Exercise 12-6



Exercise 12-6

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:

Currency

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

A. Compute the amount that Agentel would report for each unsettled receivable and payable in its balance sheet prepared at December 31.

B. 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.

Exercise 12-7

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.

A. Prepare the journal entries to record the transactions, adjust the accounts on December 31, and settle the receivable and forward contract on February 1.

B. (1) Based on the data given above, complete the following table.

2008 2009

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?

Pr 12-2

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.

1. 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

A. Prepare journal entries for the transactions including the necessary adjustments on December 31.

B. Explain the income statement treatment given to any transaction gains and losses recognized at December 31.

Ex 13-2

Select the best answer for each of the following items:

1. 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

a. Current exchange rate in effect at the balance sheet date.

b. Exchange rate in effect at the date the capital transactions of the subsidiary took place.

c. Exchange rate in effect at the date Golf Company purchased the Ping Company stock.

d. Exchange rate effective when Ping Company was organized.

2. 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

a. The currency in which the entity’s transactions are recorded.

b. The currency of the primary economic environment in which the entity operates.

c. The U.S. dollar.

d. The local currency of the country in which the entity is physically located.

3. 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. No No

b. Yes No

c. No Yes

d. Yes Yes

4. 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

a. Deferred and amortized over a period not to exceed 40 years.

b. Deferred until a subsequent year when a loss occurs and offset it against that loss.

c. Included as a separate item in the equity section of the balance sheet.

d. Included in net income in the period in which it occurs.

5. 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:

LCU

Amortization of patent (patent was acquired 01/01/2006) 40,000

Provision for doubtful accounts 40,000

Rent 120,000

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?

a. $48,000

b. $40,000

c. $48,400

d. $42,000

Ex 13-3

Select the best answer choice for each of the following items.

1. 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:

Translated at:

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?

a. $480,000

b. $490,000

c. $495,000

d. $580,000

2. 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

a. An extraordinary items in the income statement for the period in which the rate changes.

b. An ordinary item in the income statement for losses but deferred for gains in accordance with the conservatism convention.

c. An ordinary item in the income statement for the period in which the rate changes.

d. A deferred item in the balance sheet.

3. 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

a. Retained earnings at January 1, 2008

b. Equipment purchased in 2008

c. Sales for 2008

d. Cash at December 31, 2008

4. 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?

a. There is a high volume of intercompany transactions

b. Financing is primarily denominated in the local currency

c. Sales are mostly in the United States, or sales contracts are denominated in dollars

d. Sales prices are primarily responsive in the short term to exchange rate changes

5. 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

A. Current Average for year

B. Historical Current

C. Historical Historical

D. Current Current

Pr 13-3

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

Credits

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:

1. Beginning inventory of 830,000 francs was acquired when the exchange rate was $.165.

2. Purchases made uniformly throughout 2009 were 2,520,000 francs.

3. The franc is identified as the subsidiary’s functional currency.

4. The subsidiary’s beginning (1/1/09) retained earnings and cumulative translation adjustment (credit) in dollars were $75,948 and $36,462, respectively.

5. All plant assets were acquired before the parent obtained controlling interest in the subsidiary.

6. Sales are made and all expenses are incurred uniformly throughout the year.

7. The ending inventory was acquired during the last quarter.

8. The subsidiary declared and paid dividends of 375,000 francs on September 2.

9. 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

A. Prepare a translated balance sheet and combined statement of income and retained earnings for the subsidiary.

B. Prepare a schedule to verify the translation adjustment.

C. Compute the following ratios based on the franc and the U.S. dollar financial statements.

1. Current ratio

2. Debt to equity

3. Gross profit percentage

4. Net income to sales

E12-6)

Part A Accounts Receivable Amount

SLS, Inc. (denominated in $) $200,000

TNT, Ltd. (130,000 × $1.482) 192,660

Accounts Payable

AGT (600,000 × $.460) 276,000

SDS, Ltd. (denominated in $) $160,000

Part B Receivable Payable       

SLS, Inc. TNT, Ltd. AGT SDS, Ltd.

Transaction date $200,000 $195,780* $294,000** $160,000

Balance sheet date 200,000 192,660 276,000 160,000

Transaction gain (loss) $ 0 $ ( 3,120) $ 18,000  $    0

* 130,000 × $1.506 = $195,780

** 600,000 × $0.490 = $294,000

E12-7)

Part A Oct. 2 Accounts Receivable (300,000 × $.4737) 142,110

Service Revenue 142,110

2 Dollars Receivable from Exchange Dealer 141,900

FC Payable to Exchange Dealer 141,900

(300,000 × $.473= $141,900)

Dec 31 Accounts Receivable 4,740

Transaction Gain [(300,000 × $.4895 = 146,850) - 142,110] 4,740

31 Transaction Loss [(300,000 × $.4810 = $144,300) - $141,900] 2,400

FC Payable to Exchange Dealer 2,400

Feb 1 Accounts Receivable 1,650

Transaction Gain [(300,000 × $.4950 = $148,500) - $146,850] 1,650

1 Transaction Loss [(300,000 × $.4950 = $148,500) - $144,300] 4,200

FC Payable to Exchange Dealer 4,200

Feb. 1 Investment in FC 148,500

Accounts Receivable (300,000 × $.4950) 148,500

Feb. 1 Cash 141,900

FC Payable to Exchange Dealer 148,500

Investment in FC 148,500

Dollars Receivable from Exchange Dealer 141,900

2008 2009

Part B 1. Revenue $142,110 $ 0

Transaction gain (loss) related to the exposed receivable balance 4,740 1,650

Transaction gain (loss) related to the forward contract (2,400) (4,200)

Effect on net income $144,450 $(2,550)

2. Cumulative effect on net income: $144,450 - $2,550 = $141,900

3. Cash received = $141,900

Pr12-2)

Part A Dec 1 Purchases 26,565

Accounts Payable (210,000 × $.1265) 26,565

1 FC Receivable from Exchange Dealer 27,594

Dollars Payable to Exchange Dealer 27,594

(210,000 × $.1314 = $27,594)

Dec. 29 Accounts Receivable (120,000 × $.1240) 14,880

Sales 14,880

31 Accounts Payable 126

Transaction Gain [(210,000 × $.1259 = $26,439) - $26,565] 126

31 Transaction Loss 126

FC Receivable from Exchange Dealer 126

[(210,000 × $.1308 = $27,468) - $27,594]

31 Accounts Receivable 228

Transaction Gain [(120,000 × $.1259 = $15,108) - $14,880] 228

Apr. 1 Cash (120,000 × .1430) 17,160

Accounts Receivable 15,108

Transaction Gain 2,052

1 Transaction Loss 3,591

Accounts Payable [(210,000 × $.1430 = $30,030) - $26,439] 3,591

1 FC Receivable from Exchange Dealer 2,562

Transaction Gain [(210,000 × $.1430 = $30,030 - $27,468] 2,562

1 Investment in FC 30,030

Dollars Payable to Exchange Dealer 27,594

Cash 27,594

FC Receivable from Exchange Dealer 30,030

1 Accounts Payable 30,030

Investment in Foreign Currency 30,030

Part B The aggregate transaction gain of $228 ($126 - $126 + $228) is included in the firm's income

statement as part of continuing operations.

E13-2)

1. c 2. b 3. d 4. d 5. c

E13-3)

1. a 2. c 3. c 4. b 5. b

Pr13-3)

Balance Sheet

Cash 962,500 $.19 182,875

Accounts Receivable 660,000 .19 125,400

Inventories 1,037,500 .19 197,125

Land 500,000 .19 95,000

Buildings (net) 550,000 .19 104,500

Equipment (net)   405,000 .19  76,950

4,115,000 781,850

Accounts Payable 800,000 .19 152,000

Short-term Notes Payable 650,750 .19 123,643

Bonds Payable 850,000 .19 161,500

Common Stock 960,000 .15 144,000

Additional Paid-in Capital 300,000 .15 45,000

Retained Earnings 554,250 81,708

Cumulative Translation Adjustment (Credit)       ---  73,999

4,115,000 781,850

Part B Verification of the Translation Adjustment

Translation

Francs Rate U.S.$ 

Exposed net asset position - 1/1 1,773,000* $.17 301,410

Adjustments for changes in net asset position during the year:

Net income for the year 416,250 .176 73,260

Dividends declared (375,000) .18 (67,500)

Net asset position translated using rate in effect at date of transaction --- 307,170

Exposed net asset position - 12/31 1,814,250 .19 344,708

Change in cumulative translation adjustment during the year - net increase 37,538

Cumulative translation adjustment - 1/1 (Given) 36,462

Cumulative translation adjustment - 12/31 (Credit balance) 74,000**

** Difference of $1.00 ($74,000 compared to $73,999) due to rounding.

* Common stock 960,000

Additional paid-in capital 300,000

Retained earnings   513,000

1,773,000

Francs $  

Part C Current ratio [pic] = 1.83 [pic] = 1.83

Debt to equity [pic] = 1.27 [pic] = 1.27

Gross profit percentage [pic] = 38.7% [pic] = 38.7%

Net income to sales [pic] = 11.0% [pic] = 11.0%

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