Chapter 21
Problem I 1. Functional Currency Is the Local Currency Unit – Translation Into the Presentation Currency (Current/Closing Rate Method) Functional Currency Is Local Currency Unit – US Dollars Translation into the Presentation Currency (Current/Closing Rate Method) Combined Statement of Income and Retained Earnings Sales Cost of goods sold Depreciation expense Other expenses Income tax expense Net Income to Retained Earnings Retained earnings, 1/1 Total Less: Dividends declared, 9/1/20x4 Retained earnings, 12/31 to Balance Sheet Balance Sheet Cash………………………. Accounts receivable (net) Inventory (FIFO) Land……………………………. Buildings (net) Equipment (net) Total
Adjusted Trial Balance ($)
Translation Exchange Rate
3,624,000 2,220,000 120,000 786,000 98,400 399,600 576,000 975,600 360,000 615,600
(A) (A) (A) (A) (A)
40.20 40.20 40.20 40.20 40.20
(H)
40.10
1,116,000 729,600 996,000 600,000 780,000 516,000
(C) (C) (C) (C) (C) (C)
40.25 40.25 40.25 40.25 40.25 40.25
(1)
4,737,600
Adjusted Trial Balance (Pesos)
145,684,800 89,244,000 4,824,000 31,597,200 3,955,680 16,063,920 23,040,000 39,103,920 14,436,000 24,667,920 44,919,000 29,366,400 40,089,000 24,150,000 31,395,000 20,769,000 190,688,400
Accounts payable…………… 768,000 (C) 40.25 30,912,000 Short-term notes payable 762,000 (C) 40.25 30,670,500 Bonds payable………………… 1,080,000 (C) 40.25 43,470,000 Common stock, P10 par……… 1,152,000 (H) 40.00 46,080,000 Paid-in capital in excess of par 360,000 (H) 40.00 14,400,000 Retained earnings, from above _ 615,600 24,667,920 Total 4,737,600 190,200,420 Foreign Currency Translation Reserve Gain OCI) – credit……………………………………………………… _________ B/A 487,980 Total…… 4,737,600 190,688,400 *Include as a component of other comprehensive income (1) Retained earnings in pesos on January 2 (date of acquisition) (A) Average exchange rate used to approximate the rate on the date these elements were recognized. (H) Historical exchange rate (C) Current exchange rate (5) B/A – balancing amount
Verification of the Translation Adjustment – Current/Closing Rate Method (Functional Currency – US Dollars)
1/2 Exposed net asset position……………… Adjustments for changes in net asset position during year: Net income for year……………….
US $ *2,088,000 399,600
Translation Exchange Rate 40.00 40.20
Reporting Currency (Pesos) 83,520,000 16,063,920
Dividends declared……………………. Net asset position translated using rate in effect at date of each transaction……………….. 12/31 Exposed net asset position……………. Change in cumulative translation adjustment during year—net increase…………. 1/2 Cumulative translation adjustment**……………. 12/31 Cumulative translation adjustment…………..
(360,000)
40.10
( 14,436,000)
2,127,600
40.25
85,147,920 85,635,900 487,980 -0487,980
*A condensed balance sheet for S Company on January 2, 20x4 was as follows: US $ Monetary assets 1,320,000 Monetary Liabilities Nonmonetary assets Common stock Inventory 912,000 Paid-in capital in excess of par Fixed assets 2,016,000 Retained earnings Total 4,248,000 Total 1/1 Net assets = $4,248,000 - $2,160,000 = 2,088,000 **the beginning balance is zero since this was the first year the investment was held.
US $ 2,160,000 1,152,000 360,000 576,000 4,248,000
Statement of Comprehensive Income and Statement of Shareholders’ Equity
Functional Currency Is Local Currency Unit – US$ Translation into the Presentation Currency (Current/Closing Rate Method)
S Company Statement of Comprehensive Income For the Year Ended December 31, 20x4 Net income ………………………………………………………………………………………… Other comprehensive income: Foreign currency translation reserve gain………………………………………….. Comprehensive Income………………………………………………………………………….
P16,063,920 487,980 P16,055,100
S Company Statement of Shareholders’ Equity For the Year Ended December 31, 20x4
Balance, 1/1/20x4 Comprehensive Income: Net income Other comprehensive Income Comprehensive Income Dividends declared Balance, 12/31/20x4……
Common Stock P46,080,000
Paid-in capital in excess of par P14,400,000
Retained Earnings P23,040,000
P
OCI*
0
16,063,920
16,063,920 487,980
_______ P46,080,000
*OCI – other comprehensive income
___________ P14,400,000
(14,436,000) P24,667,920
Total P83,520,000
________ P 487,980
2. Translation into the Functional Currency (Remeasurement or Temporal Method)
487,980 P100,071,900 (14,436,000) P85,635,900
Functional Currency Is Philippine Peso Translation into the Functional Currency (Remeasurement or Temporal Method) Balance Sheet Cash………………………. Accounts receivable (net) Inventory (FIFO) Land……………………………. Buildings (net) Equipment (net) Total Accounts payable…………… Short-term notes payable Bonds payable………………… Common stock, P10 par……… Paid-in capital in excess of par Retained earnings Total
Combined Statement of Income and Retained Earnings
Adjusted Trial Balance ($)
1,116,000 729,600 996,000 600,000 780,000 516,000
(C) (C) (H) (H) (H)
Remeasurement Exchange Rate 40.25 40.25 Schedule 40.00 40.00 40.00
4,737,600
Adjusted Trial Balance (Pesos)
44,919,000 29,366,400 40,059,120 24,000,000 31,200,000 20,640,000
190,184,520
768,000 762,000 1,080,000 1,152,000 360,000 _ 615,600 4,737,600
(C) (C) (C) (H) (H)
40.25 40.25 40.25 40.00 40.00 (B/A)
30,912,000 30,670,500 43,470,000 46,080,000 14,400,000 24,652,020 190,184,520
Sales 3,624,000 (A) 40.20 145,684,800 Cost of goods sold 2,220,000 Schedule 89,041,680 Depreciation expense 120,000 (H) 40.00 4,800,000 Other expenses 786,000 (A) 40.20 31,597,200 Income tax expense 98,400 (A) 40.20 __3,955,680 Net income before remeasurement loss 16,290,240 Remeasurement loss - debit 0 ___242,220 Net Income to Retained Earnings 399,600 16,048,020 Retained earnings, 1/1 576,000 (1) 23,040,000 Total 975,600 39,088,020 Less: Dividends declared, 9/1/20x4 360,000 (H) 40.10 14,436,000 Retained earnings, 12/31 from balance sheet 615,600 24,652,020 *Include as a component of other comprehensive income (1) Retained earnings in pesos on January 2 (date of acquisition) (A) Average exchange rate used to approximate the rate on the date these elements were recognized. (H) Historical exchange rate (C) Current exchange rate B/A – balancing amount Schedule Translation of Cost of Goods Sold
Accounts Beginning inventory (assumed)…………. Purchases (assumed)…………….. Total…………………….. Less: Ending inventory……………. Cost of goods sold……………
($) 912,000 2,304,000 3,216,000 996,000 2,220,000
(H) (A) (A)
Remeasurement Exchange Rate 40.00 40.20 40.22
Pesos 36,480,000 92,620,800 129,100,800 40,059,120 89,041,680
Verification of the Translation Adjustment – Remeasurement or Temporal Method (Functional Currency – Philippine Peso) US $
Translation Exchange Rate
Reporting Currency (Pesos)
1/2 Exposed net monetary liability position….. Adjustments for changes in net monetary position during year: Less: Increase in cash and receivables from sales Add: Decrease in monetary assets or increase in monetary liabilities: Purchases Other expenses Income taxes Dividends declared…………….. Net monetary liability position translated using rate in effect at date of each transaction.. Less: 12/31 Exposed net monetary liability position Remeasurement gain (loss)
*840,000
40.00
33,600,000
(3,624,000)
40.20
145,684,800
2,304,000 786,000 98,400 360,000
40.20 40.20 40.20 40.10
92,620,800 31,597,200 3,955,680 14,436,000
**764,400
40.25
30,524,880 30,767,100 ( 242,220)
*The January 2, 20x4 condensed balance sheet is given in Figure 19-3:
US $ 2,160,000 1,320,000 840,000
Monetary liabilities Less: Monetary assets
Net monetary liability position….. **See above:
US $ 2,610,000 1,845,600 764,400
Monetary liabilities (768,000 + 762,000 + 1,080,000) Less: Monetary assets (1,116,000 + 729,600)
Net monetary liability position…..
3. Translation Using a Trial Balance Approach Translation into the Presentation Currency (Current/Closing Rate Method) Functional Currency Is Local Currency Unit – US Dollars Translation into the Presentation Currency (Current/Closing Rate Method) Accounts Sales Cost of goods sold Depreciation expense Other expenses Income tax expense Retained earnings, 1/1 Dividends declared, 9/1 Cash………………………. Accounts receivable (net) Inventory (FIFO), 12/31 Land………………………… Buildings (net) Equipment (net) Accounts payable………… Short-term notes payable Bonds payable…………… Common stock, P10 par… Paid-in capital in excess of par Sub-totals Foreign Currency Translation Reserve Gain OCI) – credit Totals
Adjusted Trial Balance ($) Debit Credit
2,220,000 120,000 786,000 98,400 360,000 1,116,000 729,600 996,000 600,000 780,000 516,000
3,624,000
576,000
_________ 8,322,000
768,000 762,000 1,080,000 1,152,000 __360,000 8,322,000
_________ 8,322,000
_________ 8,322,000
(A) (A) (A) (A) (A) (H) (C) (C) (C) (C) (C) (C) (C) (C) (C) (H) (H)
Exchange Rate 40.20 40.20 40,20 40.20 40.20 (1) 40.10 40.25 40.25 40.25 40.25 40.25 40.25 40.25 40.25 40.25 40.00 40.00
Adjusted Trial Balance (Pesos) Debit Credit 89,244,000 4,824,000 31,597,200 3,955,680 14,436,000 44,919,000 29,366,400 40,089,000 24,150,000 31,395,000 20,769,000
145,684,800
23,040,000
___________ 334,745,280
30,912,000 30,670,500 43,470,000 46,080,000 _14,400,000 334,257,300
___________ 334,745,280
487,980 334,745,280
*Include as a component of other comprehensive income (1) Retained earnings in pesos on January 2 (date of acquisition) (A) Average exchange rate used to approximate the rate on the date these elements were recognized. (H) Historical exchange rate (C) Current exchange rate Note: In the pre-closing trial balance approach, the following should be observed: 1. The retained earnings should be of beginning balance. 2. In the event that there are details as to the component of cost of goods sold purchases should be translated using average and inventory should be of a beginning balance translated at the appropriate rate existing at the date of inventory acquired.
Translation into the Functional Currency (Remeasurement or Temporal Method) Functional Currency Is Philippine Peso Translation into the Functional Currency (Remeasurement or Temporal Method) Accounts
Adjusted Trial Balance ($) Debit Credit
Exchange Rate
Adjusted Trial Balance (Pesos) Debit Credit
Sales 3,624,000 (A) 40.20 145,684,800 Purchases 2,304,000 (A) 40.20 92,620,800 Depreciation expense 120,000 (H) 40.00 4,800,000 Other expenses 786,000 (A) 40.20 31,597,200 Income tax expense 98,400 (A) 40.20 3,955,680 Retained earnings, 1/1 576,000 (1) 23,040,000 Dividends declared, 9/1 360,000 (H) 40.10 14,436,000 Cash………………………. 1,116,000 (C) 40.25 44,919,000 Accounts receivable (net) 729,600 (C) 40.25 29,366,400 Inventory (FIFO), 1/1 (assumed) 912,000 (H) 40.00 36,480,000 Land………………………… 600,000 (C) 40.00 24,000,000 Buildings (net) 780,000 (C) 40.00 31,200,000 Equipment (net) 516,000 (C) 40.00 20,640,000 Accounts payable………… 768,000 (C) 40.25 30,912,000 Short-term notes payable 762,000 (C) 40.25 30,670,500 Bonds payable…………… 1,080,000 (C) 40.25 43,470,000 Common stock, P10 par… 1,152,000 (H) 40.00 46,080,000 Paid-in capital in excess of par _________ __360,000 (H) 40.00 ___________ 14,400,000 Sub-totals 8,322,000 8,322,000 334,015,080 334,257,300 Remeasurement loss - debit _________ _________ ____242,220 ___________ Totals 8,322,000 8,322,000 334,257,300 334,257,300 *Include as a component of other comprehensive income (1) Retained earnings in pesos on January 2 (date of acquisition) (A) Average exchange rate used to approximate the rate on the date these elements were recognized. (H) Historical exchange rate (C) Current exchange rate Note: In the pre-closing trial balance approach, the following should be observed: 1. The retained earnings should be of beginning balance. 2. In the event that there are details as to the component of cost of goods sold purchases should be translated using average and inventory should be of a beginning balance translated at the appropriate rate existing at the date the inventory was acquired, refer to schedule below. Schedule Translation of Cost of Goods Sold
Accounts Beginning inventory (assumed)…………. Purchases (assumed)…………….. Total…………………….. Less: Ending inventory……………. Cost of goods sold……………
($) 912,000 2,304,000 3,216,000 996,000 2,220,000
(H) (A) (A)
Remeasurement Exchange Rate 40.00 40.20 40.22
Pesos 36,480,000 92,620,800 129,100,800 40,059,120 89,041,680
Alternatively, the cost of goods sold will be lump into one amount (refer to schedule below), and the inventory ending balance will be the amount presented in the trial balance the way it was presented under the current/closing rate method
Accounts Sales Cost of goods sold Depreciation expense Other expenses Income tax expense Retained earnings, 1/1 Dividends declared, 9/1 Cash………………………. Accounts receivable (net) Inventory (FIFO), 1/1 (assumed) Land………………………… Buildings (net) Equipment (net) Accounts payable………… Short-term notes payable Bonds payable…………… Common stock, P10 par… Paid-in capital in excess of par Sub-totals Remeasurement loss - debit Totals
Adjusted Trial Balance ($) Debit Credit 2,220,000 120,000 786,000 98,400 360,000 1,116,000 729,600 996,000 600,000 780,000 516,000
_________ 8,322,000 _________ 8,322,000
3,624,000
576,000
768,000 762,000 1,080,000 1,152,000 __360,000 8,322,000 _________ 8,322,000
(A) (A) (A) (A) (H) (C) (C) (H) (C) (C) (C) (C) (C) (C) (H) (H)
Exchange Rate 40.20 Schedule 40.00 40.20 40.20 (1) 40.10 40.25 40.25 40.00 40.00 40.00 40.00 40.25 40.25 40.25 40.00 40.00
Schedule Translation of Cost of Goods Sold
Accounts Beginning inventory (assumed)…………. Purchases (assumed)…………….. Total…………………….. Less: Ending inventory……………. Cost of goods sold……………
($) 760,000 1,920,000 2,680,000 830,000 1,850,000
(H) (A) (A)
Adjusted Trial Balance (Pesos) Debit Credit 89,041,680 4,800,000 31,597,200 3,955,680 14,436,000 44,919,000 29,366,400 40,059,120 24,000,000 31,200,000 20,640,000
___________ 334,015,080 ____242,220 278,547,750
Remeasurement Exchange Rate 40.00 40.20 40.22
145,684,800
23,040,000
30,912,000 30,670,500 43,470,000 46,080,000 14,400,000 334,257,300 ___________ 278,547,750
Pesos 36,480,000 96,620,800 129,100,800 _40,059,120 89,041,680
Correction: …Exchange rate for 1 dollar instead of 1 peso; 20x9 should be 20w9 Problem II Translation Into the Presentation Currency or Translation From Functional Translation Into Currency to the Presentation the Functional Currency or Currency or Current Rate Method Temporal Method or Translation** or Remeasurement Accounts payable P.16 C P.16 C Accounts receivable P.16 C P.16 C Accumulated depreciation P.16 C P.26 H Advertising expense P.19 A P.19 A Amortization expense P.19 A P.25 H Buildings P.16 C P.26 H Cash P.16 C P.16 C
Common stock Depreciation expense Dividends paid (10/1) Notes payable Patents (net) Salary expense Sales
P.28 H P.19 A P.20 H P.16 C P.16 C P.19 A P.19 A
P.28 H P.26 H P.20 H P.16 C P.25 H P.19 A P.19 A
* C = current rate, H = historical rate, A = average rate ** Revenue and expense accounts were translated using average rate, since the historical rate is not practicable to determine. Problem III Accounts Receivable Prepaid Assets Accounts Payable Common Stock Land Goodwill Sales Revenue Depreciation Expense Problem IV a. Prepaid Insurance b. Land c. Common Stock d. Bonds Payable e. Sales f. Goodwill g. Allowance for Doubtful Accounts h. Deferred Income Taxes Problem V a. Cash b. Accounts Receivable c. Inventory, carried at cost d. Equipment e. Accumulated Depreciation f. Bonds Payable g. Common Stock h. Sales Problem VI
Net sales
Remeasurement / Temporal Method Current Historical Current Historical Historical Historical Weighted Average Historical
Current Method Current Current Current Historical Current Current Weighted Average Weighted Average
Current Current Historical Current Weighted Average Current Current Current Current Current Historical Historical Historical Current Historical Weighted Average
Rock Corporation For the Year Ended December 31, 20x7 Income Statement
FC FC 2,000,000
Rate .37
Dollars P740,000
Costs and expenses Net income
800,000 FC 1,200,000
Statement of Retained Earnings Retained earnings, beginning of year Net income Subtotal Dividends (declared on March 31) Retained earnings, end of year
FC 6,500,000 1,200,000 FC 7,700,000 1,000,000 FC 6,700,000
Balance Sheet Assets: Current assets Plant assets (net) (purchased January 1, 20x4) Total assets Liabilities and Stockholders' Equity: Current liabilities Long-term debt Common stock (issued January 1, 20x4) Paid-in capital in excess of par Retained earnings Cumulative translation adjustments Total liabilities and stockholders' equity
FC
.37 .37
.40
296,000 P444,000 P1,300,000 444,000 P1,744,000 _ 400,000 P1,344,000
3,000,000
.50
P 1,500,000
55,000,000 FC 58,000,000
.50
27,500,000 P29,000,000
FC
.50 .50 .25 .25
P 2,000,000 12,500,000 1,250,000 4,325,000 P 1,344,000 7,581,000 P29,000,000
4,000,000 25,000,000 5,000,000 17,300,000 6,700,000 _____________ FC 58,000,000
Problem VII - Abercrombie 20x4 net loss (100,000 FCs) x P.215 20x5 net income (200,000 FCs) x P.24 20x6 dividend (50,000 FCs) x P.245 20x6 net income 75,000 FCs x P.25 Translated balance on December 31, 20x6 Problem VIII – Philippine-owned Foreign Subsidiary Beginning-of-year net assets x change in exchange rate during the year: 210,000 x (P1.15 P1.10) Net income for 20X1 x (current rate average rate): 50,000 x (P1.15 P1.125) Increase in net assets from stock issue x (current rate - historical rate): 30,000 x (P1.15 P1.12) Decrease in assets from dividends (current rate dividend date rate): (10,000) x (P1.15 P1.13)
P (21,500) 48,000 (12,250) 18,750 P 33,000
P10,500 1,250 900 (200) P12,450
Problem IX Functional Currency Is the Currency of a Hyperinflationary Economy
Cash (M) . . . . . . . . . . . . . . . . . . . . . . Inventory (N) . . . . . . . . . . . . . . . . . . . Property, plant and equipment (N) Total . . . . . . . . . . . . . . . . . . . . . . . . . .
FC 420,000 3,240,000 1,080,000 4,740,000
Current liabilities (M) . . . . . . . . . . . . Non-current liabilities (M) . . . . . . . . Common stock (issued 20x0) (N) . . Retained earnings . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . .
840,000 600,000 480,000 2,820,000 4,740,000
Price Index * 300/270 300/150
Restated (in FC) 420,000 3,600,000 2,160,000 6,180,000
* * 300/100
840,000 600,000 1,440,000 3,300,000 6,180,000
(C) (C) (C)
Exchange Rate 1.75 1.75 1.75
Translated (in Pesos) 735,000 6,300,000 3,780,000 10,815,000
(C) (C) (C) (C)
1.75 1.75 1.75 (B/A)
1,470,000 1,050,000 2,520,000 5,775,000 10,815,000
M – monetary; N – non-monetary C – current rate B/A – balancing amount *monetary – no restatement
Multiple Choice Problems 1. a The peso is the functional currency, so a remeasurement (or temporal method) is appropriate. Cash and accounts receivable are monetary assets remeasured at current exchange rate of P47,500 and P95,000, respectively. Inventory is a nonmonetary asset (carried at market value) are remeasured at the current exchange rate of P76,000. Land and equipment, both nonmonetary assets (carried at cost) are remeasured at the historical exchange rate of P54,000 and P135,000, respectively. 2. b
3. a
4. c
5. d
Because the functional currency is the local currency, a translation (or current rate method) is required. All assets accounts are translated at current rates. The foreign currency is the US dollars, so a translation (or current rate method) is appropriate. All assets are translated at the current exchange rate of P1,270,000. The peso is the functional currency, so a remeasurement (or temporal method) is appropriate. Accounts receivable is a monetary asset remeasured at current exchange rate of P175,000. Inventories (carried at cost) is remeasured at the historical exchange rate of P450,000. Prepaid insurance and land, both nonmonetary assets (carried at cost) are remeasured at the historical exchange rate of P45,000 and P100,000, respectively. The foreign currency is the LCU, so a translation (or current rate method) is appropriate. All assets are translated at the current exchange rate of P215,000. The peso is the functional currency, so a remeasurement (or temporal method) is appropriate. All accounts receivable are monetary assets remeasured at current exchange rate of P150,000 (P100,000 + P50,000). Prepaid insurance and patents, both
nonmonetary assets (carried at cost) are remeasured at the historical exchange rate of P30,000 and P45,000, respectively. 6. a
LCU – it is assumed that historical rate is not practicable (despite the presence of it), then PAS 21 requires the use of average rate [(2,600,000 - 0)/10 years x 1.8LCU per peso = P144,444] Peso - expense related to nonmonetary asset such as depreciation should be remeasured using the historical exchange rate (exchange rate when the equipment was acquired), i.e., : 20x2: (1,700,000 LCU – 0)/10 years = 170,000 LCU /1.5 LCU per peso..P113,333 20x3: (900,000 LCU – 0)/10 years = 90,000 LCU /1.6 LCU per peso…… 56,250 Total……………………………………………………………………………….P169,583
7. a
LCU – the current rate method is used since the term “translated” was used, a translation (or current rate method) is required. Inventory account is translated at current rate (25,000 LCU / 2 LCU per peso = P12,500) Peso – the peso is the functional currency, so a remeasurement (or temporal method) is appropriate. Inventory is a nonmonetary asset (carried at cost) is remeasured at the historical exchange rate of 2.2 LCU per peso (25,000 LCU / 2.2 LCU per peso = P11,364)
8. b
The foreign currency is the functional currency, so a translation (or current rate method) is appropriate. All assets (including inventory) are translated at the current exchange rate [100,000 x P.17].
9. c
There is no indication that the historical rate is not practicable or any indication that revenue and expenses account were incurred evenly throughout the year and at same time the historical rate is given, therefore, cost of goods sold is translated at exchange rate in effect at the date of accounting recognition, which is the date goods were sold [100,000 x P.18].
the the the the
10. d The foreign currency is the functional currency, so a translation (or current rate method) is appropriate. All assets are translated at the current exchange rate of P.19. 11. c
12. a
The peso is the functional currency, so a remeasurement (or temporal method) is appropriate. Inventory is a nonmonetary asset (carried at cost) is remeasured at the historical exchange rate of P.16. Marketable equity securities is a nonmonetary asset (carried at market value) are remeasured at the current exchange rate of P.19. LCU is Functional Currency P120,000 = 2/15/x4 Peso value (110,000) = 12/31/x3 Peso value P 10,000 = Foreign currency transaction gain
Peso is Functional Currency P10,000 = Foreign currency transaction gain 30,000 = Remeasurement gain P40,000 = Foreign exchange Gain
Note: The term “restating” used by foreign subsidiary is an indication that the temporal or remeasurement method is used. 13. a
LCU is Functional Currency P15,000 = Preadjusted foreign exchange loss 6,000 = Foreign currency transaction loss ($100,000 - $106,000) P21,000 = Foreign exchange loss
Peso is Functional Currency P15,000 = Preadjusted foreign exchange loss 6,000 = Foreign currency transaction loss 20,000 = Remeasurement gain P41,000 = Net foreign exchange loss
Note: The term “restatement” used by foreign subsidiary is an indication that the temporal or remeasurement method is used. 14. b Consideration transferred Less: Book and fair values of sub's net assets 680,000 FC x P.21 x .90 = Positive excess: Goodwill (partial)
P160,000 128,520 P 31,480
Based on the choices given, the question is leaning on the partial goodwill approach. Since, there is no choice available for full-goodwill approach. 15. c Goodwill Impairment
Pesos P10,500 1,100 (FC 5,000 x P.22)
FC (P10,500 / P.21) 5,000 (FC 50,000 / 10)
FC 50,000
16. a - Impairment loss = P10,500 / 10 = P1,050 17. a - The foreign currency is the functional currency, so a translation (or current rate method) is appropriate. All assets (including inventory) are translated at the current exchange rate [48,000 FC x P1.53 = P73,440]. 18. a - The peso is the functional currency, so a remeasurement (or temporal method) is appropriate. Inventory is a nonmonetary asset (carried at cost) is remeasured at the historical exchange rate, but since the historical exchange rate cannot be specifically identified and purchases happens evenly throughout the period, therefore 20x4 historical (average – which is unusual for a remeasurement method but allowed on exceptional cases such as No. 33) rate of P1.45 is used. Thus: Cost: 50,000 FC x P1.45 per FC (lower)………………………………………P 72,500 Market: 48,000 FC x P.153 per FC…………………………………………….P 73,440 Under the temporal method, since the valuation of inventory is at historical exchange rate which leads to valuation at cost (average in this case), so the LCM rule is applied, in contrast to the current rate method (in No. 32), wherein the valuation of inventory is outright current exchange rate.
19. a - the current rate method is used since the term “translate” was used, a translation (or current rate method) is required. Dividend declared and paid is translated at historical exchange rate at the date of declaration. i.e. 121 FC to P1. 20. a – [1,500,000 baht / .630 baht, the average rate (historical rate is not practicable because the data of sales per transaction were not given) = P2,380,952] 21. b – (280,000 / .620 baht, the current rate = P451,613) 22. c Net Assets (SHE), beginning…………… Add: Net Income: (30,000 – 20,000)…. Net Assets (SHE), ending……………….. Net Assets (SHE), ending……………….. Translation adjustment (positive – credit) – gain………………
Foreign Currencies 20,000 10,000
Exchange Rate .15 (HR) .19 (HR)
30,000
.21 (CR)
Pesos 3,000 1,900 4,900 6,300 1,400
SHE – stockholders’ equity. HR (historical rate) was used for Net Income (Sales and Costs of Sales since the details of transaction were given.) CR (current rate) was used for Net Assets (Assets and Liabilities account) to determine the ending balance, so that the translation gain should be properly determined. 23. a Beginning net monetary assets, 1/1…………… Increases in net monetary assets: Sale of inventory .................................... Decreases in net monetary assets: Purchase of equipment........................ Purchase of inventory ........................... Transfer to parent................................... Ending net monetary assets, 12/31 .................. Ending net monetary assets at the current exchange rate .................. Remeasurement gain .........................................
FC 100,000
Exchange Rate x P.16 =
Pesos P16,000
50,000
x P.20 =
10,000
(60,000) (30,000) (10,000) 50,000
x P.16 = x P.18 = x P.21 =
(9,600) (5,400) (2,100) P 8,900
50,000
x P.22 =
(11,000) P(2,100)
24. b – the term “translation adjustments” was used indicating that the current rate method is in effect (in contrast to the term “remeasurement adjustments” used by the temporal method), therefore any translation debit (which is a loss) will be classified as other comprehensive income. 25. a - the foreign currency is the functional currency, so a translation (or current rate method) is appropriate. All assets (including inventory) are translated at the current exchange rate [120,000 FC x P.20 = P24,000].
26. e – Current Rate Method. The same situation with No. 9 except that the that the historical rate is not practicable since the rate on January 17, 20x5 (date of sale) were not given, therefore, cost of goods sold is translated at the average exchange rate for 20x5 which is P.24 (120,000 FC x P.24 = P28,800). 27. d Accounts Beginning inventory Purchases Total Less: Ending inventory Cost of goods sold
(FC) 500,000 1,000,000 1,500,000 400,000 1,100,000
(H)* (A)
Remeasurement Exchange Rate P.00148 .00160
(A)
.00162
*not specifically identified unlike No. 46, may also be termed as average (historical) rate
28.
b – If the functional currency is the currency of a third country, remeasure (temporal method) from LCU into the functional currency; then translate ( c u r r e n t r a t e m e t h o d ) into peso by using the average exchange rate since historical rate is not practicable (no data available on the specific date the items that were purchased) , i.e., 1,100,000 FC x P0.00160 = P1,760. It should be noted that the requirement is “translation” of cost of goods sold which means that the value of cost of goods sold should be under the current rate method.
29. c Accounts Beginning inventory Purchases Total Less: Ending inventory Cost of goods sold 30.
Pesos P 740 1,600 P2,340 __648 P1,692
(FC) 10,000 80,000 90,000 15,000 75,000
(H) (A)
Remeasurement Exchange Rate P1.60 1.50
(A)
1.45
Pesos P 16,000 120,000 P136,000 __21,750 P114,250
b – If the functional currency is the foreign currency, then cost of goods sold will be translated using the average exchange rate since historical rate is not practicable (no data available on the specific date the items that were purchased) , i.e., 75,000 FC x P1.50 = P112.500.
31. b Accounts Beginning inventory Purchases Total Less: Ending inventory Cost of goods sold
(FC) 20,000 400,000 420,000 _15,000 405,000
(H) (A)
Remeasurement Exchange Rate P.93 .96
(A)
.99
*not specifically identified unlike No. 46, may also be termed as average (historical) rate
Pesos P 18,600 384,000 P402,6 00 __14,850 P 387,750
32. c - historical rate is not practicable since the rate on date of acquisition is not given unlike No. 9, therefore, cost of goods sold is translated at the average exchange rate for 20x5 which is P.96 [405,000 FC (refer to No. 48) x P.96 = P388,800). 33. d – refer to No. 31 34. e – under the current rate method, all assets are translated at the current exchange rate, therefore the inventory should be translated at P1.01 (FC 15,000 x P1.01 = P15,150). 35. a – under the temporal method, inventory being a nonmonetary asset (carried at cost) is remeasured at the historical exchange rate, but since the historical exchange rate cannot be specifically identified and purchases happens evenly throughout the period, therefore 20x4 historical (average – which is unusual for a remeasurement method but allowed on exceptional cases such as No. 33) rate of P1.43 is used. Thus: Cost: 300,000 LCU x P1.43 per LCU (lower)………………………………………P 429,000 Market (NRV at replacement cost) : 320,000 LCU x P.142 per LCU…………P 454,400 Under the temporal method, since the valuation of inventory is at historical exchange rate which leads to valuation at cost (average in this case), so the LCM rule is applied, in contrast to the current rate method (in No. 53), wherein the valuation of inventory is outright current exchange rate. 36. a - under the current rate method, all assets are translated at the current exchange rate, therefore the inventory should be translated at P1.42 (FC 320,000 x P1.42 = P454,400). 37. a CNI, P3,100,000 and Cons. CI, P3,220,000
Consolidated Net Income for 20x4 Net income from own/separate operations: P Company S Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess Goodwill impairment Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4 Add: Comprehensive Income Consolidated Comprehensive Income *Non-controlling Interest in Net Income (NCINI) for 20x4 Net income of S Company Less: Amortization of allocated excess (refer to amortization table above) Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) Add: NCI on Comprehensive Income (translation gain) (P120,000 x 20%) Non-controlling Interest in Comprehensive Income
P220,000 0 _____ 0
P2,000,000 1,100,000 P3,100,000 220,000 P2,880,000 220,000 P3,100,000 120,000 P3,220,000 P 1,100,000 0 P 1,100,000 20% P 220,000 24,000 P 244,000
38. a – regardless of the method used (whether current rate or temporal method, the rate to be used should be the historical rate on the date of declaration, i.e. P.23 (20,000 LCU x P.23 x 75% = P3,450).
39. c - Translation adjustment loss (debit): P8,000 x 75% = P6,000 40. c - under the current/closing rate method (the functional currency of Transport Corporation is the LCU), the translation adjustments on the goodwill, if any and the fair value differential relating to the patent as they are considered net assets of Transport and are translated at the current or closing rate. The translation adjustments are as follows:
On the fair value differential: Undervalued patent on 1/1/20x4: P25,000 / P.20 = FC 125,000……. Less: Amortization expense [125,000/ 5 years = FC 25,000 x P.22]…. Undervalued patent, net on 12/31/20x4……………………................ Undervalued building, net on 12/31/20x4 [(125,000 FC – 25,000 FC = 100,000 FC x P.24………………………………………………………. Translation adjustment gain on undervalued patent (OCI)……..
P 25,000 ( 5,500) P 19,500 P
24,000 4,500
41. b - Amortization expense [125,000/ 5 years = FC 25,000 x P.22] = P5,500. Under the current rate method, the historical rate is not given therefore, historical rate is not practicable to be use, and then PAS 21 requires the use of average rate. 42. a – Current rate method, (50,000 FC x P.90, current = P45,000) Number of Foreign Currencies (FCs) Sales: P40,000 / P.80 = 50,000 FC Cost: P30,000 / P.80 = 37,500 FC 43. c – Current rate method: Unrealized intercompany profit: (50,000 FC – 37,500 FC) x P.80, historical rate = P10,000. 44. d – (P45,000 – P10,000, unrealized profit = P35,000) 45. No answer available – P250,000
Common stock Purchases Sales Cash* Equipment Translation loss
FC
Debit 8,000,000 8,000,000 1,000,000 17,000,000
Credit 5,000,000 12,000,000 _________ 17,000,000
Exchange rate .20 .18 .18 .16 .16
*5,000,000 – 8,000,000 + 12,000,000 – 1,000,000 Apply to rules under the current method.
Pesos Debit 1,440,000 1,280,000 _160,000 2,880,000 _250,000 3,160,000
Credit 1,000,000 2,160,000 _________ 3,160,000 ________ 3,160,000
48. b – under the current rate method, revenues and expenses will be translated using the average rate since historical rates are not practicable (with revenues and expenses are not identified as to the date of acquisition) 49. b –
FC
Exchange rate
Pesos
Net assets, 1/1/20x4 Changes in net assets, 20x4 Issued common stock Net income Dividends paid Net assets, 12/31/20x4 Net assets, 12/31/20x4 at current rate Translation adjustment – increase (gain) Apply to rules under the current method.
0 1,000,000 80,000 ( 20,000) 1,060,000 1,060,000
P 1 FC / P.48 1 FC / P.44 1 FC / P.46 1 FC / P.42
0
2,083,333 181,818 ( 43,478) P2,221,673 _2,523,810 P 302,137
50. a 51. b 52. b On November 29, 20x4, the following amounts should be recorded by Manilow, ignoring interest payable on the loan. The cash advance from the bank is translated at the rate on the date that it was received (1,520,000 yen x P1 / 1.52 yen = P1,000,000) and a liability recorded for the same amount. 53. b
As the loan was still outstanding at the end of the period and it is a monetary item, it should be retranslated at the exchange rate at the end of the reporting period (1,520,000 yens x P1 / 1.66 yens = P915,663 ). The exchange difference should be recognized as a gain in profit or loss for the period. (P1,000,000 less P915,663 = P84,337). PAS 21 par. 28 states that “Exchange differences arising on the settlement of monetary items (i.e. bank loan payable in this case) or on translating monetary items at rates different from those at which they were translated on initial recognition during the period or in previous financial statements shall be recognized in profit or loss in the period in which they arise.
54.
b The goodwill at the date of acquisition is P100,000 (400,000 baht x P1 / 4 baht). At the yearend it is retranslated to P80,000 (400,000 baht x P1/5 baht). The difference of P20,000 is recorded as an exchange loss and reported in other comprehensive income.
55.
c – Nt Dollar 175,000 / Nt Dollar 1.298 = P134,823 Goodwill arising from acquisition…………………………………………… Nt Dollar 175,000 Divided by: Closing/Current rate (Nt dollar : peso)………………………Nt Dollar 1.298 Goodwill in the consolidated balance sheet……………………………. P134,823 In the consolidated financial statements, any goodwill arising on the acquisition of a foreign operation should be treated as an asset of the foreign operation. The goodwill should therefore be expressed in the functional currency of the foreign operation and translated at the closing rate at the date of each statement of financial position. The same treatment is required of any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of a foreign operation. In both cases exchange differences are recognized in other comprehensive income, rather than as part of the profit or loss for the period.
56.
b
Fair value adjustments (undervaluation of land)……………… …………….Nt 50,000 Divided by: CLOSING / CURRENT RATE on the balance sheet (Nt dollar per peso)………………………………………………… 1.56 Fair value adjustments…………………………………………………………... P 32,051 PAS21 par. 47 requires fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of a foreign operation to be treated as assets and liabilities of the foreign operation. Therefore they are translated at the closing rate of exchange. 57.
c – 160,000 yens x P1 / 2.40 yens = P66,667 PAS 21 par. 23 (a) requires the foreign currency monetary items, such as trade payables, of an entity to be retranslated at the closing rate at the end of a reporting period.
58. c Consideration Transferred…………………………………………………………. 9.0 million Less: Fair value of net assets acquired………………………………………….. 6.0 million Goodwill………………………………………………………………………………. 3.0 million Divided by: Current/Closing rate on the balance sheet……………………. 2.0 baht per peso Goodwill in the Consolidated Balance Sheet………………………………….P1.5 million Examinees or students may be misled that since the functional currency is peso, the temporal method (applied only in case of subsequent to date of acquisition) should then be applied wherein goodwill or any fair value adjustments is considered as a non-monetary asset carried at historical cost be remeasured (or translated) using historical rate (which in this problem is 1.5 baht = P1). But the problem do not fall under this category – the temporal method, instead it is an example of a goodwill and fair value adjustments arising from acquisition of subsidiaries. Goodwill arising from the Acquisition of Subsidiaries (Date of Acquisition) When a company acquires a controlling interest in another company, the excess of the purchase price over the acquirer’s interest in the fair value of the identifiable net assets of the acquired company is recognized as goodwill on consolidation. In the context of a foreign company, the issue arises as to whether goodwill is an asset of the acquired company or an asset in the acquirer’s books. If it is an asset of the acquired subsidiary, the goodwill is a foreign asset which should be translated in the same manner as any other asset of the acquired subsidiary, which may give rise to a translation difference. However, if it is treated as an asset in the acquirer’s books, there is no need for translation. Pas 21 par. 47 states that: “Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amount of assets and liabilities arising on the acquisition of that foreign operation shall be treated as assets and liabilities of the foreign operations. Thus they shall be expressed in the functional currency of the foreign operation and shall be translated at the closing rate…” Subsequent to date of acquisition, accordingly goodwill has to be measured in the functional currency of the foreign operation. If the functional currency of the foreign operation is the local currency, the goodwill on acquisition is to be translated at the closing rate. On the other hand, if the functional currency of the foreign operation is the parent’s
currency (or the presentation currency), goodwill on acquisition is treated as a nonmonetary asset and remeasured at the exchange rate of the acquisition of the foreign operation, 59.
b - refer to No. 58 for further discussion. The goodwill at the date of acquisition is P100,000 (400,000 baht x P1 / 4 baht). At the year-end it is retranslated to P80,000 (400,000 baht x P1/5 baht). The difference of P20,000 is recorded as an exchange loss and reported in other comprehensive income. In the consolidated financial statements, any goodwill arising on the acquisition of a foreign operation should be treated as an asset of the foreign operation. The goodwill should therefore be expressed in the functional currency of the foreign operation and translated at the closing rate at the date of each statement of financial position. The same treatment is required of any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of a foreign operation. In both cases exchange differences are recognized in other comprehensive income, rather than as part of the profit or loss for the period.
60. a Allocated Excess arising from consolidation………………………………………P1,200,000 baht Divided by: CLOSING / CURRENT RATE on the balance sheet (baht per peso) _ 2.0 Allocated Excess (over/under valuation)………………………………………... P 600,000 Refer to Nos. 55 and 58 for further discussion of using closing/current rate. Again, the same with No. 58, the functional currency of peso is somewhat misleading; it does not refer to the use of temporal method on the date of acquisition. 61. b = 60,000 LCUs x (P100,000 – P50,000)/P100,000 = 30,000 LCUs x P1/4 LCUs = P7,500
Note: The deferred profit included in the inventory should be translated based on the historical rate (average rate if historical rate is not practicable) since it will eventually be treated as a revenue.
62. b – the P8,000 downward adjustment in liability indicates a gain on transaction presented in statement of comprehensive income (income statement). The 60,000 occurred in translation since the functional currency is the foreign currency, then current rate method is used and any cumulative translation gain or loss (AOCI) will be in the stockholders’ equity. 63. c Net income: 100,000 LCUs x P.70 (average rate since evenly)………………P 70,000 Less: Dividend paid: 20,000 LCUs x P.75 (historical rate)…………………….... 15,000 Effect on retained earnings – increase…………………………………………...P 55,000 64. d Correction: LCU should be Pesos Total assets Total Liabilities and SHE Liabilities SHE Common stock Retained earnings,1/1/x6 Add: Net income (P200,000- P150,000) Less: Dividends AOCI (loss) Effect on the 20x6 exchange rate
P500,000 P 300,000 P 80,000 50,000 _____-0-
40,000 130,000 ( 20,000)
__450,000 P 50,000
65. c Correction: LCU should be Pesos Retained earnings,1/1/x6 Add: Net income (P200,000- P150,000) Less: Dividends Retained earnings,1/1/x6 66. c
Hedging Instrument: 12 month -Forward rate date of hedging, 1/1/x6 Spot rate, date of expiration, 12/31/20x6 x: No. of foreign currencies: LCUs Forward Contract gain – Cash flow hedge (AOCI) Translation Loss (AOCI) Net Assets (Assets – Liabilities): (700,000 – 600,000) x P.56, current rate Stockholders’ equity: 100,000 LCU x P.60, historical rate Net AOCI
67. b
P 80,000 50,000 _____-0P130,000
Selling price of subsidiary Less: Carrying/book value of subsidiary Gain on sale of subsidiary AOCI – translation adjustment loss Net gain on sale of subsidiary
P .60 ____.56 P .04 100,000 P 4,000 P 56,000 __60,000
_4,000 P -0P 5,000,000 __4,000,000 P 1,000,000 ___300,000 P 700,000
68. d PAS No. 29 does not establish an absolute rate at which hyperinflation is deemed to arise but allows judgment as to when restatement of financial statements becomes necessary. One of the characteristics of the economic environment of a country which indicate the existence of hyperinflation includes: “the cumulative inflation rate over three years approaches, or exceeds, 100%” The computation of cumulative inflation rate over three years is as follows: (210 – 90)/90 = 133.33%. 69. 70. 71. 72. 73. 74. 75.
b - 64,000,000 x P.0085 = P544,000 a - 875,000 x P1.62 = P1,417,500 d - 4,300,000 x P.57 = P2,451,000 b – (930,000 - 600,000) P1.03 = P339,900 debit c - 675,000,000 x P.0086 + 60,000,000 x P.0088 = P6,333,000 a - [(675,000,000 - 135,000,000)/8] P.0086 + (60,000,000/10) (8/12) P.0088 = P615,700 bBeginning balance 135,000,000 x P.0086 P1,161,000 Current period depreciation expense 615,700 [(675,000,000 - 135,000,000)/8] P.0086 + (60,000,000/10) (8/12) P.0088 Ending balance P1,776,700
76. 77. 78. 79. 80. 81. 81. 82. 83.
d - P1,529,000 + P52,000 - P490,000 - P253,000 - P352,000 = P486,000 b - (P692,000 + P18,000 - P185,000 - P72,000 - P126,000) .6 = P196,200 a - {[(198,000 - 138,000) + (720,000 - (650,000 - 230,000))/10] P.095} .9 = P7,695 c - (P690,000 - P351,000 - P103,000 - P125,000 - P12,000) .2 = P19,800 a - [P458,000 - P175,000 - P52,000 + P15,000 - (140,000 + 450,000/10) P.68] .2 = P24,040 d - [P760,000 - P260,000 - P80,000 - P20,000 - (100,000 + 260,000/10) P1.06] .4 = P114,576 a - (800,000,000 + 75,000,000) P.0084 = P7,350,000 b - [(800,000,000 - 300,000,000)/5] P.0088 + [(75,000,000/10) (3/12)] P.0086 = P896,125 c Beginning balance 300,000,000 Current period depreciation expense [(800,000,000 101,875,000 300,000,000)/5] + [(75,000,000/10) (3/12)] Ending balance (LCU) 401,875,000 Ending balance (pesos) 401,875,000 x P.0084 = P 3,375,750 84. b - P600,000 - P327,000 - P57,000 = P216,000 85. b - P370,000 + P760,000 + P374,000 + P36,000 + P30,000 - P572,000 - P472,000 - P550,000 = P24,000 debit 86. a - P1,478,000 - P530,000 - P268,000 - P247,000 = P433,000 87. b - (P1,783,000 - P741,000 - P358,000 - P416,000) .7 = P187,600 88. b - {[(180,000 - 137,000) + (830,000 - 650,000)/10] P1.53} .8 = P74,664 89. b - (47,000 x P1.18 + 78,000 x P1.16) .8 = P116,752 90. a - (52,000 x P.66 + 76,000 x P.69) .9 = P47,196 91. c Correction: 200x – should 20x5 (P120,000 - P86,000) .8 = P27,200 credit 92. b - (P1,623,000 - P847,000 - P179,000 - P252,000) .1 = P34,500 93. d - [P735,000 - P322,000 - P258,000 - (160,000 + 360,000/10) P.66] .3 = P7,692 94. c - [P1,200,000 - P420,000 - P190,000 - (110,000 + 180,000/10) P1.20] .2 = P87,280 95. a – the foreign currency is the functional currency, since historical rate (rate on date of transaction) is not practicable to determine , then PAS 21 requires the use of average rate : Share in net income: FC 25,000 x 100% x P.124……………….. P31,000 Less: Amortization of allocated excess………………………… 0 Income from subsidiary…………………………………………….P 31,000 96. d – regardless of what method used to translate the F/S of a foreign entity (subsidiary), the rate use to translate dividends declared or paid would always be the historical rate on the date of declaration, i.e., P1.30 x FC 5,000 = P6,500. 97. c Consideration transferred Less: Book and fair values of sub's net assets 300,000 FC x P1.20x 100% = Positive excess: Goodwill (partial) Goodwill Impairment Balance
Dollars P42,000 4,340 (FC3,500 x P1.24) P37,660
Translated balance
P41,580 (FC 31,500 x P1.32)
P402,000 360,000 P 42,000 Euros (P 42,000 / P1.20) 3,500 (FC 35,000 / 10) FC 31,500 FC 35,000
Translation adjustment: P41,580 minus P37,660 = P3,920 – use for No. 28. 98. b Translation adjustment from translating the trial balance P 12,000 cr Translation adjustments from translating goodwill 3,920 cr Total translation adjustment P15,920cr
Quiz - XXI
1. P430,000 - Because the foreign currency is the functional currency, a translation (or current rate method) is required. All assets accounts are translated at current rates. 2.
P440,000, because the peso is the functional currency, a remeasurement is required. All receivables which are monetary assets are remeasured at current rates. Assets carried at historical cost, such as prepaid insurance and goodwill which are nonmonetary assets, are remeasured at historical rates.
3. P755,000 - The current rate method is used since the term “translated” was used, a translation (or current rate method) is required. All assets accounts are translated at current rates. 4. P1,270,000 - The current rate method is used since the term “translated” was used, a translation (or current rate method) is required. All assets accounts are translated at current rates. 5. a The current rate method is used since the term “translated” was used, a translation (or current rate method) is required. All assets accounts are translated at current rates. 6. P687,500 LCU – since the problem indicates that expense accounts occurred approximately evenly during the year is an indication that historical rate is not practicable, then PAS 21 requires the use of average rate [(375,000 + 250,000 + 625,000) x P.55 = P687,500]. 7. The temporal method is used since the term “remeasure” was used. Patent is a nonmonetary asset carried at cost is remeasured at the historical exchange rate of P1.50 8. P52,000 = 100,000 LCUs x P.52, current rate (or balance sheet rate, since it is a current rate method. The inflation rate of 20% is not a basis to conclude that the country where the subsidiary is located is experiencing a hyperinflationary economy because the requirement should be a cumulative inflation of 100% or more over a three year period). 9.
Assume the use of current rate method - P113,000 increase – assume revenue and expense were incurred evenly during the year. Net income: 300,000 LCUs x P.55…………………………………………………..P 165,000 Less: Dividend paid: 100,000 LCUs x P.52 (historical rate)…………………….. 52,000 Effect on retained earnings – increase………………………………………….P 113,000
10. Answers: P15,000 decrease or loss from the translation process; P21,000 loss from hedging instrument; P36,000 AOCI balance - loss Hedging Instrument: 12 month -Forward rate date of hedging, 1/1/x6 Spot rate, date of expiration, 12/31/20x6 x: No. of foreign currencies: LCUs
P .82 ____.75 P .07 300,000
Forward Contract loss – Cash flow hedge (AOCI) Translation Loss (AOCI) Net Assets (Assets – Liabilities): (800,000 – 500,000) x P.75, current rate Stockholders’ equity: 300,000 LCU x P.80, historical rate AOCI balance - loss
P 21,000 P 225,000 _240,000
_15,000 P36,000
11. P4,307,000 = 7,300,000 LCUs x P.59 12. P736,000 = 800,000 LCUs x P.92 13. P972,000 = 900,000 LCUs x P1.08 14. P164,900 debit = (400,000 - 230,000) P.97 15. P112,000 debit = (900,000 - 700,000) P.56 16. P21,000 credit = P440,000 + P670,000 + P329,000 + P27,000 + P20,000 - P327,000 - P728,000 P410,000 = P21,000 credit 17. a LCU – since historical rate (rate on date of transaction) were not given for provision of doubtful accounts and rent expense, therefore, historical rate is not practicable, then PAS 21 requires the use of average rate [(120,000 + 80,000 + 200,000) x P.44 = P176,000]. Peso – Expense related to nonmonetary asset such as depreciation should be remeasured using the historical exchange rate (exchange rate when the equipment was acquired), i.e., 120,000 x P.50 = P60,000 Expenses related to monetary asset such as uncollectible accounts and rent expense should be remeasured using average exchange rate [(80,000 + 200,000) x P.44 = P123,200] 18. a
LCU is Functional Currency P13,000 = Preadjusted foreign exchange loss 4,000 = Foreign currency transaction loss (P60,000 - P64,000) P17,000 = Foreign exchange loss
Peso is Functional Currency P13,000 = Preadjusted foreign exchange loss 4,000 = Foreign currency transaction loss (7,000) = Remeasurement gain P10,000 = Net foreign exchange loss
Note: The term “restatement” used by foreign subsidiary is an indication that the temporal or remeasurement method is used. 19.
LCU (No. 39) is Functional Currency P10,000 = Preadjusted foreign exchange loss 3,000 = Foreign currency transaction loss (P50,000 – P53,000) P13,000 = Foreign exchange loss
Peso (No. 40) is Functional Currency P10,000 = Preadjusted foreign exchange loss 3,000 = Foreign currency transaction loss 15,000 = Remeasurement loss P10,000 = Net foreign exchange loss
Note: The term “restatement” used by foreign subsidiary is an indication that the temporal or remeasurement method is used. 20. refer to No. 19 21. if analysis is in pesos:
Fair value of Subsidiary (100%) Consideration transferred: Cash Less: Book value of stockholders’ equity of Hastie: (P450,000 FC x P.70, current rate x 100%) Allocated excess (excess of cost over book value)….. Less: Over/under valuation of assets and liabilities: Increase in patent due to undervaluation
or, if analysis is in foreign currency:
Fair value of Subsidiary (100%) Consideration transferred: Cash P350,000 / P.70 Less: Book value of stockholders’ equity of Hastie: (P450,000 FC x 100%) Allocated excess (excess of cost over book value)….. Less: Over/under valuation of assets and liabilities: Increase in patent due to undervaluation
P350,000 315,000 P 35,000 __35,000 P 0
FC 500,000 450,000 50,000 __50,000 0
PAS 21 paragraph 47 states: “Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation shall be treated as assets and liabilities of the foreign operation”. Thus, they shall be expressed in the functional currency of the foreign operation (meaning their functional currency is the LCU), and shall be translated at the current/closing rate.” Thus, since patent is a fair value adjustments it should be translated at the current rate (on the date of acquisition), i. e. P.70 (P.70 x 50,000 FC = P35,000). 22.
23.
The subsequent accounting treatments for goodwill and fair value adjustments together with their impairment and depreciation/amortization depend on the method being used, since the functional currency of Hastie is the FC, then the current rate method is used. Therefore, the average rate of P.68 [P.68 x (50,000 FC / 5 years) = P6,800] is used for depreciation since the historical rate for patent is not practical to be determined. The subsequent accounting treatments for goodwill and fair value adjustments together depend on the method being used, since the functional currency of Hastie is the FC, then the current rate method is used. Therefore, the current rate on balance sheet date of P.65 [P.65 x (50,000 FC – 10,000 FC, depreciation) = P26,000] is used.
24. the foreign currency is the functional currency, since historical rate (rate on date of transaction) is not practicable to determine , then PAS 21 requires the use of average rate :
Share in net income (given)..…………………………………….. P25,000 Less: Amortization of allocated excess (No.55)…..…………… 6,800 Income from subsidiary……………………………………………. P18,200 Note: The equity method of accounting is used, the manner the choices were presented. 25. a – under the current rate method since historical rate (rate on date of transaction) is not practicable to determine , then PAS 21 requires the use of average rates: Investment balance, January 1, 20x4……………………………P1,600,000 Add: Share in net income: 800,000 FC x 70% x P.57…………... 319,200 Less: Amortization of allocated excess ………..…..…………… Dividends; 50,000 FC x 70% x P.59, historical rate on date of declaration…………………………………. 20,650 Translation adjustment loss (debit): P25,000 x 70%........... 17,500 Investment balance, December 31, 20x4………………………P1,881,050 26. d – 30% x P25,000 = P7,500. 27. P451,600 Beginning inventory (230,000 x P.68) Purchases (720,000 x P.71) Ending inventory (300,000 x P.72) Cost of Goods Sold 28. P216,000 Beginning inventory (230,000 x P.68) Purchases (720,000 x P.71) Ending inventory (300,000 x P.72) Cost of Goods Sold 29. P1,975,000 Beginning inventory Purchases Ending inventory Cost of Goods Sold
P156,400 511,200 (216,000) P451,600 P156,400 511,200 (216,000) P451,600 400,000 1,700,000 (520,000) 1,580,000 x P1.25 = P1,975,000
30. P629,200 - Ending inventory (520,000 x P1.21) = P629,200 Multiple Choice Theories 1. D 9. a 17. 2. C 10. c 18. 3. C 11. a 19. 4. D 12. b 20. 5. C 13. b 21. 6. B 14. c 22. 7. A 15. c 23. 8. D 16. a 24. Note for:
c c d b c d c a
25. 26. 27. 28. 29. 30. 31. 32.
d c b a d b b d
33. 34. 35. 36. 37. 38. 39. 40.
a a b c c a a c
41. 42. 43. 44. 45. 46. 47. 48.
d c c a b c d c
49. 50. 51. 52. 53. 54. 55. 56.
c c b a c c b b
57. 58. 59. 60. 61. 62. 63. 64.
c d a a a b a e
65. 66. 67. 68. 69. 70. 71. 72.
b d b e e d d a
73. 74. 75. 76. 77. 78.
a a c a a b
17. Note: Answer – d – under PAS 29 in relation to PAS 21, it requires restatement first before translation and neither of the two methods is use. In fact all assets, liabilities and equity accounts are translated using current rates. In US, the temporal method is used in cases of highly inflationary economy. 39. The unadjusted trial balance is remeasured regardless of the functional currency. For US GAAP, the answer should be letter “D.
51. Because the peso is the functional currency, the financial statements must be translated using the current rate method. Therefore, answers (a) and (d) can be eliminated. Because the subsidiary has a net asset position and the peso has appreciated from P.16 to P.19, a positive translation adjustment will result. 52. All asset accounts are translated at current rates. 56. By translating items carried at historical cost by the historical exchange rate, the temporal method maintains the underlying valuation method used by the foreign subsidiary. 54. Marketable equity securities are carried at market value and therefore translated at the current exchange rate under the temporal method. 55. When the U.S. dollar is the functional currency, SFAS 52 requires remeasurement using the temporal method with remeasurement gains and losses reported in income. 56. Wages payable is translated at the current exchange rate. 57. Gains and losses on hedges of net investments (whether through a forward contract, borrowing, or other technique) are offset against the translation adjustment being hedged. 58. Remeasurement gains are reported in the income statement as a part of income from continuing operations. 64. 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. 62. 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 occurs throughout the year, a weighted average exchange rate can be used for translation. 63. 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.
