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.
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
Consolidated Income and Retained Earnings Statement
for the Year Ended December 31, 2008
Cost of Goods Sold:
Beginning Inventory 600,000
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
Less: Dividends Paid 100,000
Dec. 31 Retained Earnings 965,000
The account balances are computed in conformity with U.S. generally accepted accounting
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
4. Depreciation for the period in New Zealand dollars was computed as follows:
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
6. Dividends of 50,000 New Zealand dollars were paid on July 1 and December 31.
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.
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.
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. ...
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.
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