Chapter 12, Problem 12.13E

a

To determine

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 it occurs uniformly over the period. Any gain or loss on account of translation adjustment is recognized in the comprehensive income statement.

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.

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

To determine

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.

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
Retained earnings	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

  $\begin{array}{c}\text{Exchange rate}=\frac{\$.03333+\$.02857}{2}\\ =\$.030945\end{array}$

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

To determine

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

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
$\text{R}90,000\times \left(\frac{\$.02857+\$.025}{2}\right)$	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

To determine

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

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