Question 3 - 8985

Giant Company is a U.S. firm that produces parts for nuclear reactors. Giant Company has a subsidiary, Grande, Inc., that operates in Mexico and is responsible for designing and manufacturing connection fittings that are vital for the proper operation of its parent company痴 reactors.

• Giant Company considers the U.S. dollar to be the functional currency of Grande, Inc.

• Grande, Inc., began operations January 1, 2001.

• Common Stock and Fixed Assets were acquired January 1, 2000.

• Inventory is accounted for under the last in, first out (LIFO) cost flow assumption, with a slow rate of turnover.

• The inventory in the January 1, 2001, Balance Sheet was acquired on January 1, 2001.

The beginning U.S. dollar value of retained earnings was $2,600,000.

Part 1)
Giant Company should use the following method to reflect the results of Grande, Inc., in its financial statements:

Part 2)
The Retained Earnings balance of Grande, Inc., on December 31, 2001, expressed in U.S. dollars is:

Part 3)
The Cost of Goods Sold for Grande, Inc., for the year ended December 31, 2001, expressed in U.S. dollars is:

Part 4)
Assume for this question only that Cost of Goods sold is translated at $5,100,000 and Retained Earnings is translated at $500,000. What is the translation gain or loss for Grande, Inc., for the year ended December 31, 2001?

Part 5)
The translation gain or loss from the activities of Grande, Inc., should be reported in:

Part 6)
Revenues for 2001 translated into U.S. dollars amount to:

Question

Part 1)
Your answer: B was incorrect. The correct answer was D) the temporal method.

The temporal method is used when the functional currency is the parent’s currency

Part 2)
Your answer: B was incorrect. The correct answer was D) $0.

In the temporal method, Retained Earnings is a plug figure after the other asset, liability, and capital accounts are remeasured. Cash and accounts receivable are remeasured at the current rate ($0.10). Inventory, given LIFO cost flow assumptions and a slow turnover rate, is remeasured as of the date it was originally purchased, January 1, 2001, at a rate of $0.12, and net fixed assets are remeasured at their historical cost of $0.14. On the liabilities and equity side of the balance sheet, accounts payable and long-term debt are remeasured at the current rate of $0.10, and common stock is remeasured at the historical rate of $0.14. Subtracting the other liabilities and equity accounts from the asset accounts leaves the plug figure for retained earnings. Remeasured assets total [(20,000,000) * ($0.10)] + [(35,000,000) * ($0.10)] + [(15,000,000) * ($0.12)] + [(60,000,000) * ($0.14)] = $15,700,000. Remeasured liabilities and common stock total [(10,000,000) * ($0.10)] + [(35,000,000) * ($0.10)] + [(80,000,000) * ($0.14)] = $15,700,000. Subtracting $15,700,000 from $15,700,000 leaves $0 as the plug figure for retained earnings.

Part 3)
Your answer: B was incorrect. The correct answer was A) $4,950,000.

Both the beginning and ending inventory under LIFO cost flow assumptions and a slow inventory turnover are translated at the $0.12 rate as of the date the original inventory was acquired, January 1, 2001. Because beginning and ending inventories expressed in Mexican pesos are equal, the purchases for the year will equal the Cost of Goods Sold, which is remeasured at the average cost of acquiring the goods during the year: $0.11. (45,000,000 * $0.11) = $4,950,000.

Part 4)
Your answer: B was incorrect. The correct answer was D) $400,000.

Translation gain is the difference between the translated increase in retained earnings and translated net income. For Grande, Inc., the increase in retained earnings is $500,000 ($500,000 - $0) and the computed net income is Sales (remeasured at the average rate) less Cost of Goods Sold less Depreciation (remeasured at the average cost of acquiring the goods during the year). [(60,000,000) * ($0.11)] - $5,100,000 – [(10,000,000) * $0.14)] = $100,000. The difference is $500,000 - $100,000 = a translation gain of $400,000.

Part 5)
Your answer: B was correct!

Under the temporal method, translation gains and losses are included in the income statement.

Part 6)
Your answer: B was incorrect. The correct answer was A) $6,600,000.

Under the temporal method, Revenues are translated at the average rate during the reporting period.

60,000,000 * 0.11 = $6,600,000