Agentel Corporation is a U.S. –based importing-exporting company. The company entered into the following transactions during the month of November.
Nov. 6 Purchased merchandise from AGT, a Swiss firm, for 600,000 francs.
5 Sold merchandise to SLS Inc, a firm located in rio De Janeiro, for $200,000.
18 Sold merchandise to TNT, Ltd., a British firm, for 130,000 pounds.
20 Purchased merchandise from SDS, Ltd., a British firm, for $160,000.
All the transactions were unsettled at December 31, Agentel’s fiscal year-end. Spot rates are as follows:
Date Franc Real Pound
November 6 $.490 $.412 $1.520
November 15 $.487 $.409 $1.509
November 18 $.476 $.414 $1.506
November 20 $.468 $.405 $1.498
November 31 $.460 $.398 $1.482
Compute the amount that Agentel would report for each unsettled receivable and payable in its balance sheet prepared at December 31.
Compute the transactions gain or loss on each unsettled receivable and payable that would be reported in the income statement prepared for the year ended December 31.
ASI recently completed the development and installation of an accounting information system for a company located in Rio De Janeiro, Brazil. The company considered that all revenue realization criteria were satisfied and accordingly recorded on October 2, 2008, a receivable from the foreign company. The receivable is to be settled in 120 days on February 1 by the delivery of 300,000 Real. To hedge against an unfavorable change in the foreign exchange rate, ASI acquired a forward contract to sell 300,000 real on February 1 for $.4730 per real. The following exchange rates were quoted:
Date Spot Rate Forward Rate (Delivery on 2/1)
October 2 $.4737 $.4730
December 31 $.4895 $.4810
February 1 $.4950 —
ASI is a calendar-year company.
Prepare the journal entries to record the transactions, adjust the accounts on December 31, and settle the receivable and forward contract on February 1.
(1) Based on the data given above, complete the following table.
Revenue _______ _________
Transaction gain (loss) related to the exposed receivable bal. _______ _________
Transaction gain (loss) related to the forward contract _______ _________
Effect on net income _______ _________
(2) What was the cumulative effect on net income (ie., 2008 plus 2009)?
(3) How much cash was received when the account was settled?
Crystal Exporting Co. is a U.S. wholesaler engaged in foreign trade. The following transactions are representative of its business dealings. The company used a periodic inventory system and is ona calendar-year basis. All exchange rates are direct quotations.
Dec. 1 Crystal Exporting purchased merchandise from Chang’s Ltd., a Hong Kong manufacturer. The invoice was 210,000 Hong Kong dollars, payable on April 1. On this same date, Crystal Exporting acquired a forward contract to buy 210,000 Hong Kong dollars on April 1 for $.1314.
Dec. 29 Crystal Exporting sold merchandise to Zintel Retailers for 120,000 Hong Kong dollars, receivable in 90 days. No hedging was involved.
April 1 Crystal Exporting received 120,000 Hong Kong dollars from Zintel Retailers.
Crystal Exporting submitted full payment of 210,000 Hong Kong dollars to Chang’s, Ltd., after obtaining the 210,000 Hong Kong dollars on its forward contract.
Spot rates and the forward rates for the Hong Kong dollar were as follows:
Spot Rate Forward rate for Apr. 1 Delivery
Dec 1 $.1265 $.1314
Dec. 29 $.1240 $.1305
Dec. 31 $.1259 $.1308
April 1 $.1430
Prepare journal entries for the transactions including the necessary adjustments on December 31.
Explain the income statement treatment given to any transaction gains and losses recognized at December 31.
Select the best answer for each of the following items:
Golf Company acquired 80% of the outstanding common stock of Ping Company, a foreign company, in an acquisition accounted for as a purchase transaction. In preparing consolidated statements, the paid-in capital of Ping Company should be translated into dollars at the
Current exchange rate in effect at the balance sheet date.
Exchange rate in effect at the date the capital transactions of the subsidiary took place.
Exchange rate in effect at the date Golf Company purchased the Ping Company stock.
Exchange rate effective when Ping Company was organized.
The account balances of a foreign entity are required by SFAS No. 52 to be measured using that entity’s functional currency. The functional currency of an entity is defined as
The currency in which the entity’s transactions are recorded.
The currency of the primary economic environment in which the entity operates.
The U.S. dollar.
The local currency of the country in which the entity is physically located.
When translating foreign currency financial statements for an entity whose functional currency is the local currency of the country in which it is physically located, which of the following accounts is translated using current exchange rates?
Bonds payable Inventories carried at market
A translation adjustment (or translation gain) that is a consequence of translation of a functional currency that is different from the reporting currency should be
Deferred and amortized over a period not to exceed 40 years.
Deferred until a subsequent year when a loss occurs and offset it against that loss.
Included as a separate item in the equity section of the balance sheet.
Included in net income in the period in which it occurs.
A wholly owned foreign subsidiary of Import Corporation has certain expense accounts for the year ended December 31, 2008, stated in local currency units (LCU) as follows:
Amortization of patent (patent was acquired 01/01/2006) 40,000
Provision for doubtful accounts 40,000
The exchange rates at various dates are as follows:
Dollar Equivalent of 1 LCU
December 31, 2008 $.20
Average for the year ended December 31, 2008 $.24
January 1, 2006 $.25
The subsidiary’s operations were an extension of the parent company’s operations. What total dollar amount should be included in Import’s income statement to reflect the foregoing expenses for the year ended December 31, 2008?
Select the best answer choice for each of the following items.
Perez Company’s operations are unrelated to the operations of its subsidiary. Certain balance sheet accounts of the foreign subsidiary at December 31, 2008, have been translated into U.S. dollars as follows:
Current rates Historical rates
Accounts receivable, current $200,000 $220,000
Accounts receivable, long-term $130,000 $140,000
Prepaid insurance $50,000 $55,000
Goodwill $100,000 $110,000
If the accounting is in accordance with SFAS No. 52, what total should be included in Perez’s balance sheet at December 31, 2008, for the foregoing items?
When the functional currency of a foreign operation is the U.S. dollar, translation gains and losses resulting from translating (remeasuring) foreign currency financial statements into U.S. dollars should be included as
An extraordinary items in the income statement for the period in which the rate changes.
An ordinary item in the income statement for losses but deferred for gains in accordance with the conservatism convention.
An ordinary item in the income statement for the period in which the rate changes.
A deferred item in the balance sheet.
Pal Company is translating account balances of its foreign subsidiary into dollars for its December 31, 2008, balance sheet and its 2008 income statement. The functional currency was identified as the local currency of the foreign subsidiary. The average exchange rate for 2008b should be used to translate
Retained earnings at January 1, 2008
Equipment purchased in 2008
Sales for 2008
Cash at December 31, 2008
One of the first steps in translating the financial statements of a foreign subsidiary is the identification of the functional currency of that entity. Which of the following indicates that the functional currency is the local currency of the foreign entity?
There is a high volume of intercompany transactions
Financing is primarily denominated in the local currency
Sales are mostly in the United States, or sales contracts are denominated in dollars
Sales prices are primarily responsive in the short term to exchange rate changes
When the foreign operations are conducted in a highly inflationary economy, at what translation rates should the goodwill and accounts receivable accounts in foreign statements be translated into U.S. dollars?
Goodwill Accounts Receivable
Current Average for year
On January 2, 2008, P Company, a U.S. based company, acquired for 2,000,000 francs an 80% interest in SFr Company, a Swiss company. On January 2, 2008, SFr Company reported a retained earnings balance of 480,000 francs. SFr’s books are maintained in francs and are in conformity with U.S. generally accepted accounting principles. Trial balances of the two companies as of December 31, 2009, are presented here:
Debits P Company (dollars) SFr Company (francs)
Cash 500,200 962,500
Accounts Receivable 516,400 660,000
Inventories (FIFO cost) 627,800 1,037,500
Investment in SFr Company 300,000 —
Land 450,000 500,000
Buildings (net) 610,000 550,000
Equipment (net) 290,000 405,000
Dividends declared 200,000 375,000
Cost of goods sold 2,720,000 2,312,500
Depreciation expense 210,000 125,000
Other expense 914,000 818,750
Income tax expense 100,000 102,500
Totals 7,438,400 7,848,750
Accounts payable 540,000 800,000
Short-term notes payable 300,000 650,750
Bonds payable 700,000 850,000
Common stock 800,000 960,000
Additional paid-in capital 300,000 300,000
Retained earnings, 1/1 544,400 513,000
Sales 4,200,000 3,775,000
Dividend income 54,000 —
Totals 7,438,400 7,848,750
Other information related to the subsidiary follows:
Beginning inventory of 830,000 francs was acquired when the exchange rate was $.165.
Purchases made uniformly throughout 2009 were 2,520,000 francs.
The franc is identified as the subsidiary’s functional currency.
The subsidiary’s beginning (1/1/09) retained earnings and cumulative translation adjustment (credit) in dollars were $75,948 and $36,462, respectively.
All plant assets were acquired before the parent obtained controlling interest in the subsidiary.
Sales are made and all expenses are incurred uniformly throughout the year.
The ending inventory was acquired during the last quarter.
The subsidiary declared and paid dividends of 375,000 francs on September 2.
The following direct exchange rate quotations were available:
Date of subsidiary acquisition $.15
Average for 2008 $.156
January 1, 2009 $.17
September 2, 2009 $.18
December 31, 2009 $.19
Average for the 4th quarter, 2009 $.185
Average for 2009 $.176
Prepare a translated balance sheet and combined statement of income and retained earnings for the subsidiary.
Prepare a schedule to verify the translation adjustment.
Compute the following ratios based on the franc and the U.S. dollar financial statements.
Debt to equity
Gross profit percentage
Net income to sales