1.
Rose Co has fixed assets information as below:
Jan 1, Year 1. Purchase £2,000 PPE with rate of $1 per £
Jan 1, Year 2. Purchase £2,400 PPE with rate of $1,2 per £
Both equipment have a five year useful life.
Average exchange rate for year 2 is $1.1 per £
At Dec 31, Year 2, Exchange rate is $1.3 per £
Required:
A, Determine assets value (asset costs) on Dec 31, year 2 in parent currency ($)
B, Determine accumulated depreciation on Dec 31, year 2 in $
Answer:
- Current rate method
Equipment 1 £ Translation rate $
Cost 2,000 1,3 2600
Acc.depn 800 1,3 1040
Carrying amount 1,200 1,3 1560
Depn expense 400 1,1 440
Equipment 2 £ Translation rate $
Cost 2,400 1,3 3120
Acc.depn 480 1,3 624
Carrying amount 1,920 1,3 2496
Depn expense 480 1,1 528
=> Assets value on Dec 31, year 2 under current rate method: $1560 + $2496 = $4056.
=> Acc depreciation on Dec 31, year 2 under current rate method: $1664
- Temporal method
Equipment 1 £ Translation rate $
Cost 2,000 1 2000
Acc.depn 800 1 800
Carrying amount 1,200 1 1200
Depn expense 400 1 400
Equipment 2 £ Translation rate $
Cost 2,000 1,2 2400
Acc.depn 800 1,2 960
Carrying amount 1,200 1,2 1440
Depn expense 400 1,2 480
=> Assets value on Dec 31, year 2 under temporal method: $1200+$1440 =$2640
=> Acc. depreciation on Dec 31, year 2 under temporal method: $1760.
2. Dec 1, 20X8, Topica, a U.K Company, makes a sale and ships goods to Eximco, a U.S
compay.
Sales price is 20,000 USD. Eximco agrees to pay in USD by bank transfer on Mar 1, 20X9
Spot rate as of Dec 1, 20X8 is 1,3$ per £
Spot rate as of Dec 31, 20X8 is 1,32$ per £
Spot rate as of Mar 1, 20X9 is 1,29$ per £
Topica has a December 31 year end.
Required:
1. How does Topica record the sale (in £) on Dec 1, 20X8?
2. How does Topica record the foreign Exchange gain/loss on Dec 31, 20X8 and on Mar 1,
20X9?
-Dec 1,20X8
Debit Account Receivable: $20,000*1,3 = £26,000
Credit Revenue: £26,000
-Dec 31,20x8
Debit Account Receivable: $20,000*1,32- £26,000 = £400
Credit Gain onn exchange rate: £400
-Mar 1,20X9
Dr Cash = $20,000*1,29 = £25,800
Dr Loss on exchange rate = £600
Cr Account Receivable = £26,400
3. Multico, a US company forms a wholly owned subsidiary in Italy (Italco) on 31/12/20X0.
On that date, Multico invests $1,350,000 in exchange for all of the subsidiary’s capital stock.
Italco purchased its inventory on 31/12/20X0 and its beginning balance sheet on 1 Jan 20X1
is as follows:
Assets € Liabilities and Equity €
Cash 400,000 Capital stock 1,000,000
Inventory 600,000
Relevant exchange rates for 20X1 are as follows:
January 1, 20X1 1.35
Rate when PPE are acquired and long-term debt was incurred, Jan 15, X1 1.33
Rate when patent was acquired and capital was increased Feb 1, X1 1.32
Average for 20X1 1.3
Rate when dividends was declared, Dec 1, X1 1.27
Average for the month of Dec 1.26
Dec 31, 20X1 1.25
Required: Translate the Italy subsidiary’s Financial statements into USD using temporal
method.
Answer:
Balance sheet Dec 31, 20X1
Euro translation rate USD
Cash 750.000 1,25 937.500
A/R 600.000 1,25 750.000
Inventory 800.000 1,26 1.008.000
PPE 2.000.000 1,33 2.660.000
Acc. Depn - 200.000 1,33 -266.000
Patent, net 80.000 1,32 105.600
Total asset 4.030.000 5.195.100
AP 330.000 1,25 412.500
Long-term
liability 2.000.000 1,25 2.500.000
Capital stock 1.200.000 1,35 1.620.000
RE 500.000 662.600
Total liability
+ equity 4.030.000 5.195.100
Income Statement, 20X1
Euro translation rate USD
Sales 8.000.000 1,3 10.400.000
COGS 6.000.000 7.862.000
S.A expenses 500.000 1,3 650.000
Depn expense 200.000 1.33 266.000
Amortization expense 20.000 1.32 26.4000
Interest exp 180.000 1.3 234.000
Income tax exp 275.000 1,3 357.500
Remeasurement
gain/loss - 91.250
Net income 825.000 1.095.000
Statement of Retained earnings, 20X1
Step 2 Euro Translation rate USD
RE, 1/1/X1 - -
Net income 825.000 1.095.350
Dividend, 1/12/X1 325.000 1,27 412.750
RE, 31/12/X1 500.000 682.600
Calculation for
COGS Euro translation rate USD
opening inventory 600.000 1,35 810.000
Purchase 6.200.000 1,3 8.060.000
COGS 6.000.000 7.862.000
Closing inventory 800.000 1,26 1.008.000
Calculation for
Capital stock Euro translation rate USD
Beginning 1.000.000 1,35 1.350.000
Added 200.000 1.3 260.000
Ending 1.200.000 1,25 1.500.000
