Beechy 7e Tif Ch09

Beechy, Trivedi, MacAulay Advanced Financial Accounting, Seventh Edition
Chapter 9 Reporting Foreign Operations

35) DNA was incorporated on January 2, 20X0, and commenced active operations immediately. Common
shares were issued on the date of incorporation and no new common shares have been issued since then.
On December 31, 20X3, INT purchased 70% of the outstanding common shares of DNA for 800,000
Swedish Krona (SEK).
DNA's main operations are located in Switzerland. For the year ending December 31, 20X6, the income
statement (in 000s) for DNA was as follows:
Sales SEK 1,625

Cost of goods sold (1,200)
Depreciation expense (75)
Income tax expensecurrent (100)
Net income SEK 250
The comparative and condensed statements of financial position (in 000s) for DNA were as follows:
20X6 20X5
Accounts receivable SEK 400 SEK 385
Inventory 200 90
Property, plant, and equipment net 1,750 1,825
Total SEK 2,350 SEK 2,300
Accounts payable SEK 90 SEK 85

Other current monetary liabilities 200 250
Common shares 1,250 1,250
Retained earnings (Note 3) 810 715
OTHER INFORMATION:
Purchases and sales of merchandise inventory occurred evenly throughout the year.
The ending inventory was purchased evenly throughout the last month of the year.
DNA purchased the property, plant, and equipment on hand at the end of 20X6 on March 17, 20X1.
There were no purchases or sales of these assets from 20X3 to 20X6.
Dividends were paid on June 30, 20X6.
Assume that foreign exchange rates were as follows:

January 2, 20X0 $1 = SEK 2.30
March 17, 20X1 $1 = SEK 2.60
December 31, 20X3 $1 = SEK 2.70
Average for 20X5 $1 = SEK 2.90
Average for quarter 4 for 20X5 $1 = SEK 3.00
Average for December 20X5 $1 = SEK 3.10
December 31, 20X5 $1 = SEK 3.30
June 30, 20X6 $1 = SEK 3.60
December 31, 20X6 $1 = SEK 3.90
Copyright 2014 Pearson Canada Inc.

9-1
DNA's financial statements need to be translated into Canadian dollars for consolidation with INT's
financial statements.
Required:
Calculate the exchange gain/loss on current monetary items for 20X6 under the temporal method.
Answer:
SEK Rate $
(Note 1)
Net monetary assets, beginning 50,000 3.3 15,152

Sales 1,625,000 3.5 464,286
Purchases (SEK1,200 + SEK200 - SEK90) (1,310,000) 3.5 (374,286)
Income taxes (100,000) 3.5 (28,571)
Dividends (SEK715 + SEK250 - SEK810) (155,000) 3.6 (43,056)
Net monetary assets, end of year 33,525
Actual net monetary assets, end of year 110,000 3.9 28,205
Exchange loss 5,320
Note 1: The Canadian dollar amount is determined by taking the amount in SEK and dividing by the
exchange rate.
Page Ref: 452-455, 472-476

Learning Obj.: 9.5
Difficulty: Moderate
36) DNA was incorporated on January 2, 20X0, and commenced active operations immediately. Common
shares were issued on the date of incorporation and no new common shares have been issued since then.
On December 31, 20X3, INT purchased 70% of the outstanding common shares of DNA for 800,000
Swedish Krona (SEK).
DNA's main operations are located in Switzerland. For the year ending December 31, 20X6, the income
statement (in 000s) for DNA was as follows:
Sales SEK 1,625

Cost of goods sold 1,200
Amortization expense 75
Income tax expensecurrent 100
Net income SEK 250
The comparative and condensed statements of financial position (in 000s) for DNA were as follows:
20X6 20X5
Accounts receivable SEK 400 SEK 385
Inventory (Note 1) 200 90
Capital assetsnet (Note 2) 1,750 1,825
Accounts payable SEK 90 SEK 85

Other current monetary liabilities 200 250
9-2
Common shares 1,250 1,250
Retained earnings (Note 3) 810 715
OTHER INFORMATION:
Purchases and sales of merchandise inventory occurred evenly throughout the year.
The ending inventory was purchased evenly throughout the last month of the year.
DNA purchased the property, plant, and equipment on hand at the end of 20X6 on March 17, 20X1.
There were no purchases or sales of these assets from 20X3 to 20X6.
Dividends were paid on June 30, 20X6.
Assume that foreign exchange rates were as follows:

January 2, 20X0 $1 = SEK 2.30
March 17, 20X1 $1 = SEK 2.60
December 31, 20X3 $1 = SEK 2.70
December 31, 20X5 $1 = SEK 3.30
June 30, 20X6 $1 = SEK 3.60
December 31, 20X6 $1 = SEK 3.90
DNA's financial statements need to be translated into Canadian dollars for consolidation with INT's
financial statements.
Required:
Translate DNA's statement of financial position at December 31, 20X6, into Canadian dollars under the
temporal method.
Answer: SEK 3.9 C$

Accounts receivable 400,000 3.9 102,564
Inventory 200,000 3.8 52,632
Property, plant, and equipment 1,750,000 2.7 648,148
803,344
Accounts payable 90,000 3.9 23,077

Other current monetary liabilities 200,000 3.9 51,282
Common shares 1,250,000 2.7 462,963
Retained earnings
810,000 plug 266,022
803,344
37) Liverpool Company operates retail stores in Canada and an exporting business in London that
specializes in buying and selling British tweeds. The London subsidiary provided the following financial
statements in pounds sterling to the Canadian parent company.
LIVERPOOL COMPANY, London Branch
Statement of Comprehensive Income
9-3
Year Ended December 31, 20X5
Sales 2,300,000
Cost of goods sold (1,200,000)
Depreciation expense (300,000)
Other expenses (300,000)
Comprehensive income 500,000

Statement of Changes in EquityPartialRetained Earnings section
Retained earningsJanuary 1 850,000

Comprehensive income for the year 500,000
Less: Dividends declared and paid,
December 31 (200,000)
Retained earningsDecember 31 1,150,000

Statement of Financial Position
December 31, 20X5
Assets 20X5 20X4

Cash and receivables 1,150,000 520,000
Merchandise inventory 450,000 380,000
Property, plant, and equipment 3,450,000 3,750,000
Total 5,050,000 4,650,000
Current liabilities 700,000 600,000

Long-term notes payable, due December 31, 20X9 1,200,000 1,200,000
Capital stock 2,000,000 2,000,000
Retained earnings 1,150,000 850,000
Total 5,050,000 4,650,000
Liverpool Company was incorporated on January 1, 1984, at which time an amount of property, plant,
and equipment with a present (December 31, 20X5) net book value of 3,000,000 was purchased.
Additional equipment was purchased December 31, 20X4 (20% of depreciation expense relates to this
new equipment). The long-term notes were issued, to replace financing provided by the parent, on
January 1, 20X4.
Direct exchange rates for the pound sterling are:
January 1, 1984 1 = $1.9180

January 1, 1986 1.8365
January 1, 20X4 1.6000

9-4
Average for quarter 4, 20X4 1.5612
December 31, 20X4 / January 1, 20X5 1.5426
December 31, 20X5 1.4730
Average for 20X5 1.5093
The January 1, 20X5, retained earnings balance of the London Branch of the Liverpool Company correctly
translated to Canadian dollars was $1,783,774. The beginning inventory of 380,000 was acquired during the
last quarter of 20X4 and the ending inventory was acquired during the last quarter of 20X5. Sales and
purchases were made, and other expenses were incurred, evenly throughout the year.
Required:
Compute the gain or loss on holding net monetary items for the Liverpool Company for the year ending
December 31, 20X5.
Answer:
Gain or Loss on Net Monetary Items
$
Opening net monetary assets (1,280,000) 1.5426 (1,974,528))
Inflows Sales 2,300,000 1.5093 3,471,390
Outflows Purchases (1,270,000) 1.5093 (1,916,811)
Other (300,000) 1.5093 (452,790)
Dividends (200,000) 1.4730 (294,600)
Derived ending net monetary assets (1,167,339)

Actual ending non-monetary assets (750,000) 1.4730 (1,104,750)
Gain on net monetary assets 62,589
specializes in buying and selling British tweeds. The London subsidiary, which was acquired on January
1, 1986, provided the following financial statements in pounds sterling to the Canadian parent company.

Sales 2,300,000


9-5
December 31 (200,000)

December 31, 20X5
Assets 20X5 20X4

Total 5,050,000 4,650,000

Capital stock 2,000,000 2,000,000
Total 5,050,000 4,650,000
January 1, 20X4.
January 1, 1984 $1 = $1.9180

January 1, 1986 1.8365
January 1, 20X4 1.6000
December 31, 20X5 1.4730
The January 1, 20X5 retained earnings balance of the London Branch of the Liverpool Company correctly
Required:
Translate the statement of comprehensive income and statement of changes in equitypartialretained
earnings section of Liverpool Company for the year ending December 31, 20X5, into dollars, assuming
that the temporal method is appropriate.

9-6
Answer:
LIVERPOOL COMPANYLondon Branch
Sales 2,300,000 1.5093 $3,471,390

Cost of goods sold (see note 1) (1,200,000) (1,837,317)
Depreciation expense see note 2 (240,000) 1.8365 (440,760)
(60,000) 1.5426 (92,556)
Other expenses (300,000) 1.5093 (452,790)
Translation gain (see note 3) 62,589
Comprehensive income 500,000 $710,666
Note 1:
Cost of Goods Sold OI 380,000 1.5612 593,256
P 1,270,000 1.5093 1,916,811
EI (450,000) 1.4950 (672,750)
1,200,000 1,837,317
Note 2: The historical rate is the rate on the date that the subsidiary was acquired by the parent, which
was January 1, 1986.
Note 2:
Gain or Loss on Net Monetary Items
$
Opening net monetary assets (1,280,000) 1.5426 (1,974,528))
Inflows Sales 2,300,000 1.5093 3,471,390
Outflows Purchases (1,270,000) 1.5093 (1,916,811)
Other (300,000) 1.5093 (452,790)
Dividends (200,000) 1.4730 (294,600)
Derived ending net monetary assets (1,167,339)

Actual ending non-monetary assets (750,000) 1.4730 (1,104,750)
Gain on net monetary assets 62,589
LIVERPOOL COMPANY
$
Retained earnings - 1/1 850,000 1,783,774
Comprehensive income 500,000 710,666
Less: Dividends (200,000) 1.4730 (294,600)
Retained earningsend 1,150,000 $2,199,840


9-7
specializes in buying and selling British tweeds. The London subsidiary, which was acquired on January
1, 1986, provided the following financial statements in pounds sterling to the Canadian parent company.

Sales 2,300,000


December 31 (200,000)

December 31, 20X5
Assets 20X5 20X4

Total 5,050,000 4,650,000

Capital stock 2,000,000 2,000,000
Total 5,050,000 4,650,000

9-8
January 1, 20X4.
January 1, 1984 1 = $1.9180

January 1, 1986 1.8365
January 1, 20X4 1.6000
December 31, 20X5 1.4730
The January 1, 20X5, retained earnings balance of the London Branch of the Liverpool Company correctly
Required:
Translate the December 31, 20X5, statement of financial position of Liverpool Company into dollars
assuming the London branch has a functional currency of C$s and a presentation currency of C$s.
Explain how it might be determined that the London branch had a function currency of Canadian $s.
Answer: Use the temporal method when the functional currency is C$ and the presentation currency is
C$. The historical date to use is the date of acquisition by the parentJanuary 1, 1986.
LIVERPOOL COMPANY - London Branch

December 31, 20X5
Cash and receivables 1,150,000 1.4730 $1,693,950

Merchandise inventory 450,000 1.4950 672,750
PP& E. 3,000,000 1.8365 5,509,500
PP& E. 450,000 1.5426 694,170
Total 5,050,000 $8,507,370
Current liabilities 700,000 1.4730 1,031,100

Long-term notes payable 1,200,000 1.4730 1,767,600
Capital stock 2,000,000 1.8365 3,673,000
Retained earnings 1,150,000 2,035,670
Total 5,050,000 $8,507,370
To determine the functional currency of the London Branch, the following factors are considered.
Primary indicators consider what currencies have the most influence on the company's
cost of goods sold;

9-9
selling prices and sales; and
competition.
Secondary indicators would be to assess what currencies are used for:
financing activities;
cash investments; and
transactions with the parent in addition to the number and amounts.
To assess that the London Branch had a functional currency of Canadian dollars, the branch would have
to be primarily dependent on the parent, buy primarily in Canadian dollars, and raise financing in
Canadian dollars.
40) Water Bottling Inc. (WBI) is a 100% wholly owned subsidiary with operations in France. WBI was
purchased by a Canadian parent on January 1, 20X5, and the FVA was 375,000, all allocated to goodwill.
The financial records of WBI are maintained in euros and provide the following information with respect
to equipment and goodwill.
Equipment: Purchased on January 1, 20X5, for 250,000, and depreciated over five years on a straight-line
basis.
basis.
Goodwill had a balance of 375,000.
Foreign exchange rates were as follows:
January 1, 20X5 1 = 1.50

Average for 20X5 1 = 1.48
January 1, 20X6 1 = 1.46
January 1, 20X7 1 = 1.51
December 31, 20X7 1 = 1.62
Required:
Assume that WBC's functional currency is the euro. Calculate the translated Canadian dollar balances for
the following accounts for December 31, 20X7.
a. Equipment
b. Accumulated depreciationequipment
c. Depreciation expense
d. Goodwill
Answer: If the functional currency of WBC is the euro, then the balances are translated at the current
rate on December 31, 20X7.
a. Equipment (425,000 1.62) $688,500

b. Accumulated depreciation
1st purchase (250,000/5 3 1.62) $243,000
2nd purchase (175,000/5 2 1.62) 113,400

9-10
Total $356,400
[(250,000/5 + 175,000/5) 1.58] $134,300
d. Goodwill ((375,000 1.62) $607,500
41) Water Bottling Inc. (WBI) is a 100% wholly owned subsidiary with operations in France. WBI was
purchased by a Canadian parent on January 1, 20X5, and the FVA was 375,000, all allocated to goodwill.
The financial records of WBI are maintained in euros and provide the following information with respect
to equipment, investment property, and goodwill.
basis.
basis.
Investment property was purchased January 1, 20X7, for 5,600,000. At December 31, 20X7, the property
had a fair value of 5,400,000. The company uses the fair value method for the investment property.
Goodwill had a balance of 375,000.
Foreign exchange rates were as follows:

January 1, 20X5 1= C$1.50
Average for 20X5 1 = C$1.48
January 1, 20X6 1 = C$1.46
January 1, 20X7 1 = C$1.51
December 31, 20X7 1 = C$1.62
Required:
Assume that WBC's functional currency is the Canadian dollar. Calculate the translated Canadian dollar
balances for the following accounts for December 31, 20X7:
a. Equipment
b. Accumulated depreciationequipment
d. Investment property
e. Goodwill
Answer: If the functional currency of WBC is the Canadian dollar, then the balances are translated at the
rate in effect when the transaction took placei.e., the temporal method.
a. Equipment
1st purchase (250,000 1.50) $ 375,000
2nd purchase (175,000 1.46) 255,500
Total $ 630,500
b. Accumulated depreciation
1st purchase (250,000/5 3 1.50) $ 225,000
9-11
2nd purchase (175,000/5 2 1.46) 102,200

Total $ 327,200
1st purchase (250,000/5 1.50) $ 75,000
2nd purchase (175,000/5 1.46) 51,100
Total $ 177,200
d. Investment property $8,748,000

5,400,000 1.62
e. Goodwill 375,000 1.50 562,500

Page Ref: 462-477
Learning Obj.: 9.4, 9.5

9-12
42) On January 1, 20X7, Clock Inc. of Vancouver purchased 75% of the outstanding shares of Time
Limited in London, England. Time Limited's statements of financial position and statements of
comprehensive income and changes in equityretained earnings section for the year ended December 31,
20X7, are below.

9-13
Additional information:
1. Time was incorporated on January 1, 20X3, when it acquired all its equipment for 4,005,000 and
issued its 10-year bonds payable.
2. Time's purchases and sales occurred evenly over the year. Inventories on hand at December 31, 20X6,
and December 20X7 were purchased evenly over the last quarter of 20X6 and 20X7, respectively.
Inventories as at December 31, 20X7, were 650,000.
3. Dividends were paid on March 31, 20X7. There were no changes in share capital over the year.
4. Foreign exchange rates are as follows:
January 1, 20X3 1 = C$1.95

Average for Oct to Dec, 20X6 1 = C$1.64
December 31, 20X6/January 1, 20X7 1 = C$1.67
March 31, 20X7 1 = C$1.61
December 31, 20X7 1 = C$1.52
Required:
Translate Time's statement of financial position at December 31, 20X7, into Canadian dollars, assuming its
functional currency is British pound sterling. Include a calculation to prove the amount of the cumulative
foreign exchange translation gains and losses.
Answer: The current rate method is used in this case.
Time Limited
December 31, 20X7
(in thousands of 's)
Assets Exchange rate C$

Cash 50 1.52 76
Accounts receivable 575 1.52 874
Inventories 825 1.52 1,254
Equipment, net 2,670 1.52 4,058
Total assets 4,120 6,262
Liabilities
Accounts payable 465 1.52 706
Bonds payable 1,290 1.52 1,961
Common shares 1,200 1.67 2,004
Retained earnings 1,165 1,926
Cumulative translation gains and losses (335)
Total liabilities and shareholders' equity 4,120 6,262
In In
thousands thousands
of 's of C$'s
9-14
(2) Cumulative translation gain

(loss):
Net assets, Dec 31, 20X6
(1,002 + ,1200) 2,202 1.67 3,677
Changes in net assets, 20X7
Net income 213 1.57 334
Dividends (50) 1.61 (81)
Calculated net assets 3,930
Actual net assets 2,365 1.52 3,595
Cumulative translation gain 335 Dr.
20X7, are below.

9-15
dditional information:
3. Dividends were paid on March 31, 20X7.
January 1, 20X3 1 = C$1.95

January 1, 20X6 1 = C$1.85
March 31, 20X7 1 = C$1.61
December 31, 20X7 1 = C$1.52
Required:
Translate Time's statement of financial position at December 31, 20X7, into Canadian dollars, assuming its
functional currency is Canadian dollars. Calculate the translation gain or loss arising in 20X7.
Answer: The temporal method is used in this case.

9-16
Time Limited
December 31, 20X7
Assets Exchange rate C$

Cash 50 1.52 76
Accounts receivable 575 1.52 874
Inventories 825 1.55 1,279
Equipment, net 2,670 1.85 4,940
Total assets 4,120 7,169
Liabilities
Accounts payable 465 1.52 706
Bonds payable 1,290 1.52 1,961
Common shares 1,200 1.85 2,220
Retained earnings 1,165 2,282
Total liabilities and shareholders' equity 4,120 7,169
Calculation of translation gain or loss for 20X7.
Local currency
In thousands of 's Exchange rate C$
Monetary items:
Balance January 1, 20X7 (1,385) 1.67 (2,313)
Changes during 20X7
Sales 2,170 1.57 3,407
Purchases (note 1) (1,378) 1.57 (2,163)
Interest (80) 1.57 (126)
Other expenses (407) 1.57 (639)
Dividends paid (50) 1.61 (81)
Derived balance (1,915)
Actual balanceDecember 31, 20X7 (1,130) 1.52 (1,718)
Net translation gain for 20X7 197
Note 1: Purchases is equal to:

Cost of goods sold add closing inventory less opening inventory:
= 1,203 +825 - 650 = 1,378
Page Ref: 472-476
Learning Obj.: 9.5
Difficulty: Difficult

9-17
20X7, are below.

9-18
Additional information:
3. Dividends were paid on March 31, 20X7.
January 1, 20X3 1 = C$1.95

January 1, 20X6 1 = C$1.85
March 31, 20X7 1 = C$1.61
December 31, 20X7 1 = C$1.52
Required:
Translate Time's statement of comprehensive income for the year ended December 31, 20X7 into
Canadian dollars assuming its functional currency is Canadian dollars. Calculate the translation gain or
loss arising in 20X7.

9-19
Answer: Time Limited
Exchange rate C$
Sales 2,170 1.57 3,407
Opening inventory 650 1.64 1,066

Purchases 1,378 1.57 2,163
Closing inventory (825) 1.55 (1,279)
Depreciation expense 267 1.85 494
Interest expense 80 1.57 126
Other expenses 407 1.57 639
1,957 3,209
198
Translation gain 197
Comprehensive income 213 395
Calculation of translation gain or loss for 20X7.
Local
currency Exchange
In thousands of 's rate C$
Monetary items:
Balance January 1, 20X7 (1,385) 1.67 (2,313)
Changes during 20X7
Sales 2,170 1.57 3,407
Purchases (note 1) (1,378) 1.57 (2,163)
Interest (80) 1.57 (126)
Other expenses (407) 1.57 (639)
Dividends paid (50) 1.61 (81)
Derived balance (1,915)
Actual balanceDecember 31, 20X7 (1,130) 1.52 (1,718)
Net translation gain for 20X7 197
Note 1: Purchases is equal to:

Cost of goods sold add closing inventory less opening inventory:
= 1,203 + 825 - 650 = 1,378
Page Ref: 472-476
Learning Obj.: 9.5
Difficulty: Difficult

9-20

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Beechy, Trivedi, MacAulay Advanced Financial Accounting, Seventh Edition

Chapter 9 Reporting Foreign Operations

Sales SEK 1,625

Accounts payable SEK 90 SEK 85

Assume that foreign exchange rates were as follows:

Copyright 2014 Pearson Canada Inc.

Net monetary assets, beginning 50,000 3.3 15,152

Page Ref: 452-455, 472-476

Sales SEK 1,625

Accounts payable SEK 90 SEK 85

Assume that foreign exchange rates were as follows:

Answer: SEK 3.9 C$

Accounts payable 90,000 3.9 23,077

Comprehensive income 500,000

LIVERPOOL COMPANY, London Branch

Retained earningsJanuary 1 850,000

LIVERPOOL COMPANY, London Branch

Assets 20X5 20X4

Current liabilities 700,000 600,000

Direct exchange rates for the pound sterling are:

January 1, 1984 1 = $1.9180

Copyright 2014 Pearson Canada Inc.

Derived ending net monetary assets (1,167,339)

LIVERPOOL COMPANY, London Branch

Comprehensive income 500,000

LIVERPOOL COMPANY, London Branch

Retained earningsJanuary 1 850,000

LIVERPOOL COMPANY, London Branch

Assets 20X5 20X4

Current liabilities 700,000 600,000

Direct exchange rates for the pound sterling are:

January 1, 1984 $1 = $1.9180

Copyright 2014 Pearson Canada Inc.

Sales 2,300,000 1.5093 $3,471,390

Comprehensive income 500,000 $710,666

Derived ending net monetary assets (1,167,339)

Retained earningsend 1,150,000 $2,199,840

Copyright 2014 Pearson Canada Inc.

LIVERPOOL COMPANY, London Branch

Comprehensive income 500,000

LIVERPOOL COMPANY, London Branch

Retained earningsJanuary 1 850,000

LIVERPOOL COMPANY, London Branch

Assets 20X5 20X4

Current liabilities 700,000 600,000

Copyright 2014 Pearson Canada Inc.

Direct exchange rates for the pound sterling are:

January 1, 1984 1 = $1.9180

LIVERPOOL COMPANY - London Branch

Cash and receivables 1,150,000 1.4730 $1,693,950

Total 5,050,000 $8,507,370

Current liabilities 700,000 1.4730 1,031,100

Total 5,050,000 $8,507,370

Copyright 2014 Pearson Canada Inc.

Foreign exchange rates were as follows:

January 1, 20X5 1 = 1.50

a. Equipment (425,000 1.62) $688,500

Copyright 2014 Pearson Canada Inc.

Foreign exchange rates were as follows:

2nd purchase (175,000/5 2 1.46) 102,200

d. Investment property $8,748,000

e. Goodwill 375,000 1.50 562,500

Copyright 2014 Pearson Canada Inc.

Copyright 2014 Pearson Canada Inc.