Exercises 1.

Rose Co has fixed assets information as below:

Jan 1, Year 1. Purchase £2,000 PPE with rate of $1 per £
Jan 1, Year 2. Purchase £2,400 PPE with rate of $1,2 per £
Both equipment have a five year useful life.
Average exchange rate for year 2 is $1.1 per £
At Dec 31, Year 2, Exchange rate is $1.3 per £
Required:

A, Determine assets value (asset costs) on Dec 31, year 2 in parent currency ($)
B, Determine accumulated depreciation on Dec 31, year 2 in $
Answer:
- Current rate method
Equipment 1 £ Translation rate $

Cost 2,000 1.3 2600

Acc.depn 800 1.3 1040
Carrying amount 1,600 1.3 2080
Depn expense 400 1.1 440

Equipment 2 £ Translation rate $

Cost 2,400 1.3 3120
Acc.depn 480 1.3 624
Carrying amount 1,920 1.3 2496
Depn expense 480 1.1 528

=> Assets value on Dec 31, year 2 under current rate method: 2080+2496=4576
=> Acc depreciation on Dec 31, year 2 under current rate method:
1040+624=1664
- Temporal method
Equipment 1 £ Translation rate $
Cost 2,000 1 2000
Acc.depn 800 1 800
Carrying amount 1,600 1 1600
Depn expense 400 1.1 440
Equipment 2 £ Translation rate $
Cost 2,400 1.2 2880
Acc.depn 480 1.2 576
Carrying amount 1,920 1.2 2304
Depn expense 480 1.1 528

=> Assets value on Dec 31, year 2 under temporal method: 1600+2304=3904
=> Acc. depreciation on Dec 31, year 2 under temporal method: 800+576=1376
2. Dec 1, 20X8, Topica, a U.K Company, makes a sale and ships goods to
Eximco, a U.S compay.
Sales price is 20,000 USD. Eximco agrees to pay in USD by bank transfer on
Mar 1, 20X9
Spot rate as of Dec 1, 20X8 is 1,3$ per £
Spot rate as of Dec 31, 20X8 is 1,32$ per £
Spot rate as of Mar 1, 20X9 is 1,29$ per £
Topica has a December 31 year end.
Required:
1. How does Topica record the sale (in £) on Dec 1, 20X8?
2. How does Topica record the foreign Exchange gain/loss on Dec 31, 20X8
and on Mar 1, 20X9?
3. Multico, a US company forms a wholly owned subsidiary in Italy (Italco) on
31/12/20X0. On that date, Multico invests $1,350,000 in exchange for all of the
subsidiary’s capital stock. Italco purchased its inventory on 31/12/20X0 and its
beginning balance sheet on 1 Jan 20X1 is as follows:

Assets € Liabilities and Equity €

Cash 400,000 Capital stock 1,000,000
Inventory 600,000
Relevant exchange rates for 20X1 are as follows:
January 1, 20X1 1.35
Rate when PPE are acquired and long-term debt was incurred, Jan 15, X1 1.33
Rate when patent was acquired and capital was increased Feb 1, X1 1.32
Average for 20X1 1.3
Rate when dividends was declared, Dec 1, X1 1.27
Average for the month of Dec 1.26
Dec 31, 20X1 1.25
Required: Translate the Italy subsidiary’s Financial statements into USD using
temporal method.
Answer:
Balance sheet Dec 31, 20X1

Euro translation rate USD

Cash 750.000
A/R 600.000
Inventory 800.000
PPE 2.000.000
Acc. Depn - 200.000
Patent, net 80.000
Total asset 4.030.000
AP 330.000
Long-term
liability 2.000.000

Capital stock 1.200.000

RE 500.000
Total liability +
equity 4.030.000

Income Statement, 20X1

Euro translation rate USD
Sales 8.000.000
COGS 6.000.000
S.A expenses 500.000
Depn expense 200.000
Amortization expense 20.000
Interest exp 180.000
Income tax exp 275.000
Remeasurement
gain/loss -
Net income 825.000
 Statement of Retained earnings, 20X1
Step 2 Euro Translation rate USD
RE, 1/1/X1 -
Net income 825.000
Dividend, 1/12/X1 325.000
RE, 31/12/X1 500.000

Calculation for
COGS Euro translation rate USD
opening inventory 600.000
Purchase 6.200.000
COGS 6.000.000
Closing inventory 800.000

Calculation for
Capital stock Euro translation rate USD
Beginning
Added
Ending