Answer with explanation:
1. What is meant by the “translation” of foreign currency financial statements?
2. What is the cause of balance sheet exposure?
3. What is the primary difference between transaction exposure and accounting exposure?
4. When would the balance sheet exposure arising from the current rate method become realized?
5. Why would the management of a multinational corporation incur real costs to hedge accounting exposure, which is only on paper?
P 13-3 Translation worksheet, parent accounting
Pylon Corporation acquired all the outstanding capital stock of Sooth Company of London on January 1, 2008, for $800,000, when the exchange rate for British pounds was $1.60 and Sooth's stockholders' equity consisted of £400,000 capital stock and £100,000 retained earnings. Sooth's functional currency is the British pound. Balance sheet accounts for Sooth at January 1, 2008, in British pounds and U.S. dollars are summarized as follows:
British' Pounds Exchange Rate U.S. Dollors
Cash £ 50,000 $1.60 $ 80,000
Accounts receivable-net 60,000 1.60 96,000
Inventories 40,000 1.60 64,000
Equipment 750,000 1.60 1,200,000
Total £900,000 $1,440,000
Accumulated depreciation £250,000 $1.60 $ 400,000
Accounts payable 150,000 1.60 240,000
Capital stock 400,000 1.60 640,000
Retained earnings 100,000 1.60 160,000
Total £900,000 $1,440,000
Exchange rates for 2008 are as follows:
Current exchange rate January 1, 2008 $1.60
Average exchange rate for 2008 1.63
Rate for cash dividends 1.62
Current exchange rate December 31, 2008 1.65
Sooth's adjusted trial balance in British pounds at December 31, 2008, is as follows:
Debits
Cash £ 20,000
Accounts receivable-net 70,000
Inventories 50,000
Equipment 800,000
Cost of sales 350,000
Depreciation expense 80,000
Operating expenses 100,000
Dividends 30,000
Total £1,500,000
Credits
Accumulated depreciation £ 330,000
Accounts payable 70,000
Capital stock 400,000
Retained earnings 100,000
Sales 600,000
Total £1,500,000
REQUIRED with calculation:
1. Prepare a translation worksheet to convert Sooth's December 31, 2008, adjusted trial balance into U.S.
2. Prepare journal entries on Pylon's books to account for the investment in Sooth for 2008.
3. Directly compute the translation gain or loss.
P 13-5 Remeasurement worksheet
Philip Corporation, a U.S. firm, acquired 100% of Stuart Corporation's outstanding stock at book value on January 1, 2008, for $112,000. Stuart is a New Zealand company, and its functional currency is the U.S. dollar. The exchange rate for New Zealand dollars (NZ$) was $0.70 when Philip acquired its interest. Stuart's stockholders' equity on January 1, 2008, consisted of NZ$150,000 capital stock and NZ$10,000 retained earnings. The adjusted trial balance for Stuart at December 31, 2008, is as follows:
Debits
Cash NZ$ 15,000
Accounts receivable—net 60,000
Inventories 30,000
Prepaid expenses 10,000
Land 45,000
Equipment 60,000
Cost of sales 120,000
Depreciation expense 12,000
Other operating expenses 28,000
Dividends 20,000
Total NZ$400,000
Credits
Accumulated depreciation NZ$ 22,000
Accounts payable 18,000
Capital stock 150,000
Retained earnings 10,000
Sales 200,000
Total NZ$400,000
ADDITIONAL INFORMATION
1. Prepaid expenses (supplies) of NZ$18,000 were on hand when Philip acquired Stuart. Other operating expenses include NZ$8,000 of these supplies that were used in 2008. The remaining NZ$10,000 of sup-plies is on hand at year-end.
2. The NZ$120,000 cost of sales consists of NZ$50,000 inventory on hand at January 1, 2008, and NZ$100,000 in purchases during the year, less NZ$30,000 ending inventory that was acquired when the exchange rate was $0.66.
3. The NZ$60,000 of equipment consists of NZ$50,000 included in the business combination and NZ$10,000 purchased during 2008, when the exchange rate was $0.68. A depreciation rate of 20% is applicable to all equipment for 2008.
4. Exchange rates for 2008 are summarized as follows:
Current exchange rate January 1, 2008 $0.70
Exchange rate when new equipment was acquired 0.68
Average exchange rate for 2008 0.67
Exchange rate for December 31, 2008, inventory 0.66
Exchange rate for dividends 0.66
Current exchange rate December 31, 2008 0.65
REQUIRED with calculation:
Prepare a worksheet to premeasure the adjusted trial balance of Stuart Corporation into U.S. dollars at December 31, 2008.