a
Introduction: Translation adjustment is the method used to convert the local currency into the parents’ functional currency when the local currency is the foreign entity’s functional currency. The current rate is used to translate the financial statements that are the exchange rate on the
The strengthening or weakening of currency in 20X6 and 20X7 by presenting both direct and indirect exchange rate for the rupees for the given dates.
a
Answer to Problem 12.13E
The dollar strengthened both during 20X6 and 20X7
Explanation of Solution
| Direct $/R 1 | Indirect R/$1 | |
| January 1, 20X6 | $.03333 = R 1 | R 30 = $1 |
| December 31, 20X6 | $.02857 = R 1 | R 35 = $1 |
| December 31, 20X7 | $.025 = R 1 | R40 = $1 |
The dollar appreciated against rupees during 20X6 because the amount of rupees required to buy one U.S dollar at the end of the year is R35 which is greater than the amount of rupees required to buy one dollar at the beginning of the year that is R 30. The dollar value continued its upward trend during the year 20X7 to R40.
b
Introduction: Translation adjustment is the method used to convert the local currency into the parents' functional currency when the local currency is the foreign entity’s functional currency. The current rate is used to translate the financial statements that are the exchange rate on the balance sheet date. The average rate is used to translate revenue and expenses as it is assumed that occurs uniformly over the period. Any gain or loss on account of translation adjustment is recognized in the comprehensive income statement.
The subsidiary’s translated balance sheet of December 31, 20X6 assuming rupee is the subsidiary’s functional currency.
b
Answer to Problem 12.13E
The dollar strengthened both during 20X6 and 20X7
Explanation of Solution
Translated balance sheet for December 31, 20X6
| Details | Subsidiary balancesIn Rupees | Direct exchange rate | Translated balances$ |
| Cash | 100,000 | $.02857 | $2,857 |
| Receivables | 450,000 | $.02857 | 12,857 |
| Inventory | 680,000 | $.02857 | 19,428 |
| Fixed assets | 1,000,000 | $.02857 | 28,570 |
| Total assets | 2,230,000 | 63,712 | |
| Accumulated other comprehensive income: | |||
| Translation adjustment debit | 2,903 | ||
| Total Assets | 66,615 | ||
| Current payables | 260,000 | $.02857 | 7,428 |
| Long term debts | 1,250,000 | $.02857 | 35,713 |
| Common stock | 500,000 | $.03333 | 16,665 |
| 220,000 | $03095 | 6,809 | |
| Total Liabilities and Equity | 2,230,000 | 66,615 |
Exchange rate for retained earnings will be average of beginning and ending exchange rate
Working note: Proof of translation adjustment
| Details | In Rupees | translation rate | $ |
| Net assets 1/1/X6 | 500,000 | $.03333 | 16,665 |
| Adjustment for changes in net assets during year | |||
| Net income | 220,000 | $.03095 | 6,809 |
| Net assets translated at: | |||
| Rates during the year | 23,474 | ||
| Rates at end of the year | 720,000 | $.02857 | (20,570) |
| Change in translation adjustment during year | 2,904 |
c
Introduction: Translation adjustment is the method used to convert the local currency into the parents' functional currency when the local currency is the foreign entity’s functional currency. The current rate is used to translate the financial statements that are the exchange rate on the balance sheet date. The average rate is used to translate revenue and expenses as it is assumed that occurs uniformly over the period. Any gain or loss on account of translation adjustment is recognized in the comprehensive income statement.
The subsidiary translated balance sheet as of December 31, 20X7 assuming the rupee is the subsidiary functional currency
c
Answer to Problem 12.13E
Balance sheet total after translation adjustment $61,885
Explanation of Solution
| Details | Subsidiary balancesIn Rupees | Direct exchange rate | Translated balances$ |
| Cash | 80,000 | $.025 | $2,000 |
| Receivables | 550,000 | $.025 | 13,750 |
| Inventory | 720,000 | $.025 | 18,000 |
| Fixed assets | 900,000 | $.025 | 22,500 |
| Total assets | 2,250,000 | 56,250 | |
| Accumulated other comprehensive income: | |||
| Translation adjustment debit | 5,635 | ||
| Total Assets | 61,885 | ||
| Current payables | 340,000 | $.025 | 8,500 |
| Long term debts | 1,100,000 | $.025 | 27,500 |
| Common stock | 500,000 | $.03333 | 16,665 |
| Retained earnings | 310,000 | A | 6,809 |
| Total Liabilities and Equity | 2,250,000 | 61,885 |
Determination of retained earnings
| Retained earnings December 31, 20X6 | $6,809 |
| 2,411 | |
| $9,220 |
Working note: Proof of translation adjustment
| Details | In Rupees | translation rate | $ |
| Net assets 1/1/X6 | 720,000 | $.02857 | 20,570 |
| Adjustment for changes in net assets during year | |||
| Net income | 90,000 | $.02679 | 2,411 |
| Net assets translated at: | |||
| Rates during the year | 22,981 | ||
| Rates at end of the year | 810,000 | $.025 | (20,250) |
| Income translation | 2,731 | ||
| Translation adjustment 1/1/X7 | 2,904 | ||
| Accumulated other comprehensive | |||
| Translation adjustment 12.31.X7 | 5,635 |
d
Introduction: Translation adjustment is the method used to convert the local currency into the parents' functional currency when the local currency is the foreign entity’s functional currency. The current rate is used to translate the financial statements that are the exchange rate on the balance sheet date. The average rate is used to translate revenue and expenses as it is assumed that occurs uniformly over the period. Any gain or loss on account of translation adjustment is recognized in the comprehensive income statement.
The comprehensive income for 20X7 would include as a result of the translation
d
Answer to Problem 12.13E
The comprehensive income for 20X7 would include as a result of the translation $2,731
Explanation of Solution
Income to be reported in 20X7
| Details | In Rupees | translation rate | $ |
| Net assets 1/1/X6 | 720,000 | $.02857 | 20,570 |
| Adjustment for changes in net assets during year | |||
| Net income | 90,000 | $.02679 | 2,411 |
| Net assets translated at: | |||
| Rates during the year | 22,981 | ||
| Rates at end of the year | 810,000 | $.025 | (20,250) |
| Income translation | 2,731 |
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Chapter 12 Solutions
EBK ADVANCED FINANCIAL ACCOUNTING
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