Fundamentals of Advanced Accounting
Fundamentals of Advanced Accounting
7th Edition
ISBN: 9781259722639
Author: Joe Ben Hoyle, Thomas Schaefer, Timothy Doupnik
Publisher: McGraw-Hill Education
Question
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Chapter 8, Problem 37P

Part I.

To determine

Translate the Czech koruna financial statement when functional currency is Czech koruna.

Part I.

Expert Solution
Check Mark

Explanation of Solution

Translate (remeasure) foreign currency financial statements using US GAAP and explain the translation adjustments.

When Czech koruna is the functional currency the translation adjustment should be determined using current rate method.

a.

Income StatementCzech korunaExchange RateUS Dollars
Sale25,000,0000.035875,000
Cost of goods sold(12,000,000)0.035(420,000)
Depreciation Expenses-equipment(2,500,000)0.035(87,500)
Depreciation Expenses-Building(20,000)0.035(63,000)
Research and development Expenses(1,200,000)0.035(42,000)
Other Expenses(1,000,000)0.035(35,000)
Net income6,500,000227,500
Retained earnings 1/1/17500,000(given)22,500
Dividend paid 12/15/2017(1,500,000)0.031(46,500)
Retained earnings 12/15/175500000203,500

Table: (1)

Balance sheet as on 12/31/2017:

Income StatementCzech korunaExchange RateUS Dollars
Cash2,000,0000.03060,000
Accounts Receivable3,300,0000.03099,000
Inventory8,500,0000.030255,000
Equipment25,000,0000.030750,000
Accumulative depreciation- Equipment(8,500,000)0.030(255,000)
Building72,000,0000.0302,160,000
Accumulative depreciation- Equipment(30,300,000)0.030(909,000)
Land6,000,0000.030180,000
Total assets78,000,0002,340,000
Accounts Payable25000000.03075,000
Long term debt50,000,0000.0301,500,000
Common stock5,000,0000.050250,000
Additional paid in capital15,000,0000.050750,000
Retained earnings 12/31/20175,500,000203,500
Translation adjustment(438,500)
Total liabilities and equities78,000,0002,340,000

Table: (2)

Calculation of translation adjustment:

Income StatementCzech korunaExchange RateUS Dollars
Net asset 1/1/201720,500,0000.040820,000
Net income, 20176,500,0000.035227,500
Dividends 12/15/2017(1,500,000)0.031(46,500)
Net assets 12/31/201725,500,0001,001,000
Net assets at current rate 12/31/2017255000000.030765,000

Translation adjustment , 2017

( negative)

236,000
Cumulative Translation adjustment , 2017 ( negative)438,500

Table: (3)

b.

The translation should be done as per temporal method as US Dollar is functional currency:

Income StatementCzech korunaExchange RateUS Dollars
Sale25,000,0000.035875,000
Cost of goods sold(12,000,000)Section-A(493,500)
Depreciation Expenses-equipment(2,500,000)Section-B(118,000)
Depreciation Expenses-Building(1800,000)0.035(63,000)
Research and development Expenses(1,200,000)0.035(42,000)
Other Expenses(1,000,000)0.035(35,000)
Income  before re-measurement gain6,500,000101,300
Re-measurement gain, 2017408,000
Net income6,500,000509,300
Retained earnings 1/1/17500,000Given353,000
Dividend paid 12/15/2107(1,500,000)0.031(46,500)
Retained earnings 1/1/17(5,500,000)815,800

Table: (4)

Balance sheet as on 12/31/2017:

Income StatementCzech korunaExchange RateUS Dollars
Cash2,000,0000.03060,000
Accounts Receivable3,300,0000.03099,000
Inventory8,500,0000.032272,000
Equipment25,000,000Section-B1,180,000
Accumulative depreciation- Equipment(8,500,000)Section-B418,000
Building72,000,000Section-C3,408,000
Accumulative depreciation- Equipment(30,300,000)Section-C(1,510,200)
Land6,000,0000.050300,000
Total assets78,000,0003,390,800
Accounts Payable25000000.03075,000
Long term debt50,000,0000.0301,500,000
Common stock5,000,0000.050250,000
Additional paid in capital15,000,0000.050750,000
Retained earnings 12/31/20175,500,000Above815,800
To balance(438,500)
Total liabilities and equities78,000,0003,390,800

Table: (5)

Section –A: Cost of goods sold:

Income StatementCzech korunaExchange RateUS Dollars
Beginning inventory (1/1/2017)6,000,0000.043258,000
Purchases14,500,0000.035507,500
Ending inventory(8,500,000)0.032272,000
Cost of goods sold12,000,000493,500

Table: (6)

Section –B: Equipment:

Income StatementCzech korunaExchange RateUS Dollars
 Old Equipment (1/1/2017)     20,000,0000.0501,000,000
New Equipment-acquired (1/3/2017)5,000,0000.036180,000
Total500,0001,180,000
Accumulated depreciation-old equipment8,000,0000.0504,000,000
Accumulated depreciation-new equipment500,0000.03618,000
Total85000004,018,000
Depreciation expenses-old equipment2,000,0000.050100,000
Depreciation expenses-new equipment500,0000.03618000
Total2500,000118,000

Table: (7)

Section –C: Building:

Income StatementCzech korunaExchange RateUS Dollars
 Old Building (1/1/2017)     60,000,0000.0503,000,000
New Building-acquired (3/5/2017)5,000,0000.034408,000
Total72,000,0003,408,000
Accumulated depreciation-old Building30,000,0000.0501,500,000
Accumulated depreciation-new Building300,0000.03410,200
Total30,300,0001,510,200
Depreciation expenses-old Building1500,0000.05075,000
Depreciation expenses-new Building300,0000.03410,200
Total1,800,00085,200

Table: (8)

Calculation of Re-measurement gain:

Income StatementCzech korunaExchange RateUS Dollars
 Net monetary liabilities (1/1/2017)(37,000,000)0.040(1480000)
Increase  in monetary  assets:
Sales2,500,0000.03587,500
Decrease in monetary  assets:
Purchase of inventory(14,500,000)0.035(507,500)
Research and development(1,200,000)0.035(42,000)
Other expenses(1,000,000)0.035(35,000)
Dividend paid 12/15/2017(1,500,000)0.031(46,500)
Purchase of equipment 1/1/2017(5,000,000)0.036(180,000)
Purchase of building 3/5/2017(12,000,000)0.034408,000
Net monetary liabilities(47,200,000)(1,824,000)
Net monetary liabilities at current rate 12/31/201747,200,0000.030(1,416,000)
Re-measurement gain -2017(408,000)

Table: (9)

c.

Calculation as Re-measurement loss:

Income StatementCzech korunaExchange RateUS Dollars
 Net monetary assets(1/1/2017)13,000,0000.040520,000
Increase  in monetary  assets:
Sales2,500,0000.03587,500
Decrease in monetary  assets:
Purchase of inventory(14,500,000)0.035(507,500)
Research and development(1,200,000)0.035(42,000)
Other expenses(1,000,000)0.035(35,000)
Dividend paid 12/15/2017(1,500,000)0.031(46,500)
Purchase of equipment 1/1/2017(5,000,000)0.036(180,000)
Purchase of building 3/5/2017(12,000,000)0.034408,000
Net monetary assets2,800,000176,000
Net monetary assets at current rate 12/31/20172,800,0000.03084,000
Re-measurement loss -201792,000

Table: (10)

Part II.

To determine

Explain the positive or negative sign as the translation adjustment in part (a) and explain why a re-measurement gain or loss exists in part 1(b) and 1(c).

Part II.

Expert Solution
Check Mark

Explanation of Solution

The negative translation adjustment in part 1(a) arises because of two factors:

  • The Czech koruna has depreciated from $0.40 to $0.30 from beginning as the year to ending of year.
  • Arises because there is a net asset balance sheet exposure.

A net asset balance sheet exposure exists because all assets are translated at current exchange rate that excesses all liabilities at current rate.

Re-measurement gain in part 1 (b):

It arises because of two factors:

  • The Czech koruna has depreciated against US Dollar.
  • There is net monetary liability balance sheet exposure.

Under the temporal method accounts receivables and cash are translated at current rate then accounts payable, long term debt are also translated at current rate that results in net monetary liability balance sheet exposure.

Re-measurement gain in part 1 (c):

It arises because of two factors:

  • The Czech koruna has depreciated against the US Dollar during 2017.
  • There is a net monetary asset balance sheet exposure.

Accounts receivable and cash are translated at current rate and account payables are also translated at current rate.

Because the Czech koruna amount of asset translate at current rate exceeds the Czech koruna amount of liabilities which are translated at the current rate and net monetary assets exposure in balance sheet exists.

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