Translation of Financial Statements of a Foreign Subsidiary

1. Under IAS 21, which of the following statements pertains to functional currency?
a. It refers to the currency of the primary economic environment in which the
entity operates.
b. It refers to the currency in which the financial statements are presented.
c. It refers to the currency other than the functional currency of the entity.
d. It refers to the type of currency in a given jurisdiction which a creditor may be
compelled to accept.

2. Under IAS 21, what is the initial measurement of foreign currency denominated
transaction?
a. Both monetary and nonmonetary items are measured initially at transaction
or historical rate.
b. Monetary items are measured at closing rate while nonmonetary items are
measured at transaction rate.
c. Monetary items are measured at transaction rate while nonmonetary items are
measured at closing rate.
d. Both monetary and nonmonetary items are measured initially at closing rate.

3. Under IAS 21, what is the subsequent measurement of nonmonetary items?

a. Closing rate
b. Transaction rate
c. Average rate
d. Monthly rate

4. Under IAS 21, what is the subsequent measurement of monetary items?

a. Closing rate
b. Transaction rate
c. Average rate
d. Monthly rate

5. IAS 21 provides that exchange differences/(gain/loss) arising on the settlement or

remeasuring foreign currency transaction shall be recognized in
a. Profit or loss
b. Other comprehensive income
c. Share premium
d. Retained earnings
6. Which of the following items will result to foreign currency transaction gain/loss
due to settlement or remeasurement?
a. Foreign currency denominated income statement accounts such as revenue,
income, expense or loss.
b. Foreign currency denominated non-monetary assets such as inventory, PPE,
intangible asset or prepaid asset.
c. Foreign currency denominated monetary items such as accounts payable,
accounts receivable, notes payable, loans receivable or interest payable.
d. Foreign currency denominated non-monetary liabilities such as unearned revenue,
warranty liability, premium liability and deferred tax liability.
e. Foreign currency denominated equity accounts such as ordinary shares,
preference shares, treasury shares and share premium.

7. IAS 21 provides that an entity may present its financial statements in any currency
even different from its functional currency. When the company translates its financial
statements from its functional currency to its selected presentation currency, how shall
the exchange differences arising from the translation be recognized?
a. It shall be recognized in profit or loss.
b. It shall be recognized in other comprehensive income with reclassification
adjustment to profit or loss if realized.
c. It shall be recognized in other comprehensive income without reclassification
adjustment and reclassified directly to retained earnings if realized.
d. It shall be recognized directly to retained earnings.

8. When translating the financial statements of an entity from its functional currency to
its selected presentation currency, which of the following translation measurements is
incorrect?
a. Assets and liabilities are translated at the closing rate at the date of statement of
financial position.
b. Income and expenses are translated at (1) exchange rates at the date of the
transaction or (2) Average rate for the period for practicality.
c. Equity accounts other than retained earnings are translated at the date of the
transaction resulting in that equity item.
d. Retained earnings are translated using the average rate during the period.
 Problem 1. The following data were taken from the trial balance on
December 31,2020 of Foreign Co., a subsidiary of Manila Co.
Total Assets 21,750
Total Liabilities 11,500
Shareholders’ Equity
Ordinary shares 5,000
Retained earnings (1/1/ 2020) 2,500
Sales 90,000
Cost of goods sold 80,000
Depreciation expense 1,500
Other operating expenses 5,750
Additional Information:
a. The balance of the exchange differences in translating foreign financial
statements at December 31, 2019 was P50,000 credit.
b. The translated balance of retained earnings in Philippine peso at December 31,
2019 was P119,500.
c. When Foreign Co. was incorporated, the exchange rate was 1FC = P67.20. No
ordinary share changes had occurred since then.
d. The following data were the exchange rates during the year:

January 1, 2020 1FC = P67.40

December 31, 2020 1FC = P67.60
Average for 2020 1FC = P67.50

Compute the cumulative translation adjustment to be reported on December 31,

2020
a. 51,775 credit
b. 51,775 debit
c. 50,775 credit
d. 50,775 debit

Compute the translation adjustment for the year 2020

a. 1,775 debit
b. 1,775 credit
c. 775 debit
d. 775 credit
Solution:
Total Assets 21,750 x 67.60 = P1,470,300
========

Total Liabilities 11,500 x 67.60 = P 777,400

Total SHE
O/S 5,000 x 67.20 = P 336,000
*RE, end P 305,125

Cumulative Translation Adjustment (Cr) 51,775 (balancing figure)

Total Liab & SHE P1,470,300
========

*RE, 12/31/20

RE, 12/31/19 P119,500

Add: Net Income (2,750 x 67.50) 185,625
Re, 12/31/20 P305,125

Problem 2. The following data are taken from the records of Elite
Imports Company, a foreign subsidiary in New Zealand.

NZ dollar
Total Assets 12/31/20 146,000
Total Liabilities 12/31/20 45,000
Common Stock 12/31/20 60,000
Retained Earnings 01/01/20 29,000
Net Income 2020 15,000
Dividends Declared 12/31/20 3,000

Exchange rates:
Closing/Current rate P 10
Historical rate 11
Weighted Average Rate 12

The peso balance of retained earnings on December 31, 2019 is P325,000.

Compute the Cumulative Translation Adjustment reported in the Consolidated

Statement of Financial Position on December 31, 2020
a. 122,000 debit
b. 116,000 credit
c. 125,000 debit
d. 125,000 credit
Solution:
Total Assets 146,000 x 10 = P1,460,000
========

Total Liabilities 45,000 x 10 = P 450,000

Total SHE
O/S 60,000 x 11 = P 660,000
*RE, end P 475,000

Cumulative Translation Adjustment (Dr)(125,000) (balancing figure)

Total Liab & SHE P1,460,000
========

*RE, 12/31/20

RE, 12/31/19 P325,000

Add: Net Income (15,000 x 12) 180,000
Deduct: Dividends (3,000 x 10) (30,000)
Re, 12/31/20 P475,000

Problem 3. Cleared Corp. owns a subsidiary in Singapore whose Statement of

Financial Position in Singapore Dollars for the last two years follow:

Dec 31, 2020 Dec 31, 2021

Assets

Cash and Cash equivalents S$ 90,000 S$ 75,000

Receivables 367,500 442,500
Inventory 480,000 510,000
Property and Equipment, net 765,000 690,000
Total Assets S$ 1,702,500 S$ 1,717,500
Liabilities and Equity

Accounts Payable S$ 165,000 S$ 225,000

Long-term debt 967,500 855,000
Common stock 345,000 345,000
Retained earnings 225,000 292,500
Total Liabilities and Equity S$ 1,702,500 S$ 1,717,500
Relevant exchange rates are:

January 1, 2020 S$ 1 = P 45
December 31, 2020 S$ 1 = P 42.50
December 31, 2021 S$ 1 = P 47.50
Average 2020 S$ 1 = P 43.75
September 12, 2020 S$ 1 = P 40

Cleared formed the subsidiary on January 1, 2020. Income of the subsidiary was earned
evenly throughout the years and the subsidiary declared dividends worth S$15,000 on
September 12, 2020 and none were declared during 2021.

Compute the cumulative translation adjustment in 2021

A. P1,818,750
B. P1,706,250
C. P3,018,750
D. P2,625,000

Solution:

2020
Total Assets 1,702,500 x 42.50 = P72,356,250
=========

Total Liabilities 1,132,500 x 42.50 = P48,131,250

Total SHE
O/S 345,000 x 45 = P15,525,000
*RE, end P 9,900,000

Cumulative Translation Adjustment (Dr) ( 1,200,000) (balancing figure)

Total Liab & SHE P72,356,250
=========

*RE, 12/31/20

Net Income, 2020 (240,000 x 43.75) P10,500,000

Note:225,000 + 15,000 div = 240,000
Deduct: Dividends, 2020 (15,000 x 40) (600,000)
Re, 12/31/20 P9,900,000
2021

Total Assets 1,717,500 x 47.50 = P81,581,250

=========

Total Liabilities 1,080,000 x 47.50 = P51,300,000

Total SHE
O/S 345,000 x 45 = P15,525,000
*RE, end P12,937,500

Cumulative Translation Adjustment (Cr) 1,818,750 (balancing figure)

Total Liab & SHE P81,581,250
=========

*RE, 12/31/21

Net Income, 2020 (240,000 x 43.75) P10,500,000

Add: Net Income, 2021 (67,500 x 45) 3,037,500
Deduct: Dividends, 2020 (15,000 x 40) (600,000)
Re, 12/31/21 P12,937,500

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