CHAPTER 10

TRANSLATION OF FOREIGN
CURRENCY FINANCIAL STATEMENTS

Answers to Questions
1. The two major issues related to the translation of foreign currency financial statements are:
(a) which method should be used and (b) where should the resulting translation adjustment
be reported in the consolidated financial statements. The first issue relates to determining
the appropriate exchange rate (historical, current, or average for the current period) for the
translation of foreign currency balances. Those items translated at the current exchange
rate are exposed to translation adjustment. The second issue relates to whether the
translation adjustment should be treated as a gain or loss in income, or should be deferred
as a separate component of stockholders equity.
2. Balance sheet exposure arises when a foreign currency balance is translated at the current
exchange rate. By translating at the current exchange rate, the foreign currency item in
essence is being revalued in U.S. dollar terms on the consolidated financial statements.
There will be either a net asset balance sheet exposure or net liability balance sheet
exposure depending upon whether assets translated at the current rate are greater or less
than liabilities translated at the current rate. Balance sheet exposure generates a
translation adjustment which does not result in an inflow or outflow of cash. Transaction
exposure, which results from the receipt or payment of foreign currency, generates foreign
exchange gains and losses which are realized in cash.
3. Although balance sheet exposure does not result in cash inflows and outflows, it does
nevertheless affect amounts reported in consolidated financial statements. If the foreign
currency is the functional currency, translation adjustments will be reported in stockholders
equity. If translation adjustments are negative and therefore reduce total stockholders
equity, there is an adverse (inflationary) impact on the debt to equity ratio. Companies with
restrictive debt covenants requiring them to stay below a maximum debt to equity ratio,
may find it necessary to hedge their balance sheet exposure so as to avoid negative
translation adjustments being reported. If the U.S. dollar is the functional currency or an
operation is located in a high inflation country, remeasurement gains and losses are
reported in income. Companies might want to hedge their balance sheet exposure in this
situation to avoid the adverse impact remeasurement losses can have on consolidated
income and earnings per share.
The paradox in hedging balance sheet exposure is that, by agreeing to receive or deliver
foreign currency in the future under a forward contract, a transaction exposure is created.
This transaction exposure is speculative in nature, given that there is no underlying inflow
or outflow of foreign currency that can be used to satisfy the forward contract. By hedging
balance sheet exposure, a company might incur a realized foreign exchange loss to avoid
an unrealized negative translation adjustment or unrealized remeasurement loss.
4. The gains and losses arising from financial instruments used to hedge balance sheet
exposure are treated in a similar manner as the item the hedge is intended to cover. If the
foreign currency is the functional currency, gains and losses on hedging instruments will be
taken to other comprehensive income. If the U.S. dollar is the functional currency, gains
and losses on the hedging instruments will be offset against the related remeasurement
gains and losses.

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Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e 10-1
5. The major concept underlying the temporal method is that the translation process should
result in a set of translated U.S. dollar financial statements as if the foreign subsidiarys
transactions had actually been carried out using U.S. dollars. To achieve this objective,
assets carried at historical cost and stockholders equity are translated at historical
exchange rates; assets carried at current value and liabilities (carried at current value) are
translated at the current exchange rate. Under this concept, the foreign subsidiarys
monetary assets and liabilities are considered to be foreign currency cash, receivables,
and payables of the parent which are exposed to transaction risk. For example, if the
foreign currency appreciates, then the foreign currency receivables increase in U.S. dollar
value and a gain is recognized. Balance sheet exposure under the temporal method is
analogous to the net transaction exposure which exists from having both receivables and
payables in a particular foreign currency.

The major concept underlying the current rate method is that the entire foreign investment
is exposed to foreign exchange risk. Therefore all assets and liabilities are translated at
the current exchange rate. Balance sheet exposure under this concept is equal to the net
investment.
6. The Retained Earnings balance is created by a multitude of transactions: all revenues,
expenses, gains, losses, and dividends since the companys inception. Identifying each
component of this account (so that a separate translation can be made) would be virtually
impossible. Therefore, in the initial year that Statement 52 was applied, the ending
balance calculated under Statement 8 was merely brought forward. Thereafter, the ending
balance translated each year for retained earnings becomes the beginning figure to be
reported for the following year.
7. The major differences relate to non-monetary assets carried at historical cost and related
expenses, i.e., inventory and cost of goods sold; property, plant, and equipment and
depreciation expense; and intangible assets and amortization expense. Under the temporal
method, these items are all translated at historical exchange rates. Under the current rate
method, the assets are translated at the current exchange rate and the related expenses
are translated at the average exchange rate for the current period.
8. The functional currency is the currency of the subsidiarys primary economic environment.
It is usually identified as the currency in which the company generates and expends cash.
SFAS 52 recommends that several factors such as the location of primary sales markets,
sources of materials and labor, the source of financing, and the amount of intercompany
transactions should be evaluated in identifying an entitys functional currency. SFAS 52
does not provide any guidance as to how these factors are to be weighted (equally or
otherwise) when identifying an entitys functional currency.
9. The foreign subsidiary's net asset position in foreign currency at the beginning of the
period is first determined. Changes in net assets are determined to explain the net asset
balance in foreign currency at the end of the period. The beginning net asset position and
changes in net assets are translated at appropriate exchange rates and the ending net
asset position in dollars is determined.
The ending net asset balance in foreign currency is then translated at the current rate and
this result is subtracted from the ending net asset position in dollars (already calculated).
The difference is the translation adjustment. It is positive if the actual dollar net asset
position is less than the net asset position based on the current exchange rate. The
translation adjustment is negative if the actual dollar net asset position is greater than if
translated at the current rate.

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1-2 Solutions Manual
10. One theory mentioned by the FASB identifies the translation adjustment as a measure of
unrealized increases and decreases that have occurred in the value of the foreign
subsidiary because of exchange rate changes. A second theory argues that this
adjustment is no more than a mechanically derived number that must be included to keep
the balance sheet in equilibrium although the figure has no intrinsic meaning. The FASB
did not indicate in Statement 52 that either theory is considered more appropriate.
11. Remeasurement is required in two situations:
a. The U.S. dollar is the functional currency.
b. The foreign subsidiary operates in a highly inflationary country.
Translation is required when a foreign currency is the functional currency.
Remeasurement is carried out using the temporal method, with remeasurement gains and
losses reported in consolidated income. Translation is done using the current rate method
and the resulting translation adjustment is carried as a separate component of
stockholders equity.
12. The temporal method must be used to remeasure the financial statements of operations in
highly inflationary countries. One reason for mandating the use of the temporal method is
that it avoids the disappearing plant problem that exists when the current rate method is
used. Under the current rate method, fixed assets are translated at current exchange
rates. With high rates of inflation, the foreign currency will depreciate significantly. When
the historical cost of fixed assets is translated at a significantly lower current exchange
rate, the dollar value of fixed assets disappears. This problem is avoided by translating at
the historical exchange rate as is done under the temporal method.

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Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e 10-3
Answers to Problems

1. C
2. C
3. C
4. B Since the peso is the functional currency, the financial statements must be
translated using the current rate method. Therefore, answers a and d can
be eliminated. Because the subsidiary has a net asset position and the
peso has appreciated from $.16 to $.19, a positive translation adjustment
will result.
5. A All asset accounts are translated at current rates.
6. A Since the foreign currency is the functional currency, a translation is
required. All assets accounts are translated at current rates.
7. C Since the U.S. dollar is the functional currency, a remeasurement is
required. All receivables are remeasured at current rates. Assets carried at
historical cost, such as prepaid insurance and goodwill, are remeasured at
historical rates.
8. B The foreign currency is the functional currency, so a translation is
appropriate. All assets (including inventory) are translated at the current
exchange rate [100,000 x $.17].
9. C Cost of goods sold is translated at the exchange rate in effect at the date
of accounting recognition, which is the date the goods were sold [100,000
x $.18].
10. D The foreign currency is the functional currency, so a translation is
appropriate. All assets are translated at the current exchange rate of $.19.
11. C The U.S. dollar is the functional currency, so a remeasurement is
appropriate. Inventory (carried at cost) is remeasured at the historical
exchange rate of $.16. Marketable equity securities (carried at market
value) are remeasured at the current exchange rate of $.19.
12. C Beginning inventory FCU 200,000 x $1.00 = $ 200,000
Purchases 10,300,000 x $0.80 = 8,240,000
Ending inventory (500,000) x $0.75 = (375,000)
Cost of goods sold FCU 10,000,000 $8,065,000

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1-4 Solutions Manual
13. C Beginning net assets, 1/1.. P20,000 x $.15 = $ 3,000
Increase in net assets:
Income......................................... 10,000 x $.19 = 1,900
Ending net assets, 12/31................. P30,000 $ 4,900
Ending net assets at
current exchange rate................ P30,000 x $.21 = $ 6,300
Translation Adjustment (positive) . $(1,400)
14. C By translating items carried at historical cost by the historical exchange
rate, the temporal method maintains the underlying valuation method used
by the foreign subsidiary.
15. A Beginning net monetary assets, 1/1 P100,000 x $.16 = $16,000
Increases in net monetary assets:
Sale of inventory......................... 50,000 x $.20 = 10,000
Decreases in net monetary assets:
Purchase of equipment.............. (60,000) x $.16 = (9,600)
Purchase of inventory................ (30,000) x $.18 = (5,400)
Transfer to parent....................... (10,000) x $.21 = (2,100)
Ending net monetary assets, 12/31 P 50,000 $ 8,900
Ending net monetary assets at
the current exchange rate.......... P 50,000 x $.22 = (11,000)
Remeasurement gain....................... $(2,100)
16. C Marketable equity securities are carried at market value and therefore
translated at the current exchange rate under the temporal method.
17. B When the U.S. dollar is the functional currency, SFAS 52 requires
remeasurement using the temporal method with remeasurement gains and
losses reported in income.
18. B Wages payable is translated at the current exchange rate.
19. C Gains and losses on hedges of net investments (whether through a forward
contract, borrowing, or other technique) are offset against the translation
adjustment being hedged.
20. D Remeasurement gains are reported in the income statement as a part of
income from continuing operations.
21. (10 minutes) (Specify appropriate rates for a translation)
Rent expenseuse actual (historical) rate at time of recording. Rent
expense would often be recorded evenly throughout the year so that an
average rate for the period is acceptable.
Dividends paiduse historical rate at time of recording, the date of
declaration.
Equipmentas an asset, use current rate at the balance sheet date.
Notes payableas a liability, use current rate at the balance sheet date.
21. (continued)
Salesuse actual (historical) rate at time of recording. Sales often occur
evenly throughout the year so that an average rate is acceptable. However, if
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Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e 10-5
 sales are more prevalent at a particular time during the year, historical rates
should be used.
Depreciation expenseuse historic rate at time of recording. In most cases,
average rate for the year is acceptable, because depreciation occurs evenly
throughout the year. Depreciation is recorded at year-end only as a matter of
convenience.
Cashas an asset, use the current rate at the balance sheet date.
Accumulated depreciationas a contra-asset account, use the current ex-
change rate at the balance sheet date.
Common stockas an equity account, use historic rate at time of recording,
the date of issuance.
22. (5 minutes) (Determine translated values)
As a translation, both the asset (inventory) and the liability (accounts
payable) utilize the current exchange rate at the balance sheet date
(December 31). Thus, the translated values are as follows:
Inventory LCU120,000 x 25% left = LCU30,000 x 1/3.0 = $10,000
Accounts payable LCU120,000 x 40% unpaid = LCU48,000 x 1/3.0 = $16,000
23. (10 minutes) (Determine translation and remeasurement rates)
Translation Remeasurement
Accounts payable $.16 C $.16 C
Accounts receivable $.16 C $.16 C
Accumulated depreciation $.16 C $.26 H
Advertising expense $.19 A $.19 A
Amortization expense $.19 A $.25 H
Buildings $.16 C $.26 H
Cash $.16 C $.16 C
Common stock $.28 H $.28 H
Depreciation expense $.19 A $.26 H
Dividends paid (10/1) $.20 H $.20 H
Notes payable $.16 C $.16 C
Patents (net) $.16 C $.25 H
Salary expense $.19 A $.19 A
Sales $.19 A $.19 A
* C = current rate, H = historical rate, A = average rate

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1-6 Solutions Manual
24. (20 minutes) (Calculate translation adjustment and remeasurement gain/loss
and explain their economic relevance)
The translation adjustment and remeasurement gain/loss can be determined
as the plug figure that keeps the dollar balance sheet in balance:
Translation Remeasurement
CHF Rate US$ Rate US$
Cash............................. 500,000 $.75 C 375,000 $.75 C 375,000
Inventory...................... 1,000,000 $.75 C 750,000 $.70 H 700,000
Fixed assets................ 3,000,000 $.75 C 2,250,000 $.70 H 2,100,000
Total assets................ 4,500,000 3,375,000 3,175,000
Notes payable.......... 800,000 $.75 C 600,000 $.75 C 600,000
Owners equity............. 3,700,000 $.70 H 2,590,000 $.70 H 2,590,000
Translation adjustment 185,000
Retained earnings
(remeasurement loss) (15,000)
Total .......................... 4,500,000 3,375,000 3,175,000
Alternatively, the translation adjustment and remeasurement loss can be
calculated by analyzing the subsidiarys balance sheet exposure:
Translation
Beginning net assets, 12/1 CHF3,700,000 x $.70 = $2,590,000
Ending net assets, 12/31 at
current exchange rate CHF3,700,000 x $.75 = (2,775,000)
Translation adjustment (positive) $( 185,000)
Remeasurement
Beginning net monetary
liability position, 12/1 CHF(300,000) x $.70 = $(210,000)
Ending net monetary liability
position, 12/31 at current
exchange rate CHF(300,000) x $.75 = (225,000)
Remeasurement loss $ 15,000

Economic Relevance of Translation Adjustment

The translation adjustment increases stockholders equity by $185,000. The
positive translation adjustment arises because the Swiss subsidiary has a net asset
position of CHF3,700,000 and the Swiss franc appreciates by $.05 [CHF3,700,000 x
$.05 = $185,000]. The positive translation adjustment is not realized in terms of
dollar cash flow. It would be a realized gain only if Stephanie sold this operation on
December 31 for exactly CHF3,700,000 and converted the sales proceeds into
dollars at the current exchange rate of $.75 per Swiss franc.
Economic Relevance of Remeasurement Loss
The remeasurement loss arises because the Swiss subsidiary has a net monetary
liability position of CHF300,000 (Cash of CHF500,000 less Notes payable of
CHF800,000) and the Swiss franc has appreciated by $.05 [CHF300,000 x $.05 =
$15,000]. The loss is unrealized. It would be realized only if the Swiss subsidiary
converted its Swiss franc cash into dollars at December 31, thereby realizing a
transaction gain of $25,000 [CHF500,000 x ($.75-$.70)], and the parent paid off the
Swiss franc note payable using U.S. dollars, thereby realizing a transaction loss of
$40,000 [CHF800,000 x ($.75-$.70)]. (The note could have been paid at December 1
for $560,000 [CHF800,000 x $.70]. At December 31, it takes $600,000 to pay off the
note [CHF800,000 x $.75].)

25. (30 minutes) (Prepare financial statements for a foreign subsidiary and then
translate them into U.S. dollars)
Fenwicke Company Subsidiary
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Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e 10-7
 Income Statement
LCU U.S. Dollars
Rent revenue 60,000 x $1.90 A = $114,000
Interest expense (10,000) x $1.90 A = (19,000)
Depreciation expense (14,000) x $1.90 A = (26,600)
Repair expense (4,000) x $1.85*H = (7,400)
Net income 32,000 $ 61,000
* Repairs is the only expense which is not incurred evenly throughout the
year.
Statement of Retained Earnings
LCU U.S. Dollars

Retained earnings, 1/1 -0- -0-

Net income 32,000 (above) $61,000
Dividends paid (5,000) x $1.80 H = (9,000)
Retained earnings, 12/31 27,000 $52,000
Balance Sheet
LCU U.S. Dollars
Cash 41,000 x $1.80 C = $ 73,800
Accounts receivable 10,000 x $1.80 C = 18,000
Building 140,000 x $1.80 C = 252,000
Accumulated depreciation (14,000) x $1.80 C = (25,200)
Total assets 177,000 $318,600
Interest payable 10,000 x $1.80 C = $ 18,000
Note payable 100,000 x $1.80 C = 180,000
Common stock 40,000 x $2.00 H = 80,000
Retained earnings 27,000 (above) 52,000
Translation adjustment (below) (11,400)
Total liabilities and equities177,000 $318,600
Computation of Translation Adjustment
Beginning net assets -0- -0-
Increase in net assets:
Issued common stock 40,000 x $2.00 = $ 80,000
Net income 32,000 (above) 61,000
Decrease in net assets:
Dividends paid (5,000) x $1.80 = (9,000)
Ending net assets 67,000 $132,000
Ending net assets at current
exchange rate 67,000 x $1.80 = 120,600
Translation adjustment (negative) $ 11,400

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1-8 Solutions Manual
26. (30 minutes) (Prepare a statement of cash flows for a foreign subsidiary and
then translate it into U.S. dollars)
Fenwicke Company Subsidiary
Statement of Cash Flows
LCU U.S. Dollars
Operating Activities:
Net income 32,000 (from prob 25)
plus: depreciation 14,000 x $1.9 A = 26,600
less: increase in accounts receivable (10,000) x $1.9 A = (19,000)
plus: increase in interest payable 10,000 x $1.9 A = 19,000
Cash flow from operations 46,000 87,600
Investing Activities:
Purchase of building (140,000) x $2.0 H = (280,000)
Financing Activities:
Sale of common stock 40,000 x $2.0 H = 80,000
Borrowing on note 100,000 x $2.0 H = 200,000
Dividends paid (5,000) x $1.8 H = (9,000)

135,000 271,000
Increase in cash 41,000 78,600
Effect of exchange rate change on cash (4,800)
Cash, 1/1 -0- -0-
Cash, 12/31 41,000 x $1.80 C = $ 73,800

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Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e 10-9
27. (25 minutes) (Compute translation adjustment and remeasurement gain or
loss)
a. Translationonly changes in net assets have an impact on the computation
of the translation adjustment.
Net asset balance 1/1 KM30,000 x $.32 = $ 9,600
Increases in net assets (income):
Sold inventory at a profit 5/1 5,000 x $.34 = 1,700
Sold land at a gain 6/1 1,000 x $.35 = 350
Decreases in net assets:
Paid a dividend 12/1 (3,000) x $.41 = (1,230)
Depreciation recorded (2,000) x $.37 = ( 740)
Net asset balance 12/31 KM31,000 $ 9,680
Net asset balance 12/31
at current exchange rate KM31,000 x $.42 = (13,020)
Translation adjustmentpositive $(3,340)
b. Remeasurementonly changes in net monetary assets and liabilities have an
impact on the computation of the remeasurement gain.
Beginning net monetary
liability position KM (3,000) x $.32 = $ ( 960)
Increases in monetary assets:
Sold inventory 5/1 15,000 x $.34 = 5,100
Sold land 6/1 5,000 x $.35 = 1,750
Decreases in monetary assets:
Bought inventory 10/1 (12,000) x $.39 = (4,680)
Bought land 11/1 (4,000) x $.40 = (1,600)
Paid a dividend 12/1 (3,000) x $.41 = (1,230)
Ending net monetary liability
position KM(2,000) $(1,620)
Ending net monetary liability position
at current exchange rate KM(2,000) x $.42 = (840)
Remeasurement gain $ (780)
Note: The purchase of land on account did not result in a decrease in
monetary assets, rather an increase in monetary liabilities. Payment on the
note payable and collection of accounts receivable do not affect the net
monetary liability position.

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1-10 Solutions Manual
28. (20 minutes) (Compute translation adjustment and remeasurement gain or
loss)
a. The translation adjustment is based on changes in the net assets of the
subsidiary.
Net assets, 1/1 82,000 LCU x $.24 = $19,680
Changes in net assets
Rendered services 30,000 LCU x $.25 = 7,500
Incurred expense (18,000) LCU x $.26 = (4,680)
Net assets, 12/31 94,000 LCU 22,500
Net assets, 12/31 at
current exchange rate 94,000 LCU x $.29 = 27,260
Translation adjustment (positive) $(4,760)
b. The remeasurement gain or loss is based on changes in the net monetary
assets of the subsidiary.
Net monetary assets, 1/1 22,000 LCU x $.24 = $ 5,280
Changes in net monetary assets
Rendered services 30,000 LCU x $.25 = 7,500
Incurred expense (18,000) LCU x $.26 = (4,680)
Net monetary assets, 12/31 34,000 LCU $ 8,100
Net monetary assets, 12/31 at
current exchange rate 34,000 LCU x $.29 = 9,860
Remeasurement gain $(1,760)
c. Translated value of land 60,000 LCU x $.29 = $17,400
Remeasured value of land 60,000 LCU x $.23 = $13,800
29. (10 minutes) (Determine the appropriate exchange rate)
Account (a) Translation (b) Remeasurement
Sales 20 A 20 A
Inventory 22 C 19 H
Equipment 22 C 13 H
Rent expense 20 A 20 A
Dividends 21 H 21 H
Notes receivable 22 C 22 C
Accumulated depreciation--equipment 22 C 13 H
Salary payable 22 C 22 C
Depreciation expense 20 A 13 H
C = current exchange rate, A = average exchange rate, H = Historical
exchange rate

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Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e 10-11
30. (30 minutes) (Hedge of balance sheet exposure)
a. Net assets, 1/1 (132,000 54,000) 78,000 kites x $0.80 = $62,400
Change in net assets:
Net income 26,000 kites x $0.77 = 20,020
Dividends, 3/1 (5,000) kites x $0.78 = (3,900)
Dividends, 10/1 (5,000) kites x $0.76 = (3,800)
Net assets, 12/31 94,000 kites $74,720
Net assets at current
exchange rate, 12/31 94,000 kites x $0.75 = 70,500
Translation adjustment (negative) $ 4,220
b. Forward contract journal entries
10/1 No entry
12/31 Forward Contract................................... 2,000
Translation Adjustment (positive). . 2,000
(To record the change in the value of the forward contract as
an adjustment to the translation adjustment)
Foreign Currency (kites)....................... 150,000
Cash................................................... 150,000
(To record the purchase of 200,000 kites at the spot rate of
$.75)
Cash ...................................................... 152,000

Foreign Currency (kites).................. 150,000

Forward Contract............................. 2,000
(To record delivery of 200,000 kites, receipt of $152,000, and
close the forward contract account.)
c. The net negative translation adjustment (debit balance) to be reported in
other comprehensive income at 12/31 is $2,220 ($4,220 $2,000).

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1-12 Solutions Manual
31. (45 minutes) (Translation and remeasurement of foreign subsidiary trial
balance)
a. Translation of Subsidiary Trial Balance
Debits Credits
Cash. 8,000 KQ x 1.62 $12,960
Accounts Receivable.. 9,000 KQ x 1.62 14,580
Equipment.. 3,000 KQ x 1.62 4,860
Accumulated Depreciation 600 KQ x 1.62 $ 972
Land 5,000 KQ x 1.62 8,100
Accounts Payable 3,000 KQ x 1.62 4,860
Notes Payable.. 5,000 KQ x 1.62 8,100
Common Stock 10,000 KQ x 1.71 17,100
Dividends Paid. 4,000 KQ x 1.66 6,640
Sales 25,000 KQ x 1.64 41,000
Salary Expense 5,000 KQ x 1.64 8,200
Depreciation Expense 600 KQ x 1.64 984
Miscellaneous Expense. 9,000 KQ x 1.64 14,760
$71,084
Translation Adjustment (negative) 948
$72,032 $72,032
Calculation of Translation Adjustment
Net assets, 1/1.. -0- -0-
Increase in net assets:
Common stock issued. 10,000 KQ x 1.71 $17,100
Sales. 25,000 KQ x 1.64 41,000
Decrease in net assets:
Dividends paid.. ( 4,000) KQ x 1.66 (6,640)
Salary expense.. ( 5,000) KQ x 1.64 (8,200)
Depreciation expense. ( 600) KQ x 1.64 ( 984)
Miscellaneous expense . ( 9,000) KQ x 1.64 (14,760)
Net assets, 12/31. 16,400* KQ $27,516
Net assets, 12/31 at
current exchange rate. 16,400 KQ x 1.62 26,568
Translation adjustment (negative) $ 948
* This amount can be verified as ending assets (24,400 KQ) minus ending
liabilities (8,000 KQ) net assets, 12/31 = 16,400 KQ.

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Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e 10-13
31. (continued)
b. Remeasurement of Subsidiary Trial Balance
Debits Credits
Cash 8,000 KQ x 1.62 $12,960
Accounts Receivable 9,000 KQ x 1.62 14,580
Equipment 3,000 KQ x 1.71 5,130
Accumulated Depreciation 600 KQ x 1.71 $ 1,026
Land 5,000 KQ x 1.59 7,950
Accounts Payable 3,000 KQ x 1.62 4,860
Notes Payable 5,000 KQ x 1.62 8,100
Common Stock 10,000 KQ x 1.71 17,100
Dividends Paid 4,000 KQ x 1.66 6,640
Sales 25,000 KQ x 1.64 41,000
Salary Expense 5,000 KQ x 1.64 8,200
Depreciation Expense 600 KQ x 1.71 1,026
Miscellaneous Expense 9,000 KQ x 1.64 14,760
$71,246
Remeasurement loss (debit) 840
$72,086 $72,086
Calculation of Remeasurement Loss
Net monetary assets, 1/1 -0- -0-
Increase in net monetary assets:
Common stock issued 10,000 KQ x 1.71 $17,100
Sales 25,000 KQ x 1.64 41,000
Decrease in net monetary assets:
Acquired equipment (3,000) KQ x 1.71 (5,130)
Acquired land (5,000) KQ x 1.59
(7,950)
Dividends paid (4,000) KQ x 1.66
(6,640)
Salary expense (5,000) KQ x 1.64
(8,200)
Miscellaneous expense (9,000) KQ x 1.64 (14,760)
Net monetary assets, 12/31 9,000* KQ $15,420
Net monetary assets, 12/31
at current exchange rate 9,000 KQ x 1.62 14,580
Remeasurement loss (debit) $ 840
* This amount can be verified as ending assets (17,000 KQ) minus ending
liabilities (8,000 KQ) net assets, 12/31 = 9,000 KQ.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2007

1-14 Solutions Manual
32. (30 minutes) (Translate the financial statements of a foreign subsidiary)
LIVINGSTON COMPANY
Income Statement
For Year Ending December 31, 2007
Goghs U.S. Dollars
Sales 270,000 x 1/.63 = 428,571
Cost of Goods Sold (155,000) x 1/.63 = (246,032)
Gross Profit 115,000 182,539
Operating Expenses (54,000) x 1/.63 = (85,714)
Gain on Sale of Equipment 10,000 x 1/.58 = 17,241
Net Income 71,000 114,066
Statement of Retained Earnings
For Year Ending December 31, 2007
Goghs U.S. Dollars
Retained Earnings, 1/1/07 216,000 given 395,000
Net Income 71,000 above 114,066
Dividends Paid (26,000) x 1/.62 = (41,935)
Retained Earnings, 12/31/07 261,000 467,131

Balance Sheet
December 31, 2007
Goghs U.S. Dollars
Cash 44,000 x 1/.65 = 67,692
Receivables 116,000 x 1/.65 = 178,462
Inventory 58,000 x 1/.65 = 89,231
Fixed Assets (net) 339,000 x 1/.65 = 521,538
Total 557,000 856,923
Liabilities 176,000 x 1/.65 = 270,769
Common Stock 120,000 x 1/.48 = 250,000
Retained Earnings 261,000 above 467,131
Translation Adjustment (130,977)
Total 557,000 856,923
Translation Adjustment Goghs U.S. Dollars
Net assets, 1/1/07 336,000 x 1/.60 = 560,000
Net income, 2007 71,000 above 114,066
Dividends paid (26,000) above (41,935)
Net assets, 12/31/07 381,000 632,131
Net assets at current exchange rate,
12/31/07 381,000 x 1/.65 = 586,154
Translation adjustment, 2007 (negative) 45,977
Cumulative translation adjustment, 1/1/07 (negative) 85,000
Cumulative translation adjustment, 12/31/07 (negative) 130,977

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2007

Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e 10-15
33. (35 minutes) (Compute translation adjustment and remeasurement gain or
loss)
a. Remeasurement Gain or Loss
Net monetary assets, 1/1/07* 2,000 KR x 2.50 = $ 5,000
Increases in net monetary assets:
Issued Common Stock (4/1/07) 10,000 KR x 2.60 = 26,000
Sold Building** (7/1/07) 22,000 KR x 2.80 = 61,600
Sales (2007) 80,000 KR x 2.70 = 216,000
Decreases in net monetary assets:
Purchased Equipment (4/1/07) (30,000) KR x 2.60 = (78,000)
Paid Dividends (10/1/07) (32,000) KR x 2.90 = (92,800)
Rent Expense (2007) (14,000) KR x 2.70 = (37,800)
Salary Expense (2007) (20,000) KR x 2.70 = (54,000)
Utilities Expense (2007) ( 5,000) KR x 2.70 = (13,500)
Net monetary assets, 12/31/07 13,000 KR $ 32,500
Net monetary assets, 12/31/07 at
current exchange rate 13,000 KR x 3.00 = 39,000
Remeasurement gain (credit) $ (6,500)
* Net monetary assets: (Cash + Accounts Receivable) - (Account Payable +
Bonds Payable)
** To determine cash proceeds from the sale of the building, changes in the
Accumulated Depreciation and Buildings accounts must be analyzed
along with Depreciation Expense and Gain on Sale of Building.
Depreciation expense is KR 15,000; KR 5,000 is attributable to equipment
(Accumulated DepreciationEquipment increases by KR 5,000), KR
10,000 is depreciation of buildings. Accumulated Depreciation
Buildings increases by only KR 5,000 during 2007, therefore, the
accumulated depreciation related to the building sold during 2007 is KR
5,000. The Buildings account is decreased by KR 21,000, thus the book
value of the building sold must have been KR 16,000 (as given). The Gain
on Sale of Building is KR 6,000; therefore, cash proceeds from the sale
are KR 22,000.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2007

1-16 Solutions Manual
33. (continued)
b. Translation Adjustment

Net assets, 1/1/07* 100,000 KR x 2.50 = $250,000

Increases in net assets
Issued Common Stock (4/1/07) 10,000 KR x 2.60 = 26,000
Gain on Sale of Building** (7/1/07) 6,000 KR x 2.80 = 16,800
Sales (2007) 80,000 KR x 2.70 = 216,000
Decreases in net assets
Paid Dividends (10/1/07) (32,000) KR x 2.90 = (92,800)
Depreciation Expense (2007) (15,000) KR x 2.70 = (40,500)
Rent Expense (2007) (14,000) KR x 2.70 = (37,800)
Salary Expense (2007) (20,000) KR x 2.70 = (54,000)
Utilities Expense (2007) ( 5,000) KR x 2.70 = (13,500)
Net assets, 12/31/07 110,000 KR $270,200
Net monetary assets, 12/31/07 at
current exchange rate 110,000 KR x 3.00
330,000
Translation adjustment (positive) $(59,800)
* Net assets: Common stock + Retained earnings
** Selling a building at a gain of KR 6,000 increases net assets by that
amount.
Although not required by Part b, the beginning translation adjustment as of
January 1, 2007 can be computed by translating the January 1 accounts and
assuming that the translation adjustment is the balancing figure:
Common Stock, 1/1/07 70,000 KR x 2.40 = $168,000
Retained Earnings, 1/1/07 30,000 KR given 62,319
Net assets, 1/1/07 100,000 KR $230,319
Net assets, 1/1/07 at current
exchange rate 100,000 KR x 2.50 = 250,000
Cumulative translation adjustment (positive), 1/1/07 $ (19,681)
Translation adjustment (positive), 2007 (59,800)
Cumulative translation adjustment (positive), 12/31/07 $ (79,481)

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2007

Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e 10-17
34. (90 minutes) (Remeasure non-functional currency accounts into foreign
functional currency and then translate foreign functional currency financial
statements into U.S. dollars)
a. Remeasurement of Mexican Operations
Canadian
Dollars
Pesos Debit Credit
Accounts payable 49,000 x .35 C 17,150
Accumulated depreciation 19,000 x .25 H 4,750
Building and equipment 40,000 x .25 H 10,000
Cash 59,000 x .35 C 20,650
Depreciation expense 2,000 x .25 H 500
Inventory (beginning
income statement) 23,000 x .30 A (06) 6,900
Inventory (ending
income statement) 28,000 x .34 A(07) 9,520
Inventory (endingbalance sheet) 28,000 x .34 A(07) 9,520
Purchases 68,000 x .34 A(07) 23,120
Receivables 21,000 x .35 C 7,350
Salary expense 9,000 x .34 A 3,060
Sales 124,000 x .34 A 42,160
Main office 30,000 given 7,530
Remeasurement loss Schedule One 10
Total 81,110 81,110

Schedule OneRemeasurement Loss Pesos Canadian Dollars

Net monetary liabilities, 1/1/07* (16,000) x .32 (5,120)
Increases in net monetary assets
Sales 124,000 x .34 42,160
Decreases in net monetary assets
Purchases (68,000) x .34 (23,120)
Salary Expense ( 9,000) x .34 ( 3,060)
Net monetary assets, 12/31/07** 31,000 10,860
Net monetary assets, 12/31/07 at
current exchange rate 31,000 x .35 10,850
Remeasurement loss 10

* Net monetary liabilities, 1/1/07, can be determined by first determining the

net monetary assets at 12/31/07 and then backing out the changes in
monetary assets and liabilities during 2007sales, purchases, and salary
expense.
** Net monetary assets, 12/31/07: Cash + Receivables Accounts Payable

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2007

1-18 Solutions Manual
34. (continued)
b. The following C$ financial statements are produced by combining the
figures from the main operation with the remeasured figures from the
branch operation. The Branch Operation and Main Office accounts offset
each other. Cost of goods sold for the Mexican branch is determined by
combining beginning inventory, purchases, and ending inventory as
remeasured in C$.
Income Statement c. Translation into U.S. dollars
For the Year Ended December 31, 2007 Current Rate Method
Sales C$ 354,160 x .67 A = $ 237,287.20
Cost of goods sold (223,500) x .67 A = (149,745.00)
Gross profit 130,660 87,542.20
Depreciation expense (8,500) x .67 A = (5,695.00)
Salary expense (29,060) x .67 A = (19,470.20)
Utility expense (9,000) x .67 A = (6,030.00)
Gain on sale of equipment 5,000 x .68 H = 3,400.00
Remeasurement loss (10) x .67 A = (6 .70)

Net income C$ 89,090 $ 59,740.30

Statement of Retained Earnings
For the Year Ended December 31, 2007
Retained earnings, 1/1/07 C$ 135,530 Given $ 70,421.00
Net income (above) 89,090 Above 59,740.30
Dividends paid ( 28,000) x .69 H = (19,320.00)
Retained earnings, 12/31/07 C$ 196,620 $110,841.30

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2007

Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e 10-19
34. (continued)
Balance Sheet
December 31, 2007
Cash C$ 46,650 x .65 C = $ 30,322.50
Receivables 75,350 x .65 C = 48,977.50
Inventory 107,520 x .65 C = 69,888.00
Buildings and equipment 177,000 x .65 C = 115,050.00
Accumulated depreciation (31,750) x .65 C = (20,637.50)
Total C$ 374,770 $243,600.50
Accounts payable C$ 52,150 x .65 C = $ 33,897.50
Notes payable 76,000 x .65 C = 49,400.00
Common stock 50,000 x .45 H = 22,500.00
Retained earnings 196,620 Above 110,841.30
Cumulative translation adjustment Schedule Two 26,961.70
Total C$ 374,770 $ 243,600.50
Schedule TwoTranslation Adjustment
Net assets, 1/1/07 C$ 185,530 x .70 = $129,871.00
Changes in net assets
Net income 89,090 Above 59,740.30
Dividends (28,000) x .69 = (19,320.00)
Net assets, 12/31/07 C$ 246,620 $170,291.30
Net assets, 12/31/07 at
current exchange rate C$ 246,620 x .65 = 160,303.00
Translation adjustment, 2007 (negative) $ 9,988.30
Cumulative translation adjustment, 1/1/07 (positive) (36,950.00)
Cumulative translation adjustment, 12/31/07 (positive) $(26,961.70)

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2007

1-20 Solutions Manual
35. (90 minutes) (Translate foreign currency financial statements and prepare
consolidation worksheet)
Step One
Simbel's financial statements are first translated into U.S. dollars after
reclassification of the 10,000 pound expenditure for rent from rent expense
to prepaid rent. Credit balances are in parentheses.
Translation Worksheet
Exchange
Account Pounds Rate Dollars
Sales (800,000) 0.274 (219,200)
Cost of goods sold 420,000 0.274 115,080
Salary expense 74,000 0.274 20,276
Rent expense (adjusted) 36,000 0.274 9,864
Other expenses 59,000 0.274 16,166
Gain on sale of fixed
assets, 10/1/08 (30,000) 0.273 (8,190)
Net income (241,000) (66,004)
R/E, 1/1/08 (133,000) Schedule 1 (38,244)
Net income (241,000) Above (66,004)
Dividends paid 50,000 0.275 13,750
R/E,12/31/08 (324,000) (90,498)
Cash and receivables 146,000 0.270 39,420
Inventory 297,000 0.270 80,190
Prepaid rent (adjusted) 10,000 0.270 2,700
Fixed assets 455,000 0.270 122,850
Total 908,000 245,160
Accounts payable (54,000) 0.270 (14,580)
Notes payable (140,000) 0.270 (37,800)
Common stock (240,000) 0.300 (72,000)
Addl paid-in capital (150,000) 0.300 (45,000)
Retained earnings, 12/31/08 (324,000) Above (90,498)
Subtotal (259,878)
Cumulative translation
adjustment (negative) Schedule 2 14,718
Total (908,000) (245,160)

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2007

Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e 10-21
35. (continued)
Schedule 1Translation of 1/1/08 Retained Earnings
Pounds Dollars
Retained earnings, 1/1/07 -0- -0-
Net income, 2007 (163,000) 0.288 (46,944)
Dividends, 6/1/07 30,000 0.290 8,700
Retained earnings, 12/31/07 (133,000) (38,244)

Schedule 2Calculation of Cumulative Translation Adjustment at 12/31/08

Pounds Dollars

Net assets, 1/1/07 (390,000) 0.300 (117,000)

Net income, 2007 (163,000) 0.288 (46,944)
Dividends, 6/1/07 30,000 0.290 8,700
Net assets, 12/3/07 (523,000) (155,244)
Net assets, 12/31/07 at
current exchange rate (523,000) 0.280 (146,440)
Translation adjustment, 2007 (negative) (8,804)
Net assets, 1/1/08 (523,000) 0.280 (146,440)
Net income, 2008 (241,000) Above (66,004)
Dividends, 6/1/08 50,000 0.275 13,750
Net assets, 12/31/08 (714,000) (198,694)
Net assets, 12/31/08 at
current exchange rate (714,000) 0.270 (192,780)
Translation adjustment, 2008 (negative) (5,914)
Cumulative translation adjustment, 12/31/08 (negative) (14,718)

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2007

1-22 Solutions Manual
35. (continued)
Step Two
Cayce and Simbel's U.S. dollar accounts are then consolidated. Necessary
adjustments and eliminations are made.
Consolidation Worksheet
Adjustments and
Consolidated
Cayce Simbel Eliminations Balances
Account Dollars Dollars Debit Credit Dollars
Sales (200,000) (219,200) (419,200)
Cost of goods sold 93,800 115,080 208,880
Salary expense 19,000 20,276 39,276
Rent expense 7,000 9,864 16,864
Other expenses 21,000 16,166 37,166
Dividend income (13,750) -0- (I) 13,750 -0-
Gain, 10/1/08 -0- (8,190) (8,190)
Net income (72,950) (66,004) (125,204)
Ret earn, 1/1/08 (318,000) (38,244) (S) 38,244 (*C) (38,244) (356,244)
Net income (72,950) (66,004) (125,204)
Dividends paid 24,000 13,750 (I) (13,750) 24,000
Ret earn, 12/31/08 (366,950) (90,498) (457,448)
Cash and receivables 110,750 39,420 150,170
Inventory 98,000 80,190 178,190
Prepaid rent 30,000 2,700 32,700
Investment 126,000 -0- (*C) 38,244 (S)(164,244) -0-
Fixed assets 398,000 122,850 (S) 9,000 (E) (900) 528,950
Total 762,750 245,160 890,010
Accounts payable (60,800) (14,580) (75,380)
Notes payable (132,000) (37,800) (169,800)
Common stock (120,000) (72,000) (S) 72,000 (120,000)
Additional PIC (83,000) (45,000) (S) 45,000 (83,000)
Ret earn, 12/31/08 (366,950) (90,498) (457,448)
Subtotal (259,878) (905,628)
Cum trans adjust 14,718 (E) 900 15,618
Total (762,750) (245,160) 217,138 (217,138) (890,010)

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2007

Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e 10-23
35. (continued)
Explanation of Adjustment and Elimination Entries

Entry *C
Investment in Simbel..................................................... 38,244
Retained earnings, 1/1/08......................................... 38,244
To accrue 2007 increase in subsidiary book value (see Schedule 1). Entry is
needed because parent is using the cost method.

Entry S
Common Stock (Simbel) ................ 72,000
Add'l Paid-in-capital (Simbel)............ 45,000
Retained earnings, 1/1/08 (Simbel)... 38,244
Fixed assets (revaluation) ................ 9,000
Investment in Simbel ................ 164,244
To eliminate subsidiary's stockholders' equity accounts and allocate the
excess of purchase price over book value to land (fixed assets).
The excess of cost over book value is calculated as follows:
Purchase price..................................................... $126,000
Book value, 1/1/07...............................................

Common stock.................................................. (72,000)

Addl paid-in capital.......................................... (45,000)
Excess of purchase price over book value...... $ 9,000
The excess of cost over book value is 30,000 pounds. The U.S. dollar
equivalent at 1/1/07, the date of purchase, is $9,000 (E30,000 x $.30).
Entry I
Dividend income.................................................. 13,750
Dividends paid................................................ 13,750
To eliminate intercompany dividend payments recorded by parent as
income.
Entry E
Cumulative translation adjustment................... 900
Fixed assets (revaluation) ............................ 900
To revalue (write-down) the excess of cost over book value for the change in
exchange rate since the date of acquisition with the counterpart recognized
in the consolidated cumulative translation adjustment.
The revaluation of "excess" is calculated as follows:
Excess of cost over book value
U.S. dollar equivalent at 12/31/08 E30,000 x $.27 = $8,100
U.S. dollar equivalent at 1/1/07 E30,000 x $.30 = 9,000
Cumulative translation adjustment
related to excess, 12/31/08 (negative) $( 900)

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2007

1-24 Solutions Manual
36. (90 minutes) (Translate foreign currency financial statements using U.S.
GAAP and explain sign of translation adjustment [remeasurement
gain/loss].)
Part I (a). Czech koruna is the functional currencycurrent rate method
Exchange
KCS Rate US$
Sales 25,000,000 0.035 875,000
Cost of goods sold (12,000,000) 0.035 (420,000)
Depreciation expenseequipment (2,500,000) 0.035 (87,500)
Depreciation expensebuilding (1,800,000) 0.035 (63,000)
Research and development expense (1,200,000) 0.035 (42,000)
Other expenses (1,000,000) 0.035 (35,000)
Net income 6,500,000 227,500
Retained earnings, 1/1/08 500,000 given 22,500
Dividends paid, 12/15/08 (1,500,000) 0.031 (46,500)
Retained earnings, 12/31/08 5,500,000 203,500
Cash 2,000,000 0.030 60,000
Accounts receivable 3,300,000 0.030 99,000
Inventory 8,500,000 0.030 255,000
Equipment 25,000,000 0.030 750,000
Accum. deprec.equipment (8,500,000) 0.030 (255,000)
Building 72,000,000 0.030 2,160,000
Accum. deprec.equipment (30,300,000) 0.030 (909,000)
Land 6,000,000 0.030 180,000
Total assets 78,000,000 2,340,000
Accounts payable 2,500,000 0.030 75,000
Long-term debt 50,000,000 0.030 1,500,000
Common stock 5,000,000 0.050 250,000
Additional paid-in capital 15,000,000 0.050 750,000
Retained earnings, 12/31/08 5,500,000 above 203,500
Translation adjustment - to balance (438,500)
Total liabilities and equities 78,000,000 2,340,000

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2007

Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e 10-25
36. (continued)
Calculation of Translation Adjustment
Translation adjustment, 2007 (negative) 202,500
Net assets, 1/1/08 20,500,000 0.040 820,000
Net income, 2008 6,500,000 0.035 227,500
Dividends, 12/15/08 (1,500,000) 0.031 (46,500)
Net assets, 12/31/08 25,500,000 1,001,000
Net assets, 12/31/08 at current
exchange rate 25,500,000 0.030 765,000
Translation adjustment, 2008 (negative) 236,000
Cumulative translation adjustment, 12/31/08 (negative) 438,500

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2007

1-26 Solutions Manual
36. (continued)
Part I (b). U.S. dollar is the functional currencytemporal method
Exchange
KCS Rate US$
Sales 25,000,000 0.035 875,000
Cost of goods sold (12,000,000) Sched.A (493,500)
Depreciation expenseequipment (2,500,000) Sched.B (118,000)
Depreciation expensebuilding (1,800,000) Sched.C (85,200)
Research and development expense (1,200,000) 0.035 (42,000)
Other expenses (1,000,000) 0.035 (35,000)
Income before remeasurement gain 6,500,000 101,300
Remeasurement gain, 2008 - 408,000
Net income 6,500,000 509,300
Retained earnings, 1/1/08 500,000 given 353,000
Dividends paid, 12/15/08 (1,500,000) 0.031 (46,500)
Retained earnings, 12/31/08 5,500,000 815,800
Cash 2,000,000 0.030 60,000
Accounts receivable 3,300,000 0.030 99,000
Inventory 8,500,000 0.032 272,000
Equipment 25,000,000 Sched.B 1,180,000
Accum. deprec.equipment (8,500,000) Sched.B (418,000)
Building 72,000,000 Sched.C 3,408,000
Accum. deprec.equipment (30,300,000) Sched.C (1,510,200)
Land 6,000,000 0.050 300,000
Total assets 78,000,000 3,390,800
Accounts payable 2,500,000 0.030 75,000
Long-term debt 50,000,000 0.030 1,500,000
Common stock 5,000,000 0.050 250,000
Additional paid-in capital 15,000,000 0.050 750,000
Retained earnings, 12/31/08 5,500,000 above 815,800
Total liabilities and equities 78,000,000 3,390,800
Schedule ACost of goods sold
KCS ER US$
Beginning inventory 6,000,000 0.043 258,000
Purchases 14,500,000 0.035 507,500
Ending inventory (8,500,000) 0.032 (272,000)
Cost of goods sold 12,000,000 493,500

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2007

Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e 10-27
36. (continued)
Schedule BEquipment
KCS ER US$
Old Equipmentat 1/1/08 20,000,000 0.050 1,000,000
New Equipmentacquired 1/3/08 5,000,000 0.036 180,000
Total 25,000,000 1,180,000
Accum. Depr.Old Equipment 8,000,000 0.050 400,000
Accum. Depr.New Equipment 500,000 0.036 18,000
Total 8,500,000 418,000
Deprec expenseOld Equipment 2,000,000 0.050 100,000
Deprec expenseNew Equipment 500,000 0.036 18,000
Total 2,500,000 118,000
Schedule CBuilding
KCS ER US$
Old Buildingat 1/1/07 60,000,000 0.050 3,000,000
New Buildingacquired 3/5/08 12,000,000 0.034 408,000
Total 72,000,000 3,408,000
Accum. Depr.Old Building 30,000,000 0.050 1,500,000
Accum. Depr.New Building 300,000 0.034 10,200
Total 30,300,000 1,510,200
Deprec. expenseOld Building 1,500,000 0.050 75,000
Deprec. expenseNew Building 300,000 0.034 10,200
Total 1,800,000 85,200
Calculation of Remeasurement Gain
KCS ER US$
Net mon. liab., 1/1/08 (37,000,000) 0.040 (1,480,000)
Increase in mon. assets:
Sales 25,000,000 0.035 875,000
Decrease in mon. 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)
Dividends paid, 12/15/08 (1,500,000) 0.031 (46,500)
Purchase of equipment, 1/3/08 (5,000,000) 0.036 (180,000)
Purchase of buildings, 3/5/08 (12,000,000) 0.034 (408,000)
Net mon liab, 12/31/08 (47,200,000) (1,824,000)
Net mon liab, 12/31/08 at
current exchange rate (47,200,000) 0.030 (1,416,000)
Remeasurement gain2008 (408,000)

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2007

1-28 Solutions Manual
36. (continued)

Part I (c). U.S. dollar is the functional currencytemporal method (no long-
term debt)
Exchange
KCS Rate US$
Sales 25,000,000 0.035 875,000
Cost of goods sold (12,000,000) Sched.A (493,500)
Depreciation expenseequipment (2,500,000) Sched.B (118,000)
Depreciation expensebuilding (1,800,000) Sched.C (85,200)
Research and development expense (1,200,000) 0.035 (42,000)
Other expenses (1,000,000) 0.035 (35,000)
Income before remeasurement loss 6,500,000 101,300
Remeasurement loss, 2008 - (92,000)
Net income 6,500,000 9,300
Retained earnings, 1/1/08 500,000 given (147,000)
Dividends paid, 12/15/08 (1,500,000) 0.031 (46,500)
Retained earnings, 12/31/08 5,500,000 (184,200)

Cash 2,000,000 0.030 60,000

Accounts receivable 3,300,000 0.030 99,000
Inventory 8,500,000 0.032 272,000
Equipment 25,000,000 Sched.B 1,180,000
Accum. deprec.equipment (8,500,000) Sched.B (418,000)
Building 72,000,000 Sched.C 3,408,000
Accum. deprec.equipment (30,300,000) Sched.C(1,510,200)
Land 6,000,000 0.050 300,000
Total assets 78,000,000 3,390,800

Accounts payable 2,500,000 0.030 75,000

Long-term debt 0 0.030 0
Common stock 20,000,000 0.050 1,000,000
Additional paid in capital 50,000,000 0.050 2,500,000
Retained earnings, 12/31/08 5,500,000 above (184,200)
Total liabilities and equities 78,000,000 3,390,800

Schedule ACost of goods sold - same as in Part I (b)

Schedule BEquipment - same as in Part I (b)

Schedule CBuilding - same as in Part I (b)

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Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e 10-29
36. (continued)
Calculation of Remeasurement Loss
KCS ER US$
Net monetary assets, 1/1/08 13,000,000 0.040 520,000
Increase in monetary assets:
Sales 25,000,000 0.035 875,000
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)
Dividends paid, 12/15/08 (1,500,000) 0.031 (46,500)
Purchase of equipment, 1/3/08 (5,000,000) 0.036 (180,000)
Purchase of buildings, 3/5/08 (12,000,000) 0.034 (408,000)
Net monetary assets, 12/31/08 2,800,000 176,000
Net monetary assets, 12/31/08
at current exchange rate 2,800,000 0.030 84,000
Remeasurement loss2008 92,000
Part II. Explanation of the negative translation adjustment in Part I (a),
remeasurement gain in Part I (b), and remeasurement loss in Part I (c).
The negative translation adjustment in Part I (a) arises because of two
factors: (1) there is a net asset balance sheet exposure and (2) the Czech
koruna has depreciated against the U.S. dollar during 2008 (from $.040 at
1/1/08 to $.030 at 12/31/08). A net asset balance sheet exposure exists
because all assets are translated at the current exchange rate and exceed
total liabilities which are also translated at the current exchange rate.
The remeasurement gain in Part I (b) arises because of two factors: (1) there
is a net monetary liability balance sheet exposure and (2) the Czech koruna
has depreciated against the U.S. dollar. Under the temporal method, Cash
and Accounts Receivable are the only assets translated at the current
exchange rate (total KCS 5,300,000). Accounts Payable and Long-term Debt
are also translated at the current exchange rate (total KCS 52,500,000).
Because the Czech koruna amount of liabilities translated at the current rate
exceeds the Czech koruna amount of assets translated at the current rate, a
net monetary liability balance sheet exposure exists.
The remeasurement loss in Part I (c) arises because of two factors: (1) there
is a net monetary asset balance sheet exposure and (2) the Czech koruna has
depreciated against the U.S. dollar during 2008. Cash and Accounts
Receivable are the only assets translated at the current exchange rate (total
KCS 5,300,000). Because there is no Long-term Debt in part 1(c), Accounts
Payable is the only liability translated at the current exchange rate (total KCS
2,500,000). Because the Czech koruna amount of assets translated at the
current rate exceeds the Czech koruna amount of liabilities translated at the
current rate, a net monetary asset balance sheet exposure exists.

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1-30 Solutions Manual
Excel CaseTranslating Foreign Currency Financial Statements
1.2. Spreadsheet for the translation (current rate method) and remeasurement
(temporal method) of the FC financial statements of Charles Edward
Companys foreign subsidiary.
Temporal Method Current Rate Method
December 31, 2007 FC Rate USD Rate USD
Sales 5,000 $0.45 A $2,250 $0.45 A $2,250
Cost of goods sold (3,000) calculation (1,360) $0.45 A (1,350)
Gross profit 2,000 subtotal 890 subtotal 900
Selling expense (400) $0.45 A (180) $0.45 A (180)
Depreciation expense (600) $0.50 H (300) $0.45 A (270)
Remeasurement gain/loss 0 to balance 355 n/a 0
Income before tax 1,000 subtotal 765 subtotal 450
Income taxes (300) $0.45 A (135) $0.45 A (135)
Net income 700 subtotal 630 subtotal 315
Retained earnings, 1/1/07 0 0 0
Retained earn, 12/31/07 700 from B/S 630 total 315

Cash 1,000 $0.38 C 380 $0.38 C 380

Inventory 2,000 $0.43 H 860 $0.38 C 760
Fixed assets 6,000 $0.50 H 3,000 $0.38 C 2,280
Less: accum/deprec (600) $0.50 H (300) $0.38 C (228)
Total assets 8,400 total 3,940 total 3,192

Current liabilities 1,500 $0.38 C 570 $0.38 C 570

Long-term debt 3,000 $0.38 C 1,140 $0.38 C 1,140
Contributed capital 3,200 $0.50 H 1,600 $0.50 H 1,600
Cum. trans. adjust. 0 n/a 0 to balance (433)*
Retained earnings 700 to balance 630 from I/S 315
Total liab and stock equity 8,400 A=L+SE 3,940 A=L+SE 3,192

Exchange Rates Temporal methodCOGS (on a FIFO basis)

January 1-31, 2007 $0.50 BI 1,000 $0.50 H $500
Average 2007 $0.45 P 4,000 $0.43 H 1,720
December 31, 2007 $0.38 EI (2,000) $0.43 H (860)
Inventory purchases $0.43 COGS 3,000 $1,360
Key:
Average Exchange Rate A
Current Exchange Rate C
Historical Exchange Rate H

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Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e 10-31
*Computation of Translation Adjustment
FC USD
Net assets, 1/1/07 3,200 $0.50 1,600
Net income, 2007 700 $0.45 315
Net assets, 12/31/07 3,900 1,915
Net assets, 12/31/07
at current exchange rate 3,900 $0.38 1,482
Translation adjustment (negative) 433

3. With the FC as functional currency, the U.S. dollar net income reflected in the
consolidated income statement is $315. If the U.S. dollar were the functional
currency, the amount would be twice as much$630. The amount of total
assets reported on the consolidated balance sheet is 23.4% smaller than if the
U.S. dollar were functional currency [($3,940 $3,192)/$3,192].

The relations between the current ratio, the debt to equity ratio, and profit
margin calculated from the FC financial statements and from the translated
U.S. dollar financial statements are shown below.

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1-32 Solutions Manual
 FC Temporal Current Rate
Current ratio
CA 3,000 1,240 1,140
CL 1,500 570 570
2.0 2.1754 2.0

Debt to equity ratio

Total liabilities 4,500 1,710 1,710
Total stockholders 3,900 2,230 1,482
equity
1.15385 0.76682 1.15385

Profit margin
NI 700 630 315
Sales 5,000 2,250 2,250
0.14 0.28 0.14

Return on equity
NI 700 630 315
Average TSE 3,550 1,915 1,541
0.19718 0.32898 0.20441

Inventory turnover
COGS 3,000 1,360 1,350
Average Inventory 1,000 430 380
3 3.16279 3.55263

These results show that the temporal method distorts all ratios as calculated
from the original foreign currency financial statements. The current rate
method maintains all ratios that use numbers in the numerator and
denominator from the balance sheet only (current ratio, debt-to-equity ratio)
or the income statement only (profit margin). For ratios that combine
numbers from the income statement and balance sheet (return on equity,
inventory turnover), even the current rate method creates distortions.

The U.S. dollar amounts reported under the temporal method for inventory
and fixed assets reflect the equivalent U.S. dollar cost of those assets as if
the parent had sent dollars to the subsidiary to purchase the assets. For
example, to purchase FC 6,000 worth of fixed assets when the exchange rate
was $.50/FC, the parent would have had to provide the subsidiary with
$3,000.

The U.S. dollar amounts reported under the current rate method for inventory
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Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e 10-33
 and fixed assets reflect neither the equivalent U.S. dollar cost of those
assets nor their U.S. dollar current value. By multiplying the FC historical
cost by the current exchange rate, these assets are reported at what they
would have cost in U.S. dollars if the current exchange rate had been in
effect when they were purchased. This is a hypothetical number with little, if
any, meaning.

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1-34 Solutions Manual