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    Translation of Financial Statements of Foreign Affiliates

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    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.

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    https://brainmass.com/business/foreign-exchange-rates/translation-of-financial-statements-of-foreign-affiliates-441748

    Solution Preview

    See the attached file.

    The attached MS Word document will show how the financial statements of Ventana Grains are translated when in P1 the local currency is the functional currency and in P2 to remeasure when the US dollar is the functional currency. Also the following information may be useful to understand the translation of financial statements of foreign affiliates.

    A U.S. firm may maintain branch offices or hold equity interests in companies that are domiciled in foreign countries. As a general rule, a foreign subsidiary is consolidated if the parent company owns, directly or indirectly, a controlling interest in the voting stock of the subsidiary or otherwise exercises the ability to control the activities of the subsidiary. ...

    Solution Summary

    This solution is comprised of an advanced accounting problem that deals with how to translate the financial statements into dollars assuming that the local currency of the foreign subsidiary was identified as its functional currency. In a related problem it shows how to remeasure the financial statements into dollars assuming that the U.S. dollar is identified as the functional currency of the foreign subsidiary. Finally, it shows how to prepare a schedule in each scenario to verify the translation adjustments, as well as how the translation adjustments including translation of any gain or loss will be reported in the financial statements.

    The problem shown here is taken from Advanced Accounting, 4 ed., Wiley Publishing, however, the detail step-by-step explanation of this complicated topic provides students with a clear understanding of the concept.

    Thank you for using BrainMass.com. Have a great day!

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