Reading 26- LOS f ～ Q11－18 currency, 2008, country, balance

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11.The Precision Screen Printers (PSP) Company has a foreign subsidiary, the Acer Tool & Die Company, located in the country of Rolivia. The currency of Rolivia is the Chad. The balance sheet and income statement of Acer Tool & Die Company for the year-ended December 31, 2005, is shown below. The balance sheet has been restated using the U.S. dollar as the functional currency.

Acer Tool & Die Company Balance Sheet As of December 31, 2005
	Chad (millions)		Exchange Rate (Chad/US$)		U.S. $ (millions)
Cash	20		0.25		$80
Accounts receivable	30		0.25		120
Inventory	100		0.3125		320
Fixed assets (net)	500		0.3333		1,500
Total assets	650				$2,020
Accounts payable	50		0.25		$200
Capital stock	380		0.3333		1,140
Retained earnings	220		--		680
Total liabilities and equity	650				$2,020
Acer Tool & Die Company Income Statement For year ending December 31, 2005 (Amounts in millions of Chad)
Revenues			1,000
Cost of sales			700
Depreciation expense			50
Selling expense			30
Net income			220

The exchange rate at the beginning of 2005 was 0.3333 Chad/US$. The exchange rate at the end of 2005 was 0.25 Chad/US$. The average rate for 2005 is 0.3125 Chad/US$. Beginning inventory is 90 Chad. Acer Tool & Die uses FIFO inventory valuation and depreciates fixed assets using the straight-line method.

Using the current rate method for the Acer Tool & Die Company, what is the translation adjustment for this period?

A)   $556 gain.

B)   $0.

C)   $52 loss.

D)   $231 gain.

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12．Geocorp is a global corporation with operations in North America, Asia, and Europe. Its primary business is marketing industrial machinery for the construction industry. Geocorp has regional headquarters located in New York, Tokyo, and Paris. All North American and U.S. operations report to its regional and world headquarters located in New York, while all Asian operations report to Tokyo, and all European operations report to Paris.

The following information is relevant to Geocorp’s subsidiaries:

§ Geocorp has a Canadian subsidiary that reports its results in Canadian dollars (CAD). The CAD is the functional currency.

§ All domestic U.S. operations report their results in U.S. dollars (USD).

§ All world-wide operations are reported in USD.

§ Geocorp’s Asian operations report their results in Japanese yen (JPY). The JPY is the functional currency.

§ Geocorp has a Chinese subsidiary that reports its results in Chinese yuan renminbi (CNY). The USD is the functional currency.

§ Geocorp’s European headquarters (in Paris) operations report their results in euros (EUR). The EUR is the functional currency.

§ Geocorp has a British subsidiary that reports its results in British pounds (GBP). The USD is the functional currency.

The following table is a summary of selected financial results from Geocorp’s foreign operations:

All values are in millions	CAD	JPY	CNY	GBP	EUR
Revenues	50	5,000	250	150	700
Cost of goods sold (COGS)	20	2,700	110	100	480
Gross profit	30	2,300	140	50	220
Selling, general & administrative (SGA) expenses	18	1,000	52	29	200
EBIT	12	1,300	88	21	10
Cash	35	4,200	130	102	400
Accounts receivable	12	1,400	55	45	170
Inventory	20	3,900	135	123	300
Fixed assets	62	7,680	188	370	450
Accounts payable	27	3,300	76	68	350
Long-term debt	70	8,450	290	320	550
Common stock	10	2,000	150	50	350

The following exchange rates apply (USD per foreign currency unit):

Currency	Historical Rate	Average Rate	December 31, 2002
CAD	USD 0.7013	USD 0.6803	USD 0.6592
JPY	USD 0.0094	USD 0.0088	USD 0.0082
CNY	USD 0.1010	USD 0.1109	USD 0.1208
EUR	USD 0.9801	USD 1.0318	USD 1.0834
GBP	USD 1.4803	USD 1.5506	USD 1.6209

With respect to the Canadian subsidiary, what method should be used to value its revenues, what is the appropriate exchange rate, and what is the translated value (in USD)?

A)   Current method, current rate, USD 33.0 million.

B)   Temporal method, current rate, USD 33.0 million.

C)   Current method, average rate, USD 34.0 million.

D)   Temporal method, average rate, USD 34.0 million.

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13．With respect to the Japanese subsidiary, what method should be used to value its accounts receivable, what is the appropriate exchange rate, and what is the translated value (in USD)?

A)   Current method, current rate, USD 11.5 million.

B)   Current method, average rate, USD 12.3 million.

C)   Temporal method, current rate, USD 11.5 million.

D)   Temporal method, average rate, USD 12.3 million.

 

14.With respect to the European HQ subsidiary, what method should be used to value its SG&A expenses, what is the appropriate exchange rate, and what is the translated value (USD)?

A)   Current method, current rate, USD 216.7 million.

B)   Temporal method, current rate, USD 216.7 million.

C)   Current method, average rate, USD 206.4 million.

D)   Temporal method, average rate, USD 206.4 million.

 

15.With respect to the British subsidiary, what method should be used to value its fixed assets, what is the appropriate exchange rate, and what is the translated value (USD)?

A)   Temporal method, historical rate, USD 547.7 million.

B)   Current method, historical rate, USD 547.7 million.

C)   Temporal method, current rate, USD 599.7 million.

D)   Current method, current rate, USD 599.7 million.

 

16.With respect to the Chinese subsidiary, what method should be used to value its long term debt, what is the appropriate exchange rate, and what is the translated value (in USD)?

A)   Temporal method, historical rate, USD 29.3 million.

B)   Current method, historical rate, USD 29.3 million.

C)   Temporal method, current rate, USD 35.0 million.

D)   Current method, current rate, USD 35.0 million.

 

17.Which of the following statements is CORRECT with respect to accounting for inventory and cost of goods sold (COGS) using last-in first out (LIFO) under the temporal method?

A)   Inventory is translated at the historical rate, and COGS is translated at the historical rate.

B)   Inventory is translated at the historical rate, and COGS is translated at the average rate.

C)   Inventory is translated at the average rate while COGS is translated at the historical rate.

D)   Inventory is translated at the current rate while COGS is translated at the historical rate.

 

18.The Schuldes Company had the following reported assets in euros at historical cost for the period ending December 31, 2005.

Cash	134
Accounts receivable	270
Inventory	404
Net fixed assets	1347
Total assets	2155

The exchange rate per was $0.8734 on January 1, 2005 and $0.9896 on December 31, 2005. The average exchange rate for the year 2005 was $0.8925. The total assets of Schuldes using the current rate method are:

A)   $2,178.

B)   $1,882.

C)   $2,133.

D)   $1,923.

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11.The Precision Screen Printers (PSP) Company has a foreign subsidiary, the Acer Tool & Die Company, located in the country of Rolivia. The currency of Rolivia is the Chad. The balance sheet and income statement of Acer Tool & Die Company for the year-ended December 31, 2005, is shown below. The balance sheet has been restated using the U.S. dollar as the functional currency.

Acer Tool & Die Company Balance Sheet As of December 31, 2005
	Chad (millions)		Exchange Rate (Chad/US$)		U.S. $ (millions)
Cash	20		0.25		$80
Accounts receivable	30		0.25		120
Inventory	100		0.3125		320
Fixed assets (net)	500		0.3333		1,500
Total assets	650				$2,020
Accounts payable	50		0.25		$200
Capital stock	380		0.3333		1,140
Retained earnings	220		--		680
Total liabilities and equity	650				$2,020
Acer Tool & Die Company Income Statement For year ending December 31, 2005 (Amounts in millions of Chad)
Revenues			1,000
Cost of sales			700
Depreciation expense			50
Selling expense			30
Net income			220

The exchange rate at the beginning of 2005 was 0.3333 Chad/US$. The exchange rate at the end of 2005 was 0.25 Chad/US$. The average rate for 2005 is 0.3125 Chad/US$. Beginning inventory is 90 Chad. Acer Tool & Die uses FIFO inventory valuation and depreciates fixed assets using the straight-line method.

Using the current rate method for the Acer Tool & Die Company, what is the translation adjustment for this period?

A)   $556 gain.

B)   $0.

C)   $52 loss.

D)   $231 gain.

The correct answer was A)

When using the current rate method, all assets and liabilities are translated at the current rate, so the net exposure is assets minus liabilities, or total shareholder’s equity.

The currency translation adjustment (CTA) is calculated as the sum of the flow effect and holding effect.

Flow effect (in $) = change in exposure (in LC) × (ending rate – average rate)

Holding gain/loss effect (in $) = beginning exposure (in LC) × (ending rate – beginning rate)

Going back to our data in the example:

Beginning exposure = 380

Ending exposure = (380 + 220) = 600

Change in exposure = (600 – 380) = 220

Flow effect (in $) = 220 × [(1/0.25) – (1/0.3125)] = 220 × [4 – 3.2] = 176

Holding gain/loss effect (in $) = 380 × [(1/0.25) – (1/0.3333)] = 380 × [4 – 3] = 380

Translation gain (in $) = flow effect + holding gain/loss effect = $176 + $380 = $556

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12．Geocorp is a global corporation with operations in North America, Asia, and Europe. Its primary business is marketing industrial machinery for the construction industry. Geocorp has regional headquarters located in New York, Tokyo, and Paris. All North American and U.S. operations report to its regional and world headquarters located in New York, while all Asian operations report to Tokyo, and all European operations report to Paris.

The following information is relevant to Geocorp’s subsidiaries:

§ Geocorp has a Canadian subsidiary that reports its results in Canadian dollars (CAD). The CAD is the functional currency.

§ All domestic U.S. operations report their results in U.S. dollars (USD).

§ All world-wide operations are reported in USD.

§ Geocorp’s Asian operations report their results in Japanese yen (JPY). The JPY is the functional currency.

§ Geocorp has a Chinese subsidiary that reports its results in Chinese yuan renminbi (CNY). The USD is the functional currency.

§ Geocorp’s European headquarters (in Paris) operations report their results in euros (EUR). The EUR is the functional currency.

§ Geocorp has a British subsidiary that reports its results in British pounds (GBP). The USD is the functional currency.

The following table is a summary of selected financial results from Geocorp’s foreign operations:

All values are in millions	CAD	JPY	CNY	GBP	EUR
Revenues	50	5,000	250	150	700
Cost of goods sold (COGS)	20	2,700	110	100	480
Gross profit	30	2,300	140	50	220
Selling, general & administrative (SGA) expenses	18	1,000	52	29	200
EBIT	12	1,300	88	21	10
Cash	35	4,200	130	102	400
Accounts receivable	12	1,400	55	45	170
Inventory	20	3,900	135	123	300
Fixed assets	62	7,680	188	370	450
Accounts payable	27	3,300	76	68	350
Long-term debt	70	8,450	290	320	550
Common stock	10	2,000	150	50	350

The following exchange rates apply (USD per foreign currency unit):

Currency	Historical Rate	Average Rate	December 31, 2002
CAD	USD 0.7013	USD 0.6803	USD 0.6592
JPY	USD 0.0094	USD 0.0088	USD 0.0082
CNY	USD 0.1010	USD 0.1109	USD 0.1208
EUR	USD 0.9801	USD 1.0318	USD 1.0834
GBP	USD 1.4803	USD 1.5506	USD 1.6209

With respect to the Canadian subsidiary, what method should be used to value its revenues, what is the appropriate exchange rate, and what is the translated value (in USD)?

A)   Current method, current rate, USD 33.0 million.

B)   Temporal method, current rate, USD 33.0 million.

C)   Current method, average rate, USD 34.0 million.

D)   Temporal method, average rate, USD 34.0 million.

The correct answer was C)

Self-contained, independent subsidiaries reporting their results in the local currency that is also the functional currency use the current method. Revenues under the current method are translated using the average rate. Hence, 50 × 0.6803 = USD 34.0 million.

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13．With respect to the Japanese subsidiary, what method should be used to value its accounts receivable, what is the appropriate exchange rate, and what is the translated value (in USD)?

A)   Current method, current rate, USD 11.5 million.

B)   Current method, average rate, USD 12.3 million.

C)   Temporal method, current rate, USD 11.5 million.

D)   Temporal method, average rate, USD 12.3 million.

The correct answer was A)

Self-contained, independent subsidiaries reporting their results in the local currency that is also the functional currency use the current method. Assets under the current method are translated using the current rate. Hence, 1400 × 0.0082 = USD 11.5 million.

14.With respect to the European HQ subsidiary, what method should be used to value its SG&A expenses, what is the appropriate exchange rate, and what is the translated value (USD)?

A)   Current method, current rate, USD 216.7 million.

B)   Temporal method, current rate, USD 216.7 million.

C)   Current method, average rate, USD 206.4 million.

D)   Temporal method, average rate, USD 206.4 million.

The correct answer was C)

Self-contained, independent subsidiaries reporting their results in the local currency that is also the functional currency use the current method. Expenses under the current method are translated using the average rate. Hence, 200 × 1.0318 = USD 206.4 million.

15.With respect to the British subsidiary, what method should be used to value its fixed assets, what is the appropriate exchange rate, and what is the translated value (USD)?

A)   Temporal method, historical rate, USD 547.7 million.

B)   Current method, historical rate, USD 547.7 million.

C)   Temporal method, current rate, USD 599.7 million.

D)   Current method, current rate, USD 599.7 million.

The correct answer was A)

Self-contained, independent subsidiaries reporting their results in the local currency that is NOT the functional currency use the temporal method. Fixed assets under the temporal method are translated using the historical rate. Hence, 370 × 1.4803 = USD 547.7 million.

16.With respect to the Chinese subsidiary, what method should be used to value its long term debt, what is the appropriate exchange rate, and what is the translated value (in USD)?

A)   Temporal method, historical rate, USD 29.3 million.

B)   Current method, historical rate, USD 29.3 million.

C)   Temporal method, current rate, USD 35.0 million.

D)   Current method, current rate, USD 35.0 million.

The correct answer was C)

Self-contained, independent subsidiaries reporting their results in the local currency that is NOT the functional currency use the temporal method. Long-term debt under the temporal method is considered a monetary liability and is translated using the current rate. Hence, 290 × 0.1208 = USD 35.0 million.

17.Which of the following statements is CORRECT with respect to accounting for inventory and cost of goods sold (COGS) using last-in first out (LIFO) under the temporal method?

A)   Inventory is translated at the historical rate, and COGS is translated at the historical rate.

B)   Inventory is translated at the historical rate, and COGS is translated at the average rate.

C)   Inventory is translated at the average rate while COGS is translated at the historical rate.

D)   Inventory is translated at the current rate while COGS is translated at the historical rate.

The correct answer was A)

If using LIFO, units sold during the year are the ones purchased during the year. Under the temporal method, COGS and inventory would be translated at the historical rate.

18.The Schuldes Company had the following reported assets in euros at historical cost for the period ending December 31, 2005.

Cash	134
Accounts receivable	270
Inventory	404
Net fixed assets	1347
Total assets	2155

The exchange rate per was $0.8734 on January 1, 2005 and $0.9896 on December 31, 2005. The average exchange rate for the year 2005 was $0.8925. The total assets of Schuldes using the current rate method are:

A)   $2,178.

B)   $1,882.

C)   $2,133.

D)   $1,923.

The correct answer was C)

With the current rate method all balance sheet items except common stock use the current exchange rate to translate the functional currency into the reporting currency.  

2155 x $0.9896/ = $2,133.