UM Tagum College

Arellano Street, Tagum City, 8100 Philippines

PREREV LECTURE

Translation of Foreign Currency Financial Statement

PROBLEM 1
On January 1, 2008, Pace Company acquired all of the outstanding stock of Spin PLC, a US Company for P312,500.
Spin's net assets on the date of acquisition were 250,000 US dollars . On January 1, 2008, the book and fair values of
the Spin's identifiable assets and liabilities approximated their fair values .Spin's trial balance on December 31, 2008,
in US dollars, follows:

Debits Credits
Cash $ 70,000
Accounts receivable (net) 100,000
Inventory 120,000
Property Plant and Equipment 330,000
Accumulated depreciation 120,000
Accounts Payable 110,000
Notes Payable 90,000
Common stock 100,000
Retained earnings 150,000
Sales 420,000
Cost of goods sold 270,000
Operating expenses 60,000
Depreciation expense 30,000
Dividends paid 10,000
Total 990,000 990,000

Additional Information
1 Spin uses the FIFO method for its inventory. The beginning inventory was acquired on December 31, 2007, and
ending inventory was acquired on December 26, 2008. Purchases of $300,000 were made evenly throughout 2008.
2 Spin acquired all of its property, plant, and equipment on March 1, 2006, and uses straight-line depreciation.
3 Spin's sales were made evenly throughout 2008, and its operating expenses were incurred evenly throughout 2008.
4 The dividends were declared and paid on November 1, 2008.
5. Exchange rates were as follows:

March 1, 2006 P 1.20

December 31, 2007 P 1.25
January 1, 2008 P 1.25
November 1,2008 P 1.26
December 26,2008 P 1.31
December 31, 2008 P 1.35
Average for 2008 P 1.30

Required:
Case 1:
1. Assume the dollar is the functional currency.Determine the following in Philippine Peso:
 a. Net Income e. Total Liabilities
b. Dividends f. Cumulative translation adjustment
c. Retained earnings,end g. Stockholder’s equity,end
d. Total Assets
Case 2:
1. Assume the Philippine peso is the functional currency. Determine the following in Philippine Peso:
a. Net Income e. Total Liabilities
b. Dividends f. Remeasurement gain (loss)
c. Retained earnings,end g. Stockholder’s equity,end
d. Total Assets
.

PROBLEM 2
Naruto Incorporated operates in Japan where the functional currency is the Yen. However the presentation currency of
Naruto Inc. is the Philippine Peso. The following data are provided concerning Naruto’s Statement of Financial Position
in Japanese Yen as of December 31, 2020.
Cash and Cash Equivalent Y 1,000,000 Accounts Payable Y 3,000,000
Receivables 2,000,000 Notes Payable 1,000,000
Investments 3,000,000 Common Stock 3,000,000
Property Plant and 4,000,000 Preferred Stock 1,000,000
Equipment
Total Assets Y 10,000,000 Retained Earnings 2,000,000
Total SHE and Equity Y 10,000,000
The following additional data are provided:
 Naruto Inc. reported net income of for 2020 in the amount of Y 500,000 and declared cash dividends in the
amount of Y 300,000 when the exchange rate was P4.
 The common stock was issued last year when the exchange rate was P 4.8 while preferred stock was issued
last year when the exchange rate was P 3.
 The December 31, 2019 Retained earnings at translated amount is P5,000,000.
 The following direct exchange rates are also given
 December 31, 2019 P 4.50
 December 31,2020 P 5.00
 Average rate during 2020 P 3.50

1. What is the translation gain (loss) in OCI for year 2020?

a. P 3,350,000 gain b. P 3,700,000 gain c. P 7,050,000 gain d. P 6,500,000 gain
2. Using the same data in number 5 , what is the cumulative translation credit (debit) as of December 31, 2020?
a. P3,350,000 credit b. P3,700,000 credit c. P 7,050,000 credit d. P 6,500,000 credit
3. Using the same data in number 5, what is the cumulative translation credit (debit) as of December 31,
2019?
a. P3,350,000 credit b. P3,700,000 credit c. P 7,050,000 credit d. P 6,500,000 credit
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Translation of a subsidiary’s financial statements
Use the following information for the next nine questions:
ABC Co. owns 80% of the ordinary shares of a foreign subsidiary, XYZ, Inc., a company based in Korea. XYZ, Inc.'s
functional currency is won. The subsidiary was acquired at the start of the reporting period for 6,000,000 wons, when
the subsidiary's retained earnings were 3,200,000 wons.

At the date of the acquisition the fair value of the net assets of the subsidiary were 5,600,000 wons. This included a fair
value adjustment in respect of land.

ABC Co. elected to measure non-controlling interest at the NCI’s proportionate share of the fair value of the subsidiary‘s
net assets. The group determined at year-end that goodwill is not impaired. There were no changes in the share capital
of the subsidiary during the year.

The relevant exchange rates are as follows:

Date Exchange rates
Jan. 1, 20x1………………………………….₱0.03: KRW 1
Average for the year………………………..₱0.04: KRW 1
Dec. 31, 20x1………………………………..₱0.05: KRW 1

A summary of the individual financial statements of the entities at the end of reporting period are shown below:

Statements of financial position

As at December 31, 20x1
ABC Co. XYZ, Inc.
ASSETS (pesos) (wons)
Investment in subsidiary 180,000
Other assets 8,000,000 5,200,000
TOTAL ASSETS 8,180,000 5,200,000

LIABILITIES AND EQUITY

Liabilities 1,600,000 240,000
Share capital 4,000,000 800,000
Retained earnings 2,580,000 4,160,000
Total equity 6,580,000 4,960,000
TOTAL LIABILITIES AND EQUITY 8,180,000 5,200,000

Statements of profit or loss

For the year ended December 31, 20x1
ABC Co. XYZ, Inc.
(pesos) (wons)
Revenues 3,600,000 2,400,000
Expenses (2,160,000) (1,440,000)
Profit for the year 1,440,000 960,000

1. How much is the goodwill as of December 31, 20x1?

a. 45,600 b. 76,000 c. 66,500 d. 64,500
2. How much is the non-controlling interest in the net assets of the subsidiary (NCI) as of December 31, 20x1?
a. 39,360 b. 56,600 c. 54,360 d. 65,600
3. How much is the consolidated retained earnings as of December 31, 20x1?
a. 2,618,400 b. 2,702,400 c. 2,672,340 d. 2,610,720
4. How much is the total translation gain (loss) to be recognized in other comprehensive income in 20x1?
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 a. 152,000 b. 121,600 c. 161,600 d. 136,000
5. How much is the consolidated profit in 20x1?
a. 1,478,400 b. 1,488,000 c. 1,596,400 d. 1,696,000
6. How much is the consolidated total comprehensive income in 20x1?
a. 1,640,000 b. 1,630,400 c. 1,718,000 d. 1,832,000
7. How much is the comprehensive income attributable to owners of the parent?
a. 1,592,320 b. 1,606,080 c. 1,598,400 d. 1,638,080
8. How much is the consolidated total assets as of December 31, 20x1?
a. 8,416,000 b. 9,680,000 c. 8,340,000 d. 9,860,000
9. How much is the equity attributable to owners of the parent as of December 31, 20x1?
a. 6,676,320 b. 6,828,320 c. 6,738,400 d. 6,804,000

Translation of a foreign operation – Hyperinflationary economy

Use the following information for the next four questions:
ABC Co., a corporation based in the Philippines, has a foreign branch that is operating in a hyperinflationary economy.
The financial statements of the branch prior to restatement and translation are shown below:

Statement of financial position

As of December 31, 20x1
Amounts in Angolan Kwanza (AOA)
184,000
Cash
Accounts receivable 296,000
Inventory 160,000
Building 400,000
Accumulated depreciation (80,000)
Total assets 960,000

Loan payable 120,000

Share capital 400,000

Retained earnings 440,000
Total equity 840,000
Total liabilities and equity 960,000

Statement of profit or loss

For the year ended December 31, 20x1
Amounts in Angolan Kwanza (AOA)
Sales 480,000
Cost of sales:
Inventory - Jan. 1 240,000
Purchases 120,000
Total goods available for
360,000
sale
Inventory - Dec. 31 (160,000) (200,000)
Gross profit 280,000
Depreciation expense (40,000)
Other operating expenses (160,000)
Profit for the year 80,000

Additional information:
 The building was acquired on January 1, 20x0.
 The share capital was issued on January 1, 20x0.
 Revenues were earned and expenses were incurred evenly during the year.

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 Selected values of general price indices (CPI) are shown below:
January 1, 20x0 100
Average for 20x0 110
January 1, 20x1 120
Average for 20x1 125
December 31, 20x1 140
 The net monetary assets as of January 1, 20x1 is ₱160,000.
 The exchange rates are as follows:
January 1, 20x1 1.00 AOA : 0.45 PHP
Average for 20x1 1.00 AOA : 0.47 PHP
December 31, 20x1 1.00 AOA : 0.50 PHP
1. How much is the gain (loss) on net monetary position?
a. (53,224) b. (51,887) c. (50,667) d. (48,333)
2. How much is the translated total assets as of December 31, 20x1?
a. 552,400 b. 553,600 c. 554,800 d. 556,300
3. How much is the translated total equity as of December 31, 20x1?
a. 553,600 b. 489,600 c. 495,600 d. 493,600
4. How much is the translated profit (loss) for 20x1?
a. (4,461) b. 4,240 c. (4,561) d. (4,362)

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