Translation of Financial Statements of Foreign Affiliates

P1-Translation - Local Currency Is the Functional Currency

On January 1, 2008, a U.S. company purchased 100% of the outstanding stock of Ventana
Grains, a company located in Latz City, New Zealand. Ventana Grains was organized on January
1, 1994. All the property, plant, and equipment held on January 1, 2008, was acquired
when the company was organized. The business combination was accounted for as a purchase
transaction. The 2008 financial statements for Ventana Grains, prepared in its local currency,
the New Zealand dollar, are given here.

VENTANA GRAINS
Comparative Balance Sheets
January 1 and December 31, 2008
Jan. 1 Dec. 31
Cash and Receivables 500,000 880,000
Inventories 600,000 500,000
Land 400,000 400,000
Buildings (net) 650,000 605,000
Equipment (net) 465,000 470,000
Totals 2,615,000 2,855,000
Jan. 1 Dec. 31
Short-Term Accounts and Notes 295,000 210,000
Long-Term Notes (600,000 issued
September 1, 2000, 80,000 issued
July 1, 2008) 600,000 680,000
Common Stock 800,000 800,000
Additional Paid-in Capital 200,000 200,000
Retained Earnings 720,000 965,000
Total 2,615,000 2,855,000

VENTANA GRAINS
Consolidated Income and Retained Earnings Statement
for the Year Ended December 31, 2008
Revenues 3,225,000
Cost of Goods Sold:
Beginning Inventory 600,000
Purchases 2,100,000
Goods Available for Sale 2,700,000
Less: Ending Inventory 500,000
Cost of Goods Sold 2,200,000
Gross Profit on Sales 1,025,000
Depreciation Expense 140,000
Other Expenses 540,000 680,000
Net Income 345,000
Jan. 1 Retained Earnings 720,000
Total 1,065,000
Less: Dividends Paid 100,000
Dec. 31 Retained Earnings 965,000

The account balances are computed in conformity with U.S. generally accepted accounting
standards.

Other information is as follows:

1. Direct exchange rates for the New Zealand dollar on various dates were:
Date Exchange Rate
January 1, 1994 $.8011
September 1, 2004 .5813
January 1, 2008 .7924
July 1, 2008 .7412
December 31, 2008 .7298
Average for 2008 .7480
Average for the last four months of 2008 .7476

2. Ventana Grains purchased additional equipment for 100,000 New Zealand dollars on July
1, 2008, by issuing a note for 80,000 New Zealand dollars and paying the balance in cash.

3. Sales were made and purchases and 'Other Expenses' were incurred evenly throughout
the year.

4. Depreciation for the period in New Zealand dollars was computed as follows:
Building 45,000
Equipment Purchased before 1/1/2008 85,000
Equipment Purchased July 1, 2008 10,000

5. The inventory is valued on a FIFO basis. The beginning inventory was acquired when the
exchange rate was $.7480. The ending inventory was acquired during the last four months
of 2008.

6. Dividends of 50,000 New Zealand dollars were paid on July 1 and December 31.
Required:
A. Translate the financial statements into dollars assuming that the local currency of the foreign
subsidiary was identified as its functional currency.
B. Prepare a schedule to verify the translation adjustment determined in requirement A. Describe
how the translation adjustment would be reported in the financial statements.

P2 Remeasurement - U.S. Dollar Is the Functional Currency
Refer to the information given in P1.

Required:
A. Remeasure the financial statements into dollars assuming that the U.S. dollar was identified
as the functional currency of the foreign subsidiary.
B. Prepare a schedule to verify the translation gain or loss determined in requirement A. Describe
how the translation gain or loss would be reported in the financial statements.