Chapter 8

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)
Translation Adjusted Trial
Combined Statement of Income and Adjusted Trial Exchange Balance
Retained Earnings Balance ($) Rate (Pesos)
Sales 3,624,000 (A) 40.20 145,684,800
Cost of goods sold 2,220,000 (A) 40.20 89,244,000
Depreciation expense 120,000 (A) 40.20 4,824,000
Other expenses 786,000 (A) 40.20 31,597,200
Income tax expense 98,400 (A) 40.20 3,955,680
Net Income to Retained Earnings 399,600 16,063,920
Retained earnings, 1/1 576,000 (1) 23,040,000
Total 975,600 39,103,920
Less: Dividends declared, 9/1/20x4 360,000 (H) 40.10 14,436,000
Retained earnings, 12/31 to Balance Sheet 615,600 24,667,920

Balance Sheet
Cash………………………. 1,116,000 (C) 40.25 44,919,000
Accounts receivable (net) 729,600 (C) 40.25 29,366,400
Inventory (FIFO) 996,000 (C) 40.25 40,089,000
Land……………………………. 600,000 (C) 40.25 24,150,000
Buildings (net) 780,000 (C) 40.25 31,395,000
Equipment (net) 516,000 (C) 40.25 20,769,000
Total 4,737,600 190,688,400

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)
Translation Reporting
Exchange Currency
US $ Rate (Pesos)
1/2 Exposed net asset position……………… *2,088,000 40.00 83,520,000
Adjustments for changes in net asset position
during year:
Net income for year………………. 399,600 40.20 16,063,920
Dividends declared……………………. (360,000) 40.10 ( 14,436,000)
 Net asset position translated using rate in
effect at date of each transaction……………….. 85,147,920
12/31 Exposed net asset position……………. 2,127,600 40.25 85,635,900
Change in cumulative translation adjustment
during year—net increase…………. 487,980
1/2 Cumulative translation adjustment**……………. -0-
12/31 Cumulative translation adjustment………….. 487,980

*A condensed balance sheet for S Company on January 2, 20x4 was as follows:

US $ US $
Monetary assets 1,320,000 Monetary Liabilities 2,160,000
Nonmonetary assets Common stock 1,152,000
Inventory 912,000 Paid-in capital in excess of par 360,000
Fixed assets 2,016,000 Retained earnings 576,000
Total 4,248,000 Total 4,248,000
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.

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 ………………………………………………………………………………………… P16,063,920

Other comprehensive income:
Foreign currency translation reserve gain………………………………………….. 487,980
Comprehensive Income…………………………………………………………………………. P16,055,100

S Company
Statement of Shareholders’ Equity
For the Year Ended
December 31, 20x4

Paid-in
capital in
Common excess of Retained
Stock par Earnings OCI* Total
Balance, 1/1/20x4 P46,080,000 P14,400,000 P23,040,000 P 0 P83,520,000
Comprehensive Income:
Net income 16,063,920 16,063,920
Other comprehensive
Income 487,980 487,980
Comprehensive Income P100,071,900
Dividends declared _______ ___________ (14,436,000) ________ (14,436,000)
Balance, 12/31/20x4…… P46,080,000 P14,400,000 P24,667,920 P 487,980 P85,635,900
*OCI – other comprehensive income
2. Translation into the Functional Currency (Remeasurement or Temporal Method)
Functional Currency
Is Philippine Peso -
Translation into the Functional Currency (Remeasurement or Temporal Method)

Adjusted Remeasurement Adjusted

Trial Exchange Trial Balance
Balance Sheet Balance ($) Rate (Pesos)
Cash………………………. 1,116,000 (C) 40.25 44,919,000
Accounts receivable (net) 729,600 (C) 40.25 29,366,400
Inventory (FIFO) 996,000 Schedule 40,059,120
Land……………………………. 600,000 (H) 40.00 24,000,000
Buildings (net) 780,000 (H) 40.00 31,200,000
Equipment (net) 516,000 (H) 40.00 20,640,000
Total 4,737,600 190,184,520

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 _ 615,600 (B/A) 24,652,020
Total 4,737,600 190,184,520
Combined Statement of Income and
Retained Earnings
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
Remeasurement
Exchange
Accounts ($) Rate Pesos
Beginning inventory (assumed)…………. 912,000 (H) 40.00 36,480,000
Purchases (assumed)…………….. 2,304,000 (A) 40.20 92,620,800
Total…………………….. 3,216,000 129,100,800
Less: Ending inventory……………. 996,000 (A) 40.22 40,059,120
Cost of goods sold…………… 2,220,000 89,041,680
 Verification of the Translation Adjustment – Remeasurement or Temporal Method
(Functional Currency – Philippine Peso)
Translation Reporting
Exchange Currency
US $ Rate (Pesos)
1/2 Exposed net monetary liability position….. *840,000 40.00 33,600,000
Adjustments for changes in net monetary position
during year:
Less: Increase in cash and receivables from sales (3,624,000) 40.20 145,684,800
Add: Decrease in monetary assets or increase in
monetary liabilities:
Purchases 2,304,000 40.20 92,620,800
Other expenses 786,000 40.20 31,597,200
Income taxes 98,400 40.20 3,955,680
Dividends declared…………….. 360,000 40.10 14,436,000
Net monetary liability position translated using rate
in effect at date of each transaction.. 30,524,880
Less: 12/31 Exposed net monetary liability position **764,400 40.25 30,767,100
Remeasurement gain (loss) ( 242,220)
*The January 2, 20x4 condensed balance sheet is given in Figure 19-3:
US $
Monetary liabilities 2,160,000
Less: Monetary assets 1,320,000
Net monetary liability position….. 840,000

**See above:
US $
Monetary liabilities (768,000 + 762,000 + 1,080,000) 2,610,000
Less: Monetary assets (1,116,000 + 729,600) 1,845,600
Net monetary liability position….. 764,400

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)
Adjusted Trial Adjusted Trial Balance
Accounts Balance ($) Exchange (Pesos)
Debit Credit Rate Debit Credit
Sales 3,624,000 (A) 40.20 145,684,800
Cost of goods sold 2,220,000 (A) 40.20 89,244,000
Depreciation expense 120,000 (A) 40,20 4,824,000
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), 12/31 996,000 (C) 40.25 40,089,000
Land………………………… 600,000 (C) 40.25 24,150,000
Buildings (net) 780,000 (C) 40.25 31,395,000
Equipment (net) 516,000 (C) 40.25 20,769,000
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 8,322,000 334,745,280 334,257,300
 Foreign Currency Translation
Reserve Gain OCI) – credit _________ _________ ___________ 487,980
Totals 8,322,000 8,322,000 334,745,280 334,745,280
*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)
Adjusted Trial Adjusted Trial Balance
Accounts Balance ($) Exchange (Pesos)
Debit Credit Rate 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
Remeasurement
Exchange
Accounts ($) Rate Pesos
Beginning inventory (assumed)…………. 912,000 (H) 40.00 36,480,000
Purchases (assumed)…………….. 2,304,000 (A) 40.20 92,620,800
Total…………………….. 3,216,000 129,100,800
Less: Ending inventory……………. 996,000 (A) 40.22 40,059,120
Cost of goods sold…………… 2,220,000 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

Adjusted Trial Adjusted Trial Balance

Balance ($) Exchange (Pesos)
Accounts Debit Credit Rate Debit Credit
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 (A) 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) 996,000 (H) 40.00 40,059,120
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 8,322,000 278,547,750 278,547,750

Schedule
Translation of Cost of Goods Sold
Remeasurement
Exchange
Accounts ($) Rate Pesos
Beginning inventory (assumed)…………. 760,000 (H) 40.00 36,480,000
Purchases (assumed)…………….. 1,920,000 (A) 40.20 96,620,800
Total…………………….. 2,680,000 129,100,800
Less: Ending inventory……………. 830,000 (A) 40.22 _40,059,120
Cost of goods sold…………… 1,850,000 89,041,680

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 P.28 H P.28 H
Depreciation expense P.19 A P.26 H
 Dividends paid (10/1) P.20 H P.20 H
Notes payable P.16 C P.16 C
Patents (net) P.16 C P.25 H
Salary expense P.19 A P.19 A
Sales 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

Remeasurement /
Current Method Temporal Method
Accounts Receivable Current Current
Prepaid Assets Current Historical
Accounts Payable Current Current
Common Stock Historical Historical
Land Current Historical
Goodwill Current Historical
Sales Revenue Weighted Average Weighted Average
Depreciation Expense Weighted Average Historical

Problem IV

a. Prepaid Insurance Current

b. Land Current
c. Common Stock Historical
d. Bonds Payable Current
e. Sales Weighted Average
f. Goodwill Current
g. Allowance for Doubtful Accounts Current
h. Deferred Income Taxes Current

Problem V

a. Cash Current
b. Accounts Receivable Current
c. Inventory, carried at cost Historical
d. Equipment Historical
e. Accumulated Depreciation Historical
f. Bonds Payable Current
g. Common Stock Historical
h. Sales Weighted Average

Problem VI
Rock Corporation
For the Year Ended December 31, 20x7

FC Rate Dollars
Income Statement
Net sales FC 2,000,000 .37 P740,000
Costs and expenses 800,000 .37 296,000
Net income FC 1,200,000 .37 P444,000

Statement of Retained Earnings

Retained earnings, beginning of year FC 6,500,000 P1,300,000
Net income 1,200,000 444,000
Subtotal FC 7,700,000 P1,744,000
Dividends (declared on March 31) 1,000,000 .40 _ 400,000
Retained earnings, end of year FC 6,700,000 P1,344,000

Balance Sheet
Assets:
Current assets FC 3,000,000 .50 P 1,500,000
Plant assets (net)
(purchased January 1, 20x4) 55,000,000 .50 27,500,000
Total assets FC 58,000,000 P29,000,000

Liabilities and Stockholders' Equity:

Current liabilities FC 4,000,000 .50 P 2,000,000
Long-term debt 25,000,000 .50 12,500,000
Common stock (issued January 1, 20x4) 5,000,000 .25 1,250,000
Paid-in capital in excess of par 17,300,000 .25 4,325,000
Retained earnings 6,700,000 P 1,344,000
Cumulative translation adjustments _____________ 7,581,000
Total liabilities and stockholders' equity FC 58,000,000 P29,000,000

Problem VII - Abercrombie

20x4 net loss (100,000 FCs) x P.215 P (21,500)
20x5 net income (200,000 FCs) x P.24 48,000
20x6 dividend (50,000 FCs) x P.245 (12,250)
20x6 net income 75,000 FCs x P.25 18,750
Translated balance on December 31, 20x6 P 33,000

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) P10,500
Net income for 20X1 x (current rate average rate):
50,000 x (P1.15 P1.125) 1,250
Increase in net assets from stock issue x (current rate - historical rate):
30,000 x (P1.15 P1.12) 900
Decrease in assets from dividends (current rate dividend date rate):
(10,000) x (P1.15 P1.13) (200)
P12,450

Problem IX
Functional Currency
Is the Currency of a Hyperinflationary Economy
Price Restated Exchange Translated
FC Index (in FC) Rate (in Pesos)
Cash (M) . . . . . . . . . . . . . . . . . . . . . . 420,000 * 420,000 (C) 1.75 735,000
 Inventory (N) . . . . . . . . . . . . . . . . . . . 3,240,000 300/270 3,600,000 (C) 1.75 6,300,000
Property, plant and equipment (N) 1,080,000 300/150 2,160,000 (C) 1.75 3,780,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . 4,740,000 6,180,000 10,815,000

Current liabilities (M) . . . . . . . . . . . . 840,000 * 840,000 (C) 1.75 1,470,000

Non-current liabilities (M) . . . . . . . . 600,000 * 600,000 (C) 1.75 1,050,000
Common stock (issued 20x0) (N) . . 480,000 300/100 1,440,000 (C) 1.75 2,520,000
Retained earnings . . . . . . . . . . . . . . 2,820,000 3,300,000 (C) (B/A) 5,775,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . 4,740,000 6,180,000 10,815,000

M – monetary; N – non-monetary
C – current rate
B/A – balancing amount
*monetary – no restatement