the standards.

5.

shares traded in the United States had to
provide U.S. shareholders with a summary
showing what key reported financial statement numbers would have been had the
company used U.S. GAAP.

The Norwalk Agreement is a joint agreement signed in 2002 in which the IASB and
FASB pledged to work together to develop
a set of “fully compatible” accounting standards as soon as possible and to continue
to work together to make sure that those
standards stay compatible.

7.

In 2007, the SEC announced that non-U.S.
companies would be allowed to use International Financial Reporting Standards, instead of U.S. GAAP, in their financial
statement filings with the SEC. Before this,
non-U.S. companies wishing to have their

On August 27, 2008, the SEC announced a
timetable for the transition of U.S. companies from FASB standards to IFRS.

9.

In October 2008, the IASB bowed to political pressure and hastily revised an accounting standard in order to benefit European banks. This action caused the U.S.
business community, and the SEC, to slow
down the rush to grant the IASB power to
set accounting standards for U.S. companies. The new SEC “work plan” indicates

that any transition to IFRS will happen in
2015, at the earliest.

10. Ratio comparisons can yield misleading
implications if the ratios come from companies with differing accounting practices. Differences in accounting methods can make
one company look superior to another even
though they are economically identical. For
example, if one company uses a 10-year
life for depreciating fixed assets and another depreciates similar assets over a 15year life, the decreased depreciation expense for the second company will make it
look more profitable even in the absence of
real differences in operating performance.

As a result of the 2001 restructuring in
which the IASC was renamed the IASB, the
IASB Board members became full time.
The IASB Board members were chosen
from a much broader background than the
CPA community. The IASB deliberative
process was redesigned to be much more
along the lines of the FASB’s operating
procedure—public meetings, open debate,
lots of public input into the process, transparent decisions, and so forth.

6.

8.

11. The primary factor to be considered in determining a foreign subsidiary’s functional
currency is cash flows. In most cases, the
currency in which the subsidiary generates

and expends cash is that subsidiary’s
functional currency. Other factors may be
considered in determining the functional
currency. Those factors include how the
selling price of the firm’s product is determined, the source of costs incurred to
produce the product, the subsidiary’s primary sales market, and where the subsidiary obtains financing. Management has
the final responsibility for determining the
subsidiary’s functional currency.
12. When translating foreign currency financial
statements, the exchange rate as of the

967


To download more slides, ebook, solutions and test bank, visit
968

Chapter 22

balance sheet date is used to convert assets and liabilities, and the average rate for
the year is used to convert revenues and
expenses on the income statement. To
translate common stock, the historical rate
prevailing on the day the subsidiary was
purchased or the stock was issued is always used in converting common stock
from the foreign currency to the parent
company’s currency.

13. When the foreign currency financial statements are translated, the debits of the trial
balance will, in most instances, not equal

the credits. This difference results from the
effects of the differing exchange rates. This
difference between debits and credits is
called a translation adjustment and is included in the Stockholders’ Equity section
of the balance sheet as part of accumulated other comprehensive income.


To download more slides, ebook, solutions and test bank, visit
Chapter 22

969

PRACTICE EXERCISES
PRACTICE 22–1 FOREIGN CURRENCY TRANSLATION
1. 4 crowns to each U.S. dollar
Cash...............................................................
Accounts receivable .....................................
Inventory .......................................................
Land ...............................................................
Total assets .............................................
Loan payable (8,000/4) .................................
Paid-in capital (12,000/2) ..............................
Translation adjustment ................................
Total liabilities and equity ......................

(in U.S. dollars)
$ 500
1,000
1,500
2,000

$ 5,000
$ 2,000
6,000
(3,000)
$ 5,000

U.S. Multi Company suffered an economic loss because the value of the crown
declined during the year.
2. 1 crown to each U.S. dollar
Cash...............................................................
Accounts receivable .....................................
Inventory .......................................................
Land ...............................................................
Total assets .............................................

(in U.S. dollars)
$ 2,000
4,000
6,000
8,000
$20,000

Loan payable (8,000/1) .................................
Paid-in capital (12,000/2) ..............................
Translation adjustment ................................
Total liabilities and equity ......................

$ 8,000
6,000
6,000

$20,000

U.S. Multi Company experienced an economic gain because the value of the crown
increased during the year.


To download more slides, ebook, solutions and test bank, visit
970

Chapter 22

PRACTICE 22–2 FOREIGN CURRENCY TRANSLATION
Translated trial balance

Cash ............................................
Accounts Receivable .................
Inventory .....................................
Land ............................................
Expenses ....................................
Dividends ....................................
Translation Adjustment .............
Total debits ...........................
Loan Payable ..............................
Paid-In Capital ............................
Sales ...........................................
Total credits ..........................

(in crowns)
3,000
6,000

11,000
8,000
90,000
2,000

Translation
Rate
4.0
4.0
4.0
4.0
3.0
3.5

120,000
8,000
12,000
100,000
120,000

4.0
2.0
3.0

(in U.S. dollars)
$ 750
1,500
2,750
2,000
30,000

571
3,762
$41,333
$ 2,000
6,000
33,333
$41,333

U.S. Multi Company suffered an economic loss because the value of the crown
declined during the year. This is reflected in the debit amount (subtraction from
equity) in Translation Adjustment.
Income Statement
Sales ..................................................................................
Expenses ..........................................................................
Net income ..................................................................
Balance Sheet
Cash ..................................................................................
Accounts receivable ........................................................
Inventory ...........................................................................
Land ..................................................................................
Total assets .................................................................
Loan payable ....................................................................
Paid-in capital ...................................................................
Retained earnings ($3,333 – $571) ..................................
Translation adjustment ....................................................
Total liabilities and equity ..........................................

$33,333
30,000
$ 3,333

$

750
1,500
2,750
2,000
$ 7,000
$ 2,000
6,000
2,762
(3,762)
$ 7,000


To download more slides, ebook, solutions and test bank, visit
Chapter 22

971

EXERCISES
22–3.

International Metals
Translated Balance Sheet
January 3, 2013
(In
Canadian Exchange
dollars)
Rate
Assets

Cash...........................................................
Accounts receivable .................................
Inventory ...................................................
Plant assets...............................................
Total assets ...........................................
Liabilities and Equity
Accounts payable .....................................
Long-term debt .........................................
Capital stock .............................................
Retained earnings ....................................
Total liabilities and equity ...................

(In
U.S.
dollars)

$ 58,000
112,500
91,800
145,400
$407,700

$0.79
0.79
0.79
0.79

$ 45,820
88,875
72,522

114,866
$ 322,083

$165,600
98,000
65,100
79,000
$407,700

$0.79
0.79
0.79
0.79

$ 130,824
77,420
51,429
62,410
$ 322,083

Note that there is no translation adjustment because the translated balance
sheet is prepared on the acquisition date. A translation adjustment arises
from exchange rate changes after the acquisition date.
22–4.

1.

Cash ................................
Accounts Receivable .....
Inventory .........................

Equipment ......................
Cost of Goods Sold........
Expenses ........................
Dividends ........................
Total debits ..................
Accounts Payable ..........
Long-Term Debt .............
Capital Stock ..................
Retained Earnings .........
Sales ...............................
Translation Adjustment .
Total credits ...............

World Mind Company
Trial Balance
Trial Balance
Exchange
(In Japanese yen)
Rate
¥ 7,000,000
$ 0.008
17,200,000
0.008
23,500,000
0.008
32,300,000
0.008
28,550,000
0.0072
18,900,000

0.0072
6,000,000
0.0074
¥133,450,000
¥ 32,000,000
15,000,000
16,500,000
13,750,000
56,200,000
¥ 133,450,000

$ 0.008
0.008
0.0059
computed
0.0072

Trial Balance
(In U.S. dollars)
$ 56,000
137,600
188,000
258,400
205,560
136,080
44,400
$1,026,040
$ 256,000
120,000
97,350

130,000
404,640
18,050
$1,026,040


To download more slides, ebook, solutions and test bank, visit
972

22–4.
2.

Chapter 22

(Concluded)
World Mind Company
Income and Retained Earnings Statement
Sales .............................................................................
$404,640
Cost of goods sold ......................................................
205,560
Gross margin................................................................
$199,080
Other expenses ............................................................
136,080
Net income ...................................................................
$ 63,000
Beginning retained earnings .......................................
130,000
$193,000

Less: Dividends ...........................................................
44,400
Ending retained earnings ............................................
$148,600
World Mind Company
Balance Sheet
Assets
Cash ..............................................................................
Accounts receivable ....................................................
lnventory .......................................................................
Equipment ....................................................................
Total assets.............................................................

$ 56,000
137,600
188,000
258,400
$ 640,000

Liabilities and Equity
Accounts payable ........................................................
Long-term debt.............................................................
Capital stock.................................................................
Retained earnings ........................................................
Translation adjustment ................................................
Total liabilities and equity ......................................

$ 256,000
120,000
97,350

148,600
18,050
$ 640,000


To download more slides, ebook, solutions and test bank, visit
Chapter 22

973

PROBLEMS
22–5.
Doghead Technology
Trial Balance
December 31, 2013

Cash ...............................................................
Accounts Receivable....................................
Inventory .......................................................
Equipment .....................................................
Cost of Goods Sold ......................................
Expenses .......................................................
Dividends ......................................................
Total debits.................................................
Accounts Payable .........................................
Long-Term Debt ............................................
Capital Stock .................................................
Retained Earnings (balance at beginning
of year) ........................................................
Sales ..............................................................

Translation Adjustment ................................
Total credits ...............................................

Trial Balance
Dec. 31, 2013
(In Swiss
francs)
925,000
1,875,000
2,115,000
1,025,000
7,985,000
4,234,000
900,000
19,059,000
2,100,000
1,000,000
1,200,000
640,000
14,119,000

Trial Balance
Dec. 31, 2013
Exchange
(In U.S.
Rate
dollars)
$0.228
$ 210,900
0.228

427,500
0.228
482,220
0.228
233,700
0.210
1,676,850
0.210
889,140
0.205
184,500
$ 4,104,810
$0.228
0.228
0.175
computed
0.210

19,059,000

*Retained earnings, 1/1/2012 (301,000 francs  $0.175) .........................
Plus net income for 2012 (839,000 francs  $0.178)..............................
Less dividends for 2012 (500,000 francs  $0.188) ...............................
Retained earnings, 12/31/2012 ...............................................................

$ 478,800
228,000
210,000
108,017*
2,964,990

115,003
$ 4,104,810
$ 52,675
149,342
$202,017
94,000
$108,017

Doghead Technology
Income and Retained Earnings Statement
For the Year Ended December 31, 2013
Sales ..........................................................................................................
Cost of goods sold ...................................................................................
Gross margin ............................................................................................
Less: Expenses ........................................................................................
Net income ................................................................................................
Beginning retained earnings ...................................................................
Less: Dividends ........................................................................................
Ending retained earnings .........................................................................

$2,964,990
1,676,850
$1,288,140
889,140
$ 399,000
108,017
$ 507,017
184,500
$ 322,517



To download more slides, ebook, solutions and test bank, visit
974

22–5.

Chapter 22

(Concluded)
Doghead Technology
Balance Sheet
December 31, 2013

Assets
Cash ...........................................................................................................
Accounts receivable .................................................................................
Inventory ...................................................................................................
Equipment .................................................................................................
Total assets ............................................................................................

$ 210,900
427,500
482,220
233,700
$1,354,320

Liabilities and Equity
Accounts payable .....................................................................................
Long-term debt .........................................................................................
Capital stock .............................................................................................

Retained earnings.....................................................................................
Translation adjustment ............................................................................
Total liabilities and equity .....................................................................

$ 478,800
228,000
210,000
322,517
115,003
$1,354,320

22–6.
In the examples given in the text, the objective was to translate the financial statement items and determine the amount of translation adjustment required to balance
the trial balance. In this case, the translation adjustment is given and the amount of
Retained Earnings must be solved.
Kingscraft Inc.
Trial Balance

Cash .........................................................
Accounts Receivable..............................
Inventory .................................................
Plant and Equipment ..............................
Cost of Goods Sold ................................
Other Expenses ......................................
Dividends ................................................
Translation Adjustment ..........................
Total debits...........................................
Current Liabilities ...................................
Long-Term Debt ......................................
Common Stock .......................................

Retained Earnings ..................................
Revenues.................................................
Total credits .........................................

Trial Balance
£ 46,000
102,000
84,000
172,000
260,000
80,000
60,000

Exchange
Rate
$1.84
1.84
1.84
1.84
1.87
1.87
1.89

£804,000
£ 62,000
54,000
90,000
153,000*
445,000
£804,000


$1.84
1.84
2.03
computed
1.87

Trial Balance
$ 84,640
187,680
154,560
316,480
486,200
149,600
113,400
73,000
$1,565,560
$ 114,080
99,360
182,700
337,270†
832,150
$1,565,560


To download more slides, ebook, solutions and test bank, visit
Chapter 22

22–6.


975

(Concluded)

*Total debits of £804,000 less credits (excluding retained earnings) of £651,000 =
retained earnings of £153,000 as of the beginning of the year
†
Total debits of $1,565,560 less credits (excluding retained earnings) of $1,228,290 =
retained earnings of $337,270 as of the beginning of the year
Although not asked for in the problem, the Retained Earnings balance at the end of
the year is as follows:
Beginning retained earnings .............................
Plus net income ..................................................
Less dividends ....................................................
Ending retained earnings ...................................

$ 337,270
196,350
$ 533,620
113,400
$ 420,220


To download more slides, ebook, solutions and test bank, visit
976

Chapter 22

CASES
Discussion Case 22–7

If the only difference between U.S. and foreign firms was a difference in accounting methods, it would not
be a major problem to perform the necessary adjustments to be able to make financial ratios internationally comparable. Financial analysts are experienced in doing this very thing to improve the comparability
of the financial statements of U.S. companies. In addition, with the imminent adoption of IFRS in all developed countries, no major adjustments will be necessary. However, U.S. and foreign firms differ in more
than just accounting method choice; they operate in different business environments. For example, financing for most German firms comes not from stockholders but from large banks. Japanese firms are
legendary for emphasizing growth in market share over short-term profits. Because U.S. and foreign firms
do business in different ways, their financial ratios are not directly comparable, just as the financial ratios
of two firms operating in different industries are not comparable. A major challenge facing international
financial analysts is how to make appropriate adjustments for differing operating environments in order to
make proper international ratio comparisons.

Discussion Case 22–8
This scenario is very close to what actually happened inside Daimler-Benz in 1993. The chief financial
officer, Gerhard Liener, pushed hard to get Daimler-Benz to list its shares in the United States. Mr. Liener’s motivation was not so much gaining access to the U.S. securities markets but was exposing
Daimler-Benz to the regulatory and disclosure requirements in the United States. Mr. Liener believed that
without these requirements, Daimler-Benz would continue to hide operating losses through the reversal of
“hidden reserves.” In doing so, the company’s management would delay making the tough decisions
needed to fix the company.
Mr. Liener’s story is a sad one. He was later ousted from the management of Daimler-Benz after portions
of his diary, critical of the former chairman of the company, were printed. Mr. Liener committed suicide in
1998.
Source: Nathaniel C. Nath, “Ex-Executive of Daimler Is Called Suicide,” The New York Times, December
15, 1998, p. D2.

Discussion Case 22–9
This case focuses on the concept of functional currency as defined in FASB ASC Subtopic 830-30. This
concept attempts to determine the primary economic environment in which the subsidiary operates. If the
subsidiary generates and expends most of its cash in its local currency, translation is appropriate because the functional currency would be considered the subsidiary’s local currency. Other factors to consider in determining the subsidiary’s functional currency include the forces that determine the firm’s sales
price, the location of the subsidiary’s sales market, and the country in which financing is obtained and
where production costs are incurred. If it is determined, after the above factors are considered, that the
parent company’s currency is the subsidiary’s primary currency, then remeasurement is appropriate.

Management makes the final determination in selecting the firm’s functional currency.
A major difference between translation and remeasurement lies in the use of different exchange rates—
for example, assets are translated at the exchange rate in effect on the balance sheet date, whereas they
are remeasured at the historical rate in effect when they were acquired. Another difference relates to the
disclosure of the effect of changing exchange rates. With translation, the difference is reported as an equity adjustment on the balance sheet. With remeasurement, the difference is recognized as a gain or loss
and recorded on the income statement.


To download more slides, ebook, solutions and test bank, visit
Chapter 22

977

Case 22–10
The foreign currency translation adjustment represents a net decrease in comprehensive income in 2009
of $33 million. This means that the foreign currencies in the countries where Disney has subsidiaries got
weaker in 2009 relative to the U.S. dollar.

Case 22–11
To:
The Board of Directors of Jeff Pong Company
From: Member of the Accounting Staff
Subj: Conversion of Mak Hung financial statements into U.S. dollars
Once the financial statements of Mak Hung Enterprises have been restated to be in conformity with U.S.
GAAP, they will be converted into U.S. dollars using the following process:

Assets and liabilities are translated using the current exchange rate prevailing as of the balance sheet
date.

Income statement items are translated at the average exchange rate for the year.


Capital stock is translated at the historical rate, i.e., the rate prevailing on the date Mak Hung was
acquired.
This process is called translation and is used for all foreign subsidiaries that are considered to be selfcontained. A self-contained foreign subsidiary is one that denominates most of its transactions in the local
currency (Chinese yuan in this case). The local currency is called the functional currency of the subsidiary. This case contrasts with a subsidiary that primarily serves as a cash conduit for the parent; with this
type of subsidiary, many transactions are denominated in U.S. dollars and cash transactions between the
parent and subsidiary are frequent. For this type of parent-dependent subsidiary, the functional currency
is said to be the U.S. dollar and the exchange rate conversion process, called remeasurement, differs
significantly from the translation process outlined above.
The accounting implications of the translation process are that any gains or losses arising from changes
in the U.S. dollar/Chinese yuan exchange rate are not recognized as part of income but are instead reported as a separate category under consolidated equity as part of accumulated other comprehensive
income.


To download more slides, ebook, solutions and test bank, visit