(1)
EXCEL
CASE—TRANSLATING FOREIGN CURRENCY FINANCIAL STATEMENTS
Charles
Edward Company established a subsidiary in a foreign country on January 1,
2013, by investing FC 3,200,000 when the exchange rate was $0.50/FC. Charles
Edward negotiated a bank loan of FC 3,000,000 on January 5, 2013, and purchased
plant and equipment in the amount of FC 6,000,000 on January 8, 2013. It
depreciated plant and equipment on a straight-line basis over a 10-year useful
life. It purchased its beginning inventory of FC 1,000,000 on January 10, 2013,
and acquired additional inventory of FC 4,000,000 at three points in time
during the year at an average exchange rate of $0.43/FC. It uses the first-in,
first-out (FIFO) method to determine cost of goods sold. Additional exchange
rates per FC 1 during the year 2013 follow:
January
1–31, 2013. . . . . . . . . . . . . .
$0.50
Average
2013 . . . . . . . . . . . . . . . . . . . 0.45
December
31, 2013. . . . . . . . . . . . . . 0.38
The
foreign subsidiary’s income statement for 2013 and balance sheet at December
31, 2013, follow:
INCOME STATEMENT
For the Year Ended December 31, 2013
FC (in thousands)
Sales
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . FC 5,000
Cost
of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,000
Gross
profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. 2,000
Selling
expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
400
Depreciation
expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600
Income
before tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,000
Income
taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
300
Net
income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . 700
Retained
earnings, 1/1/13 . . . . . . . . . . . . . . . . . . . . . . . . . . . –0–
Retained
earnings, 12/31/13 . . . . . . . . . . . . . . . . . . . . . . . FC 700
BALANCE SHEET
At December 31, 2013
FC (in thousands)
Cash.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.. FC 1,000
Inventory
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,000
Fixed
assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. 6,000
Less:
Accumulated depreciation . . . . . . . . . . . . . . .. . . . . . (600)
Total
assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FC 8,400
Current
liabilities . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . FC
1,500
Long-term
debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Contributed
capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,200
Retained
earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 700
Total
liabilities and stockholders’ equity . . . . . . .. . . . . . FC 8,400
As
the controller for Charles Edward Company, you have evaluated the characteristics
of the foreign subsidiary to determine that the FC is the subsidiary’s
functional currency.
Required
a.
Use
an electronic spreadsheet to translate the foreign subsidiary’s FC financial
statements into U.S. dollars at December 31, 2013, in accordance with U.S.
GAAP. Insert a row in the spreadsheet after retained earnings and before total
liabilities and stockholders’ equity for the cumulative translation adjustment.
Calculate the translation adjustment separately to verify the amount obtained
as a balancing figure in the translation worksheet.
b.
Use
an electronic spreadsheet to re measure the foreign subsidiary’s FC financial
statements in U.S. dollars at December 31, 2013, assuming that the U.S. dollar
is the subsidiary’s functional currency. Insert a row in the spreadsheet after
depreciation expense and before income before taxes for the re measurement gain
(loss).
c.
Prepare
a report for James Edward, CEO of Charles Edward, summarizing the differences
that will be reported in the company’s 2013 consolidated financial statements
because the FC, rather than the U.S. dollar, is the foreign subsidiary’s
functional currency. In your report, discuss the relationship between the
current ratio, the debt-to-equity ratio, and profit margin calculated from the
FC financial statements and from the translated U.S. dollar financial
statements. Also discuss the meaning of the translated U.S. dollar amounts for
inventory and for fixed assets.
(2)
Lisali
Company gathered the following information related to inventory that it owned
on
December
31, 2013:
Historical
cost $100,000
Replacement
cost 95,000
Net
realizable value 98,000
Normal
profit margin 20%
a.
Determine
the amount at which Lisali should carry inventory on the December 31,
2013,balance sheet and the amount, if any, that should be reported in net
income related to thisinventory using (1) U.S. GAAP and (2) IFRS.
b.
Determine
the adjustments that Lisali would make in 2013 to reconcile net income
andstockholders’ equity under U.S. GAAP to IFRS.
(3)
Bracy
Company acquired a new piece of construction equipment on January 1, 2013, at a
costof $100,000. The equipment was expected to have a useful life of 10 years
and a residual valueof $20,000 and is being depreciated on a straight-line basis.
On January 1, 2014, the equipmentwas appraised and determined to have a fair
value of $101,000, a salvage value of $20,000, anda remaining useful life of
nine years.
a.
Determine
the amount of depreciation expense that Bracy should recognize in determiningnet
income in 2013, 2014, and 2015 and the amount at which equipment should be
carriedon the December 31, 2013, 2014, and 2015 balance sheets using (1) U.S.
GAAP and(2) IFRS. In measuring property, plant, and equipment subsequent to
acquisition, Bracyuses the revaluation model in IAS 16.
b.
Determine
the adjustments that Bracy would make in 2013, 2014, and 2015 to reconcile
netincome and stockholders’ equity under U.S. GAAP to IFRS.
(4)
Moxie
Corporation incurs research and development costs of $500,000 in 2013, 30
percentof which relates to development activities subsequent to certain
criteria having been met thatsuggest that an intangible asset has been created.
The newly developed product is brought tomarket in January 2014 and is expected
to generate sales revenue for 10 years.
a.
Determine
the amount Moxie should recognize as research and development expense in2013
under (1) U.S. GAAP and (2) IFRS.
b.
Determine
the adjustments that Moxie would make in 2013 and 2014 to reconcile net
incomeand stockholders’ equity under U.S. GAAP to IFRS.
