Foreign Currency Translation – Lesson 5 Summary Problem

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1
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TB Corp., a Canadian company that uses the Canadian dollar as its functional currency, purchased 100% of the common shares of Hana Inc. on December 31, Year 2. Hana is a foreign subsidiary located in India. The currency in India is the rupee (₹). TB has determined that the functional currency of Hana is the Canadian dollar.

Hana’s SCI for the year ended December 31, Year 5, is as follows:

Sales

₹501,000,000

COGS

(300,600,000)

Depreciation

(40,000,000)

Finance expense

(60,000,000)

Other expenses

(20,000,000)

Profit

80,400,000

Sales and finance expense occurred evenly over the year. Other expenses were incurred in December Year 5.

Relevant exchange rate information follows:

June 1, Year 5

₹1 = C$0.016

December 31, Year 5

₹1 = C$0.019

Average for Year 5 (January to December)

₹1 = C$0.018

Average for December Year 5

₹1 = C$0.017

Which of the following statements describes the translation of Hana’s SCI for the year ended December 31, Year 5? Assume both companies report under IFRS.

Other expenses were incurred in December Year 5, so the average rate for December is used for translation. ₹20,000,000 × $0.017 = $340,000

2
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View Industries Co. owns 50% of Plateau Inc., a joint operation located in the United States. The functional currency of both View and Plateau is the Canadian dollar. On March 31, Year 5, Plateau’s year end, the company had the following balances on its SFP:

Cash

US$83,000

Patent

US$112,000

The patent was purchased on May 15, Year 4. The cash was received evenly throughout March Year 5.

Exchange rates:

May 15, Year 4

US$1.00 = C$1.10

March 31, Year 5

US$1.00 = C$1.14

Average for fiscal Year 5

US$1.00 = C$1.12

Average for March Year 5

US$1.00 = C$1.13

Which of the following statements accurately describes the translation of Plateau’s SFP to the Canadian dollar on March 31, Year 5?

The patent is a non-monetary asset, and it is therefore translated at the historical rate from purchase. US$112,000 × $1.10 = $123,200

3
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On January 1, Year 6, Hometown Inc., a Canadian public company located in Fredericton, NB, purchased 75% of the outstanding shares of Overseas Ltd., a Brazilian company. Excerpts of Overseas’ SFP (in Brazilian reais, R$) as of December 31 and its SCI are as follows:

Year 6

Year 5

Common shares

R$ 90,000

R$ 90,000

Retained earnings

330,000

175,000

Sales

710,000

Total expenses

360,000

Profit

350,000

Dividends were declared and paid on July 1, Year 6.

The following exchange rate information is available:

December 31, Year 5, and January 1, Year 6

R$1 = C$0.64

July 1, Year 6

R$1 = C$0.68

December 31, Year 6

R$1 = C$0.72

Average for Year 6

R$1 = C$0.67

What is Overseas’ ending retained earnings balance on December 31, Year 6, assuming that Overseas’ functional currency is the Brazilian real?

Ending retained earnings is calculated as follows:

R$

Rate

C$

Retained earnings — December 31, Year 5

R$  175,000

0.64

C$ 112,000

Plus: profit

350,000

0.67

234,500

Less: dividends (see below)

    (195,000)

0.68

   (132,600)

Retained earnings — December 31, Year 6

R$  330,000

C$ 213,900

Dividends = 175,000 beginning retained earnings + 350,000 profit – 330,000 ending retained earnings = R$195,000

4
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Cohos Ltd., a Canadian public company, has a wholly owned foreign subsidiary, Limbo Inc. The functional currency of both Cohos and Limbo is the Canadian dollar. Limbo has a year end of December 31.

Limbo reported opening inventory of FCU150,000 and ending inventory of FCU135,000 at the end of the current year. COGS reported in the statement of comprehensive income was FCU1,620,000. Inventory purchases occurred evenly throughout the year.

The exchange rate at the beginning of the year

FCU1 = C$0.90

The exchange rate when opening inventory was acquired

FCU1 = C$0.87

The average exchange rate for the year

FCU1 = C$0.80

The exchange rate in effect when ending inventory was acquired

FCU1 = C$0.75

The exchange rate at the end of the year

FCU1 = C$0.70

What is translated COGS on December 31?

Purchases in FCU must first be determined by taking ending inventory plus COGS less opening inventory (FCU135,000 + FCU1,620,000 – FCU150,000 = FCU1,605,000).

Translated COGS can then be calculated as follows:

Opening inventory (FCU150,000 × C$0.87)

$130,500

+ Purchases (FCU1,605,000 × C$0.80)

1,284,000

− Ending inventory (FCU135,000 × C$0.75)

(101,250)

Translated COGS

$1,313,250

(Choice D) Incorrect. Purchases, not the cost of sales, are being translated in this calculation, at the average rate. Incorrect calculation: FCU135,000 ending inventory + FCU1,620,000 COGS – FCU150,000 opening inventory = FCU1,605,000 × C$0.80 = $1,284,000.

5
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Zapz Co. has a wholly owned foreign subsidiary, Triple C Inc. The functional currency of both Zapz and Triple C is the Canadian dollar. Triple C has a year end of December 31. Both companies apply IFRS.

Triple C paid FCU24,000 in annual interest on its long-term debt on December 31, when the exchange rate was FCU1 = C$0.95. The exchange rate on January 1 that year was FCU1 = $C0.76, and the average rate for the current year was FCU1 = C$0.80.

What is the translated interest expense for the current year?

The interest expense for the current year is translated at the average rate for the year since financing expenses are incurred evenly throughout the year. FCU24,000 × C$0.80 = $19,200

6
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Friendly Packaging Inc. (Friendly) purchased 100% of a foreign subsidiary, Excessive Plastics Co. (EPC) on May 1, Year 6. On June 30, Year 8, the year end of both companies, EPC had a net PP&E balance of FCU900,000. Of this balance, EPC had purchased FCU700,000 on December 31, Year 2, and the remaining FCU200,000 worth of PP&E was purchased on July 30, Year 7. The functional currency of both Friendly and EPC is the Canadian dollar.

Exchange rates

December 31, Year 2

FCU1 = C$0.95

May 1, Year 6

FCU1 = C$0.86

July 30, Year 7

FCU1 = C$0.83

June 30, Year 8

FCU1 = C$0.80

Average for Year 8

FCU1 = C$0.82

What is EPC’s PP&E balance after translation to the Canadian dollar on June 30, Year 8? Friendly prepares its financial statements in accordance with IFRS.


EPC’s PP&E balance is calculated as follows:

FCU

C$

PP&E — original

700,000

0.86

602,000

PP&E — purchased on Jul 30, Year 7

200,000

0.83

166,000

900,000

768,000

Note that the historical rate for the original PP&E is the date Friendly purchased EPC, as the assets were purchased prior to this date.

7
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Canadian Diaper Co. (CDC) has a foreign subsidiary that reported the following information (in FCU):

December 31, Year 3

December 31, Year 2

Building, net

FCU150,000

FCU160,000

The foreign subsidiary’s income statement for the period ended December 31, Year 3, reported the following (in FCU):

Year 3

Sales

FCU190,000

COGS

85,000

Depreciation

10,000

The following exchange rates are in effect:

January 2, Year 2 (date building was purchased)

FCU1 = C$1.220

Average rate for Year 2 and Year 3

FCU1 = C$1.210

Average rate for Year 3

FCU1 = C$1.205

December 31, Year 3

FCU1 = C$1.180

Assuming that CDC’s foreign subsidiary’s functional currency is FCU, what is the translated amount of depreciation expense for Year 3? Both companies report under IFRS.

Depreciation expense is translated at the average rate for the year: FCU10,000 × 1.205 = $12,050.