C11

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College of Southern Nevada *

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201

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Finance

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Jan 9, 2024

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C11 – The Montana Corporation Problem/Solution The Montana Corporation, based in Billings, transacts business in the United States and Mexico. It’s a wholly owned subsidiary (Cabo, Inc.) is located in Mexico. Consolidated financial statements are being prepared for Year 1. Montana Corp and Cabo Inc. have a December 31 year-end. The currency exchange rates are as follows for the current year (Year 1): January 1, Year 1: 1 peso equals $.088 Average for Year 1: 1 peso equals $.090 November 1, Year 1: 1 peso equals $.092 December 1, Year 1: 1 peso equals $.094 December 31, Year 1: 1 peso equals $.095 January 31, Year 2: 1 peso equals $.098 1. Montana Corporation has a prepaid expense for Year 2 bought on December 1, Year 1, for 100,000 pesos. Assume the U.S. dollar is Montana’s functional currency. What is reported on the consolidated balance sheet at year-end? Answer: $9,400 2. Cabo, Inc. has a prepaid expense for Year 2 bought on December 1, Year 1, for 100,000 pesos. Assume the Mexican peso is Cabo’s functional currency. What is reported on the consolidated balance sheet at year-end? Answer: $9,500 3. Cabo, Inc. has a prepaid expense for Year 2 bought on December 1, Year 1 for 100,000 pesos. Assume the U.S. dollar is Cabo’s functional currency. What is reported on the consolidated balance sheet at year-end? Answer: $9,400 1

C11 – The Montana Corporation Problem/Solution 4. Montana Corporation has a 200,000 peso Contributed Capital balance received on January 1, Year 1. Assume the U.S. dollar is Montana’s functional currency. What is reported on the consolidated balance sheet at year-end? Answer: $17,600 5. Cabo, Inc. has a 200,000 peso Contributed Capital balance received on January 1, Year 1. Assume the U.S. dollar is Cabo’s functional currency. What is reported on the consolidated balance sheet at year-end? Answer: $0 6. Cabo, Inc. pays 400,000 pesos for equipment on November 1, Year 1. At the end of the year, depreciation of 20,000 pesos is reported so that a new book value of 380,000 is shown. Assume the Mexican peso is Cabo’s functional currency. What is reported on the consolidated balance sheet at year-end? Answer: $36,100 7. Cabo, Inc. pays 400,000 pesos for equipment on November 1, Year 1. At the end of the year, depreciation of 20,000 pesos is reported so that a net book value of 380,000 is shown. Assume the U.S. dollar is Cabo’s functional currency. What is reported on the consolidated balance sheet at year-end? Answer: $34,960 2

C11 – The Montana Corporation Problem/Solution Rationale : 1. As an individual transaction outside of the company’s functional currency, the remeasurement process is appropriate. In remeasurement, only monetary assets and liabilities use the current rate. As a nonmonetary asset, the historic rate of $.094 when acquired should be used. 2. When the functional currency is the Mexican peso, Cabo would use translation. In a translation, all assets and liabilities are reported at the current rate on the balance sheet date, or $.095. 3. When the functional currency is the U.S. dollar, Cabo would use remeasurement. In remeasurement, only monetary assets and liabilities use the current rate. As a nonmonetary asset, the historic rate of $.094 when acquired should be used. 4. As an individual transaction outside of the company’s functional currency, the remeasurement process is appropriate. In remeasurement, only monetary assets and liabilities use the current rate. As a nonmonetary balance, this historic rate of $.088 when the contributed capital was collected is applicable. 5. Only the parent’s contributed capital appears in consolidated financial statements. The contributed capital of the subsidiary is eliminated. 6. When the functional currency is the Mexican peso, Cabo would use translation. In a translation, all assets and liabilities are reported at the current rate on the balance sheet date or $.095 times 380,000, or $36,200. 7. When the functional currency is the U.S. dollar, Cabo would use remeasurement. In remeasurement, only monetary assets and liabilities use the current rate. As a nonmonetary asset, the historic rate of $.092 when acquired should be used for both the equipment and the accumulated depreciation (380,000 x .092 = $34,960). 3

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