Chapter 13 Test Bank FOREIGN CURRENCY FINANCIAL STATEMENTS

Chapter 13 Test Bank " "
" "
"FOREIGN CURRENCY FINANCIAL STATEMENTS "
" "
" "
" "
"Multiple Choice Questions "

LO1
"1. " "A US firm has a Belgian subsidiary that uses the British pound as"
" " "its functional currency. Under FASB statement No. 52, the US "
" " "dollar from Belgian unit's point of view will be "
" " " " "
" " "a. "a foreign currency. "
" " "b. "its local currency "
" " "c. "its current rate method currency "
" " " d. "its reporting currency "

LO1
"2. " "Selvey Inc. is a completely owned subsidiary of Parsfield "
" " "Incorporated a US firm. The country where Selvey operates is "
" " "deemed to have a highly inflationary economy under FASB statement"
" " "No. 52. Therefore, the functional currency is "
" " " " "
" " "a. "its reporting currency. "
" " "b. "its current rate method currency. "
" " "c. "the US dollar. "
" " " d. "its local currency. "

LO1
"3. " "All of the following factors would be used to define a functional"
" " "currency, except "
" " " " "
" " "a. "high volume of intercompany transactions. "
" " "b. "expenses primarily driven by local factors. "
" " "c. "financing denominated in local currency. "
" " "d. "status as a local tax haven for transfer pricing purposes. "

LO2
"4. " "When the financial statements of a foreign subsidiary one year "
" " "after acquisition are consolidated with the parent company, "
" " "Retained Earnings is "
" " " " "
" " "a. "translated at the current exchange rate. "
" " "b. "remeasured at the current exchange rate. "
" " "c. "remeasured at the historical exchange rate. "
" " "d. "None of the above answers is correct. "

LO2
"5. " "Peachey has a foreign subsidiary, Schrivener Corporation of "
" " "Germany, whose functional currency is the euro. On December 31, "
" " "19X2, Schrivener has an account receivable denominated in British"
" " "pounds. Which one of the following statements is true? "
" " " " "
" " "a. "Because all accounts of the subsidiary are translated into US"
" " " "dollars at the current rate, the Account Receivable is not "
" " " "adjusted on the subsidiary's books before translation. "
" " "b. "The Account Receivable is remeasured into the functional "
" " " "currency and remeasurement obviates translation. "
" " "c. "The Account Receivable is first adjusted to reflect the "
" " " "current exchange rates in euros and then translated at the "
" " " "current rate into dollars. "
" " "d. "The Account Receivable is adjusted to euros at the current "
" " " "exchange rate and any resulting gain or loss is included as a"
" " " "translation adjustment in the stockholders' equity section of"
" " " "the subsidiary's separate balance sheet. "

LO2
"6. " "Paskin's Corporation's wholly-owned Canadian subsidiary has a "
" " "Canadian dollar functional currency. In translating its account "
" " "balances into US dollars for reporting purposes, which one of the"
" " "following accounts would be translated at historical exchange "
" " "rates? "
" " " " "
" " "a. "Accounts Receivable. "
" " "b. "Notes Payable. "
" " "c. "Capital Stock. "
" " "d. "Retained Earnings. "

LO2
"7. " "A foreign entity is a subsidiary of a US parent company and has "
" " "always used the current rate method to translate its foreign "
" " "financial statements on behalf of its parent company. Which one "
" " "of the following statements is incorrect? "
" " " " "
" " "a. "The US dollar will be the functional currency of this "
" " " "company. "
" " "b. "Changes in exchange rates between the subsidiary's country "
" " " "and the parent's country are not expected to affect the "
" " " "foreign entity's cash flows. "
" " "c. "Translation adjustments are shown in stockholders' equity as "
" " " "increases or decreases in other comprehensive income. "
" " "d. "Translation adjustments are not shown on the income "
" " " "statement. "

LO2
"8. " "The objective of remeasurement is to "
" " " " "
" " "a. "produce the same results as if the books were maintained in "
" " " "the currency of the foreign entity's largest customer. "
" " "b. "produce the same results as if the books were maintained "
" " " "solely in the local currency. "
" " "c. "produce the same results as if the books were maintained "
" " " "solely in the functional currency. "
" " "d. "produce the results reflective of the entity's economics in "
" " " "the local currency. "

LO2
"9. " "Which of the following assets and/or liabilities are considered "
" " "monetary? "
" " " " "
" " "a. "Intangible Assets and Plant, Property, and Equipment. "
" " "b. "Bonds Payable and Common Stock. "
" " "c. "Cash and Accounts Payable. "
" " "d. "Notes Receivable and Inventories carried at cost. "

LO2
"10. " "Which one of the following accounts would be translated at the "
" " "historical exchange rate when the local currency is the "
" " "functional currency? "
" " " " "
" " "a. "Deferred Income Taxes. "
" " "b. "Accumulated Depreciation on Equipment. "
" " "c. "Prepaid Insurance. "
" " "d. "Additional paid-in capital. "

LO2
"11. " "Accounts for uncollectible accounts are converted into US dollars"
" " "at "
" " " " "
" " "a. "historical rates when the US dollar is the functional "
" " " "currency. "
" " "b. "current rates only when the US dollar is the functional "
" " " "currency. "
" " "c. "historical rates regardless of the functional currency. "
" " "d. "current rates regardless of the functional currency. "

LO3
"12. " "Lorikeet Corporation has a foreign subsidiary located in a "
" " "country experiencing high rates of inflation. Information "
" " "concerning this country's inflation rate experience is given "
" " "below. "

" " "Change "Annual rate " "
"Date "Index "in index "of Inflation " "
"January 1,20X1 "90 " " " "
"January 1,20X2 "120 "30 "30/100 = 30.00% " "
"January 1,20X3 "150 "30 "30/130 = 23.08% " "
"January 1,20X4 "210 "60 "60/160 = 37.50% " "
" " " " " "
" " "The inflation rate that is used in determining if the subsidiary "
" " "is operating in a highly inflationary economy is "
" " " " "
" " "a. " 37.50%. "
" " "b. " 90.58%. "
" " "c. "133.33%. "
" " " " "

LO3
"13. " "A US company's foreign subsidiary has as its functional currency "
" " "the local currency. Year-end financial statements are being "
" " "consolidated. The average rate would be used for which account "
" " "of the foreign entity? "
" " " " "
" " "a. "Depreciation. "
" " "b. "Sales. "
" " "c. "Deferred credits. "
" " "d. "Deferred tax assets. "

LO5
"14. " "When translating foreign subsidiary income statements using the "
" " "current rate method, why are some accounts translated at an "
" " "average rate? "
" " " " "
" " "a. "This approach improves matching. "
" " "b. "This approach accentuates the conservatism principle. "
" " "c. "This approach smoothes out highly volatile exchange rate "
" " " "fluctuations. "
" " "d. "This approach approximates the effect of transactions which "
" " " "occur continuously during the period. "

LO5
"15. " "The following assets of Oriole Corporation's Romanian subsidiary "
" " "have been converted into US dollars at the following exchange "
" " "rates: "
" " " "Current " "Historical "
" " " "Rates " "Rates "
"Accounts receivable " "$"850,000 "$"875,000 "
"Trademark " " "600,000 " "575,000 "
"Property plant and equipment " " "1,200,000 " "900,000 "
"Totals " "$"2,650,000 "$"2,350,000 "
" " " " " " "
"If the functional currency of the subsidiary is the US dollar, the "
"assets should be reported in the consolidated financial statements of "
"Oriole Corporation and Subsidiary in the total amount of "
" " " " "
" " "a. "$2,325,000. "
" " "b. "$2,350,000. "
" " "c. "$2,375,000. "
" " "d. "$2,650,000. "

LO5
"16. " "Which of the following foreign subsidiary accounts will have the "
" " "same value on consolidated financials, regardless of whether the "
" " "statements are remeasured or translated? "
" " " " "
" " "a. "Trademark. "
" " "b. "Inventory. "
" " "c. "accounts receivable. "
" " "d. "Goodwill. "

LO6
"17. " "Remeasurement exchange gains or losses appear "
" " " " "
" " "a. "in the continuing operations section of the consolidated "
" " " "income statement. "
" " "b. "as an extraordinary item on the consolidated income "
" " " "statement. "
" " "c. "as other comprehensive income typically reported in a "
" " " "statement of stockholders' equity. "
" " "d. "as an adjustment to the beginning balance of retained "
" " " "earnings on the consolidated Statement of retained earnings. "

LO7
"18. " "A US parent makes a 1,000,000 krona loan worth $108,250 to its "
" " "Swedish subsidiary in the current year. The loan is denominated "
" " "in US dollars and the functional currency of the subsidiary is "
" " "the krona. This intercompany transaction is a foreign currency "
" " "transaction of "
" " " " "
" " " " "
" " "a. "neither the subsidiary nor the parent, as it is eliminated as"
" " " "part of the consolidation procedure. "
" " "b. "the subsidiary but not the parent. "
" " "c. "both the subsidiary and the parent. "
" " "d. "the parent but not the subsidiary. "

LO8
"19. " "A foreign subsidiary's accounts receivable balance should be "
" " "translated for the consolidated financial statements at "
" " " " "
" " "a. "the appropriate historical rate. "
" " "b. "the prior year's forecast rate. "
" " "c. "the future rate for the next year. "
" " "d. "the spot rate at year-end. "

LO9
"20. " "If a US company wants to hedge a prospective loss in a foreign "
" " "entity from a foreign currency fluctuation, which of the "
" " "following actions is recommended? "
" " " " "
" " "a. "The US company should purchase a forward to swap currency of "
" " " "the foreign entity's local country for US currency. "
" " "b. "The US company should purchase a call option to buy currency "
" " " "of the foreign entity's local country. "
" " "c. "The US company should issue a loan the foreign entity's local"
" " " "country. "
" " "d. "The US company should borrow money in the foreign entity's "
" " " "local country. "

LO2
Exercise 1

For each of the 12 accounts listed in the table below, select the correct
exchange rate to use when either remeasuring or translating a foreign
subsidiary for its US parent company.

"Codes " " "
" " " "
"C "= "Current exchange rate "
"H "= "Historical exchange rate "
"A "= "Average exchange rate "
" " " "
" " " "

" " " " " "
" " " " "The foreign "
" " "US dollar is " "currency is the "
" " "the functional " "functional "
" " "currency " "currency "
" " " " " "
"1. "Accounts receivable " " " "
" " " " " "
"2. "Marketable debt securities " " " "
" " carried at cost " " " "
" " " " " "
"3. "Inventories carried at cost " " " "
" " " " " "
"4. "Deferred income " " " "
" " " " " "
"5. "Goodwill " " " "
" " " " " "
"6. "Other paid-in capital " " " "
" " " " " "
"7. "Depreciation " " " "
" " " " " "
"8. "Refundable deposits " " " "
" " " " " "
"9. "Common stock " " " "
" " " " " "
"10. "Accumulated depreciation on " " " "
" " buildings " " " "
" " " " " "
"11. "Deferred income tax liabilities" " " "
" " " " " "
"12. "Accounts payable " " " "
" " " " " "

LO5
Exercise 2

"On January 1, 20X5, Pegler Corporation, a US company, acquired 100% of "
"Selmic Corporation of Canada, paying an excess of 90,000 Canadian "
"dollars over the book value of Selmic's net assets. The excess was "
"allocated to undervalued equipment with a three-year remaining useful "
"life. Selmic's functional currency is the Canadian dollar. Exchange "
"rates for Canadian dollars for 20X5 are: "
" "
"January 1, 20X5 $.77 "
"Average rate for 20X5 .75 "
"December 31, 20X5 .73 "

"Required: "
" " "
"1. "Determine the depreciation expense stated in US dollars on the "
" "excess allocated to equipment for 20X5. "
" " "
"2. "Determine the unamortized excess allocated to equipment on December"
" "31, 20X5. "
" " "
"3. "If Selmic's functional currency was the US dollar, what would be "
" "the depreciation expense on the excess allocated to the equipment "
" "for 20X5? "

LO5
Exercise 3

"Peake Corporation, a US company, formed a British subsidiary on January "
"1, 20X5 by investing £450,000 in exchange for all of the subsidiary's "
"no-par common stock. The British subsidiary, Searle Corporation, "
"purchased real property on April 1, 20X5 at a cost of £500,000, with "
"£100,000 allocated to land and £400,000 allocated to a building. The "
"building is depreciated over a 40-year estimated useful life on a "
"straight-line basis with no salvage value. The British pound is Searle's"
"functional currency and its reporting currency. The British economy does"
"not have high rates of inflation. Exchange rates for the pound on "
"various dates were: "
" "
"January 01, 20X5 = 1£ = $1.50 "
"April 01, 20X5 = 1£ = $1.51 "
"December 31, 20X5 = 1£ = $1.58 "
"20X5 average rate = 1£ = $1.56 "
" "
"Searle's adjusted trial balance is presented below for the year ended "
"December 31, 20X5. "
" " " "In Pounds " "
"Debits: " " " " "
"Cash "£" "220,000 " "
"Accounts receivable " " "52,000 " "
"Inventory " " "59,000 " "
"Building " " "400,000 " "
"Land " " "100,000 " "
"Depreciation expense " " "7,500 " "
"Other expenses " " "110,000 " "
"Cost of good sold " " "220,000 " "
"Total debits "£" "1,168,500 " "
" " " " " "
"Credits " " " " "
"Accumulated depreciation "£" "7,500 " "
"Accounts payable " " "111,000 " "
"Common stock " " "450,000 " "
"Retained earnings " " "0 " "
"Equity adjustment " " "0 " "
"Sales revenue " " "600,000 " "
"Total credits "£" "1,168,500 " "
" " " " " "

Required: Prepare Searle's:

1. Translation working papers;

2. Translated income statement; and

3. Translated balance sheet.

LO5

Exercise 4

"Note to Instructor: This exam item is a continuation of Exercise 3 and "
"proceeds forward with Searle's second year of operations. "

"Searle Corporation, a British subsidiary of Peake Corporation (a US "
"company) was formed by Peake on January 1, 20X5 in exchange for all of "
"the subsidiary's common stock. Searle has now ended its second year of "
"operations on December 31, 20X6. Relevant exchange rates are: "
" "
"January 01, 20X5 = 1£ = $1.50 "
"December 31, 20X6 = 1£ = $1.65 "
"20X6 average rate = 1£ = $1.63 "
" "
"Searle's adjusted trial balance is presented below for the calendar year"
"20X6. The amount of equity adjustment carried over from 20X5 is a credit"
"balance of $41,250 (in dollars). "

" " " "In Pounds " "
"Debits: " " " " "
"Cash "£" "75,000 " "
"Inventory " " "41,000 " "
"Building " " "400,000 " "
"Land " " "100,000 " "
"Cost of good sold " " "380,000 " "
"Total debits "£" "1,501,000 " "
" " " " " "
"Credits " " " " "
"Common stock " " "450,000 " "
"Retained earnings " " "262,500 " "
"Sales revenue " " "616,250 " "
"Total credits "£" "1,501,000 " "
" " " " " "
" " " " " "

Required: For Searle's second year of operations, prepare the:




LO5
Exercise 5

"Note to Instructor: This exam item is similar to Exercise 3 except that "
"the exchange rates have been changed and the temporal method is used "
"instead of the current rate method. "

"The Pearce Corporation, a US corporation, formed a British subsidiary on"
"January 1, 20X7 by investing £550,000 in exchange for all of the "
"subsidiary's no-par common stock. The British subsidiary, Seakam "
"Corporation, purchased real property on April 1, 20X7 at a cost of "
"£500,000, with £100,000 allocated to land and £400,000 allocated to the "
"building. The building is depreciated over a 40-year estimated useful "
"life on a straight-line basis with no salvage value. The US dollar is "
"Seakam's functional currency, but it keeps its records in pounds. The "
"British economy does not experience high rates of inflation. Exchange "
"rates for the pound on various dates are: "
" "
"January 01, 20X7 = 1£ = $1.40 "
"April 01, 20X7 = 1£ = $1.42 "
"December 31, 20X7 = 1£ = $1.45 "
"20X7 average rate = 1£ = $1.44 "
" "
"Seakam's adjusted trial balance is presented below for the year ended "
"December 31, 20X7. "

" " " "In Pounds "
"Debits: " " " "
"Cash "£" "200,000 "
"Accounts receivable " " "72,000 "
"Notes receivable " " "99,000 "
"Building " " "400,000 "
"Land " " "100,000 "
"Depreciation expense " " "7,500 "
"Other expenses " " "115,000 "
"Salary expense " " "208,000 "
"Total debits "£" "1,201,500 "

"Credits " " " " "
"Common stock " " "550,000 " "
"Retained earnings " " "0 " "
"Equity adjustment " " "0 " "
"Sales revenue " " "544,000 " "
"Total credits "£" "1,201,500 " "
" " " " " "

Required: Prepare Seakam's:




LO5
Exercise 6

"Note to Instructor: This exam item is a continuation of Exercise 6 and "
"proceeds forward with Seakam's second year of operations. "

"Seakam Corporation, a British subsidiary of Pearce Corporation (a US "
"company) was formed by Pearce on January 1, 20X7 in exchange for all of "
"the subsidiary's common stock. Seakam has now ended its second year of "
"operations on December 31, 20X8. Relevant exchange rates are: "
" "
"January 01, 20X7 = 1£ = $1.40 "
"April 01, 20X7 = 1£ = $1.42 "
"December 31, 20X8 = 1£ = $1.37 "
"20X8 average rate = 1£ = $1.36 "
" "
"Seakam's adjusted trial balance is presented below for the calendar year"
"20X8. "

" " " "In " "
" " " "Pounds " "
"Debits: " " " " "
"Cash "£" "172,000 " "
"Notes receivable " " "98,000 " "
"Building " " "400,000 " "
"Land " " "100,000 " "
"Salary expense " " "376,000 " "
"Total debits "£" "1,581,000 " "
" " " " " "
"Credits " " " " "
"Common stock " " "550,000 " "
"Sales revenue " " "600,000 " "
"Total credits "£" "1,581,000 " "
" " " " " "
"Required: Prepare Seakam's: " " " " "
" " " " " "
"1. Translation working papers; " " " " "
" " " " " "
"Translated income statement; and " " " " "
" " " " " "
"Translated balance sheet. " " " " "
" " " " " "

LO7

Exercise 7

"On January 1, 20X4, Pearl Corporation, a US firm, acquired a 70% "
"interest in Segar Corporation, a foreign company, for $120,000, when "
"Segar's stockholders' equity consisted of 300,000 local currency units "
"(LCU) and retained earnings of 100,000 LCU. At the time of the "
"acquisition, Segar's assets and liabilities were fairly valued except "
"for a patent that did not have any recorded book value. All excess "
"purchase cost was attributed to the patent, which had an estimated "
"economic life of 10 years at the date of acquisition. The exchange rate "
"for LCUs on January 1, 20X4 was $.40. "
" "
"A summary of changes in Segar's stockholders' equity during 20X4 and the"
"exchange rates for LCUs is as follows: "
" "
" " "
"1. "Fair value of the patent from Pearl's investment in Segar on "
" "January 1, 20X4. "
" " "
"2. "Patent amortization for 20X4. "
" " "
"3. "Unamortized patent at December 31, 20X4. "
" " "
"4. "Equity adjustment from the patent. "
" " "
"5. "Income from Segar for 20X4. "
" " "
"6. "Investment in Segar balance at December 31, 20X4. "

LO7
Exercise 8

"Peatey Corporation, a US company, acquired a 30% interest in Selby "
"Corporation of Switzerland on January 1, 20X3 for $3,300,000 when "
"Selby's stockholders' equity in Swiss francs (SF) consisted of 7,000,000"
"SF Capital Stock and 3,000,000 SF Retained Earnings. The exchange rate "
"for Swiss francs was $.66 on January 1. All excess purchase cost was "
"attributed to a trademark that did not have a recorded book value. "
"Peatey will amortize the trademark over 40 years. "
" "
"A summary of changes in Selby's stockholders' equity during 20X3 and "
"relevant exchange rates are as follows: "

" "
" " "
"1. "Fair value of the trademark from Peatey's investment in Selby on "
" "January 1, 20X3. "
" " "
"2. "Trademark amortization for 20X3. "
" " "
"3. "Unamortized trademark at December 31, 20X3. "
" " "
"4. "Equity adjustment from the trademark. "
" " "
"5. "Income from Selby for 20X3. "
" " "
"6. "Investment in Selby balance at December 31, 20X3. "
" " "

LO7
Exercise 9

Pelican Corporation, a US company, owns 100% of Swiftlet Corporation, an
Australian company. Swiftlet's equipment was acquired on the following
dates (amounts are stated in Australian dollars):

Jan. 01, 20X1 Purchased equipment for A$40,000

Jul. 01, 20X1 Purchased equipment for A$80,000

Jan. 01, 20X2 Purchased equipment for A$50,000

Jul. 01, 20X2 Sold equipment purchased on Jan. 01, 20X1 for A$35,000

Exchange rates for the Australian dollar on various dates are:

Jan. 01, 20X1 1A$ = $.500 Jan. 01, 20X2 1A$ = $.530
Jul. 01, 20X1 1A$ = $.520 Jul. 01, 20X2 1A$ = $.505
Dec. 31, 20X1 1A$ = $.530 Dec. 31, 20X2 1A$ = $.490
20X1 avg. rate 1A$ = $.515 20X2 avg. rate 1A$ = $.510

Swiftlet's equipment has an estimated 5-year life with no salvage value and
is depreciated using the straight-line method. Swiftlet's functional
currency is the US dollar, but the company uses the Australian dollar as
its reporting currency.

Required:

1. Determine the value of Swiftlet's equipment account on December 31, 20X2
in US dollars.

2. Determine Swiftlet's depreciation expense for 20X2 in US dollars.

3. Determine the gain or loss from the sale of equipment on July 1, 20X2 in
US dollars.

LO7
Exercise 10

Peregrine Falcon Inc., a US company, owns 100% of Starling Corporation, a
New Zealand company. Starling's equipment was acquired on the following
dates (amounts are stated in New Zealand dollars):

Jan. 01, 20X1 Purchased equipment for NZ$40,000

Jul. 01, 20X1 Purchased equipment for NZ$80,000

Jan. 01, 20X2 Purchased equipment for NZ$50,000

Jul. 01, 20X2 Sold equipment purchased on Jan. 01, 20X1 for NZ$35,000

Exchange rates for the New Zealand dollar on various dates are:

Jan. 01, 20X1 1NZ$ = $.500 Jan. 01, 20X2 1NZ$ = $.530
Jul. 01, 20X1 1NZ$ = $.520 Jul. 01, 20X2 1NZ$ = $.505
Dec. 31, 20X1 1NZ$ = $.530 Dec. 31, 20X2 1NZ$ = $.490
20X1 avg. rate 1NZ$ = $.515 20X2 avg. rate 1NZ$ = $.510

Starling's equipment has an estimated 5-year life with no salvage value and
is depreciated using the straight-line method. Starling's functional
currency and reporting currency are the New Zealand dollar.

Required:

1. Determine the value of Starling's equipment account on December 31, 20X2
in US dollars.

2. Determine Starling's depreciation expense for 20X2 in US dollars.

3. Determine the gain or loss from the sale of equipment on July 1, 20X2 in
US dollars.
SOLUTIONS

Multiple Choice Questions

" 1. "d " "

" 2. "c " "

" 3. "d " "

" 4. "d " "

" 5. "c " "

" 6. "c " "

" 7. "a " "

" 8. "c " "

" 9. "c " "

"10. "d " "

"11. "d " "

"12. "c "{(210 – 90)/90} x 100% = 133% "

"13. "b " "

"14. "d " "

"15. "a "Acc. Rec. $850,000 + Trademark $575,000 + Plant $900,000 "

"16. "c " "

"17. "a " "

"18. "b " "

"19. "d " "

"20. "d " "

Exercise 1

" " " " " "
" " " " "The foreign "
" " "US dollar is " "Currency is the "
" " "the functional " "functional "
" " "currency " "currency "
" " " " " "
"1. "Accounts receivable "C " "C "
" " " " " "
"2. "Marketable debt securities " " " "
" " carried at cost "H " "C "
" " " " " "
"3. "Inventories carried at cost "H " "C "
" " " " " "
"4. "Deferred income "H " "C "
" " " " " "
"5. "Goodwill "H " "C "
" " " " " "
"6. "Other paid-in capital "H " "H "
" " " " " "
"7. "Depreciation "H " "C "
" " " " " "
"8. "Refundable deposits "C " "C "
" " " " " "
"9. "Common stock "H " "H "
" " " " " "
"10. "Accumulated depreciation on " " " "
" " buildings "H " "C "
" " " " " "
"11. "Deferred income tax liabilities"C " "C "
" " " " " "
"12. "Accounts payable "C " "C "
" " " " " "

Exercise 2

"Requirement 1 "
" " "
"Depreciation expense in 20X5 "
"C$90,000/3 years x $.75/C$ = $22,500 depreciation expense "
" " "
"Requirement 2 "
" " "
"Unamortized excess at December 31, 20X5 "
"C$90,000 x 2/3 x $.73/C$ = $43,800 unamortized excess on equipment "
" " "
"Requirement 3 "
" " "
"Remeasured depreciation expense "
"C$90,000 x $.77/C$ = $69,300 excess "
"$69,300/3 years = $23,100 depreciation expense "
" " "

Exercise 3

Requirement 1

"Searle Corporation "
"Translation Working Papers "
" " " " " "
" Debits " " " " "
"Cash "220,000 "x $1.58 "= "$ " "347,600 " "
"Accounts receivable "52,000 "x $1.58 "= " " "82,160 " "
"Inventory "59,000 "x $1.58 "= " " "93,220 " "
"Building "400,000 "x $1.58 "= " " "632,000 " "
"Land "100,000 "x $1.58 "= " " "158,000 " "
"Depreciation expense "7,500 "x $1.56 "= " " "11,700 " "
"Other expenses "110,000 "x $1.56 "= " " "171,600 " "
"Cost of goods sold "220,000 "x $1.56 "= " " "343,200 " "
" " " " " " " " "
"Total debits " " " "$ " "1,839,480 " "
" " " " " " " " "
" Credits " " " " " " " "
"Accumulated depreciation "7,500 "x $1.58 "= "$ " "11,850 " "
"Accounts payable "111,000 "x $1.58 "= " " "175,380 " "
"Common stock "450,000 "x $1.50 "= " " "675,000 " "
"Sales revenue "600,000 "x $1.56 "= " " "936,000 " "
"Retained earnings " " " " " "0 " "
"Total credits " " " "$ " "1,798,230 " "
" " " " " " " " "
"Credit differential " " " "$ " "41,250 " "
" " " " " " " " "

Requirement 2

"Translated Income Statement "
"For the Year Ended December 31, 20X5 "
" "
"Sales revenue "$ " "936,000 " "
" " " " " "
"Expenses: " " " " "
"Cost of goods sold " "("343,200 ")"
"Depreciation expense " "("11,700 ")"
"Other expenses " "("171,600 ")"
" " " " " "
"Net income "$ " "409,500 " "
" " " " " "

Requirement 3

"Translated Balance Sheet "
"December 31, 20X5 "
" "
"Cash "$ " "347,600 " "
"Inventory " " "93,220 " "
"Building-net " " "620,150 " "
"Land " " "158,000 " "
"Total assets "$ " "1,301,130 " "
" " " " " "
"Accounts payable "$ " "175,380 " "
"Common stock " " "675,000 " "
"Accumulated comprehensive income " " "41,250 " "
"Total liabilities & equities "$ " "1,301,130 " "
" " " " " "

Exercise 4

Requirement 1

" " " " " "
" Debits " " " " "
"Cash "75,000 "x $1.65 "= "$ " "123,750 " "
"Inventory "41,000 "x $1.65 "= " " "67,650 " "
"Building "400,000 "x $1.65 "= " " "660,000 " "
"Land "100,000 "x $1.65 "= " " "165,000 " "
"Other expenses "133,000 "x $1.63 "= " " "216,790 " "
"Cost of goods sold "380,000 "x $1.63 "= " " "619,400 " "
" " " " " " " " "
"Total debits " " " "$ " "2,466,190 " "
" " " " " " " " "
" Credits " " " " " " " "
"Common stock "450,000 "x $1.50 "= " " "675,000 " "
"Sales revenue "616,250 "x $1.63 "= " " "1,004,487 " "
"Retained earnings "262,500 " " " " "409,500 " "
"Accumulated comprehensive " " " " " " " "
" income " " " " " "41,250 " "
"Total credits " " " "$ " "2,414,450 " "
" " " " " " " " "
" " " " " " " " "

Requirement 2

"for the year ended December 31, 20X6 "
" "
"Sales revenue "$ " "1,004,487 " "
" " " " " "
"Cost of goods sold " "("619,400 ")"
" " " " " "
"Net income "$ " "151,997 " "
"Retained earnings, January 1, 20X6 " " "409,500 " "
"Retained earnings, December 31, 20X6 "$ " "561,497 " "
" " " " " "

Requirement 3

" "
"Cash "$ " "123,750 " "
"Inventory " " "67,650 " "
"Building-net " " "631,125 " "
"Land " " "165,000 " "
"Total assets "$ " "1,584,825 " "
" " " " " "
"Common stock " " "675,000 " "
"Accumulated comprehensive income ($41,250 + $51,740) " " "92,990 " "
" " " " " "

Exercise 5

Requirement 1

"Seakam Corporation "
" " " " " "
" Debits " " " " "
"Cash "200,000 "x $1.45 "= "$ " "290,000 " "
"Notes receivable "99,000 "x $1.45 "= " " "143,550 " "
"Building "400,000 "x $1.42 "= " " "568,000 " "
"Land "100,000 "x $1.42 "= " " "142,000 " "
"Other expenses "115,000 "x $1.44 "= " " "165,600 " "
"Salary expense "208,000 "x $1.44 "= " " "299,520 " "
" " " " " " " " "
"Total debits " " " "$ " "1,723,720 " "
" " " " " " " " "
" Credits " " " " " " " "
"Common stock "550,000 "x $1.40 "= " " "770,000 " "
"Sales revenue "544,000 "x $1.44 "= " " "783,360 " "
"Retained earnings "0 " " " " "0 " "
"Total credits " " " "$ " "1,709,010 " "
" " " " " " " " "
" " " " " " " " "

Requirement 2

" "
"Sales revenue "$ " "783,360 " "
" " " " " "
"Salary expense " "("299,520 ")"
"Income before exchange gains or losses "$ " "307,590 " "
"Exchange gains " " "14,710 " "
"Net income "$ " "322,300 " "
"Retained earnings, January 1, 20X7 " " "0 " "

Requirement 3

" "
"Cash "$ " "290,000 " "
"Building-net " " "557,350 " "
"Land " " "142,000 " "
"Total assets "$ " "1,237,300 " "
" " " " " "
"Common stock " " "770,000 " "
" " " " " "

Exercise 6

" Seakam Corporation "
" " " " " "
" Debits " " " " "
"Cash "172,000 "x $1.37 "= "$ " "235,640 " "
"Notes receivable "98,000 "x $1.37 "= " " "134,260 " "
"Building "400,000 "x $1.42 "= " " "568,000 " "
"Land "100,000 "x $1.42 "= " " "142,000 " "
"Other expenses "117,000 "x $1.36 "= " " "159,120 " "
"Salary expense "376,000 "x $1.36 "= " " "511,360 " "
" " " " " " " " "
"Total debits " " " "$ " "2,186,540 " "
" " " " " " " " "
"Credits " " " " " " " "
"Common stock "550,000 "x $1.40 "= " " "770,000 " "
"Sales revenue "600,000 "x $1.36 "= " " "816,000 " "
"Retained earnings "213,500 " " " " "322,300 " "
"Total credits " " " "$ " "2,207,150 " "
" " " " " " " " "
"Debit differential " " " "$ " "20,610 " "

Requirement 2

" "
"Sales revenue "$ " "816,000 " "
" " " " " "
"Salary expense " "("511,360 ")"
"Income before exchange gains or losses "$ " "131,320 " "
"Exchange loss " "("20,610 ")"
"Net income "$ " "110,710 " "
"Retained earnings, January 1, 20X8 " " "322,300 " "
" " " " " "

Requirement 3

" "
"Cash "$ " "235,640 " "
"Building-net " " "543,150 " "
"Land " " "142,000 " "
"Total assets "$ " "1,477,010 " "
" " " " " "
"Common stock " " "770,000 " "
" " " " " "

Exercise 7

"Requirement 1 "

"Patent Fair Value " " " " "
" " " " " "
"Cost of 70% interest "$" "120,000 " "
"Book value acquired 400,000 LCU x $.40 x 70% = " "("112,000 ")"
"Patent in dollars "$" "8,000 " "
" " " " " "
"Patent in LCU = $8,000/$.40 per LCU = " " " 20,000 " "
" " " " " "
"Requirement 2 " " " " "
" " " " " "
"Patent amortization for 20X4 " " " " "
" " " " " "
"Patent: 20,000 LCU/10 years = 2,000 LCU per year " " " " "
"2,000 LCU per year x $.42 equals amortization of: "$" "840 " "
" " " " " "
" " " " " "
"Unamortized patent " " " " "
" " " " " "
"Patent (20,000 LCU – 2,000 LCU) x $.44 = "$" "7,920 " "
" " " " " "
" " " " " "
" " " " " "
" " " " " "
" " " " " "
" " " " " "
" " " " " "
"Equity adjustment from patent " " " " "
" " " " " "
" " " " " "
" " " " " "
"Beginning patent (from Req. 1) "$" "8,000 " "
"Patent amortization (from Req. 2) " "("840 ")"
"Subtotal " " "7,160 " "
"Ending goodwill 18,000 LCU x $.44 = " " "7,920 " "
"Equity adjustment "$" "760 " "
" " " " " "
" " " " " "
"Income from Segar " " " " "
"Equity in income ($42,000 x 70%) "$" "29,400 " "
"Less: Patent amortization " "("840 ")"
"Income from Segar "$" "28,560 " "
" " " " " "
"Investment in Segar balance at December 31, 20X4 " " " " "
" " " " " "
"Cost, January 1, 20X4 "$" "120,000 " "
"Add: Income for 20X4 (from Req. 5) " " "28,560 " "
"Less: Dividends ($21,500 x 70%) " "("15,050 ")"
"Add: Equity adjustment from patent (from Req. 4) " " "760 " "
"Add: Equity adjustment from translation " " " " "
" ($17,500 x 70%) " " "12,250 " "
"Investment balance, December 31, 20X4 "$" "146,520 " "
" " " " " "
"Check: " " " " "
"Book value: $198,000 x 70% = "$" "138,600 " "
"Unamortized patent (from Req. 3) " " "7,920 " "
"Investment balance "$" "146,520 " "
" " " " " "

Exercise 8

"Requirement 1 "

"Trademark " " " " "
" " " " " "
"Cost of 30% interest "$" "3,300,000 " "
"Book value acquired 10,000,000 x $.66 x 30% = " "("1,980,000 ")"
"Fair value of trademark in dollars "$" "1,320,000 " "
" " " " " "
"Trademark in $1,320,000/$.66 = " " "2,000,000 " "
" " " " " "
" " " " " "
"Trademark amortization for 20X3 " " " " "
" " " " " "
"Trademark: 2,000,000/40 yr. x $.65 average rate = "$" "32,500 " "
" " " " " "
" " " " " "
" " " " " "
"Unamortized trademark " " " " "
" " " " " "
"Trademark (2,000,000 – 50,000SF) x $.64 exchange " " " " "
" rate "$" "1,248,000 " "
" " " " " "
" " " " " "
" " " " " "
"Equity adjustment from trademark " " " " "
" " " " " "
"Beginning trademark (from Req. 1) "$" "1,320,000 " "
"Trademark amortization (from Req. 2) " "("32,500 ")"
"Less: Ending trademark (1,950,000 x $.64) " "("1,248,000 ")"
"Equity adjustment "$" "39,500 " "
" " " " " "
" " " " " "
" " " " " "
"Income from Selby " " " " "
"Equity in income ($1,625,000 x 30%) "$" "487,500 " "
"Less: Trademark amortization " "("32,500 ")"
"Income from Selby "$" "455,000 " "
" " " " " "
" " " " " "
" " " " " "
" " " " " "
"Investment in Segar balance at December 31, 20X3 " " " " "
" " " " " "
"Cost, January 1, 20X3 "$" "3,300,000 " "
"Add: Income from Selby (from Req. 5) " " "455,000 " "
"Less: Dividends ($645,000 x 30%) " "("193,500 ")"
"Less: Equity adjustment from translation " " " " "
" ($220,000 x 30%) " "("66,000 ")"
"Less: Equity adjustment from trademark (from Req. 4) " "("39,500 ")"
"Investment balance, December 31, 20X3 "$" "3,456,000 " "
" " " " " "
"Check: " " " " "
"Share of Selby's equity $7,360,000 x 30% "$" "2,208,000 " "
"Add: Unamortized trademark (from Req. 3) " " "1,248,000 " "
"Investment balance, December 31, 20X3 "$" "3,456,000 " "
" " " " " "

Exercise 9

Requirement 1

Equipment:
Jul. 01, 20X1 (A$80,000 x $.520/A$) = $41,600

Jan. 01, 20X2 (A$50,000 x $.530/A$) = 26,500

Total $68,100

Requirement 2

Depreciation expense:

{(A$40,000 x 1/5 x .5 yr.)x ($.500/A$)} = $ 2,000

{(A$80,000 x 1/5 x 1 yr.)x($.520/A$)} = 8,320

{(A$50,000 x 1/5 x 1 yr.)x($.530/A$)} = 5,300

Total $15,620

Requirement 3

Equipment sold:
(A$40,000 x $.500/A$) = $20,000

Accumulated Depreciation on equipment sold:
{(A$40,000 x 1/5 x 1.5 yrs.)x($.500/A$)} = 6,000

Net book value of equipment sold $14,000

Cash received on July 1, 20X2:
(A$35,000 x $.505/A$) = 17,675

Gain on sale of equipment $ 3,675

Exercise 10

Requirement 1

Equipment:
Jul. 01, 20X1 (NZ$80,000 x $.490/NZ$) = $39,200

Jan. 01, 20X2 (NZ$50,000 x $.490/NZ$) = 24,500

Total $63,700

Requirement 2

Depreciation expense:

{(NZ$40,000 x 1/5 x .5 yr.)x($.510/NZ$)} = $ 2,040

{(NZ$80,000 x 1/5 x 1 yr.)x($.510/NZ$)} = 8,160

{(NZ$50,000 x 1/5 x 1 yr.)x($.510/NZ$)} = 5,100

Total $15,300

Requirement 3

Equipment sold NZ$40,000

Accumulated Depreciation on sold equipment 12,000

(NZ$40,000 x 1/5 x 1.5 yr.)

Net book value of equipment sold NZ$28,000

Cash received on July 1, 20X2 35,000

Gain on sale of equipment NZ$ 7,000

Gain in US$:
(NZ$7,000 x $.510/NZ$) = $ 3,570

Chapter 13 Test Bank FOREIGN CURRENCY FINANCIAL STATEMENTS

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