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.

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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.

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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.

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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.

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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.

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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.

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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

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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.

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 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).

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 In Pounds
Debits:
Cash £ 75,000
Accounts receivable 362,000
Inventory 41,000
Building 400,000
Land 100,000
Depreciation expense 10,000
Other expenses 133,000
Cost of good sold 380,000
Total debits £ 1,501,000

Credits
Accumulated depreciation £ 17,500
Accounts payable 154,750
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:

1. Translation working papers;

2. Translated income statement; and

3. Translated balance sheet.

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:

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 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
Accumulated depreciation £ 7,500
Accounts payable 100,000
Common stock 550,000
Retained earnings 0
Equity adjustment 0
Sales revenue 544,000
Total credits £ 1,201,500

Required: Prepare Seakam's:

1. Translation working papers;

2. Translated income statement; and

3. Translated balance sheet.

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:

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 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
Accounts receivable 308,000
Notes receivable 98,000
Building 400,000
Land 100,000
Depreciation expense 10,000
Other expenses 117,000
Salary expense 376,000
Total debits £ 1,581,000

Credits
Accumulated depreciation £ 17,500
Accounts payable 200,000
Common stock 550,000
Retained earnings 213,500
Sales revenue 600,000
Total credits £ 1,581,000

Required: Prepare Seakam's:

1. Translation working papers;

2. Translated income statement; and

3. Translated balance sheet.

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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:
LCU Rates Dollars
Stockholders’ equity
1/1/X4 400,000 $ .40C $ 160,000
Net income 100,000 .42A 42,000
Dividends 12/1/X4 ( 50,000 ) .43C ( 21,500 )
Equity adjustment 17,500
Stockholders’ equity
12/31/X4 450,000 .44C $ 198,000

Required: Determine the following:

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.
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A summary of changes in Selby’s stockholders’ equity during 20X3 and
relevant exchange rates are as follows:

In Exchange In
Francs Rates Dollars
Stockholders’ equity
1/1/X3 £ 10,000,000 $ .660C $ 6,600,000
Net income 2,500,000 .650A 1,625,000
Dividends 11/1/X3 ( 1,000,000 ) .645C ( 645,000 )
Equity adjustment ( 220,000 )
Stockholders’ equity
12/31/X3 £ 11,500,000 .64C $ 7,360,000

Required: Determine the following:

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.

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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.

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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.

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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

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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 C C

liabilities

12. Accounts payable C C

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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

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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

Searle Corporation
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

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Requirement 3

Searle Corporation
Translated Balance Sheet
December 31, 20X5

Cash $ 347,600
Accounts receivable 82,160
Inventory 93,220
Building-net 620,150
Land 158,000
Total assets $ 1,301,130

Accounts payable $ 175,380

Common stock 675,000
Retained earnings 409,500
Accumulated comprehensive income 41,250
Total liabilities & equities $ 1,301,130

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Exercise 4

Requirement 1

Searle Corporation
Translation Working Papers

Debits
Cash 75,000 x $1.65 = $ 123,750
Accounts receivable 362,000 x $1.65 = 597,300
Inventory 41,000 x $1.65 = 67,650
Building 400,000 x $1.65 = 660,000
Land 100,000 x $1.65 = 165,000
Depreciation expense 10,000 x $1.63 = 16,300
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
Accumulated depreciation 17,500 x $1.65 = $ 28,875
Accounts payable 154,750 x $1.65 = 255,338
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

Credit differential $ 51,740

Requirement 2

Searle Corporation
Translated Income Statement
for the year ended December 31, 20X6

Sales revenue $ 1,004,487

Expenses:
Cost of goods sold ( 619,400 )
Depreciation expense ( 16,300 )
Other expenses ( 216,790 )

Net income $ 151,997

Retained earnings, January 1, 20X6 409,500
Retained earnings, December 31, 20X6 $ 561,497

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Requirement 3

Searle Corporation
Translated Balance Sheet
December 31, 20X6

Cash $ 123,750
Accounts receivable 597,300
Inventory 67,650
Building-net 631,125
Land 165,000
Total assets $ 1,584,825

Accounts payable $ 255,338

Common stock 675,000
Retained earnings 561,497
Accumulated comprehensive income ($41,250 + $51,740) 92,990
Total liabilities & equities $ 1,584,825

Exercise 5

Requirement 1

Seakam Corporation
Translation Working Papers

Debits
Cash 200,000 x $1.45 = $ 290,000
Accounts receivable 72,000 x $1.45 = 104,400
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
Depreciation expense 7,500 x $1.42 = 10,650
Other expenses 115,000 x $1.44 = 165,600
Salary expense 208,000 x $1.44 = 299,520

Total debits $ 1,723,720

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 Credits
Accumulated depreciation 7,500 x $1.42 = $ 10,650
Accounts payable 100,000 x $1.45 = 145,000
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

Credit differential $ 14,710

Requirement 2

Seakam Corporation
Translated Income Statement
For the Year Ended December 31, 20X7

Sales revenue $ 783,360

Expenses:
Salary expense ( 299,520 )
Depreciation expense ( 10,650 )
Other expenses ( 165,600 )
Income before exchange gains or losses $ 307,590
Exchange gains 14,710
Net income $ 322,300
Retained earnings, January 1, 20X7 0
Retained earnings, December 31, 20X7 $ 322,300

Requirement 3

Seakam Corporation
Translated Balance Sheet
December 31, 20X7

Cash $ 290,000
Accounts receivable 104,400
Notes receivable 143,550
Building-net 557,350
Land 142,000
Total assets $ 1,237,300

Accounts payable $ 145,000

Common stock 770,000
Retained earnings 322,300
Total liabilities & equities $ 1,237,300

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Exercise 6

Seakam Corporation
Translation Working Papers

Debits
Cash 172,000 x $1.37 = $ 235,640
Accounts receivable 308,000 x $1.37 = 421,960
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
Depreciation expense 10,000 x $1.42 = 14,200
Other expenses 117,000 x $1.36 = 159,120
Salary expense 376,000 x $1.36 = 511,360

Total debits $ 2,186,540

Credits
Accumulated depreciation 17,500 x $1.42 = $ 24,850
Accounts payable 200,000 x $1.37 = 274,000
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

Seakam Corporation
Translated Income Statement
For the Year Ended December 31, 20X8

Sales revenue $ 816,000

Expenses:
Salary expense ( 511,360 )
Depreciation expense ( 14,200 )
Other expenses ( 159,120 )
Income before exchange gains or losses $ 131,320
Exchange loss ( 20,610 )
Net income $ 110,710
Retained earnings, January 1, 20X8 322,300
Retained earnings, December 31, 20X8 $ 433,010

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Requirement 3

Seakam Corporation
Translated Balance Sheet
December 31, 20X8

Cash $ 235,640
Accounts receivable 421,960
Notes receivable 134,260
Building-net 543,150
Land 142,000
Total assets $ 1,477,010

Accounts payable $ 274,000

Common stock 770,000
Retained earnings 433,010
Total liabilities & equities $ 1,477,010

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

Requirement 3

Unamortized patent

Patent (20,000 LCU – 2,000 LCU) x $.44 = $ 7,920

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Requirement 4

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

Requirement 5

Income from Segar

Equity in income ($42,000 x 70%) $ 29,400
Less: Patent amortization ( 840 )
Income from Segar $ 28,560

Requirement 6

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

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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

Requirement 2

Trademark amortization for 20X3

Trademark: 2,000,000/40 yr. x $.65 average rate = $ 32,500

Requirement 3

Unamortized trademark

Trademark (2,000,000 – 50,000SF) x $.64 exchange

rate $ 1,248,000

Requirement 4

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

Requirement 5

Income from Selby

Equity in income ($1,625,000 x 30%) $ 487,500
Less: Trademark amortization ( 32,500 )
Income from Selby $ 455,000

Requirement 6

Investment in Segar balance at December 31, 20X3

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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

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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

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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

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