Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity

Statements

CHAPTER 12
MULTINATIONAL ACCOUNTING: ISSUES IN FINANCIAL REPORTING AND
TRANSLATION OF FOREIGN ENTITY STATEMENTS
ANSWERS TO QUESTIONS
Q12-1 Expected benefits of adopting a single set of high-quality accounting
standards include:
1. Continued expansion of capital markets across national borders.
2. Faster availability of financial statements that provide needed information to
investors in countries where standards have not previously focused on
information needs of investors.
3. More rapid development of stable, liquid capital markets.
4. Increased economic growth.
5. Improve ability of investors to evaluate opportunities across national borders.
6. Improve the efficient use of global capital.
7. Reduce reporting costs for corporations that wish to access capital in markets
outside of their home country.
8. Increase confidence of financial statement users in the quality of financial
reporting.
Q12-2 The IASB is an independent, privately funded accounting standards-setting
body. the mission of the IASB is to develop a single set of high-quality,
understandable, and enforceable global accounting standards.
The IASB is
composed of 14 members who each serve a five-year term subject to one
reappointment. Members are required to sever all employment relationships that
might compromise their independent judgement in setting accounting standards. The
IASB is based in London.
Q12-3 The IASB solicits input from the public when evaluating potential standards
and publishes a discussion paper and/or an exposure draft which are subject to
comment before issuing a final standard.
Q12-4 IFRS are already mandated or permitted in over 100 countries around the
world. Beginning with 2005, the European Union mandated the use of IFRS for
companies listing on stock exchanges in the EU, although the EU also continues to
accept statements prepared according to US GAAP. Beginning in 2008, foreign
private issuers who list their shares on US stock exchanges may use IFRS in their
financial statements without reconciliation to US GAAP.
Q12-5 The SEC is considering allowing US companies to use IFRS in their financial
reports. The SEC held roundtable discussions in December 2007. Among those
participating in the roundtable, there was overwhelming support for adopting for the
use of a single of global standards, and the majority of the panellists agreed that
IFRS ultimately will be the standard. There was general agreement among
roundtable participants that the SEC should specify a date by which US issuers would
be required to prepare financial statements in accordance with IFRS. The target date
most often mentioned should conversion be required is 2011, to coincide with the
adoption of IFRS by a number of other countries including Canada and India.

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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Q12-6
Improve global competitive position of US corporations.
Increase the quality of information available to investors.
Reduce costs of compliance for companies that are currently using multiple
reporting frameworks.
Enhance global capital markets.
Companies would have easier access to raising capital in the global markets.
Because SEC now permits foreign private issuers to file their financial reports
using IFRS without reconciliation, not allowing US companies to report under
IFRS could result in US companies bearing costs not incurred by foreign
private issuers.
Enhance comparability across companies for users. SEC chairman Cox
noted that two-thirds of US investors own securities of foreign companies, a
30 percent increase in the last five years.
Q12-7 a. Local currency unit. The local currency unit (LCU) is the currency used
locally; that is, the currency used in the country in which the company is located.
b. Recording currency. The recording currency is the currency used to record the
economic activities in the journals and ledger of the business entity. The recording
currency is typically the local currency, but may be some other currency.
c. Reporting currency. The reporting currency is the currency used on the financial
statements of the business entity. Typically, the reporting currency is the same as the
recording currency.
Q12-8 The functional currency is normally the currency in which the foreign entity
performs most of its cash functions. However, for entities operating in highly
inflationary economies, the functional currency is designated as the U.S. dollar
regardless of the actual currency used for cash functions. The definition of a highly
inflationary economy is one that has a cumulative inflation of approximately 100
percent or more over a 3-year period. FASB 52 provides six indicators to be used to
determine a foreign entity's functional currency: (1) cash flows, (2) sales prices, (3)
sales markets, (4) expenses, (5) financing, and (6) intercompany transactions and
arrangements. If most of these indicators take place in the foreign currency unit, then
the FCU is the functional currency. If most take place in the U.S. dollar, then the
dollar is the functional currency.
Q12-9 Harmonization means to standardize the accounting principles used around
the world. For example, the U.S. does not allow a company to revalue its own assets
for the effects of inflation. Several countries do, however, allow for this revaluation
and subsequent depreciation on the revaluation. Differences in accounting principles
from country to country make it difficult to compare business entities doing business
in different countries. The harmonization of accounting principles around the world
would eliminate many of the problems of combining and consolidating multinational
entities. A U.S. company with international investments could then be assured of
essentially the same accounting principles being applied; therefore, revenues, profits,
and investments in these foreign investments could effectively be compared and
contrasted.

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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Q12-10 When the local currency is the foreign entity's functional currency, the
translation method is used to convert the foreign entity's financial statements into U.S.
dollars, the parent company's reporting currency. The translation method uses the
current exchange rate for converting all assets and liabilities. The appropriate
historical exchange rate is used to convert the Canadian entity's stockholders' equity
accounts. The weighted average exchange rate is used to convert the Canadian
entity's income statement accounts. The change in the translation adjustment during
the period is reported as an element of other comprehensive income on the
Statement of Comprehensive Income, and is then accumulated with the other
elements of comprehensive income and reported within the stockholders equity
section of the consolidated balance sheet. The translation adjustment may have a
debit or credit balance, depending on the relative change in the exchange rate since
the parent acquired the subsidiary.
Q12-11 Remeasurement is used when the U.S. dollar is the functional currency of
the foreign entity. Furthermore, FASB 52 requires that the financial statements of
foreign entities operating in highly inflationary economies be remeasured as if the
functional currency were the reporting currency. Remeasurement requires the use of
the current exchange rate to convert all monetary assets and liabilities. The historical
exchange rate is used to convert nonmonetary assets and the stockholders' equity
accounts. The appropriate historical rate is the rate on the later of the two following
dates: (1) the day the foreign entity obtained the asset or the day the foreign entity
made a transaction affecting the stockholders' equity section such as selling
additional stock or declaring dividends, or (2) the day the U.S. parent company
purchased the foreign affiliate. In the case of a pooling of interests, the appropriate
historical rate is the rate for the day the foreign affiliate transacted to obtain the asset
or transacted in a stockholders' equity item.
The weighted average exchange rate for the period covered by the income statement
is used for revenues or expenses incurred evenly over the period except for those
expenses that are allocations of balance sheet items, such as depreciation, cost of
goods sold (inventories), or write-offs of goodwill. For cost allocations, the same rate
used on the balance sheet to convert the items to U.S. dollars is used on the income
statement.
Q12-12 Translation adjustments are the balancing items to make the debit and
credit items equal in the translated trial balance measured in U.S. dollars. The parent
company records its share of the translation adjustment in its books through an
adjusting entry. The change during the period in the translation adjustment is reported
as a component of other comprehensive income in the Statement of Comprehensive
Income. The accumulated other comprehensive income is reported as a separate
item of stockholders equity in the balance sheet. The cumulative translation
adjustment may have a debit balance or credit balance. A debit balance usually
means that the current exchange rate is less than the historical rate used to translate
the stockholders equity accounts. This means the dollar is strengthening relative to
the foreign currency. A credit balance usually results when the dollar is weakening
relative to the foreign currency, and the current exchange rate is higher than the
historical exchange rate.
Q12-13 The remeasurement gain or loss first appears as the trial balance balancing
item in the income statement section of the foreign affiliate's trial balance. The parent
company recognizes its share of the remeasurement gain through an adjusting entry.
Typically, the remeasurement gain is shown in the "Other Income" section of the
consolidated income statement.

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Q12-14 The stockholders' equity accounts are translated at the historical rate in
effect the date the parent company acquired the foreign affiliate because this aids in
the elimination entry process used to prepare the consolidated statements. The
investment account on the parent company's books includes the initial investment
measured in terms of the exchange rate on the date the parent purchased the foreign
affiliate. Thus, the basic eliminating entry to eliminate the investment account against
the capital stock and additional paid-in capital includes accounts with the same
currency measurement rate. The retained earnings include the effects of revenue and
expense transactions, all measured at different rates over time. The beginning
translated retained earnings, as measured in U.S. dollars, is taken from last year's
ending retained earnings. Net income is obtained from the income statement and
dividends are translated using the exchange rate in effect the date the dividends are
declared.
Q12-15 The current rate method uses the current exchange rate to translate the
foreign affiliate's assets and liabilities. The weighted-average exchange rate is used
to translate the foreign affiliate's revenues and expenses. This means that the
relationships within the assets and liabilities of the foreign affiliate's balance sheet are
not changed in the translation process. For example, the current ratio in U.S. dollar
statements will be the same as in the foreign currency statements. This results from
the use of a constant translation multiplier within the financial statements. However,
this relationship does not hold when computing ratios using a balance sheet account
and an income statement account: for example, return on equity. These ratios include
accounts with different translation exchange rates.
Q12-16 The excess of cost over book value has two effects: (1) the portion amortized
for the period is reported in the income statement, and (2) the unamortized balance is
reported in the balance sheet. When the local currency unit is the functional currency,
the translation method is used to convert the foreign entity's financial statements into
U.S. dollars. FASB 52 requires that the differential be evaluated in terms of the
foreign currency unit. Therefore, the period's amortization, measured in the foreign
currency, is translated at the weighted average exchange rate. The remaining
unamortized differential is translated at the current exchange rate at the end of the
period. The different exchange rates used typically result in a difference when
measured in U.S. dollars. This difference becomes part of the translation adjustment.
Q12-17 The change during the period in the translation adjustment is reported as a
component of other comprehensive income. The translation adjustment is part of the
accumulated other comprehensive income that is reported in the stockholders equity
section of the consolidated balance sheet.
Q12-18 Not all foreign subsidiaries are consolidated. The parent must be able to
exercise control over the foreign subsidiary's operating and financial policies before
consolidation is proper. This may not be the case if the foreign subsidiary is located in
a country in which the government places significant restrictions on dividend
declarations, input from non-local management, or other operating or financing
aspects of the business.
Q12-19 A recent Accounting Trends and Techniques indicated that approximately
one-quarter of the foreign subsidiaries of U.S. companies are not consolidated;
instead, they are reported as a long-term investment on the U.S. company's financial

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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statements, usually under the equity method. The cost method is used to account for
the foreign investment, however, if the U.S. investor is not able to exercise significant
influence over the foreign investee's operating and financial policies.
Q12-20* The issue with intercompany transactions is with regard to the amount of
unrealized profit. The unrealized profit determined at the time of the initial
intercompany transaction is a function of the currency exchange rate at that time. As
the rate changes, the underlying accounts may be translated at different exchange
rates, thus affecting the computation of unrealized intercompany profit. FASB 52
states that the intercompany profit should be eliminated based on the exchange rate
at the date the intercompany transaction occurred. This eliminates any potential
problems from subsequent changes in exchange rates.

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SOLUTIONS TO CASES
C12-1 Comparison of US GAAP and IFRS
Research

PricewaterhouseCoopers offers a publication on its Web site,

Similarities and differences: A comparison of IFRS and US GAAP, that
provides a topic-based comparison. Access this publication on the
Web
at
http://www.pwc.com/gx/eng/about/svcs/corporatereporting/SandD_07.
pdf. On pages 4-11, there is a table of differences between US GAAP
and IFRS by reporting issue. There is also a reference to the pages in
the document where each of these items is explained in more detail.
Select any three of the items and read about the nature of the
differences. Prepare a short paper approximately two to three pages
long that defines the nature of the differences and discusses what you
have learned.

Solutions will vary by student depending on the particular items he or she

selects.
C12-2 Structure of the IASB
Research

The IASB Web site is www.iasb.org. At the top of the page, click on
the link About Us. Briefly describe the structure of the IASB.

Solution

The International Accounting Standards Committee (IASC) Foundation

is the parent entity of the IASB. The IASC Foundation is an
independent organization. The IASC Foundation trustees appoint the
IASB members, exercise oversight, and raise funds to support the
organization. The IASC Foundation also appoints the Standards
Advisory Council, which advises the IASB and the International
financial Reporting Interpretations Committee. The IASB has the sole
responsibility for setting accounting standards. These standards are
called International Financial Reporting Standards (IFRS).

C12-3 IASB Deliberations

Research

The IASB Web site is www.iasb.org. Access the Web site and click on
the link at the top of the page for Current Projects. On the Current
Projects page, click on the IASB link. You may also access this page
directly at
http://www.iasb.org/Current+Projects/IASB+Projects/IASB+Work+Plan.htm .
What are three projects on the active agenda that are being addressed
by the IASB? What is the timetable identified for milestones on each
of the projects? What is the status of the Conceptual Framework
project?

Solutions will vary by student depending on the particular items he or she

selects.
C12-4 Determining a Functional Currency
The choice of a functional currency is based on the currency used for six criteria

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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provided in FASB Statement No. 52, as follows: (1) cash flows, (2) sales prices, (3)
sales markets, (4) expenses, (5) financing, and (6) intercompany transactions and
arrangements. The choice of a functional currency is made by management after a
subjective evaluation of these criteria. However, the U.S. dollar is specified as the
functional currency in cases in which the foreign affiliate of a U.S. company is located
in a country experiencing high inflation (approximately 100 percent or more over a
three-year period).
Foreign Entity's
Reporting Currency
1.

Argentinean peso

Foreign Entity's
Functional Currency
U.S. dollar

Process of
Restatement into
U.S. Dollars
Remeasurement

Note: This case shows that the U.S. dollar is the specified functional currency
for foreign subsidiaries located in countries with highly inflationary economies.

2.

Mexican pesos

Either peso or
dollar, management
may select either.

Either

Note: This case indicates that the criteria are not always absolute. Management
probably would select the specific functional currency on the basis of financial
effects, such as effect on earnings per share.
3.

British pound

British pound

Translation

4.

Swiss franc

European euro

Remeasurement
from franc to
euro; then
translation
from euro
to dollars

Note: This case shows that the local currency of the country in which the
foreign affiliate is located may not be the foreign affiliate's functional currency;
instead, a third currency presents the functional currency.

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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C12-5

Principles of Consolidating and Translating Foreign Accounts

[AICPA Adapted]

a. The rules for consolidating a foreign subsidiary are essentially the same as for a
domestic subsidiary. The key element is the degree of control Petie Products has
over the financial and operating policies of Cream, Ltd. Typically, a 90 percent stock
ownership level would assure the parent company's control of the subsidiary. It is
possible, however, that the country of Kolay may have severe restrictions on the
decision-making abilities of non-Kolay investors, or that Kolay may have restrictive
laws regulating commerce within Kolay. Petie Products' management must evaluate
their ability to control the foreign subsidiary. If they do possess the necessary level of
control, the foreign subsidiary should be consolidated. If not, then the foreign
subsidiary is reported as an investment on the parent company's financial statements.
b. Translation means that the local currency unit is functional. The foreign
subsidiary's assets and liabilities are translated using the current exchange rate at the
end of 20X7. The stockholders' equity accounts are translated at appropriate
historical rates. The income statement accounts are translated at the weighted
average exchange rate during 20X7.
The appropriate exchange rates for each of the 10 items are presented below:
1. Current exchange rate at December 31, 20X7
2. Current exchange rate at December 31, 20X7
3. Current exchange rate at December 31, 20X7
4. Current exchange rate at December 31, 20X7
5. Current exchange rate at December 31, 20X7
6. Historical exchange rate at January, 20X4
7. Beginning Retained Earnings is carried forward as a composite from prior
years' operations. The beginning Retained Earnings is the prior period's ending
Retained Earnings.
8. Average exchange rate for 20X7 (assumes revenues earned evenly throughout
year)
9. Average exchange rate for 20X7
10. Average exchange rate for 20X7

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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C12-6 Translating and Remeasuring Financial Statements of Foreign

Subsidiaries [AICPA Adapted]
a. The objectives of translating a foreign subsidiary's financial statements are to:
1. Provide information that is generally compatible with the expected economic
effects of a rate change on a subsidiary's cash flows and equity.
2. Reflect the subsidiary's financial results and relationships in single currency
financial statements, as measured in its functional currency and in conformity
with generally accepted accounting principles.
b. Applying different exchange rates to the various financial statement accounts
causes the restated financial statements to be unbalanced. Unbalanced means that
the debits will not equal the credits in the subsidiary's trial balance prepared in U.S.
dollars. The amount required to bring the restated financial statements into balance is
termed the gain or loss from the translation or remeasurement. The gain or loss from
remeasuring Wahl A's financial statements is reported in the consolidated income
statement. The gain or loss arising from translating Wahl F's financial statements
(described as a translation adjustment) is reported as a component of comprehensive
income and then accumulated with other comprehensive income items and reported
under stockholders' equity in the consolidated balance sheet.
c. The functional currency is the foreign currency or the parent's currency that most
closely correlates with the following economic indicators:
1. Cash flow indicators
2. Sales price indicators
3. Sales market indicators
4. Expense indicators
5. Financing indicators
6. Intercompany transactions and arrangement indicators
d. All accounts relating to Wahl A's equipment the equipment, accumulated
depreciation, and depreciation expense accounts are remeasured by using the
exchange rate prevailing between the U.S. and Australian dollars at the later of the
two following dates: (1) the date at which Wahl Co. acquired its investment in Wahl A,
or (2) the date(s) the equipment was purchased by Wahl A. This exchange rate is
referred to as the historical rate.
All accounts relating to Wahl F's equipment are translated by using the current
exchange rates prevailing between the U.S. dollar and the European euro. For the
equipment cost and the accumulated depreciation, the current exchange rate at
December 31, 20X5, should be used for translation. Depreciation expense is
translated at an appropriate weighted average exchange rate for 20X5.

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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C12-7 Translation Adjustment and Comprehensive Income

a.

Statement of income for the year, for the subsidiary

Subsidiary
Statement of Income
Year Ended December 31, 20XX
Sales
Cost of Sales
Gross Profit
Operating Expenses
Income from Operations
Consolidated Net Income to Controlling Interest

b.

$ 560,000
(285,000)
$ 275,000
(140,000)
$ 135,000
$ 135,000

Statement of comprehensive income for the year, for the subsidiary

Subsidiary
Statement of Comprehensive Income
Year Ended December 31, 20XX
Consolidated Net Income to Controlling Interest
Other Comprehensive Income:
Translation Adjustment
Comprehensive Income

c.

$ 135,000
(12,000)
$ 123,000

Balance sheet as of December 31, for the subsidiary

Subsidiary
Balance Sheet
December 31, 20XX
Assets
Cash
Receivables
Inventories
Property, Plant, and Equipment (net)
Total Assets
Liabilities and Stockholders Equity
Current Payables
Long-Term Payables
Capital Stock
Retained Earnings
Accumulated Other Comprehensive Income:
Translation Adjustment
Total Liabilities and Stockholders Equity

$ 50,000
24,700
60,300
328,000
$ 463,000
$ 16,000
181,000
100,000
258,000
(92,000)
$ 463,000

Note: The end-of-year retained earnings ($258,000) is comprised of the January 1

balance of $135,000, plus net income of $135,000, less dividends of $12,000.

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C12-7 (continued)
d.

FASB Statement No. 130 allows for either the one-statement format for the
combined statement of income and comprehensive income, or the two-statement
format for a statement of income and a separate statement of comprehensive
income. Both formats must include all the elements of comprehensive income.
The one-statement format presents the other comprehensive income elements
immediately below net income.
The two-statement format presents a separate statement of income as was done
prior to FASB 130. The statement of income ends with net income. Then, a
separate statement of comprehensive income begins with net income, followed
with the elements of other comprehensive income, and ends with comprehensive
income.

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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C12-8 Changes in the Cumulative Translation Adjustment Account

Johnson & Johnson Company applied the concepts presented in the chapter for
translating the trial balances of its foreign subsidiaries. The resulting cumulative
translation adjustment has changed dramatically from a credit balance of $134 million
at the end of 20X1 to a debit balance of $338 million at the end of 20X3.
The translation adjustment is related to the translated net asset balance (assets
minus liabilities) of the foreign subsidiaries. Several factors could account for the
decrease in the net assets of Johnson & Johnson's foreign subsidiaries, as follows:
1. The foreign subsidiaries could be increasing their local liabilities, i.e., taking out
more local debt.
2. The foreign subsidiaries could be decreasing their local assets, i.e., not
maintaining their physical capital through reinvestment.
3. The direct exchange rate of the dollar versus the local currency units of the
countries in which the company has foreign subsidiaries has been decreasing
over time (i.e., the dollar had strengthened versus the local currency units).
Question d. can be used to demonstrate these factors. Remember that it is assumed
that the translated stockholders' equity, other than the accumulated other
comprehensive income (AOCI) from the translation adjustment, remained constant at
$500 million for each of the three years. The following condensed balance sheets can
be presented:
20X1 Translated Balance Sheets of All Foreign Subsidiaries
Net assets

$634
Stockholders equity:
Other than AOCI
AOCI Translation
Adjustment

$ 500
134

20X2 Translated Balance Sheets of All Foreign Subsidiaries

Net assets

$354
Stockholders equity:
Other than AOCI
AOCI Translation
Adjustment

$ 500
(146)

20X3 Translated Balance Sheets of All Foreign Subsidiaries

Net assets

$162
Stockholders equity:
Other than AOCI
AOCI Translation
Adjustment

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$ 500
(338)

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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C12-8 (continued)
If the direct exchange rate decreased over the two-year period, the translated net
assets would decrease, thus causing a decrease (debit change) in the translation
adjustment. The direct exchange rate would decrease if the dollar were strengthening
versus the local currency units of the countries in which the company had foreign
subsidiaries. Other causes for the decrease in the translated net assets would be a
decrease in local assets, or an increase in local liabilities.
Johnson & Johnson Company did make several changes in its foreign investment
portfolio during 20X2 and 20X3 that would have resulted in a change in the combined
stockholders' equity of the company's foreign investments. During 20X3, the company
acquired approximately $266 million in European companies. In 20X2, the company
acquired approximately $47 million in Japanese companies. The company completed
relatively minor sales of foreign subsidiaries and operations during 20X2 and 20X3.
Thus, it appears that the major reasons for the significant debit change in the
accumulated other comprehensive income translation adjustment account over the
two-year period was that the foreign subsidiaries were increasing their local debt, and
that the U.S. dollar was strengthening versus the local currency units of the foreign
countries in which Johnson & Johnson Company had subsidiaries. A more specific
analysis would require knowledge of the amount of the foreign investments in each
country, the balance of the local assets and local liabilities of each of the foreign
subsidiaries, and the knowledge of the exchange rates for the dollar versus the
foreign currencies of the countries in which the company has invested.

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C12-9 Pros and Cons of Foreign Investment

The focus of this case is to consider the variables involved with the business decision
of expanding a company's production and/or marketing investment in a foreign
country. Many of the variables would be similar to those considered in the decision to
increase a company's physical capital in the U.S. But, some additional variables
should be considered for the foreign country such as: home-country laws, the political
and economic environment, the accounting and tax laws, the status of labor
organization, the cost-of-living and prevailing wages, the supply of trained labor
forces (including local management personnel), and the different cultural aspects that
might impact on obtaining the factors of production or on the markets for the
company's goods. Some companies make investment in foreign production facilities
in order to have a production capability closer to a foreign market. Thus transportation
costs of the finished goods are decreased, while the company is able to increase
overall revenue and income.
Many companies go to non-U.S. production sources because of the lower costs for
labor. Thus, if the company produces a labor-intensive product, the economics of the
decision may favor foreign production. In addition, as tariffs are reduced, U.S.
companies may find it more advantageous to move their production facilities to nonU.S. locations. One possible outcome is that the costs of the finished goods to U.S.
consumers would be lower for goods manufactured outside the U.S. However, an
argument often raised in the political arena is that unemployed U.S. consumers would
not be able to purchase the products.
The U.S. government has proposed retraining programs for dislocated workers who
lose their jobs because the company has closed the U.S. production facility. Students
should be encouraged to develop some new and novel approaches to solving the
problem of the general change in the types of new jobs being created in the U.S.
economy.

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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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C12-10 Determining an Entitys Functional Currency

MEMO
To:

Garry Parise, CFO, Maxima Corporation

From:
_______________
Department
Re:

____________________,

CPA,

Controllers

Functional Currency of Luz Maxima

According to FASB Statement No. 52, the functional currency for a company is the
primary currency that is generated by cash inflows and used for cash outflows.
Further, it is the currency the country that is primary economic environment of the
companys business operations as indicated by items such as sales, and expense,
and financing activities.
Because Luz Maxima initially did business exclusively with Maxima Corporation and
these transactions were denominated in the U.S. dollar, its functional currency was
originally determined to be the U.S. dollar. However, it appears that changes in Luz
Maximas operation over the past five years may result in a change in the functional
currency from the U.S. dollar to the Mexican peso.
Appendix A of FASB 52 provides indicators that should be considered in determining
a foreign subsidiarys functional currency. Among the indicators that may be relevant
for evaluating the functional currency of Luz Maxima are sales, expense, and
financing indicators.
Sales market indicators Luz Maxima now sells a significant amount of product
in Mexico and South America. These transactions are denominated in the peso.
Expense indicators Luz Maxima obtains a significant amount of materials from
local suppliers.
Financing indicators Luz Maxima obtained long-term debt financing and a line of
credit from banks in Mexico.
To the extent indicators are mixed and Luz Maxima also has sales, expenses, and
financing transactions denominated in the U.S. dollar, FASB 52 states that
management should make the final determination as to the functional currency.
FASB 52 also indicates that, while it is desirable for the functional currency to be
used consistently, if economic facts change, it may be appropriate to change the
determination of the functional currency.
Management should assess all aspects of Luz Maximas operation to determine the
most appropriate and relevant functional currency for this subsidiary. If a decision is
made to change the functional currency from the U. S. dollar to the Mexican peso,
Luz Maximas current financial statements should be converted to U.S. dollars using
the current rate translation method. Any adjustment that occurs as a result of
translating nonmonetary assets using the current rate method should be reported as
a component of other comprehensive income.

12-15

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

C12-10 (continued)
Authoritative support for the above memo can be found in the following references:
FASB 52, Par. 5, Par. 9, Par. 41, Par. 42, Par. 46
Suggested Query:
functional currency*
C12-11 Accounting for the Translation Adjustment
MEMO
To: Renee Voll, Controller
From:

___________ _______________, CPA

Re: Translation Adjustment for Valencia subsidiary

Since Sonoma has sold 30% of the investment in our Spanish subsidiary, the balance
of the cumulative translation adjustment, included in consolidated stockholders
equity, should be reduced proportionately.
FASB Statement No. 52 normally does not require that changes in the translation
adjustment be included in earnings. Prior to the liquidation of an investment in a
subsidiary, the FASB believes that the effects of such translation adjustments are
uncertain and should not be included in income. However, when there is a sale or
liquidation of a subsidiary, the amount of the translation adjustment that is included in
equity should be removed from equity and should be reported as part of the gain or
loss in the period in which the transaction occurs.
Although Sonoma has not completely liquidated the investment in Valencia, the
company is still required to recognize a portion of the translation adjustment in
computing the gain or loss. According to FIN 37, a pro rata portion of the
accumulated translation adjustment that is attributable to the subsidiary must be
included in the calculation of the gain or loss on the sale of a portion of the subsidiary.
Therefore, the gain on the sale of the Valencia investment should be reduced by 30%
of the (debit balance) cumulative translation adjustment related to this investment.
Sonoma should disclose the amount by which the gain is decreased because of the
adjustment for the cumulative translation adjustment.
In the presentation of comprehensive income, the adjustment to the translation
adjustment should be identified as a reclassification adjustment so that the same
amount is not included in both net income and in comprehensive income.

12-16

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

C12-11 (continued)
Authoritative support for the above memo can be found in the following references:
FASB 52, Par. 14, Par. 31, Par. 111
FASB 130, Par. 19
FIN 37, Par. 2

Suggested Query:
translation adjustment* sale

12-17

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

SOLUTIONS TO EXERCISES
E12-1 Multiple-Choice Translation and Remeasurement [AICPA Adapted]
Foreign Currency
is Functional Currency
1.

a.

U.S. Dollar
is Functional Currency

$215,000

b.

$225,000
($100,000 + $50,000 + $30,000
+ $45,000)

2.

c.

400,000 LCU x $.44 = $176,000

d.

120,000 LCU x $.50

80,000 LCU x $.44
200,000 LCU x $.44

3.

a.

Indirect rates used

c.

170,000 LCU / 1.5 LCU

90,000 LCU / 1.6 LCU

= $113,333
= 56,250
$169,583

b.

25,000 LCU / 2.2 LCU

= $ 11,364

260,000 LCU / 1.8 LCU = $144,444

4.

d.

25,000 LCU / 2 LCU = $12,500

5.

a.

d.

6.

a.

c.

7.

a.

$755,000

d.

(All assets are translated

at current rate)

= $ 60,000
= 35,200
= 88,000
$183,200

$880,000
($85,000 + $700,000 + $25,000
+ $70,000)

12-18

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

E12-2 Multiple-Choice Questions on Translation and Foreign Currency

Transactions [AICPA Adapted]
Foreign Currency
is Functional Currency
1. b.

U.S. Dollar
is Functional Currency

$10,000

d.

$120,000 = 2/15/X2 $ value

(110,000) = 12/31/X1 $ value
$ 10,000 = Foreign exchange
gain
2. d.

$10,000 = Foreign currency

transaction gain
30,000 = Remeasurement gain
$40,000 = Foreign exchange
gain

$17,000

b.

$13,000 = Preadjusted foreign

exchange loss
4,000 = Foreign currency
transaction loss
($60,000 - $64,000)
$17,000 = Foreign exchange
loss
3. c.

$21,000

$10,000
$13,000 = Preadjusted foreign
exchange loss
4,000 = Foreign currency
transaction loss
(7,000) = Remeasurement gain
$10,000 = Net foreign
exchange loss

a.

$15,000 = Preadjusted foreign

exchange loss
6,000 = Foreign currency
transaction loss
($100,000 - $106,000)
$21,000 = Foreign exchange
loss
4. a.

$40,000

$41,000
$15,000 = Preadjusted foreign
exchange loss
6,000 = Foreign currency
transaction loss
20,000 = Remeasurement gain
$41,000 = Net foreign
exchange loss

When the remeasurement method is used, monetary accounts are restated at

the exchange rate at the balance sheet date, while nonmonetary accounts are
restated using the exchange rate(s) at the date(s) the transaction(s) occurred
which are reflected in the account balance. In this question, bonds payable and
accrued liabilities are both monetary accounts and would be restated using the
balance sheet exchange rate. Trading securities represent a nonmonetary
account. Trading securities would be restated using the balance sheet rate
because the account balance is stated at the market values at the balance
sheet date. Inventories are also a nonmonetary asset. Since they are stated at
cost, a historical exchange rate would be used to restate inventories.

12-19

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

E12-2 (continued)
5.

b. The current rate method of translation allows the use of a weighted average
exchange rate for revenues and expenses that occur throughout the year. Since
both sales and wages expense occur throughout the year, a weighted average
exchange rate can be used for translation.

6.

a. For hedges of net investments in a foreign entity, the amount of the change in
fair value of the hedging instrument is recorded to other comprehensive income
that then becomes part of the accumulated other comprehensive income. The
change in the translation adjustment during the period is reported as a
component of other comprehensive income and then carried forward to be
accumulated in the stockholders equity section of the balance sheet with the
other components of other comprehensive income. Therefore, in this case in
which a hedge of a net investment in a foreign entity is used, the exchange gain
on the hedge is reported along with the change in the translation adjustment.

E12-3 Matching Key Terms

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

12-20

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

E12-4 Multiple-Choice Questions on Translation and Remeasurement

1.

2.

Investment cost
Less:
Book and fair values of sub's net assets
680,000 ringitts x $.21 x .90 =
Goodwill

$160,000
128,520
$ 31,480

C
Goodwill
Impairment

Dollars
$10,500
1,100 (RM 5,000 x $.22)

3.

Impairment loss = $10,500 / 10 = $1,050

4.

25,000 x $1.24 = $31,000

5.

5,000 x $1.30 = $6,500

6.

Investment cost on January 1, 20X5

Less:
Book and fair values of subs net assets:
300,000 x $1.20
Goodwill

Goodwill
Impairment
Balance

Dollars
$42,000
4,340 ( 3,500 x $1.24)
$37,660

Translated
balance

$41,580 ( 31,500 x $1.32)

Ringitts
RM 50,000 ($10,500 / $.21)
5,000 (RM 50,000 / 10)

$402,000
360,000
$ 42,000
Euros
35,000 ($ 42,000 / $1.20)
3,500 ( 35,000 / 10)
31,500

Translation adjustment: $41,580 minus $37,660 = $3,920 use for

question 7.
7.

Translation adjustment from

translating the trial balance
Translation adjustment from
translating goodwill
Total translation adjustment

$12,000cr
3,920cr
$15,920cr

12-21

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

E12-5 Translation
RoadTime Company
Trial Balance Translation
December 31, 20X1
Swiss
Francs

Translation
Rate

U.S.
Dollars

Cash
Accounts Receivable (net)
Receivable from Popular Creek
Inventory
Plant and Equipment
Cost of Goods Sold
Depreciation Expense
Operating Expense
Dividends Paid
Total Debits

SFr

7,000
20,000
5,000
25,000
100,000
70,000
10,000
30,000
15,000
SFr 282,000

.80
.80
.80
.80
.80
.75
.75
.75
.77

$ 5,600
16,000
4,000
20,000
80,000
52,500
7,500
22,500
11,550
$219,650

Accumulated Depreciation
Accounts Payable
Bonds Payable
Common Stock
Sales
Total
Accumulated Other Comprehensive
Income Translation
Adjustment (credit)
Total Credits

SFr 10,000
12,000
50,000
60,000
150,000
SFr 282,000

.80
.80
.80
.73
.75

$ 8,000
9,600
40,000
43,800
112,500
$213,900
5,750
$219,650

12-22

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

E12-6 Proof of Translation Adjustment

a.

Popular Creek Corporation and Subsidiary

Proof of Translation Adjustment
Year Ended December 31, 20X1

Net assets at beginning of year

Adjustment for changes in net
asset position during year:
Net income for year
Dividends paid
Net assets translated at:
Rates during year
Rates at end of year

SFr

Translation
Rate

SFr 60,000

.73

$ 43,800

40,000
(15,000)

.75
.77

30,000
(11,550)

SFr 85,000

.80

$ 62,250
68,000

Change in other comprehensive

income translation adjustment during year net increase
Accumulated other comprehensive
income translation adjustment
January 1

$ 5,750
-0-

Change in other comprehensive income

translation adjustment
December 31 (credit)
b.

U.S.
Dollars

$ 5,750

The change in the translation adjustment of $5,750 is included as a credit in the

other comprehensive income on the Statement of Comprehensive Income. The
other comprehensive income is then accumulated and reported in the
stockholders equity section of the consolidated balance sheet.

Supporting computations:
Net income:
Sales

SFr 150,000

Net Assets

CGS
Depreciation
Oper. Expenses
Net Income

(70,000)
(10,000)
(30,000) Total
SFr 40,000

Balance Sheet, 12/31/X1

$68,000 Common Stock

$68,000

Ret. Earn.*
AOCI
Total

Retained earnings, 1/1/X1

Net income
Dividends
*Retained earnings,
12/31/X1

12-23

$
43,800
18,450
5,750
$ 68,000
$

-030,000
(11,550)
$ 18,450

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

E12-7 Remeasurement
RoadTime Company
Trial Balance Remeasurement
December 31, 20X1
Swiss
Francs

U.S.
Dollars

Rate

Cash
Accounts Receivable (net)
Receivables from Popular Creek
Inventory
Plant and Equipment
Cost of Goods Sold
Depreciation Expense
Operating Expense
Dividends Paid
Total
Remeasurement Loss
Total Debits

SFr

7,000
20,000
5,000
25,000
100,000
70,000
10,000
30,000
15,000
SFr 282,000

.80
.80
.80
.77
.74
(a)
.74
.75
.77

$ 5,600
16,000
4,000
19,250
74,000
52,000
7,400
22,500
11,550
$212,300
1,000
$213,300

Accumulated Depreciation
Accounts Payable
Bonds Payable
Common Stock
Sales
Total Credits

SFr 10,000
12,000
50,000
60,000
150,000
SFr 282,000

.74
.80
.80
.73
.75

Swiss
Francs

(a) Cost of Goods Sold:

Beginning Inventory
Purchases
Goods Available for Sale
Less: Ending Inventory
Cost of Goods Sold

SFr

-095,000
SFr 95,000
(25,000)
SFr 70,000

12-24

7,400
9,600
40,000
43,800
112,500
$213,300
U.S.
Dollars

Rate
.75
.75
.77

-071,250
$ 71,250
(19,250)
$ 52,000

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

E12-8* Proof of Remeasurement Gain (Loss)

a.

Popular Creek Corporation and Subsidiary

Proof of Remeasurement Loss
Year Ended Dec. 31, 20X1
Schedule 1
Statement of Net Monetary Position

Monetary Assets:
Cash
Accounts Receivable (net)
Receivables from Popular Creek
Total
Less Monetary Liabilities:
Accounts Payable
Bonds Payable
Total
Net Monetary Assets

End of
Year

Beginning
of Year

SFr 7,000
20,000
5,000
SFr 32,000

SFr 60,000

SFr 12,000
50,000
SFr(62,000)

SFr

SFr 60,000
-0-0SFr
-0SFr 60,000

Net Monetary Liabilities

SFr 30,000

Change in net monetary investment during 20X1

SFr (90,000)

Schedule 2
Analysis of Changes in Monetary Accounts

Exposed net monetary asset

Position January 1
Adjustments for changes in the net
monetary position during the year:
Increases:
From operations:
Sales
From other sources
Decreases:
From operations:
Purchases
Cash expenses
From dividends
From purchase of
plant and equipment
Net monetary position prior to
remeasurement at year-end rates
Exposed net monetary liability
Position December 31
Remeasurement loss

SFr

Exchange
Rate

U.S.
Dollars

SFr 60,000

.73

$ 43,800

150,000
-0-

.75

112,500
-0-

(95,000)
(30,000)
(15,000)

.75
.75
.77

(71,250)
(22,500)
(11,550)

(100,000)

.74

(74,000)
$(23,000)

SFr(30,000)

12-25

.80

(24,000)
$ (1,000)

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

E12-8* (continued)
Note: The issuance of the bonds payable has no effect on net monetary assets.
Cash, a monetary asset, is increased and bonds payable, a monetary liability, is
increased.
The Remeasurement Loss results from the decrease in the net monetary asset
position during a period in which the exchange rate has increased. The end-ofperiod remeasured net liability position of $24,000 is more than the net monetary
liability position of $23,000 remeasured using the rates in effect at the times of
the transactions.
b.

The remeasurement loss is included in the period's consolidated statement of

income.

12-26

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

E12-9 Translation with Strengthening U.S. Dollar

a.

RoadTime Company
Trial Balance Translation
December 31, 20X1
Swiss
Francs

Cash
Accounts Receivable (net)
Receivable from Popular Creek
Inventory
Plant and Equipment
Cost of Goods Sold
Depreciation Expense
Operating Expense
Dividends Paid
Total
Accumulated Other Comprehensive
Income Translation Adjustment
(debit)
Total Debits

SFr

7,000
20,000
5,000
25,000
100,000
70,000
10,000
30,000
15,000
SFr 282,000

Accumulated Depreciation
Accounts Payable
Bonds Payable
Common Stock
Sales
Total Credits

SFr

Rate
.73
.73
.73
.73
.73
.75
.75
.75
.74

5,110
14,600
3,650
18,250
73,000
52,500
7,500
22,500
11,100
$208,210
4,850
$213,060

SFr 282,000
10,000
12,000
50,000
60,000
150,000
SFr 282,000

U.S.
Dollars

.73
.73
.73
.80
.75

7,300
8,760
36,500
48,000
112,500
$213,060

NOT REQUIRED: Proof of Translation Adjustment

SFr
Net assets at beginning of year
SFr 60,000
Adjustment for changes in net asset
position during year:
Net income for year
40,000
Dividends paid
(15,000)
Net assets translated at:
Rates during year
Rates at end of year
SFr 85,000
Change in other comprehensive
Income translation adjustment
during year net decrease
Accumulated other comprehensive income
translation adjustment January 1
Accumulated other comprehensive income
translation adjustment December 31
(debit)

12-27

Translation
Rate

U.S.
Dollars

.80

$ 48,000

.75
.74

30,000
(11,100)

.73

$ 66,900
(62,050)
$

4,850
-0-

4,850

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

E12-9 (continued)
b. In Exercise 12-5, the U.S. dollar weakened against the Swiss franc; i.e., the direct
exchange rate increased during the 20X1 year. Thus, the $11,000 credit
translation adjustment was the balancing item because the translated net assets
of the foreign subsidiary were higher at the end of the year than the net assets at
the beginning of the year adjusted for changes in the net assets that occurred
during the year (income less dividends).
In Exercise 12-9, the U.S. dollar strengthened against the Swiss franc during the
year; i.e., the direct exchange rate decreased during the year. Thus, the $4,850
debit translation adjustment was the balancing item in Exercise 12-9 because
the translated net assets at the end of the year were lower than the translated
net assets at the beginning of the year as adjusted for changes during the year.
The periodic change in the translation adjustment of $4,850 is reported as a
component of other comprehensive income on the Statement of Comprehensive
Income, and is then accumulated with other comprehensive income items and
reported in the stockholders equity section of the consolidated balance sheet.

12-28

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

E12-10 Remeasurement with Strengthening U.S. Dollar

a.
RoadTime Company
Trial Balance Remeasurement
December 31, 20X1
Swiss
Francs

Rate

U.S.
Dollars

Cash
Accounts Receivable (net)
Receivable from Popular Creek
Inventory
Plant and Equipment
Cost of Goods Sold
Depreciation Expense
Operating Expense
Dividends Paid
Total
Remeasurement Loss
Total Debits

SFr

7,000
20,000
5,000
25,000
100,000
70,000
10,000
30,000
15,000
SFr 282,000

.73
.73
.73
.74
.77
(a)
.77
.75
.74

Accumulated Depreciation
Accounts Payable
Bonds Payable
Common Stock
Sales
Total Credits

SFr 10,000
12,000
50,000
60,000
150,000
SFr 282,000

.77
.73
.73
.80
.75

Swiss
Francs

(a) Cost of Goods Sold:

Beginning Inventory
Purchases
Goods Available for Sale
Less: Ending Inventory
Cost of Goods Sold

SFr

-095,000
SFr 95,000
(25,000)
SFr 70,000

12-29

Rate
.80
.75
.74

5,110
14,600
3,650
18,500
77,000
52,750
7,700
22,500
11,100
$212,910
550
$213,460
7,700
8,760
36,500
48,000
112,500
$213,460

U.S.
Dollars
$

-071,250
$ 71,250
(18,500)
$ 52,750

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

E12-10 (continued)
b.

In Exercise 12-5, the U.S. dollar weakened against the Swiss franc; i.e., the
direct exchange rate increased during the 20X1 year. The $1,000
remeasurement loss resulted from the decrease in the net monetary items during
a period in which the exchange rate increased.
In Exercise 12-10, the U.S. dollar strengthened against the Swiss franc during
the year. Note that the remeasurement gain or loss is computed only on
monetary items. In E12-10, the net monetary items decreased during the year.
Thus, the $550 remeasurement loss in E12-10 results from the fact that the
remeasured net monetary liability position at the end of the year is greater than
the net monetary position prior to remeasurement at year-end rates. This is
shown in the proof below which was not required for the exercise.
NOT REQUIRED: Proof of Remeasurement Loss
Schedule 1
Statement of Net Monetary Position
End of
Year
Monetary Assets:
Cash
Accounts Receivable (net)
Receivables from Popular Creek
Total

SFr

Less Monetary Liabilities:

Accounts Payable
Bonds Payable
Total
Net Monetary Assets 1/1/X1

Beginning
of Year

7,000
20,000
5,000
SFr 32,000

SFr 60,000

SFr 12,000
50,000
SFr(62,000)

SFr

SFr 60,000
-0-0SFr
-0SFr 60,000

Net Monetary Liabilities 12/31/X1

SFr 30,000

Change in net monetary

investment during 20X1

SFr (90,000)

12-30

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

E12-10 (continued)
NOT REQUIRED: Proof of Remeasurement Loss (continued)
Schedule 2
Analysis of Changes in Monetary Accounts

Exposed net monetary asset

Position January 1
Adjustments for changes in the net
monetary position during the year:
Increases:
From operations:
Sales
From other sources
Decreases:
From operations:
Purchases
Cash expenses
From dividends
From purchase of
plant and equipment
Net monetary position prior to
remeasurement at year-end rates
Exposed net monetary liability
Position--December 31
Remeasurement loss

SFr

Exchange
Rate

U.S.
Dollars

SFr 60,000

.80

$ 48,000

150,000
-0-

.75

112,500
-0-

(95,000)
(30,000)
(15,000)

.75
.75
.74

(71,250)
(22,500)
(11,100)

(100,000)

.77

(77,000)
$(21,350)

SFr (30,000)

.73

(21,900)
$ (550)

E12-11 Remeasurement and Translation of Cost of Goods Sold

a. Remeasurement:
Spanish
Pesetas
P 220,000
846,000
P 1,066,000
(180,000)
P 886,000

Beginning Inventory
Purchases
Goods Available
Less Ending Inventory
Cost of Goods Sold

Rate
$0.0070
$0.0080
$0.0082

U.S.
Dollars
$ 1,540
6,768
$ 8,308
(1,476)
$ 6,832

b. Translation:
Spanish
Pesetas
P 886,000

Cost of Goods Sold

12-31

Rate
$0.0080

U.S.
Dollars
$ 7,088

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

E12-12 Equity-Method Entries for a Foreign Subsidiary

a.

b.

Cash
Investment in Thames Company
Receive dividend:
$19,680 = 15,000 x $1.64 x .80

19,680

Investment in Thames Company

Income from Subsidiary
Record equity accrual:
$48,000 = $60,000 x .80

48,000

19,680

48,000

Other Comprehensive Income

Translation Adjustment
Investment in Thames Company
Parent's share of subsidiary's
translation adjustment:
$5,120 = $6,400 x .80
c.
Income Statement:
Differential Jan. 1, 20X8
(10-year life)
Amortization for 20X8
Remaining balance
Balance Sheet:
Remaining balance on Dec. 31
translated at year-end rate

5,120
5,120

British
Pounds

Exchange
Rate

U.S.
Dollars

30,000

1.60

$48,000

(3,000)
27,000

1.63

(4,890)
$43,110

27,000

1.65

44,550

Difference to translation adjustment

$ 1,440

Note that the amount of the differential necessary for the balance sheet is $44,550,
while the amount, without any adjustment, would be $43,110. Therefore, the differential
portion of the parent companys investment must be increased by $1,440 through a debit
to the Investment in Thames Company account and a corresponding credit to the Other
Comprehensive Income Translation Adjustment account. The differential adjustment
adjusts to the amount needed for the balance sheet.

d.

Investment in Thames Company

Other Comprehensive Income
Translation Adjustment
Recognize translation adjustment
for increase in differential.

1,440

Income from Subsidiary

Investment in Thames Company
Amortization of trademark for 20X1:
$4,890 = 3,000 x $1.63

4,890

12-32

1,440

4,890

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

E12-12 (continued)
e.

Other comprehensive income reports the periodic change in the translation

adjustment. For 20X8, this would be the sum of a debit of $5,120 which is the
parent companys portion of the translation adjustment resulting from translating
the subsidiarys trial balance, less the $1,440 translation adjustment that is made
only by the parent company due to the adjustment of the differential. Therefore,
other comprehensive income would report $3,680 ($3,680 = $5,120 - $1,440)
due to foreign translations.

12-33

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

E12-13
a.

Effects of a Change in the Exchange Rate Translation and

Other Comprehensive Income

Direct and indirect exchange rates:

Direct ($/R 1)
$.03333 = R 1
$.02857 = R 1
$ .025 = R 1

January 1, 20X6
December 31, 20X6
December 31, 20X7

Indirect (R/$1)
R 30 = $1
R 35 = $1
R 40 = $1

The dollar strengthened during 20X6 because the number of rupees one U.S. dollar
could acquire at the end of the year (35) is greater than the number of rupees that could
be acquired at the beginning of the year (30); therefore, the value of the dollar has
increased relative to the rupee during 20X6. The dollar continued to strengthen during
20X7.
b.

Translated December 31, 20X6, balance sheet:

Cash
Receivables
Inventory
Fixed assets
Total
Accumulated other
comprehensive income
translation adjustment (debit)
Total debits
Current payables
Long-term debt
Common stock
Retained earnings
Total credits

Subsidiarys
Trial Balance
(in rupees)
R 100,000
450,000
680,000
1,000,000
R 2,230,000

Direct
Exchange
Rate
$.02857
$.02857
$.02857
$.02857

Translated
Trial Balance
(in $)
$ 2,857
12,857
19,428
28,570
$63,712
2,903
$66,615

260,000
1,250,000
500,000
220,000
R 2,230,000

$.02857
$.02857
$.03333
$.03095*

$ 7,428
35,713
16,665
6,809
$66,615

*$.03095 = average of beginning and ending exchange rates, rounded

to 4 decimal points: $.030945 = [($.03333 + $.02857) / 2]
(Not required: Proof of translation adjustment (debit) of $2,903)

Net assets, 1/1/X6

Adjustment for changes in
net assets during year:
Net income
Net assets translated at:
Rates during year
Rate at end of year
Change in translation
adjustment during year (debit)

Rupees
R 500,000

Translation
Rate
$.03333

Dollars
$16,665

220,000

$.03095

6,809

R 720,000

$.02857

$23,474
(20,570)
$ 2,904*

*Difference of $1 ($2,904 - $2,903) due to rounding of exchange rates.

12-34

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

E12-13 (continued)
c.

Translated December 31, 20X7, balance sheet:

Cash
Receivables
Inventory
Fixed assets
Total
Accumulated other
comprehensive income
translation adjustment (debit)
Total debits
Current payables
Long-term debt
Common stock
Retained earnings
Total credits

Subsidiarys
Trial Balance
(in rupees)
R
80,000
550,000
720,000
900,000
R 2,250,000

Direct
Exchange
Rate
$.025
$.025
$.025
$.025

Translated
Trial Balance
(in $)
$ 2,000
13,750
18,000
22,500
$56,250
5,635
$61,885

340,000
1,100,000
500,000
310,000
R 2,250,000

$.025
$.025
$.03333
(a)

$ 8,500
27,500
16,665
9,220
$61,885

(a) The retained earnings in dollars would begin with the December 31, 20X6's,
dollar balance ($6,809) that would be carried forward. To this would be
added 20X7's net income of R 90,000, which is the change in retained
earnings in rupees multiplied by the average 20X7 exchange rate of $.02679
[($.02857 + $.025)/2] which equals $2,411. Therefore, translated retained
earnings on December 31, 20X7, is $9,220 ($9,220 = $6,809 + $2,411).
(Not required: Proof of translation adjustment (debit) of $5,635)
Rupees
R 720,000

Net assets, 1/1/X7

Adjustment for changes in
net assets during year:
Net income
90,000
Net assets translated at:
Rates during year
Other comprehensive income

Rate at end of year

R 810,000
Change in other
comprehensive
Income translation
adjustment during year
(debit)
Accumulated other comprehensive
Income translation adjustment, 1/1/X7

12-35

Translation
Rate
$.02857

Dollars
$20,570

$.02679

2,411
$22,981

$.025

(20,250)

$ 2,731
2,904

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

Accumulated other
comprehensive
Income translation adjustment,12/31/X7 (debit)
E12-13 (continued)
d.

$ 5,635

The $2,731 change in the accumulated other comprehensive income

translation adjustment during 20X7 would be reported as a component of other
comprehensive income on 20X7's statement of other comprehensive income.

12-36

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

E12-14
a.

Computation of Gain or Loss on Sale of Asset by Foreign Subsidiary

Journal entries, in pesos, regarding the land:

1/1/X1
12/31/X2

b.

Land
Cash

P 2,000,000

Cash
Land
Gain on Sale of Land

P 3,000,000

P 2,000,000
P 2,000,000
P 1,000,000

Amount of transaction gain ($83,333), and remeasurement loss ($33,333):

Note that under remeasurement the nonmonetary items are not adjusted for
changes in the exchange rate. Therefore, land will be based on its historical cost of
P 2,000,000 x $.10, the direct exchange rate on 1/1/X1, which equals a remeasured
basis for the land of $200,000.
The direct exchange rate on 1/1/X1 is $.10 ($1 = P 10); on 12/31/X1 is $.090909 ($1
= P 11); and on 12/31/X2 is $.083333 ($1 = P 12). The appropriate exchange rate to
use to remeasure the gain on the sale of the land is $.83333 because the
transaction is significant to the subsidiary, solitary to the operations, and occurred
on a specific date, the last day of the year.
Remeasured December 31, 20X2 balance sheet:

Cash
Total
Remeasurement loss
Total debits
Common stock
Gain on sale of land
Total credits

Subsidiarys
Trial Balance
(in pesos)
P 3,000,000
P 3,000,000

Direct
Exchange
Rate
$.083333

Remeasured
Trial Balance
(in $)
$250,000
$250,000
33,333
$283,333

P 2,000,000
P 1,000,000
P 3,000,000

$.10
$.083333

$200,000
83,333
$283,333

The effect on the parent companys net income ($50,000 = $83,333 $33,333) is
the same as if the transactions had been transacted in U.S. dollars, which is an
objective of the remeasurement method. The equivalent journal entries to those in
part a. of the problem, if transacted in U.S. dollars, would be:
1/1/X1
12/31/X2

Land (P 2,000,000 x $.10)

Cash

$200,000

Cash (P 3,000,000 x $.08333)

Land
Gain on Sale of Land

$250,000

12-37

$200,000
$200,000
$ 50,000

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

E12-14 (continued)
c.

Amount of transaction gain ($83,333), and other comprehensive income effect

in 20X2 ($15,151):
To compute the change in the translation adjustment for 20X2, which is an
element of other comprehensive income for 20X2, it is necessary to prepare the
translated trial balance as of the end of 20X1, as follows:
Translated December 31, 20X1, balance sheet:

Land
Total
Accumulated other
comprehensive income
translation
adjustment (debit)
Total debits
Common stock
Total credits

Subsidiarys
Trial Balance
(in pesos)
P 2,000,000
P 2,000,000

Direct
Exchange
Rate
$.090909

Translated
Trial Balance
(in $)
$181,818
$181,818

18,182
$200,000
P 2,000,000
P 2,000,000

$.10

$200,000
$200,000

Note that the translation adjustment account has a debit balance of $18,182 as of
the end of 20X1. The next step is to translate the subsidiarys 12/31/X2 trial
balance.
Translated December 31, 20X2, balance sheet:

Cash
Total
Accumulated other
comprehensive income
translation
adjustment (debit)
Total debits
Common stock
Gain on sale of land
Total credits

Subsidiarys
Trial Balance
(in pesos)
P 3,000,000
P 3,000,000

Direct
Exchange
Rate
$.083333

Translated
Trial Balance
(in $)
$250,000
$250,000

33,333
$283,333
P 2,000,000
P 1,000,000
P 3,000,000

$.10
$.083333

$200,000
83,333
$283,333

The change in the translation adjustment during 20X2 is $15,151 ($15,151 =

$33,333 - $18,182), which is reported on 20X2's statement of comprehensive
income. The stockholders equity section of the 12/31/X2 consolidated balance
sheet would report the accumulated other comprehensive income which includes
the accumulated translation adjustment, as of 12/31/X2, in the amount of $33,333

12-38

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

E12-15* Intercompany Transactions

Measured in
U.S. Dollars

Measured in
British Pounds

Initial inventory transfer

date ($1.60 = 1):
Selling price
(7,500 = $12,000 / $1.60)
Cost to parent
Intercompany profit

$12,000
(8,000)
$ 4,000

7,500

Balance sheet date

($1.70 = 1):
Inventory translation
($12,750 = 7,500 x $1.70)

$12,750

7,500

a.

$12,750

Inventory of United, Ltd., reported in U.S. dollar

trial balance of consolidation workpaper.
($12,750 = 7,500 x $1.70)

b.

$ 8,750

($8,750 = $12,750 - $4,000 intercompany profit)

12-39

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

SOLUTIONS TO PROBLEMS
P12-16 Parent Company Journal Entries and Translation
a.

Canadian
Dollars

P
1/1/X1
100%
NB

Investment cost
Book value of investment
on January 1, 20X1
Differential
Canadian
Dollars

Exchange
Rate

U.S.
Dollars

C$150,000

.80

$120,000

90,000
C$ 60,000

.80

72,000
$ 48,000

Exchange
Rate

U.S.
Dollars

Income Statement:
Differential at date of
acquisition:
Plant and equipment
Trademark
Amortization this period:
Plant and equipment
(10 years)
Trademark (10 years)
Remaining balance:
Plant and equipment
Trademark
Balance Sheet:
Remaining balance on
12/31/X1 translated
at year-end
exchange rates:
Plant and equipment
Trademark

C$10,000

.80
.80

$8,000

C$50,000

.75
.75

(750)

(5,000)

(1,000)
C$ 9,000

$40,000

(3,750)
$7,250

C$45,000

C$ 9,000
C$45,000

Difference to OCI
translation
adjustment:
Plant and equipment
Trademark

$36,250

.70
.70

$6,300
$31,500

$ 950
$ 4,750

Note that the differential adjustment is from the amounts of $7,250 for plant and
equipment and from $36,250 for trademark. The required amounts for the
consolidated balance sheet are $6,300 for plant and equipment, and $31,500 for
trademark. Therefore, in each of these cases, the differential adjustment will reduce
the amount of the differential component in the investment account, requiring a credit
to the Investment in North Bay Company account with a corresponding debit to the
Other Comprehensive Income Translation Adjustment account. The differential
adjustment adjusts to the correct amount necessary to prepare the consolidated
balance sheet.

12-40

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

P12-16 (continued)
b.

Entries on Par Company's books during 20X1:

(1) Investment in North Bay Company
Cash
Acquire North Bay Company.
(2) Investment in North Bay Company
Income from Subsidiary
Equity in income of subsidiary:
$15,000 = C$20,000 x .75 average exchange rate

120,000
120,000
15,000
15,000

(3) Foreign Currency Units (C$)

Investment in North Bay Company
Dividend from foreign subsidiary:
$6,000 = C$8,000 x .75

6,000

(4) Income from Subsidiary

Investment in North Bay Company
Amortization of differential:
Plant and equipment
$ 750
Trademark
3,750
Total
$4,500

4,500

(5) Other Comprehensive Income

Translation Adjustment
Investment in North Bay Company
Recognize translation adjustment on
differential:
Plant and equipment
$ 950
Trademark
4,750
Total
$5,700

6,000

4,500

5,700
5,700

Note: The amount of the differential is being decreased as a result of the

translation adjustment. Therefore, the investment account must be credited
to reflect this decrease in the portion allocated to the differential.

12-41

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

P12-16 (continued)
c.

Par Company and North Bay Company

Proof of Translation Adjustment
Year Ended December 31, 20X1

Net assets at beginning of

year, 1/1/X1

Canadian
Dollars

Exchange
Rate

C$ 90,000

.80

$72,000

20,000
(8,000)

.75
.75

15,000
(6,000)

Adjustment for changes in

assets position during year:
Net income for year
Dividends paid
Net assets translated at rates
in effect for those items
Net assets at end of year

$81,000
C$102,000

.70

71,400

Change in other comprehensive income

translation adjustment during
year net decrease (debit)

$ 9,600

December 31, 20X1

(6) Other Comprehensive Income
Translation Adjustment
Investment in North Bay Company
Parent's share (100%) of translation
adjustment from translation
of subsidiary's accounts.

d.

U.S.
Dollars

Equivalent U.S. dollar value of C$8,000

on December 31, 20X1:
C$8,000 x $.70
Equivalent U.S. dollar value of C$8,000
at date of receipt:
C$8,000 x $.75
Foreign Currency Transaction Loss

December 31, 20X1

(7) Foreign Currency Transaction Loss
Foreign Currency Units (C$)
Recognize exchange loss on foreign
currency units held.

12-42

9,600
9,600

$5,600
6,000
$ 400

400
400

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

P12-17

Translation, Journal Entries, Consolidated Comprehensive Income,

and Stockholders' Equity

a.

Vikix Inc.
Trial Balance Translation
December 31, 20X5
Item
Cash
Accounts Receivable (net)
Inventory
Property, Plant, and Equipment
Cost of Goods Sold
Operating Expenses
Depreciation Expense
Dividends Paid
Total Debits
Accumulated Depreciation
Accounts Payable
Notes Payable
Common Stock
Retained Earnings
Sales
Total
Accumulated Other Comprehensive
Income Translation Adjustment
(credit)
Total Credits

12-43

Balance
Kroner
NKr 150,000
200,000
270,000
600,000
410,000
100,000
50,000
40,000
NKr 1,820,000

Exchange
Rate
.21
.21
.21
.21
.20
.20
.20
.19

Balance
Dollars
$ 31,500
42,000
56,700
126,000
82,000
20,000
10,000
7,600
$375,800

NKr 150,000
90,000
190,000
450,000
250,000
690,000
NKr 1,820,000

.21
.21
.21
.18
.18
.20

$ 31,500
18,900
39,900
81,000
45,000
138,000
$354,300
21,500
$375,800

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

P12-17 (continued)
b.

Entries for 20X5:

January 1
Investment in Vikix Company Common
Cash
Purchase of Vikix Inc.

151,200
151,200

July 1
Cash
Investment in Vikix Company
Common
Dividend received from foreign subsidiary:
$7,600 = NKr40,000 x $.19
December 31
Investment in Vikix Company Common
Income from Subsidiary
Equity in net income of foreign subsidiary:
$26,000 = Income of NKr130,000 x
$.20
Investment in Vikix Company Common
Other Comprehensive Income
Translation Adjustment
Parent's share of translation adjustment
from translation of subsidiary's accounts:
$21,500 x 1.00
Income from Subsidiary
Investment in Vikix Company
Common
Amortization of differential:
Property, plant, and equipment
Patent
Total see supporting schedule 2

7,600

26,000
26,000

21,500
21,500

3,600
3,600
$2,000
1,600
$3,600

Investment in Vikix Company Common

Other Comprehensive Income
Translation Adjustment
Translation adjustment applicable
to the differential:
Property, plant, and equipment
$2,900
Patent
1,120
Total see supporting schedule 2
$4,020

12-44

7,600

4,020
4,020

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

P12-17 (continued)
Schedule 1: Determining the differential for 20X5:
Investment cost at January 1, 20X5
Less: Book value of net assets acquired on
January 1, 20X5 (NKr700,000 x $.18)
Differential
Differential allocated to:
Property, plant, and equipment
Patent
Total

$ 151,200
(126,000)
$ 25,200
$ 18,000
7,200
$ 25,200

Schedule 2: Determining the differential amortization for 20X5:

Norwegian
Kroner
Property, plant, and equipment:
Income statement:
Difference at beginning of year
Amortization for 20X5
(NKr100,000 / 10 years)
Remaining balances
Balance sheet:
Remaining balance on
December 31, 20X5, translated
at year-end exchange rate
Difference to other comprehensive
income translation adjustment
Patent:
Income statement:
Difference at beginning of year
Amortization for 20X5
(NKr40,000 / 5 years)
Remaining balances
Balance sheet:
Remaining balance on
December 31, 20X5, translated
at year-end exchange rate
Difference to other comprehensive
income translation adjustment

Translation
Rate

U.S.
Dollars

NKr 100,000

.18

$18,000

(10,000)
NKr 90,000

.20

(2,000)
$16,000

NKr 90,000

.21

18,900
$ 2,900

NKr 40,000

.18

$ 7,200

(8,000)
NKr 32,000

.20

(1,600)
$ 5,600

NKr 32,000

.21

6,720
$ 1,120

Note that the property, plant, and equipment portion of the differential must be
increased from $16,000 to $19,000, requiring a debit of $2,900 to the investment
account. The portion of the differential attributable to patent must be increased from
$5,600 to $6,720, requiring a debit of $1,120 to the investment account. The
corresponding credit is to the Other Comprehensive Income Translation
Adjustment account ($4,020 = $2,900 + $1,120).

12-45

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

P12-17 (continued)
c.

Tafts consolidated comprehensive income for 20X5:

1.
2.
3.
4.

d.

Income from Tafts operations for 20X5, exclusive

of income from the Norwegian subsidiary
Add: Income from the Norwegian subsidiary for 20X5
Deduct: Amortization of differential for 20X5
Tafts Net Income
Add: Translation Adjustment ($21,500 + $4,020)
Tafts Consolidated Comprehensive Income

$ 275,000
26,000
(3,600)
$ 297,400
25,520
$ 322,920

Tafts consolidated stockholders equity at December 31, 20X5:

Tafts stockholders equity at Jan. 1, 20X5
Add: Net income for 20X5
Deduct: Dividends declared by Taft during 20X5
Add: Accumulated other comprehensive income:
Foreign currency translation adjustment
Consolidated Stockholders Equity at Dec. 31, 20X5
1.
2.
3.
4.

12-46

$3,500,000
297,400
(100,000)
25,520
$3,722,920

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

P12-18
a.

Remeasurement, Journal Entries, Consolidated Net Income, and

Stockholders' Equity

Schedule remeasuring the trial balance into U.S. dollars:

Item
Cash
Accounts Receivable (net)
Inventory
Property, Plant, and Equipment
Cost of Goods Sold
Operating Expenses
Depreciation Expense
Dividends Paid
Total
Remeasurement Loss
Total Debits
Accumulated Depreciation
Accounts Payable
Notes Payable
Common Stock
Retained Earnings
Sales
Total Credits

Balance
Kroner
NKr 150,000
200,000
270,000
600,000
410,000
100,000
50,000
40,000
NKr 1,820,000

NKr

150,000
90,000
190,000
450,000
250,000
690,000
NKr 1,820,000

Exchange
Rate
.21
.21
.205
.18*
(a)
.20
.18*
.19

Balance
Dollars
$ 31,500
42,000
55,350
108,000
75,450
20,000
9,000
7,600
$348,900
900
$349,800

.18*
.21
.21
.18*
.18*
.20

$ 27,000
18,900
39,900
81,000
45,000
138,000
$349,800

* .18 = exchange rate at January 1, 20X5, the date the subsidiary

was acquired by Taft Company
(a)

Norwegian
Kroner

Cost of goods sold:

Beginning inventory
(CGS of NKr410,000 + ending
inventory of NKr270,000
minus purchases of
NKr420,000 = Beg. Inv.)
Purchases
Cost of goods available
Less ending inventory
Cost of goods sold

NKr 260,000
420,000
NKr 680,000
(270,000)
NKr 410,000

12-47

Exchange
Rate

.18
.20
.205

U.S.
Dollar

$ 46,800
84,000
$130,800
(55,350)
$ 75,450

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

P12-18 (continued)
b.

Journal entries for 20X5:

January 1
Investment in Vikix Company Common
Cash
Purchase of Vikix, Inc.

151,200
151,200

July 1
Cash
Investment in Vikix Company Common
Dividend received from foreign subsidiary:
$7,600 = NKr40,000 x $.19
December 31
Investment in Vikix Company Common
Income from Subsidiary
Equity in net income of foreign subsidiary:
Income from the Norwegian sub:
Sales
$138,000
Less:
Cost of goods sold
(75,450)
Operating expenses
(20,000)
Depreciation expense
(9,000)
Income
$ 33,550
Less: Remeasurement loss
(900)
Income recorded by Taft
$ 32,650
Income from Subsidiary
Investment in Vikix Company Common
Amortization of the differential
(See Schedule 1 below).

7,600
7,600

32,650
32,650

3,240
3,240

Schedule 1: Determining and amortizing the differential for 20X5:

Investment cost at January 1, 20X5
Book value of net assets acquired
on January 1, 20X5 (NKr700,000 x $.18)
Differential
Differential allocated to:
Property, plant, and equipment
Patent
Total
Amortization for 20X5:
Property, plant, and equipment
($18,000 / 10 years)
Patent ($7,200 / 5 years)
Total

12-48

$151,200
(126,000)
$ 25,200
$ 18,000
7,200
$ 25,200

$
$

1,800
1,440
3,240

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

P12-18 (continued)
c.

Consolidated net income for 20X5:

1.

Income from Taft's operations for 20X5,

exclusive of income from the Norwegian subsidiary
2. Add: Income from the Norwegian subsidiary
3. Deduct: Amortization of differential for 20X5
Consolidated net income for 20X5
d.

$275,000
32,650
(3,240)
$304,410

Consolidated stockholders' equity at December 31, 20X5:

1. Taft's stockholders' equity at January 1, 20X5
2. Add: Consolidated net income for 20X5
3. Deduct: Dividends declared by Taft during 20X5
Consolidated stockholders' equity at December 31, 20X5

$3,500,000
304,410
(100,000)
$3,704,410

P12-19 Proof of Translation Adjustment

Net assets at beginning of year

Adjustments for changes
in net assets position during
20X5:
Net income
Dividends paid
Net assets translated at:
Rates during year
Rates at end of year

Norwegian
Kroner

Exchange
Rate

U.S.
Dollars

NKr 700,000

.18

$126,000

130,000
(40,000)

.20
.19

26,000
(7,600)

NKr 790,000

.21

$144,400
165,900

Change in other comprehensive income

translation adjustment during year
Accumulated other comprehensive income
translation adjustment January 1
Accumulated other comprehensive income
translation adjustment December 31 (credit)

12-49

$ 21,500
-0$ 21,500

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

P12-20* Remeasurement Gain or Loss

Proof of remeasurement loss for 20X5:

Exposed net monetary liability

position at January 1

Norwegian
Kroner

Exchange
Rate

U.S.
Dollars

NKr (60,000)

.18

$(10,800)

NKr 690,000

.20

138,000

(420,000)
(100,000)
(40,000)

.20
.20
.19

(84,000)
(20,000)
(7,600)

Adjustments for changes in

net monetary position
during 20X5:
Increases:
From operations:
Sales
Decreases:
From operations:
Purchases
Operating expenses
From dividends
Net monetary asset position
prior to remeasurement at
year-end rates

$ 15,600

Exposed net monetary asset

position at December 31

NKr 70,000

Remeasurement loss

.21

(14,700)
$

12-50

900

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

P12-21 Translation and Calculation of Translation Adjustment

a.
DaSilva Company
Trial Balance Translation
December 31, 20X4

Reals
Cash
Accounts Receivable (net)
Inventory
Prepaid Insurance
Plant and Equipment
Intangible Assets
Cost of Goods Sold
Insurance Expense
Depreciation Expense
Amortization Expense
Operating Expense
Dividends Paid
Total

BRL

57,700
82,000
95,000
2,400
350,000
30,000
230,000
3,200
32,500
12,000
152,300
25,000
BRL 1,072,100

Exchange
Rate

U.S.
Dollars

.20
.20
.20
.20
.20
.20
.25
.25
.25
.25
.25
Sch. A

$ 11,540
16,400
19,000
480
70,000
6,000
57,500
800
8,125
3,000
38,075
6,250
$237,170

Accumulated Other
Comprehensive Income
Translation Adjustment (debit)
Total Debits
Accumulated Depreciation
Accounts Payable
Income Tax Payable
Interest Payable
Notes Payable
Bonds Payable
Common Stock
Additional Paid-In Capital
Retained Earnings
Sales
Total Credits
Schedule A
Dividends April 7
Dividends October 9

30,250
$ 267,420
BRL

100,000
24,000
27,000
1,100
20,000
120,000
80,000
150,000
50,000
500,000
BRL 1,072,100

.20
.20
.20
.20
.20
.20
.30
.30
.30
.25

$ 20,000
4,800
5,400
220
4,000
24,000
24,000
45,000
15,000
125,000
$267,420

BRL

.28
.23

BRL

12-51

10,000
15,000
25,000

2,800
3,450
6,250

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

P12-21 (continued)
b.

Schedule to compute the accumulated other comprehensive income translation

adjustment as of December 31, 20X4.

Net assets at beginning of year

Adjustment for changes:
Net income for year
Dividends paid: April 7
October 9
Net assets translated at:
Rates during year
Rates at end of year

Reals

Exchange
Rate

U.S.
Dollars

BRL 280,000

.30

$84,000

70,000
(10,000)
(15,000)

.25
.28
.23

17,500
(2,800)
(3,450)

BRL 325,000

.20

$95,250
65,000

Accumulated other comprehensive

Income translation adjustment (debit)

$30,250

Another way of interpreting the direction (debit or credit) of the translation adjustment is
to consider the translated balance sheets, as follows:
Translated balance sheet, 1/1/X4
Net assets

$84,000

Stockholders equity

$84,000

The translated balance sheet at the end of the year would be:
Translated balance sheet, 12/31/X4
Net assets

$65,000

Stockholders equity
(from 1/1/X4)
20X4 Income
Less dividends

Total

$65,000

$84,000
$17,500
(6,250)

11,250

Accumulated other
comprehensive income
translation adjustment

(30,250)

Total

$65,000

The debit balance of $30,250 in the accumulated other comprehensive income

translation adjustment, is necessary to balance the translated balance sheet.

12-52

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

P12-22* Remeasurement and Proof of Remeasurement Gain or Loss

a.
DaSilva Company
Trial Balance Remeasurement
December 31, 20X4

Reals

Exchange
Rate

U.S.
Dollars

Cash
Accounts Receivable (net)
Inventory
Prepaid Insurance
Plant and Equipment
Intangible Assets
Cost of Goods Sold
Insurance Expense
Depreciation Expense
Amortization Expense
Operating Expense
Dividends Paid
Total Debits

BRL

57,700
82,000
95,000
2,400
350,000
30,000
230,000
3,200
32,500
12,000
152,300
25,000
BRL 1,072,100

.20
.20
.25
.30
Sch. A
.30
Sch. B
.30
Sch. C
.30
.25
Sch. D

$ 11,540
16,400
23,750
720
103,000
9,000
62,250
960
9,600
3,600
38,075
6,250
$285,145

Accumulated Depreciation
Accounts Payable
Income Tax Payable
Interest Payable
Notes Payable
Bonds Payable
Common Stock
Additional Paid-In Capital
Retained Earnings
Sales
Total

BRL

Sch. E
.20
.20
.20
.20
.20
.30
.30
.30
.25

$ 29,850
4,800
5,400
220
4,000
24,000
24,000
45,000
15,000
125,000
$277,270

100,000
24,000
27,000
1,100
20,000
120,000
80,000
150,000
50,000
500,000
BRL 1,072,100

Remeasurement Gain
Total Credits

7,875
$285,145

12-53

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

P12-22* (continued)
Exchange
Rate

U.S.
Dollars

BRL 250,000
100,000
BRL 350,000

.30
.28

$ 75,000
28,000
$103,000

BRL 95,000
230,000
BRL 325,000
(95,000)
BRL 230,000

.30
.25

$ 28,500
57,500
$ 86,000
(23,750)
$ 62,250

Reals
Schedule A
Plant and Equipment
Before January 1, 20X4
April 7, 20X4

Schedule B
Cost of Goods Sold
Beginning Inventory*
Purchases
Goods Available
Less Ending Inventory

.25

*Acquired before January 1, 20X4; use the exchange rate at date parent acquired
subsidiary.
Schedule C
Depreciation Expense
Before January 1, 20X4
April 7, 20X4
Schedule D
Dividends
April 7, 20X4
Oct. 9, 20X4
Schedule E
Accumulated Depreciation
Before January 1, 20X4:
January 1, 20X1
July 10, 20X2
April 7, 20X4

BRL 25,000
7,500
BRL 32,500

.30
.28

BRL 10,000
15,000
BRL 25,000

.28
.23

BRL 80,000
12,500
7,500
BRL 100,000

.30
.30
.28

12-54

$
$

$
$

7,500
2,100
9,600

2,800
3,450
6,250

$ 24,000
3,750
2,100
$ 29,850

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

P12-22* (continued)
b. Proof of Remeasurement Gain
Schedule 1: Statement of Net Monetary Position:
End of
Year
Monetary Assets:
Cash
Accounts Receivable (net)
Total
Monetary Liabilities:
Accounts Payable
Income Taxes Payable
Interest Payable
Notes Payable
Bonds Payable
Total
Net Monetary Liabilities

Beginning
of Year

BRL

57,700
82,000
BRL 139,700

BRL

62,000
83,900
BRL 145,900

BRL

24,000
27,000
1,100
20,000
120,000
BRL (192,100)

BRL

BRL (52,400)

BRL (45,100)

20,000
30,000
1,000
20,000
120,000
BRL (191,000)

Increase in net monetary liabilities during 20X4

BRL

(7,300)

Schedule 2: Analysis of Changes in Monetary Accounts:

Reals
Exposed net monetary liability
position-January 1, 20X4

Exchange
Rate

BRL (45,100)

.30

$(13,530)

500,000

.25

125,000

(230,000)
(152,300)
(25,000)

.25
.25
10,000 x .28
15,000 x .23

(57,500)
(38,075)

(100,000)

.28

(28,000)

Increases
From operations:
Sales
Decreases
From operations:
Purchases
Operating expenses
From dividends
From purchases of plant
and equipment
Net monetary position prior
to remeasurement at year- end
rates
Exposed net monetary liability
Position-December 31, 20X4
Remeasurement gain

U.S.
Dollars

(6,250)

$(18,355)
BRL (52,400)

12-55

.20

(10,480)
$ 7,875

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

P12-23 Translation
a.

Western Ranching Company

Trial Balance Translation
December 31, 20X3
Australian
Dollars

Exchange
Rate

A$ 44,100
72,000
86,000
240,000
330,000
24,000
131,500
5,700
9,000

.60
.60
.60
.60
.65
.65
.65
.65
.67

Cash
Accounts Receivable (net)
Inventory
Plant and Equipment
Cost of Goods Sold
Depreciation Expense
Operating Expense
Interest Expense
Dividends Declared
Total
Accumulated Other Comprehensive
Income Translation Adjustment
(debit)
Total Debits

A$942,300

Accumulated Depreciation
Accounts Payable
Payable to Alamo, Inc.
Interest Payable
12% Bonds Payable
Premium on Bonds
Common Stock
Retained Earnings
Sales
Total Credits

A$ 60,000
53,800
10,800
3,000
100,000
5,700
90,000
40,000
579,000
A$942,300

12-56

U.S.
Dollars
$ 26,460
43,200
51,600
144,000
214,500
15,600
85,475
3,705
6,030
$590,570
16,760
$607,330

.60
.60
.60
.60
.60
.60
.70
.70
.65

$ 36,000
32,280
6,480
1,800
60,000
3,420
63,000
28,000
376,350
$607,330

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

P12-23 (continued)
b.

Schedule to prove translation adjustment:

Net assets at beginning of year

Adjustments for changes:
Net income for year
Dividends paid
Net assets translated:
Rates during year
Rates at end of year
Change in other comprehensive
Income translation adjustment (debit)
Accumulated other comprehensive
Income translation adjustment, 1/1
Accumulated other comprehensive
Income translation adjustment, 12/31

12-57

Australian
Dollars

Exchange
Rate

U.S.
Dollars

A$130,000

.70

$ 91,000

87,800
(9,000)

.65
.67

57,070
(6,030)

A$208,800

.60

$142,040
(125,280)
$ 16,760
-0$ 16,760

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

P12-24 Parent Company Journal Entries and Translation

P

Investment cost
=

A$200,000 x $.70

$140,000

1/1/x3
Fair value

$140,000

80%
> Revaluation: PPE: A$40,000 x $.70
Patent: A$56,000 x $.70
S

> $28,000
> $39,200

Book value (A$130,000 x .80) x $.70 = $ 72,800

Australian
Dollars

Exchange
Rate

U.S.
Dollars

Balance Jan. 1, 20X3

Differential:
Buildings and Equipment
Patent

A$40,000
56,000

.70
.70

$28,000

Amortization:
Buildings and Equipment
(10 years)
Patent (10 years)
Remaining Balance

(4,000)
(5,600)
A$86,400

.65
.65

(2,600)

Adjusted balance Dec. 31, 20X3

Buildings and Equipment
Patent

A$36,000
A$50,400

.60
.60

$39,200

$25,400

(3,640)
$35,560

(21,600)
(30,240)

Differential Translation
Adjustment:
Patent
Buildings and Equipment

$ 5,320
3,800

Total Differential
Translation Adjustment

$ 9,120

(Note: The differential translation adjustment is necessary to decrease the buildings and
equipment component of the parent companys differential from $25,400 to $21,600, and
to decrease the patent component from $35,560 to $30,240. Thus, a credit will be made
to the parent companys investment account for the total of $9,120 ($3,800 + $5,320)
with a corresponding debit to the parent companys Other Comprehensive Income
Translation Adjustment account.)

12-58

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

P12-24 (continued)
Parent company journal entries 20X3:
(1)

(2)

(3)

Investment in Subsidiary
Cash
Acquire foreign investment.

(5)

(6)

140,000

Cash
Investment in Subsidiary
Receive dividend:
A$9,000 x .80 x $.67

4,824
4,824

Investment in Subsidiary
Income from Subsidiary
Equity accrual for percentage of
subsidiary's income:

45,656
45,656
A$
A$579,000
(330,000)
(24,000)
(131,500)
(5,700)
A$ 87,800
x
.65
$ 57,070
x
.80
$ 45,656

Sales
Cost of goods sold
Depreciation expense
Operating expense
Interest expense
Income
Average exchange rate
U.S. dollar equivalent
Parent's percent
Equity accrual
(4)

140,000

Income from Subsidiary

Investment in Subsidiary
Amortization of differential:
Buildings and equipment
Patent

$ 57,070
x
.80
$ 45,656
6,240
6,240

= $2,600
= 3,640
$6,240

Other Comprehensive Income

Translation Adjustment
Investment in Subsidiary
Translation adjustment related to
decrease in differential:
Buildings and equipment
= $3,800
Patent
= 5,320
$9,120
Other Comprehensive Income
Translation Adjustment
Investment in Subsidiary
Parent company's share of translation
adjustment from subsidiary:
$13,408 = $16,760 x .80

12-59

U.S.$
$376,350
(214,500)
(15,600)
(85,475)
(3,705)
$ 57,070

9,120
9,120

13,408
13,408

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

P12-24 (continued)
Entries posted to T-accounts (not required):

Original cost (1)

Equity accrual (3)

Investment in Subsidiary
140,000
Dividends
45,656

_______
Balance, Dec. 31, 20X3

(2) 4,824

Amortization

(4) 6,240

Translation adjustment
related to
differential

(5) 9,120

Parents share of
subsidiarys
translation
adjustment

(6) 13,408

152,064

Income from Subsidiary

Amortization (4)

6,240

Equity accrual
Balance, December 31, 20X3

12-60

(3) 45,656
39,416

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

P12-25 Consolidation Workpaper after Translation

Workpaper elimination entries:
E(1)

E(2)

E(3)

E(4)

E(5)

E(6)

Income from Subsidiary

Dividends Declared
Investment in Subsidiary
Eliminate income from subsidiary.

39,416

Income to Noncontrolling Interest

Dividends Declared
Noncontrolling Interest
Assign income to noncontrolling interest:
$11,414 = $57,070 x .20
$1,206 = $6,030 x .20

11,414

Investment in Western Ranching

Other Comprehensive Income
Translation Adjustment
Eliminate other comprehensive income
from the subsidiary that had been
recorded by the parent:
$13,408 = $16,760 x .80

13,408

Noncontrolling Interest
Other Comprehensive Income to
Noncontrolling Interest
Assign a proportionate share of the
subsidiarys other comprehensive income
to the noncontrolling interest:
$3,352 = $16,760 x .20
Common Stock
Retained Earnings, January 1
Accumulated Other
Comprehensive Income, (1/1)
Differential
Investment in Subsidiary
Noncontrolling Interest
Eliminate investment and establish
noncontrolling interest's share of
beginning equity of subsidiary:
$18,200 = $91,000 x .20
Investment in Subsidiary
Differential
Eliminate differential translation adjustment.

12-61

4,824
34,592

1,206
10,208

13,408

3,352
3,352

63,000
28,000
0
67,200
140,000
18,200

9,120
9,120

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

P12-25 (continued)
E(7)

E(8)

E(9)

Plant and Equipment

Patent
Differential
Assign differential, net of
differential adjustment:
$24,200 = $28,000 - $3,800
$33,880 = $39,200 - $5,320

24,200
33,880

Depreciation Expense
Amortization Expense
Accumulated Depreciation
Patent
Amortization of differential.

2,600
3,640

Payable to Alamo
Receivable from Western Ranching
Eliminate intercompany payable/receivable.

6,480

12-62

58,080

2,600
3,640

6,480

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

P12-25 (continued)
Alamo, Inc. and Subsidiary
Consolidation Workpaper
For the Year Ending December 31, 20X3
(after translation)
Item
Sales
Income from
Subsidiary
Credits
Cost of Goods Sold
Depreciation
Expense
Amortization
Expense
Operating Expense
Interest Expense
Debits
Income to Noncontrolling Interest
Net Income,
carry forward
Retained Earnings,
January 1
Net Income, from
above
Dividends Declared
Retained Earnings,
carry forward
Cash
Accounts
Receivable (net)
Receivable from
Western Ranching
Inventory
Plant and Equipment
Investment in
Subsidiary

Alamo

Western
Ranching

1,000,000

376,350

39,416
1,039,416
600,000

376,350
214,500

28,000

15,600

Consolidated
1,376,350

(1) 39,416
1,376,350
814,500
(8) 2,600

46,200

(8) 3,640

3,640
289,475
5,705
(1,159,520)
216,830

(2) 11,414

(11,414)

204,000
85,475
2,000
3,705
(834,000) (319,280)

205,416

57,070

57,070

179,656

28,000

(5) 28,000

179,656

205,416
385,072
(50,000)

57,070
85,070
(6,030)

57,070

205,416
385,072

-0-

(1)
(2)
85,070

205,416

4,824
1,206

(50,000)

6,030

335,072

335,072

79,040

38,000

26,460

64,460

140,000

43,200

183,200

6,480
128,000
500,000

51,600
144,000

(9)

152,064

(7) 33,880
22,528
987,072

16,760
282,020

12-63

6,480
179,600
668,200

(7) 24,200
(3) 13,408
(6) 9,120
(5) 67,200

Differential
Patent
Accumulated Other
Comp. Income,
(from below)
Total Debits

Eliminations
Debit
Credit

(1) 34,592
(5)140,000
(6) 9,120
(7) 58,080
(8) 3,640
16,760

30,240
22,528
1,148,228

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

P12-25 (continued)
Item
Accumulated
Depreciation
Accounts Payable
Payable to Alamo
Interest Payable
12% Bonds Payable
Premium on Bonds
Common Stock
Retained Earnings
Noncontrolling
Interest
Credits
Accumulated Other
Comp. Income, 1/1
Other Comp. Income
Translation Adj.(dr)
Other Comp. Income
to Noncon. Int.
Accumulated Other
Comp. Income, 12/31,
(debit) carry up

Alamo
90,000
60,000
2,000
500,000
335,072

Western
Ranching
36,000
32,280
6,480
1,800
60,000
3,420
63,000
79,040

Eliminations
Debit
Credit
(8) 2,600

6,030

3,800
60,000
3,420
500,000
335,072

(2)10,208
(5)18,200
305,710

25,056
1,148,228

(5)63,000
85,070

987,072

282,020

305,710

-0-

-0-

(5) -0-

(22,528)

(16,760)

(16,760)

-0-

-0(3)13,408

(25,880)

(4) 3,352

3,352

16,760

(22,528)

Proof of noncontrolling interest's percentage of subsidiary's stockholders' equity:

Subsidiary's Stockholders' Equity:
Common Stock
Retained Earnings
Accumulated Other Comprehensive
Income Translation Adjustment
Subsidiary's Stockholders' Equity
Noncontrolling Percent
Noncontrolling Interest

$ 63,000
79,040
(16,760)
$125,280
x
.20
$ 25,056

12-64

128,600
92,280

(9) 6,480

(4) 3,352

(22,528)

Consolidated

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

P12-25 (continued)
Optional, alternate workpaper placement of accumulated other comprehensive income below the
income section
Alamo, Inc. and Subsidiary
Consolidation Workpaper
For the Year Ending December 31, 20X3
(after translation)
Item
Sales
Income from
Subsidiary
Credits
Cost of Goods Sold
Depreciation
Expense
Amortization
Expense
Operating Expense
Interest Expense
Debits
Income to Noncontrolling Interest
Net Income,
carry forward
Accumulated Other
Comp. Income, 1/1
Other Comp. IncomeTranslation Adj.(dr)
Other Comp. Income
to NCI
Accumulated Other
Comp. Income, 12/31,
(debit) carry dwn.
Retained Earnings,
January 1
Net Income, from
above
Dividends Declared
Retained Earnings,
carry forward

Alamo

Western
Ranching

1,000,000

376,350

39,416
1,039,416
600,000

376,350
214,500

28,000

15,600

Eliminations
Debit
Credit

1,376,350
(1)39,416
1,376,350
814,500
(8) 2,600

46,200

(8) 3,640

3,640
289,475
5,705
(1,159,520)
216,830

(2)11,414

(11,414)

204,000
85,475
2,000
3,705
(834,000) (319,280)

205,416

57,070

-0-

-0-

(22,528)

(16,760)

57,070
(5)

(16,760)

-0-

179,656

28,000

(5)28,000

205,416
385,072
(50,000)

57,070
85,070
(6,030)

57,070

79,040

12-65

-0-

-0-

(22,528)

335,072

Consolidated

85,070

205,416
-0-

(3)13,408

(25,880)

(4) 3,352

3,352

16,760

(22,528)

179,656
-0-

205,416
385,072

(1) 4,824
(2) 1,206

(50,000)

6,030

335,072

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

P12-25 (continued)
Optional format
Item
Cash
Accounts
Receivable (net)
Receivable from
Western Ranching
Inventory
Plant and Equipment
Investment in
Subsidiary

Alamo
38,000

Western
Ranching
26,460

140,000

43,200

6,480
128,000
500,000

51,600
144,000

152,064

Accumulated
Depreciation
Accounts Payable
Payable to Alamo
Interest Payable
12% Bonds Payable
Premium on Bonds
Common Stock
Retained Earnings
Noncontrolling
Interest
Total Credits

16,760
282,020

90,000
60,000

36,000
32,280
6,480
1,800
60,000
3,420
63,000
79,040

2,000
500,000
335,072

282,020

179,600
668,200

(7)33,880

(1) 34,592
(5)140,000
(6) 9,120
(7) 58,080
(8) 3,640

-0-

16,760

22,528
1,148,228

2,600

128,600
92,280

(8)

30,240

(9) 6,480

(5)63,000
85,070
(4) 3,352

987,072

6,480

(7)24,200
(3)13,408
(6) 9,120
(5)67,200

22,528
987,072

Consolidated
64,460
183,200

(9)

Differential
Patent
Accumulated Other
Comp. Income,
(from above)
Total Debits

Eliminations
Debit
Credit

305,710

6,030

3,800
60,000
3,420
500,000
335,072

(2) 10,208
(5) 18,200
305,710

25,056
1,148,228

Note: This optional presentation shows the accumulated other comprehensive income section of
the worksheet immediately below the computation of net income. Thus, the placement of the
accumulated other comprehensive income section does not affect the computation of any worksheet
amounts. It is just a preference as to the organization of the consolidation worksheet. This alternate
presentation also shows students that the consolidating worksheet is a means to the end of
computing the amounts that will be reported on the consolidated financial statements, and that
alternate worksheet formats will be found in practice.

12-66

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

P12-26* Remeasurement
a.

Western Ranching Company

Trial Balance Remeasurement
December 31, 20X3
Australian
Dollars

Exchange
Rate

U.S.
Dollars

Cash
Accounts Receivable (net)
Inventory
Plant and Equipment

A$ 44,100
72,000
86,000
240,000

$ 26,460
43,200
55,900

Cost of Goods Sold

Depreciation Expense
Operating Expense
Interest Expense
Dividends Declared
Total Debits

330,000
24,000
131,500
5,700
9,000
A$942,300

.60
.60
.65
180,000 x .70
60,000 x .70
(a)
.70
.65
.65
.67

Accumulated Depreciation
Accounts Payable
Payable to Alamo, Inc.
Interest Payable
12% Bonds Payable
Premium on Bonds
Common Stock
Retained Earnings
Sales
Total
Remeasurement Gain
Total Credits

A$ 60,000
53,800
10,800
3,000
100,000
5,700
90,000
40,000
579,000

.70
.60
.60
.60
.60
.60
.70
.70
.65

A$942,300

$ 42,000
32,280
6,480
1,800
60,000
3,420
63,000
28,000
376,350
$613,330
10,040
$623,370

(a) Cost of Goods Sold:

Beginning Inventory
Purchases
Goods Available
Minus Ending Inventory
Cost of Goods Sold

Australian
Dollars
A$ 66,000
350,000
A$416,000
(86,000)
A$330,000

Exchange
Rate
.70
.65

U.S.
Dollars
$ 46,200
227,500
$273,700
(55,900)
$217,800

12-67

.65

168,000
217,800
16,800
85,475
3,705
6,030
$623,370

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

P12-26* (continued)
b. Proof of Remeasurement Gain:
Schedule 1: Statement of Net Monetary Position
End of
Year

Beginning
of Year

Monetary Assets:
Cash
Accounts Receivable (net)
Total

A$ 44,100
72,000
A$116,100

Monetary Equities:
Accounts Payable
Payable to Parent Company
Interest Payable
12% Bonds Payable
Premium on Bonds
Total

A$ 53,800
10,800
3,000
100,000
5,700
A$173,300

Net Monetary Equities

Decrease in net monetary equities
during year

A$(57,200)

A$(80,000)

A$(22,800)

Schedule 2: Analysis of Changes in Monetary Accounts

Exposed Net Monetary Liability

Position January 1
Increases:
From Operations:
Sales
Decreases:
From Operations:
Purchases
Cash Expense
Interest Expense
From Dividends
From Purchase of Plant and
Equipment

Australian
Dollars

Exchange
Rate

U.S.
Dollars

A$ (80,000)

.70

$ (56,000)

579,000

.65

376,350

(350,000)
(131,500)
(5,700)
(9,000)

.65
.65
.65
.67

(227,500)
(85,475)
(3,705)
(6,030)

(60,000)

.70

(42,000)

Net Monetary Position Prior to

Remeasurement at Year-End Rate

$ (44,360)

Exposed Net Monetary Liability

Position December 31

A$ (57,200)

Remeasurement Gain

.60

(34,320)
$ 10,040

12-68

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements

P12-27 Parent Company Journal Entries and Remeasurement

P

Investment cost

A$200,000 x $.70 =

$140,000

1/1/x3
Fair value

$140,000

80%
> Revaluation: PPE: A$40,000 x $.70
Patent: A$56,000 x $.70
S

Book value

(A$130,000 x .80) x $.70 =

> $28,000
> $39,200
$ 72,800

Parent company journal entries 20X3:

(1)

(2)

(3)

Investment in Subsidiary
Cash
Acquire foreign investment.

140,000

Cash
Investment in Subsidiary
Receive dividend:
$4,824 = A$9,000 x .80 x $.67

4,824
4,824

Investment in Subsidiary
Income from Subsidiary
Equity accrual for percentage of
subsidiary's income:

50,088
50,088
U.S.$
$ 376,350
(217,800)
(16,800)
(85,475)
(3,705)
10,040
$ 62,610
x
.80
$ 50,088

Sales
Cost of goods sold
Depreciation expense
Operating expense
Interest expense
Remeasurement gain
Subsidiary's income
Parent's percent
Equity accrual
(4)

140,000

Income from Subsidiary

Investment in Subsidiary
Amortization of differential:
Buildings and Equipment
Patent

12-69

6,720
6,720
= $2,800 ($28,000 / 10)
= 3,920 ($39,200 / 10)
$6,720

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements

P12-27 (continued)
NOT REQUIRED: Entries posted to T-accounts

Original cost
Equity accrual

(1)
(3)

Balance,
December 31, 20X3

Amortization

(4)

Investment in Subsidiary
140,000
Dividends
50,088
Amortization

(2)
(4)

4,824
6,720

(3)

50,088

178,544

Income From Subsidiary

6,720
Equity accrual

Balance, December 31, 20X3

12-70

43,368

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements

P12-28* Consolidation Workpaper after Remeasurement

Workpaper elimination entries:
E(1)

E(2)

E(3)

E(4)

E(5)

E(6)

Income from Subsidiary

Dividends Declared
Investment in Subsidiary
Eliminate income from subsidiary.

43,368

Income to Noncontrolling Interest

Dividends Declared
Noncontrolling Interest
Assign income to noncontrolling interest:
$12,522 = $62,610 x .20
$1,206 = $6,030 x .20

12,522

Common Stock
Retained Earnings, January 1
Differential
Investment in Subsidiary
Noncontrolling Interest
Eliminate beginning-of-period investment
balance and establish noncontrolling interest's
share of beginning equity of subsidiary:
$18,200 = $91,000 x .20

63,000
28,000
67,200

Plant and Equipment

Patent
Differential
Assign differential.

28,000
39,200

4,824
38,544

1,206
11,316

140,000
18,200

67,200

Depreciation Expense
Amortization Expense
Accumulated Depreciation
Patent
Amortize differential.

2,800
3,920

Payable to Alamo
Receivable from Western Ranching
Eliminate intercompany payable/receivable.

6,480

12-71

2,800
3,920

6,480

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements

P12-28* (continued)
Alamo, Inc. and Subsidiary
Consolidation Workpaper
For the Year Ending December 31, 20X3
(after translation)
Item
Sales
Income from
Subsidiary
Remeasurement
Gain
Credits
Cost of Goods
Sold
Depreciation
Expense
Amortization
Expense
Operating Expense
Interest Expense
Debits
Income to Noncontrolling Interest
Net Income,
carry forward
Retained Earnings,
January 1
Net Income, from
above
Dividends Declared
Retained Earnings,
carry forward
Cash
Accounts Receivable
(net)
Receivable from
Western Ranching
Inventory
Plant and Equipment
Investment in
Subsidiary
Differential
Patent
Total Debits

Alamo
1,000,000

Western
Ranching

Eliminations
Debit
Credit

376,350

43,368

Consolidated
1,376,350

(1)43,368

1,043,368

10,040
386,390

10,040
1,386,390

600,000

217,800

817,800

28,000

16,800

(5) 2,800

47,600

(5) 3,920

3,920
289,475
5,705
(1,164,500)
221,890

(2)12,522

(12,522)

204,000
85,475
2,000
3,705
(834,000) (323,780)

209,368

62,610

62,610

179,656

28,000

(3)28,000

209,368
389,024
(50,000)

62,610
90,610
(6,030)

62,610

-0-

209,368
179,656

-0(1)
(2)

90,610

209,368
389,024

4,824
1,206

(50,000)

6,030

339,024

339,024

84,580

38,000

26,460

64,460

140,000

43,200

183,200

6,480
128,000
500,000

55,900
168,000

(6)

(3)67,200
(4)39,200
293,560

12-72

183,900
696,000

(4)28,000

178,544

991,024

6,480

(1) 38,544
(3)140,000
(4) 67,200
(5) 3,920

35,280
1,162,840

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements

P12-28* (continued)
Item
Accumulated
Depreciation
Accounts Payable
Payable to Alamo
Interest Payable
12% Bonds Payable
Premium on Bonds
Common Stock
Retained Earnings
Noncontrolling
Interest
Total Credits

Alamo
90,000
60,000
2,000
500,000
339,024

991,024

Western
Ranching
42,000
32,280
6,480
1,800
60,000
3,420
63,000
84,580

293,560

Eliminations
Debit
Credit
(5) 2,800

(3)63,000
90,610

6,030

3,800
60,000
3,420
500,000
339,024

294,490

(2)11,316
(3)18,200
294,490

29,516
1,162,840

$ 63,000
84,580
$147,580
x
.20
$ 29,516

12-73

134,800
92,280

(6) 6,480

Proof of noncontrolling interest's percentage of subsidiary's

stockholders' equity:
Subsidiary's Stockholders' Equity:
Common Stock
Retained Earnings
Subsidiary's Stockholders' Equity
Noncontrolling Percent
Noncontrolling Interest

Consolidated

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements

P12-29 Foreign Currency Remeasurement [AICPA Adapted]

Kiner Company's Foreign Subsidiary
Remeasurement of Selected Captions into United States Dollars
December 31, 20X2, and December 31, 20X1

Balance
in LCUs
December 31, 20X1
Accounts Receivable (net)
Inventories, at cost
Property, Plant, and
Equipment (net)
Long-Term Debt
Common Stock
December 31, 20X2
Accounts Receivable (net)
Inventories, at cost
Property, Plant, and
Equipment (net)
Long-Term Debt
Common Stock

35,000 LCU
75,000

Indirect
Exchange
Rate

Remeasured
into U.S.
Dollars

1.7 LCU = $1
2.0 LCU = $1

$20,588
37,500

150,000
120,000
50,000

2.0 LCU = $1
1.7 LCU = $1
2.0 LCU = $1

75,000
70,588
25,000

40,000
80,000

1.5 LCU = $1
1.7 LCU = $1

26,667
47,059

163,000
100,000
50,000

Schedule 1
1.5 LCU = $1
2.0 LCU = $1

86,000
66,667
25,000

Schedule 1: Computation of Translation of Property, Plant and Equipment

(Net) into United States Dollars on December 31, 20X2
Balance
in LCUs
Land purchased on
January 1, 20X1
Plant and equipment
purchased on January 1, 20X1:
Original cost
Depreciation for 20X1
Depreciation for 20X2
Plant and equipment
purchased on July 4, 20X2:
Original cost
Depreciation for 20X2

Indirect
Exchange
Rate

Remeasured
into U.S.
Dollars

24,000 LCU

2.0 LCU = $1

$12,000

140,000 LCU
(14,000)
(14,000)
112,000 LCU

2.0 LCU = $1
2.0 LCU = $1
2.0 LCU = $1
2.0 LCU = $1

$70,000
(7,000)
(7,000)
$56,000

30,000 LCU
(3,000)
27,000 LCU
163,000 LCU

1.5 LCU = $1
1.5 LCU = $1
1.5 LCU = $1

$20,000
(2,000)
$18,000
$86,000

12-74

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements

P12-30 Foreign Currency Translation

Kiner Company's Foreign Subsidiary
Translation of Selected Captions into United States Dollars
December 31, 20X2, and December 31, 20X1
Balance
in LCUs
December 31, 20X1
Accounts Receivable (net)
Inventories, at cost
Property, Plant, and
Equipment (net)
Long-Term Debt
Common Stock
December 31, 20X2
Accounts Receivable (net)
Inventories, at cost
Property, Plant, and
Equipment (net)
Long-Term Debt
Common Stock

35,000 LCU
75,000

Indirect
Exchange
Rate

Translated
into U.S.
Dollars

1.7 LCU = $1
1.7 LCU = $1

$ 20,588
44,118

150,000
120,000
50,000

1.7 LCU = $1
1.7 LCU = $1
2.0 LCU = $1

88,235
70,588
25,000

40,000
80,000

1.5 LCU = $1
1.5 LCU = $1

26,667
53,333

163,000
100,000
50,000

1.5 LCU = $1
1.5 LCU = $1
2.0 LCU = $1

108,667
66,667
25,000

P12-31 Matching Key Terms

1. E
2. I
3. K
4. H
5. A
6. F
7. J
8. B
9. L
10. C

12-75

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements

P12-32 Translation Choices

Requirement 1:
a.
(7)
b.
(5)
c.
(6)
d.
(7)
e.
(7)
f.
(5)
g.
(1)
h.
(7)
i.
(8)
j.
k.

(7)
(5)

LCU .83 December 31, 20X4: end of current year

LCU .85 Average for year 20X4 for revenues
LCU .84 November 1, 20X4: declaration date
LCU .83 December 31, 20X4: end of current year
LCU .83 December 31, 20X4: end of current year
LCU .85 Average for year 20X4 for expenses
LCU .74 June 16, 20X1: date foreign company purchased
LCU .83 December 31, 20X4: end of current year
Balance computed at end of December 31, 20X4, includes
carry forward from prior periods
LCU .83 December 31, 20X4: end of current year
LCU .85 Average for year 20X4 for expenses

Requirement 2:
a.
Direct exchange rate (DER) for January 1, 20X4:
DER = $1 / LCU .80
DER = $1.25
b.

U.S. dollar versus LCU in 20X4:

Exchange rates on January 1, 20X4

Exchange rates on December 31, 20X4

Indirect
Exchange Rate
(LCU / $1)
LCU .80
LCU .83

Direct
Exchange Rate
($ / LCU 1)
$1.25
$1.2048

During 20X4, the direct exchange rate has decreased reflecting that it costs
less U.S. currency for one foreign currency unit at the end of the year as
compared with the beginning of the year. Therefore, the U.S. dollar has
strengthened during the year 20X4. Alternatively, the indirect exchange rate
has increased indicating it costs more in LCU to acquire $1 at December 31,
20X4, than at January 1, 20X4.

12-76

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements

P12-33 Proof of Translation Adjustment

a.
MaMi Co. Ltd.
Proof of Translation Adjustment
Year Ended December 31
Translation
MXP
Net assets at beginning of year
Adjustment for changes in net
assets position during year:
Net income for year
Dividends
Net assets translated at:
Rates during year
Rates at end of year

Rate

575,000

$.087

50,025

270,000
(150,000)

$.090
$.0915

24,300
(13,725)

695,000

$.093

60,600
64,635

Change in other comprehensive

income-translation adjustment
during year (net increase)

4,035

Accumulated other comprehensive

income-translation adjustment, 1/1 (credit)

3,250

Accumulated other comprehensive

income-translation adjustment, 12/31 (credit)

7,285

Note that the proof begins with the net assets at the beginning of the year. The proof
shows the change in the other comprehensive income during the year of $4,035. It is a
credit or net increase in AOCI because it must offset an increase (debit) in the net
assets from $60,600 to $64,635 during the year. A mnemonic here is to remember that
the debits must equal the credits.
If you were to prove the total AOCI of $7,285, then the proof should begin with the net
assets at the time the subsidiary was acquired and then make the adjustments in net
income, dividends, and other changes in net assets over the years since acquisition, at
the appropriate exchange rates. Or, the change in this year of $4,025 credit can simply
be added to the beginning of the period AOCI credit balance of $3,250.
b. The U.S. dollar weakened against the Mexican peso during the year shown by the
increase in the direct exchange rate indicating it costs more U.S. currency to acquire
one Mexican peso at the end of the year ($.093) as opposed to the U.S. currency cost
of one Mexican peso at the beginning of the year ($.087).

12-77

Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements

P12-33 (continued)
Another way of viewing the proof of the ending balance in AOCI is:
Translated Balance Sheet, 1/1
Net assets

$50,025

Total

$50,025

Stock and RE
AOCI (given)

$46,775 (plug)
3,250
$50,025

Translated Balance Sheet, 12/31

Net assets

$64,635

Total

$64,635

Stock and RE
$46,775 (from 1/1)
Retained earnings change:
($24,300 $13,725)
10,575
AOCI (plug)
7,285
$64,635

12-78