Chapter 14

FOREIGN CURRENCY FINANCIAL STATEMENTS

Answers to Questions

1 A companys functional currency is the currency of the primary economic environment in which it
operates. It is normally the currency in which it receives most of its payments from customers and in
which it pays most of its liabilities. Other factors that are considered in determining the functional
currency include whether its sales prices are determined primarily by local competition or local
government regulation instead of short-run exchange rate changes or worldwide markets.

The functional currency determination (local currency or parent currency or some other currency) is critical
in determining what approach to converting financial statements to the ultimate reporting currency is used:
the current rate or the temporal method. If the functional currency is the local currency, the current rate
method is used. If it is the parent currency, the temporal method is used. If it is some other currency, then
both approaches may need to be used.

2 A highly inflationary economy under GAAP is one that has cumulative inflation of approximately 100
percent or more over a three-year period. The functional currency is assumed to be the reporting currency
(for U.S. companies, the dollar) which means that the foreign currency financial statements must be
remeasured into the dollar using the temporal method. The effect of the hyperinflation is then reflected in
the current years consolidated income statement which would not be the case if the current rate method
were used. J udgment must be exercised in applying this rule to avoid changing functional currencies
frequently due to minor differences in the inflation rate.

3 The functional currency of a foreign subsidiary does not affect the original recording of the business
combination. This is because all assets, liabilities, and equities of the foreign subsidiary are converted into
U.S. dollars at the current exchange rate in effect on the date of consummation of the business
combination. As a result, no special procedure must be applied at the date of original recording of a
foreign subsidiary.

4 The current rate method is used when the foreign subsidiarys local currency is determined to be the
subsidiarys functional currency. The subsidiarys financial statements must be translated using the current
rate method into the reporting entitys currency (typically the parents currency).

5 The temporal method is used when the foreign subsidiarys currency is determined to be the reporting
entitys currency (typically the parents currency). The subsidiarys financial statements must be
remeasured using the temporal method into the reporting entitys currency.

6 Since the functional currency is not the parents currency, no direct impact on the reporting entitys
(parents) cash flows is expected due to exchange rate changes. The effects of exchange rate changes are
reflected in the consolidated statements accumulated comprehensive income account instead of being
included in the income statement.

7 Since the functional currency is assumed to be the reporting entitys (or parents) currency, a direct impact
on the parents cash flows is expected due to exchange rate changes. The effects of exchange rate changes
are reflected in the consolidated income statement.

8 A foreign subsidiarys financial statements could be both translated and remeasured if the entitys books
are maintained in a different currency than the functional currency and the functional currency is not the
reporting entitys local currency. In this case, the entitys financial statements must be remeasured into the
functional currency using the temporal method. The gain or loss on remeasurement is included in income.
The functional currency financial statements are then translated into the reporting entitys currency using
14-2 Foreign Currency Financial Statements

Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
the current rate method. The gain or loss on the translation is included in accumulated other
comprehensive income. In this situation, the consolidated financial statements would include both a
remeasurement gain or loss in income and the a translation adjustment included in accumulated other
comprehensive income.

9 No, it would not be appropriate to use the annual average exchange rate. Theoretically, the exchange rate
at the date each transaction occurs should be used. Given that this is not practical, reasonable assumptions
are made concerning what exchange rate to use. The use of an average exchange rate is appropriate when
sales are earned evenly during the year and expenses are incurred evenly during the year. A reasonable
assumption for a holiday tree grower would be to use the average exchange rate during the quarter from
October through December since those are the months that trees are typically sold. For expenses,
examining the months that are the most labor intensive (such as planting, fertilizing and harvesting) and
using a reasonable weighting of those months exchange rates would be a reasonable way of determining
the rate for those costs.

10 The parent purchased the subsidiary for an amount in excess of book value. This excess was attributable to
an unrecorded patent. Recall that the excess amount would not be included on the subsidiarys books. The
consolidated financial statements, however, would include both the amortization of the patent and the
patent. Since the current rate method is being used, the impact of the change in exchange rates on the
patent and the amortization is included in the translation adjustment to be included in consolidated
comprehensive income. The subsidiarys translation adjustment would not include this because the patent
was not included in the books. Thus, the consolidated translation adjustment is larger than the subsidiarys
translation adjustment.

11 The temporal method requires remeasuring expenses of a foreign subsidiary. Expenses related to monetary
items are remeasured at appropriately weighted average exchange rates for the period. Those types of
expenses are either paid in cash or recorded as liabilities which will require the eventual payment of cash.
Those that relate to nonmonetary items are remeasured at historical exchange rates. Expenses related to
nonmonetary items would be those related to inventory and plant assets. Under the current rate method, all
accounts are translated at the weighted average rate.

12 If the functional currency is subsidiarys local currency, the current rate method is used, and the gain or
loss on the hedge of a net investment in a foreign subsidiary is reported in other comprehensive income. If
the functional currency is the parents currency, the temporal method is used, and the gain or loss is
included in current period income.

Chapter 14 14-3

Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
SOLUTIONS TO EXERCISES

Solution E14-1

1 c 7 c
2 a 8 b
3 c 9 a
4 a
5 b
6 b



Solution E14-2 [ Based on AI CPA]

1 c 4 b
2 d 5 a
3 d



Solution E14-3

Pai Company and Subsidiary
Consol i dat ed Bal ance Sheet
at J anuar y 1, 2011

Cur r ent asset s [ $3, 000, 000 - $990, 000 + ( 100, 000 $1. 65) ]
$2, 175, 000

Land [ $800, 000 + ( 200, 000 $1. 65) ]
1, 130, 000

Bui l di ngs net [ $1, 200, 000 + ( 250, 000 $1. 65) ]
1, 612, 500

Equi pment net [ $1, 000, 000 + ( 100, 000 $1. 65) ]
1, 165, 000

Goodwi l l [ $990, 000 cost - ( 450, 000 f ai r val ue $1. 65) ]
247, 500

$6, 330, 000

Cur r ent l i abi l i t i es [ $600, 000 + ( 50, 000 $1. 65) ]
$ 682, 500

Not es payabl e [ $1, 000, 000 + ( 150, 000 $1. 65) ]
1, 247, 500

Capi t al st ock 3, 000, 000

Ret ai ned ear ni ngs 1, 400, 000

$6, 330, 000

14-4 Foreign Currency Financial Statements

Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution E14-4

Foreign currency statements

I nvent or y wi l l be car r i ed at t he 10, 000 eur os hi st or i cal cost .

Remeasured statements (Temporal Method)

I nvent or y wi l l be car r i ed at cost of $5, 300.

Under translated statements (Current Rate Method)

I nvent or y wi l l be car r i ed at year - end cur r ent r at e of $6, 000.

Solution E14-5

1 Pat ent at acqui si t i on of Si m

Cost of Si m $1, 200, 000

Book val ue acqui r ed: ( 35, 000, 000 Eur os $. 030)
1, 050, 000
Pat ent i n dol l ar s $ 150, 000

Pat ent i n Eur os ( $150, 000/ $. 030) 5, 000, 000 Eu

2 Pat ent amor t i zat i on i n dol l ar s

Pat ent amor t i zat i on i n Eur os ( 5, 000, 000/ 10 year s)
= 500, 000 Eur os


Pat ent amor t i zat i on i n $ ( 500, 000 Eur os $. 032 aver age

r at e) $ 16, 000

3 Ent r y t o r ecor d pat ent amor t i zat i on

I ncome f r omSi m $16, 000
I nvest ment i n Si m 3, 000
Equi t y adj ust ment f r omt r ansl at i on of
Pat ent 19, 000

To r ecor d pat ent amor t i zat i on and t he equi t y adj ust ment f r om
t r ansl at i on of pat ent comput ed as f ol l ows:
Begi nni ng pat ent 5, 000, 000 Eur os $. 030 $ 150, 000
Amor t i zat i on ( 500, 000) . 032 ( 16, 000)
4, 500, 000 134, 000
Equi t y adj ust ment 19, 000
Endi ng pat ent 4, 500, 000 . 034 $ 153, 000

Chapter 14 14-5

Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution E14-6

Pr el i mi nar y comput at i ons
Cost of i nvest ment i n St a $163, 800
Book val ue acqui r ed ( 90, 000 $1. 66)
149, 400
Excess i n dol l ar s $ 14, 400

Excess al l ocat ed t o equi pment ( 6, 000 $1. 66)
$ 9, 960

Pat ent $ 4, 440
$ 14, 400

1 Equi t y adj ust ment f r omexcess al l ocat ed t o equi pment on December 31,
2011

Depr eci at i on of excess based on ( 6, 000/ 3 year s) 2, 000

Undepr eci at ed excess bal ance at year - end based on

( 4, 000 $1. 64 cur r ent r at e)
$ 6, 560

Add: Depr eci at i on on excess based on 2011


2, 000 $1. 65 aver age r at e
3, 300
9, 860
Less: Begi nni ng excess based on U. S. dol l ar s 9, 960

Equi t y adj ust ment f r omt r ansl at i on of excess al l ocat ed
t o equi pment ( l oss) $ 100

2 Equi t y adj ust ment f r omexcess al l ocat ed t o pat ent on December 31, 2011.

Pat ent ( must be car r i ed i n ) $4, 440/ $1. 66 = 2, 675 pat ent
Pat ent amor t i zat i on i s 2, 675 / 10 year s = 267

Unamor t i zed excess bal ance at year - end based on

( 2, 408 $1. 64 cur r ent r at e)
$ 3, 949
Add: Amor t i zat i on of pat ent based on

( 267 $1. 65 aver age r at e)
441
$ 4, 390
Less: Begi nni ng pat ent based on U. S. dol l ar s $ 4, 440
Equi t y adj ust ment f r omt r ansl at i on of pat ent ( l oss) $ 50

Not required: The ent r y t o r ecor d t he decr ease i n t he equi t y adj ust ment
r el at ed t o equi pment and pat ent woul d be as f ol l ows:

I ncome f r omSt a $3, 741
Equi t y adj ust ment f r omt r ansl at i on ( equi pment ) 100
Equi t y adj ust ment f r omt r ansl at i on of pat ent 50
I nvest ment i n St a $ 3, 891

To adj ust t he i ncome f r omSt a f or depr eci at i on on t he excess
al l ocat ed t o equi pment ( $3, 300) and amor t i zat i on of pat ent ( $441) ,
and t o r ecor d a decr ease i n t he equi t y adj ust ment f r omt r ansl at i on
f or t he f or ei gn exchange r at e changes.

14-6 Foreign Currency Financial Statements

Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution E14-7

Preliminary computations
I nvest ment cost $1, 350, 000
Book val ue acqui r ed ( 1, 400, 000 Eu $. 75 exchange r at e)
1, 050, 000
Excess cost over book val ue acqui r ed $ 300, 000

Excess al l ocat ed t o under val ued l and ( 400, 000 Eu $. 75)
$ 300, 000

Equity adjustment from translation on excess allocated to land

Excess on l and at J anuar y 1, 2011 $ 300, 000
Less: Excess on l and at December 31, 2011
( 400, 000 Eu $. 77 cur r ent r at e at year - end)
308, 000
Equi t y adj ust ment f r omt r ansl at i on - gai n ( cr edi t ) $ 8, 000


Solution E14-8 [ Based on AI CPA]

1 a
Exchange l oss of $15, 000 l ess an exchange gai n on t he account payabl e of
$4, 000 ( $64, 000 or i gi nal payabl e - $60, 000 year - end adj ust ed bal ance) =
$11, 000 l oss.

2 b
Tr ansl at ed at hi st or i cal r at e: 25, 000/ 2. 2 = $11, 364

3 d
Depr eci at i on on t he pr oper t y, pl ant , and equi pment i s comput ed as
f ol l ows:

Pr oper t y, Pl ant Exchange Pr oper t y, Pl ant Amor t i zat i on Annual
and Equi pment Rat e and Equi pment Per i od Depr eci at i on
2011 2, 400, 000 LCU

1. 6 = $1, 500, 000

10 year s = $150, 000

2012 1, 200, 000 LCU

1. 8 = 666, 667

10 year s = 66, 667

3, 600, 000 LCU $2, 166, 667 $216, 667

4 a
5. 7 LCU t o $1, t he r at e i n ef f ect when t he di vi dend was pai d.

5 d

Long- t er mr ecei vabl es 1, 500, 000 LCU 1. 5 =
$1, 000, 000

Long- t er mdebt 2, 400, 000 LCU 1. 5 =
$1, 600, 000

6 c
Al l t hr ee account s ar e t r ansl at ed at cur r ent r at es.

7 c
Cumul at i ve i nf l at i on r at e = ( 330 - 150) / 150 = 120%
Chapter 14 14-7

Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
SOLUTIONS TO PROBLEMS

Solution P14-1

1 Pak s i ncome f r omSco f or 2011

I nvest ment cost of 40%i nt er est i n Sco $1, 080, 000

Less: Book val ue acqui r ed ( $2, 400, 000 40%)
( 960, 000)
Pat ent i n dol l ar s at acqui si t i on $ 120, 000

Pat ent i n eur os at acqui si t i on
$120, 000/ $. 60 exchange r at e = 200, 000 eur os


Equi t y i n Sco s i ncome ( $310, 000 40%)
$ 124, 000
Pat ent amor t i zat i on f or 2011

200, 000 eur os/ 10 year s $. 62 aver age r at e
( 12, 400)
I ncome f r omSco f or 2011 $ 111, 600


2 I nvest ment i n Sco at December 31, 2011

I nvest ment cost $1, 080, 000
Add: I ncome f r omSco 111, 600

Less: Di vi dends ( $192, 000 40%)
( 76, 800)
Add: Equi t y adj ust ment f r omt r ansl at i on

( $212, 000 40%)
84, 800
Add: Equi t y adj ust ment f r ompat ent comput ed as:
Begi nni ng bal ance $120, 000
Less: Pat ent amor t i zat i on 12, 400
Less: Unamor t i zed pat ent at year end 117, 000 9, 400
I nvest ment i n Sco December 31, 2011 $1, 209, 000

3 Pr oof of i nvest ment bal ance


Net asset s at December 31, 2011 of $2, 730, 000 40%
$1, 092, 000

Add: Unamor t i zed pat ent ( 180, 000 eur os $. 65)
117, 000
I nvest ment bal ance $1, 209, 000

14-8 Foreign Currency Financial Statements

Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P14-2

1 Excess Pat ent at J anuar y 1, 2011:

Cost $342, 000
Book val ue of i nt er est acqui r ed

( 4, 000, 000 LCUs $. 15) 40%
( 240, 000)
Excess Pat ent $102, 000
Excess Pat ent i n LCUs $102, 000/ $. 15 = 680, 000 LCUs

2 Excess Pat ent amor t i zat i on 2011:


Excess Pat ent i n LCUs 680, 000/ 10 year s $. 14 aver age

r at e = $ 9, 520

3 Unamor t i zed Excess Pat ent at December 31, 2011:


( 680, 000 - 68, 000 LCUs amor t i zat i on) $. 13 cur r ent r at e
$ 79, 560

4 Equi t y adj ust ment f r omExcess Pat ent :

Begi nni ng bal ance i n U. S. dol l ar s $102, 000
Less: Amor t i zat i on f or 2011 ( 9, 520)
Less: Endi ng bal ance ( 79, 560)
Equi t y adj ust ment f r omExcess Pat ent $ 12, 920

Al t er nat i vel y,

68, 000 LCUs ( $. 15 - $. 14) =
$ 680

612, 000 LCUs ( $. 15 - $. 13) =
12, 240
$12, 920

5 I ncome f r omSor 2011:


Equi t y i n i ncome ( $112, 000 40%)
$ 44, 800
Less: Excess Pat ent amor t i zat i on ( 9, 520)

I ncome f r omSor 2011
$ 35, 280

6 I nvest ment i n Sor bal ance at December 31, 2011:

Cost J anuar y 1 $342, 000
Add: I ncome 2011 35, 280

Less: Di vi dends ( $56, 000 40%)
( 22, 400)

Less: Equi t y adj ust ment ( $84, 000 40%)
( 33, 600)
Less: Equi t y adj ust ment f r omExcess Pat ent ( 12, 920)
I nvest ment i n Sor December 31, 2011 $308, 360

Check: Net asset s $228, 800 ( $572, 000 40%) pl us $79, 560 unamor t i zed
Excess Pat ent = $308, 360 i nvest ment i n Sor at December 31, 2011.


Chapter 14 14-9

Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P14-3

1 Soo Company, Ltd.
Tr ansl at i on Wor ksheet f or 2011

Br i t i sh Exchange
Pounds Rat e US Dol l ar s
Debits
Cash 20, 000 $1. 65 C $ 33, 000

Account s r ecei vabl e net
70, 000 1. 65 C 115, 500
I nvent or i es 50, 000 1. 65 C 82, 500
Equi pment 800, 000 1. 65 C 1, 320, 000
Cost of sal es 350, 000 1. 63 A 570, 500
Depr eci at i on expense 80, 000 1. 63 A 130, 400
Oper at i ng expenses 100, 000 1. 63 A 163, 000
Di vi dends 30, 000 1. 62 R 48, 600
1, 500, 000 $2, 463, 500
Credits
Accumul at ed depr eci at i on 330, 000 $1. 65 C $ 544, 500
Account s payabl e 70, 000 1. 65 C 115, 500
Capi t al st ock 400, 000 1. 60 H 640, 000
Ret ai ned ear ni ngs 100, 000 measur ed 160, 000
Sal es 600, 000 1. 63 978, 000
Equi t y adj ust ment f r omt r ansl at i on 25, 500
1, 500, 000 $2, 463, 500

2 J our nal ent r i es 2011

January 1, 2011
I nvest ment i n Soo $800, 000
Cash $800, 000
To r ecor d pur chase of Soo at book val ue.

During 2011
Cash $ 48, 600
I nvest ment i n Soo $ 48, 600
To r ecor d di vi dends f r omSoo.

December 31, 2011
I nvest ment i n Soo $139, 600
I ncome f r omSoo $114, 100
Equi t y adj ust ment f r omt r ansl at i on 25, 500
To r ecor d i ncome f r omSoo and ent er equi t y adj ust ment f or cur r ency
f l uct uat i ons.

Check:
I nvest ment i n Soo 1/ 1 $800, 000 Capi t al st ock 400, 000
Di vi dends ( 48, 600) Ret ai ned ear ni ngs 1/ 1 100, 000
I ncome f r omSoo 114, 100 Add: I ncome 70, 000
Equi t y adj ust ment 25, 500 Less: Di vi dends ( 30, 000)
I nvest ment i n Soo 12/ 31 $891, 000 St ockhol der s equi t y 540, 000
Cur r ent r at e $ 1. 65
$891, 000

14-10 Foreign Currency Financial Statements

Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P14-4

Pr el i mi nar y comput at i ons
I nvest ment cost $4, 000, 000
Less: Book val ue of i nt er est acqui r ed
( 7, 000, 000 eur os $. 50 exchange r at e 80%i nt er est )
2, 800, 000
Pat ent $1, 200, 000
Pat ent i n eur os ( $1, 200, 000/ $. 50 exchange r at e) = 2, 400, 000 eur os
Pat ent amor t i zat i on based on eur os 2, 400, 000 eur os/ 10 year s = 240, 000 eur os

1 Sul Corporation
Tr ansl at i on Wor ksheet
at and f or t he year ended December 31, 2011

Exchange
Eur os Rat e U. S. Dol l ar s
Debits
Cash 1, 000, 000 $. 6000 C $ 600, 000
Account s r ecei vabl e 2, 000, 000 . 6000 C 1, 200, 000
I nvent or i es 4, 000, 000 . 6000 C 2, 400, 000
Equi pment 8, 000, 000 . 6000 C 4, 800, 000
Cost of sal es 4, 000, 000 . 5500 A 2, 200, 000
Depr eci at i on expense 800, 000 . 5500 A 440, 000
Oper at i ng expenses 2, 700, 000 . 5500 A 1, 485, 000
Di vi dends 500, 000 . 5400 H 270, 000
23, 000, 000 $13, 395, 000
Credits

Accumul at ed depr eci at i on
equi pment
2, 400, 000 . 6000 C $ 1, 440, 000
Account s payabl e 3, 600, 000 . 6000 C 2, 160, 000
Capi t al st ock 5, 000, 000 . 5000 H 2, 500, 000
Ret ai ned ear ni ngs, J anuar y 1 2, 000, 000 . 5000 H 1, 000, 000
Sal es 10, 000, 000 . 5500 A 5, 500, 000
Equi t y adj ust ment f r omt r ansl at i on 795, 000
23, 000, 000 $13, 395, 000

2 Pet s i ncome f r omSul 2011

Shar e of Sul s net i ncome ( $5, 500, 000 sal es -
$2, 200, 000 cost of sal es - $440, 000 depr eci at i on -
$1, 485, 000 oper at i ng expenses) $ 1, 375, 000
Per cent age owned 80%

Equi t y i n Sul s net i ncome 1, 100, 000

Less: Pat ent amor t i zat i on ( 240, 000 eur os $. 55 aver age

r at e)
( 132, 000)

I ncome f r omSul $ 968, 000

Chapter 14 14-11

Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P14-4 ( cont i nued)

3 I nvest ment i n Sul December 31, 2011

I nvest ment J anuar y 1, 2011 $4, 000, 000
Add: I ncome f r omSul 968, 000

Add: Equi t y adj ust ment f r omt r ansl at i on ( $795, 000 80%)
636, 000
Add: Equi t y adj ust ment f r omPat ent
[ $1, 200, 000 Pat ent at begi nni ng of t he per i od - $132, 000

Pat ent amor t i zat i on ( 2, 160, 000 eur os unamor t i zed
Pat ent $. 60 cur r ent r at e) ] ( 228, 000)

Less: Di vi dends ( $270, 000 80%)
( 216, 000)
I nvest ment i n Sul December 31, 2011 $5, 160, 000



Solution P14-5

Sar Company
Remeasur ement Wor ksheet at December 31, 2011

Exchange
Br i t i sh Rat e U. S. Dol l ar s

Cash 50, 000 $1. 70 C $ 85, 000
Account s r ecei vabl e 200, 000 1. 70 C 340, 000
Shor t - t er mnot e r ecei vabl e 50, 000 1. 70 C 85, 000
I nvent or i es 150, 000 1. 68 H 252, 000
Land 300, 000 1. 60 H 480, 000
Bui l di ngs net
400, 000 1. 60 H 640, 000
Equi pment net
500, 000 1. 60 H 800, 000
Cost of sal es 650, 000 * H 1, 058, 000
Depr eci at i on expense 200, 000 1. 60 H 320, 000
Ot her expenses 400, 000 1. 65 A 660, 000
Di vi dends 100, 000 1. 64 164, 000
Exchange l oss on r emeasur ement 61, 000
3, 000, 000 $4, 945, 000

Account s payabl e 180, 000 $1. 70 C $ 306, 000
Bonds payabl e 10%
500, 000 1. 70 C 850, 000
Bond i nt er est payabl e 20, 000 1. 70 C 34, 000
Capi t al st ock 500, 000 1. 60 H 800, 000
Ret ai ned ear ni ngs 300, 000 M 480, 000
Sal es 1, 500, 000 1. 65 A 2, 475, 000
3, 000, 000 $4, 945, 000

* Cost of sal es = Begi nni ng i nvent or y ( 200, 000 $1. 60) + pur chases ( 600, 000
$1. 65) - endi ng i nvent or y ( 150, 000 $1. 68) = $1, 058, 000

14-12 Foreign Currency Financial Statements

Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P14-6

Stu Corporation
Remeasur ement Wor ksheet
December 31, 2011

New Zeal and
Dol l ar s Exchange Rat e U. S. Dol l ar s
Debits
Cash 15, 000 $ 0. 65 C $ 9, 750
Account s r ecei vabl e net
60, 000 0. 65 C 39, 000
I nvent or i es 30, 000 0. 66 H 19, 800
Pr epai d expenses 10, 000 0. 70 H 7, 000
Land 45, 000 0. 70 H 31, 500
Equi pment 60, 000 Not e 1 M 41, 800
Cost of sal es 120, 000 Not e 2 M 82, 200
Depr eci at i on expense 12, 000 Not e 3 M 8, 360
Ot her oper at i ng expenses 28, 000 Not e 4 M 19, 000
Di vi dends 20, 000 0. 66 H 13, 200
Remeasur ement l oss 1, 450
400, 000 $273, 060
Credits
Accumul at ed depr eci at i on 22, 000 Not e 5 M $ 15, 360
Account s payabl e 18, 000 $ 0. 65 C 11, 700
Capi t al st ock 150, 000 0. 70 H 105, 000
Ret ai ned ear ni ngs 10, 000 M 7, 000
Sal es 200, 000 0. 67 A 134, 000
400, 000 $273, 060

Not e 1 Or i gi nal equi pment ( 50, 000 NZ$ $. 70) + equi pment pur chased i n
2006 ( 10, 000 NZ$ $. 68)

Not e 2 Begi nni ng i nvent or y ( 50, 000 NZ$ $. 70) + pur chases ( 100, 000 NZ$
$. 67) - endi ng i nvent or y ( 30, 000 NZ$ $. 66)

Not e 3 Depr eci at i on on or i gi nal equi pment ( 50, 000 NZ$ 20% $. 70) +
depr eci at i on on new equi pment ( 10, 000 NZ$ 20% $. 68)

Not e 4 Ot her oper at i ng expenses consi st of t he pr epai d suppl i es used
( 8, 000 NZ$ $. 70) + cur r ent year out l ays ( 20, 000 NZ$ $. 67)

Not e 5 Accumul at ed depr eci at i on on t he or i gi nal equi pment ( 20, 000 NZ$
$. 70) + accumul at ed depr eci at i on on t he equi pment pur chased ( 2, 000
NZ$ $. 68)

Chapter 14 14-13

Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l

Solution P14-7

1 Sar Company
Tr ansl at i on Wor ksheet
at and f or t he year ended December 31, 2011

Tr ansl at i on
Sheqel s Rat e U. S. $
Debits
Cash 40, 000 $. 30 C $ 12, 000
Tr ade r ecei vabl es 50, 000 . 30 C 15, 000
I nvent or i es 150, 000 . 30 C 45, 000
Land 160, 000 . 30 C 48, 000

Equi pment net
300, 000 . 30 C 90, 000

Bui l di ngs net
500, 000 . 30 C 150, 000
Expenses 400, 000 . 32 A 128, 000
Exchange l oss ( advance) * 20, 000 . 32 A 6, 400
Di vi dends 100, 000 . 33 R 33, 000
Equi t y adj ust ment 40, 600
Tot al 1, 720, 000 $568, 000
Credits
Account s payabl e 120, 000 $. 30 C $ 36, 000
Ot her l i abi l i t i es 60, 000 . 30 C 18, 000
Advance f r omPel 140, 000 . 30 C 42, 000
Common st ock 500, 000 . 35 H 175, 000
Ret ai ned ear ni ngs J anuar y 1 300, 000 . 35 H 105, 000
Sal es 600, 000 . 32 A 192, 000
Tot al 1, 720, 000 $568, 000
* Sar i ncr eased i t s advance by 20, 000 sheqel s and r ecogni zed a 20, 000 sheqel
l oss.

2 J our nal ent r i es t o account f or t he i nvest ment i n Sar :
January 1, 2011
I nvest ment i n Sar $308, 000
Cash $308, 000
To r ecor d t he i nvest ment i n Sar Co.

January 2, 2011
Advance t o Sar $ 42, 000
Cash $ 42, 000
To r ecor d advance t o Sar denomi nat ed i n U. S. dol l ar s.

June 2011
Cash $ 33, 000
I nvest ment i n Sar $ 33, 000
To r ecor d r ecei pt of di vi dends ( 100, 000 sheqel s $. 33) .

December 31, 2011
I nvest ment i n Sar $ 17, 000
Equi t y adj ust ment f r omt r ansl at i on 40, 600
I ncome f r omSar $ 57, 600
To r ecor d equi t y i n Sar .
I ncome f r omSar $ 2, 560
Equi t y adj ust ment f r omt r ansl at i on 3, 840
I nvest ment i n Sar $ 6, 400
To r ecor d equi t y adj ust ment f r omPat ent amor t i zat i on comput ed as
f ol l ows:
Pat ent amor t i zat i on 80, 000 sheqel s/ 10 year s $. 32 r at e = $2, 560
Endi ng bal ance 72, 000 sheqel s $. 30 r at e = $21, 600
14-14 Foreign Currency Financial Statements

Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
$28, 000 begi nni ng bal ance - $21, 600 endi ng bal ance = $6, 400
Chapter 14 14-15

Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P14-8

Pr el i mi nar y comput at i ons

I nvest ment cost of SAA $1, 710, 000
Book val ue acqui r ed ( 8, 000, 000 LCU $. 190)
( 1, 520, 000)
Pat ent $ 190, 000

Pat ent based on LCU ( $190, 000/ $. 190) 1, 000, 000 LCU
Amor t i zat i on of Pat ent ( 1, 000, 000 LCU/ 10 year s) 100, 000 LCU

Pat ent amor t i zat i on f or 2011 ( 100, 000 LCU $. 185)
$ 18, 500

Unamor t i zed Pat ent at December 31, 2011
( 900, 000 LCU $. 180)
$ 162, 000

Equi t y adj ust ment f or Pat ent f or 2011:
Begi nni ng bal ance $190, 000
Less: Amor t i zat i on ( 18, 500)
Less: Endi ng bal ance ( 162, 000) $ 9, 500

Reconci l i at i on of i nvest ment account :
I nvest ment i n SAA J anuar y 1, 2011 $1, 710, 000
Add: I ncome f r omSAA f or 2011
( $360, 750 - $18, 500 Pat ent amor t i zat i on) 342, 250
Equi t y adj ust ment f r omt r ansl at i on ( $84, 750 100%)
( 84, 750)
Equi t y adj ust ment f r omPat ent ( 9, 500)
Di vi dends f r omSAA ( 185, 000)
I nvest ment i n SAA December 31, 2011 $1, 773, 000

14-16 Foreign Currency Financial Statements

Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P14-8 ( cont i nued)

1 J our nal ent r i es t o account f or t he i nvest ment i n SAA

January 1, 2011
I nvest ment i n SAA $1, 710, 000
Cash $1, 710, 000
To r ecor d pur chase of SAA st ock f or cash.

July 1, 2011
Advance t o SAA $ 333, 000
Cash $ 333, 000
To r ecor d shor t - t er madvance t o SAA denomi nat ed i n dol l ar s.

September 1, 2011
Cash $ 185, 000
I nvest ment i n SAA $ 185, 000
To r ecor d r ecei pt of di vi dends when exchange r at e i s $. 185.

December 31, 2011
I nvest ment i n SAA $ 276, 000
Equi t y adj ust ment f r omt r ansl at i on 84, 750
I ncome f r omSAA $ 360, 750
To r ecor d equi t y i n i ncome of SAA.

I ncome f r omSAA $ 18, 500
Equi t y adj ust ment f r omt r ansl at i on 9, 500
I nvest ment i n SAA $ 28, 000
To r ecor d Pat ent amor t i zat i on and equi t y adj ust ment f r omPat ent
comput ed as f ol l ows:


Pat ent amor t i zat i on: 100, 000 LCU $. 185 aver age r at e = $18, 500
Equi t y adj ust ment : $190, 000 begi nni ng Pat ent bal ance - $18, 500
amor t i zat i on - ( 900, 000 LCU unamor t i zed Pat ent at year end $. 180
cur r ent r at e) = $9, 500

Chapter 14 14-17

Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P14-8 ( cont i nued)

PWA Corporation and Subsidiary
Consol i dat i on Wor ki ng Paper s
f or t he year ended December 31, 2011


PWA

SAA
Adj ust ment s and
El i mi nat i ons
Consol i dat ed
St at ement s
Income Statement
Sal es

$ 569, 500

$1, 110, 000

$1, 679, 500
I ncome f r omSAA 342, 250 a 342, 250
Expenses ( 400, 000) ( 740, 000) c 18, 500 ( 1, 158, 500)
Exchange l oss ( 9, 250) ( 9, 250)
Net i ncome
$ 511, 750 $ 360, 750 $ 511, 750

Retained Earnings
Ret ai ned ear ni ngs PWA

$ 856, 500

$ 856, 500
Ret ai ned ear ni ngs SAA
$ 570, 000 b 570, 000
Net i ncome 511, 750 360, 750 511, 750
Di vi dends ( 300, 000) ( 185, 000) a 185, 000 ( 300, 000)

Ret ai ned ear ni ngs
December 31, 2011

$1, 068, 250

$ 745, 750


$1, 068, 250

Balance Sheet
Cash

$ 90, 720

$ 99, 000

$ 189, 720
Account s r ecei vabl e 128, 500 90, 000 218, 500
Advance t o SAA 333, 000 d 333, 000
I nvent or i es 120, 000 270, 000 390, 000
Land 100, 000 288, 000 388, 000
Equi pment net
600, 000 540, 000 1, 140, 000
Bui l di ngs net
300, 000 900, 000 1, 200, 000
I nvest ment i n SAA 1, 773, 000 a 157, 250
b 1, 615, 750

Pat ent b 180, 500 c 18, 500 162, 000

$3, 445, 220 $2, 187, 000 $3, 688, 220

Account s payabl e $ 162, 720 $ 135, 000 $ 297, 720
Advance f r omPWA 333, 000 d 333, 000
Ot her l i abi l i t i es 308, 500 108, 000 416, 500
Capi t al st ock 2, 000, 000 950, 000 b 950, 000 2, 000, 000
Ret ai ned ear ni ngs 1, 068, 250 745, 750 1, 068, 250
Equi t y adj ust ment PWA
( 94, 250) ( 94, 250)
Equi t y adj ust ment SAA
( 84, 750) b 84, 750
$3, 445, 220 $2, 187, 000 $3, 688, 220


14-18 Foreign Currency Financial Statements

Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P14-9

1 San Corporation
Adj ust ed Tr i al Bal ance Tr ansl at i on Wor ksheet
at December 31, 2011

LCUs Rat e U. S. Dol l ar s
Debits
Cash 150, 000 $. 20 C $ 30, 000
Account s r ecei vabl e 180, 000 . 20 C 36, 000
I nvent or i es 230, 000 . 20 C 46, 000
Land 250, 000 . 20 C 50, 000
Bui l di ngs 600, 000 . 20 C 120, 000
Equi pment 800, 000 . 20 C 160, 000
Cost of sal es 200, 000 . 22 A 44, 000
Depr eci at i on expense 100, 000 . 22 A 22, 000
Ot her expenses 120, 000 . 22 A 26, 400
Exchange l oss 30, 000 . 22 A 6, 600
Di vi dends 100, 000 . 21 R 21, 000
Equi t y adj ust ment - - - 44, 000
2, 760, 000 $606, 000

Credits

Accumul at ed depr eci at i on bui l di ngs
300, 000 $. 20 C $ 60, 000

Accumul at ed depr eci at i on equi pment
400, 000 . 20 C 80, 000
Account s payabl e 130, 000 . 20 C 26, 000
Shor t - t er ml oan f r omPar 230, 000 . 20 C 46, 000
Capi t al st ock 800, 000 . 24 H 192, 000
Ret ai ned ear ni ngs J anuar y 1 200, 000 . 24 H 48, 000
Sal es 700, 000 . 22 A 154, 000
2, 760, 000 $606, 000

2 J our nal ent r i es f or 2011 [Pars books]

January 1, 2011
I nvest ment i n San $216, 000
Cash $216, 000
To r ecor d pur chase of 90%i nt er est i n San: 1, 000, 000 LCU $. 24
exchange r at e 90%i nt er est .

May 1, 2010
Advance t o San $ 46, 000
Cash $ 46, 000
To r ecor d shor t - t er ml oan t o San denomi nat ed i n U. S. dol l ar s:
200, 000 LCU $. 23 exchange r at e.

Chapter 14 14-19

Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P14-9 ( cont i nued)

September 2011
Cash $ 18, 900
I nvest ment i n San $ 18, 900
To r ecor d r ecei pt of di vi dends f r omSan ( 100, 000 LCU $. 21
exchange r at e 90%i nt er est )

December 31, 2011
I nvest ment i n San $ 9, 900
Equi t y adj ust ment f r omt r ansl at i on 39, 600
I ncome f r omSan $ 49, 500
To r ecor d i nvest ment i ncome f r omSan of $49, 500 comput ed as
[ $154, 000 r evenue ( $44, 000 cost of sal es + $22, 000 depr eci at i on
expense + $26, 400 ot her expenses + $6, 600 exchange l oss) ] 90%
and t o r ecor d equi t y adj ust ment f r omt r ansl at i on of $39, 600
comput ed as $44, 000 90%.



Supporting computations

I nvest ment bal ance J anuar y 1, 2011 $216, 000
Less: Di vi dends ( 18, 900)
Add: I ncome f r omSan 49, 500
Less: Equi t y adj ust ment f r omt r ansl at i on ( 39, 600)
I nvest ment bal ance December 31, 2011 $207, 000

Noncont r ol l i ng i nt er est at J anuar y 1, 2011 dat e of
acqui si t i on


1, 000, 000 LCU $. 24 10%
$ 24, 000
Less: Noncont r ol l i ng i nt er est s shar e of t he equi t y
adj ust ment


f r omt r ansl at i on f or 2011 ( $44, 000 10%)
( 4, 400)
Begi nni ng Noncont r ol l i ng i nt er est i n consol i dat i on wor ki ng
Paper s $ 19, 600

14-20 Foreign Currency Financial Statements

Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P14-9 ( cont i nued)

3 Par Corporation and Subsidiary
Consol i dat i on Wor ki ng Paper s
f or t he year ended December 31, 2011


Par

San 90%
Adj ust ment s and
El i mi nat i ons
Noncont r o
l l i ng
I nt er est
Consol i dat ed
St at ement s
Income Statement
Sal es

$ 800, 000

$ 154, 000

$ 954, 000
I ncome f r omSan 49, 500 a 49, 500
Cost of sal es ( 400, 000) ( 44, 000) ( 444, 000)
Depr eci at i on expense ( 81, 000) ( 22, 000) ( 103, 000)
Ot her expenses ( 200, 000) ( 26, 400) ( 226, 400)
Exchange l oss ( 6, 600) ( 6, 600)
Noncont r ol l i ng i ncome $ 5, 500 ( 5, 500)
Net i ncome
$ 168, 500 $ 55, 000 $ 168, 500

Retained Earnings
Ret ai ned ear ni ngs
Par


$ 220, 000


$ 220, 000
Ret ai ned ear ni ngs
San

$ 48, 000

b 48, 000

Net i ncome 168, 500 55, 000 168, 500
Di vi dends ( 100, 000) ( 21, 000) a 18, 900 ( 2, 100) ( 100, 000)
Ret ai ned ear ni ngs
December 31, 2011

$ 288, 500

$ 82, 000


$ 288, 500

Balance Sheet
Cash

$ 47, 000

$ 30, 000

$ 77, 000
Account s r ecei vabl e 90, 000 36, 000 126, 000
Loan t o San 46, 000 c 46, 000
I nvent or i es 110, 000 46, 000 156, 000
Land 150, 000 50, 000 200, 000

Bui l di ngs net
180, 000 60, 000 240, 000

Equi pment net
160, 000 80, 000 240, 000
I nvest ment i n San 207, 000 a 30, 600
b 176, 400


$ 990, 000 $ 302, 000 $1, 039, 000

Account s payabl e $ 241, 100 $ 26, 000 $ 267, 100
Loan f r omPar 46, 000 c 46, 000
Capi t al st ock 500, 000 192, 000 b 192, 000 500, 000
Ret ai ned ear ni ngs 288, 500 82, 000 288, 500
Equi t y adj ust ment
Par

( 39, 600)

( 39, 600)
Equi t y adj ust ment
San

( 44, 000)

b 44, 000


$ 990, 000 $ 302, 000


Noncont r ol l i ng i nt er est J anuar y 1, 2011 b 19, 600 19, 600
Noncont r ol l i ng i nt er est December 31, 2011
$23, 000

23, 000
$1, 039, 000

Chapter 14 14-21

Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l