Reference no: EM13850553

Answer with explanation:

1. What is meant by the “translation” of foreign currency financial statements?

2. What is the cause of balance sheet exposure?

3. What is the primary difference between transaction exposure and accounting exposure?

4. When would the balance sheet exposure arising from the current rate method become realized?

5. Why would the management of a multinational corporation incur real costs to hedge accounting exposure, which is only on paper?

P 13-3 Translation worksheet, parent accounting

Pylon Corporation acquired all the outstanding capital stock of Sooth Company of London on January 1, 2008, for $800,000, when the exchange rate for British pounds was $1.60 and Sooth's stockholders' equity consisted of £400,000 capital stock and £100,000 retained earnings. Sooth's functional currency is the British pound. Balance sheet accounts for Sooth at January 1, 2008, in British pounds and U.S. dollars are summarized as follows:

                                                                                British' Pounds                  Exchange Rate U.S. Dollors

Cash                                                                      £ 50,000                                $1.60 $                  80,000

Accounts receivable-net 60,000 1.60 96,000

Inventories 40,000 1.60 64,000

Equipment 750,000 1.60 1,200,000

                Total                                                      £900,000 $1,440,000

Accumulated depreciation £250,000 $1.60 $ 400,000

Accounts payable 150,000 1.60 240,000

Capital stock 400,000 1.60 640,000

Retained earnings 100,000                                 1.60 160,000

                Total                                                      £900,000 $1,440,000

Exchange rates for 2008 are as follows:

Current exchange rate January 1, 2008 $1.60

Average exchange rate for 2008                                                1.63

Rate for cash dividends 1.62

Current exchange rate December 31, 2008 1.65

Sooth's adjusted trial balance in British pounds at December 31, 2008, is as follows:

Debits

Cash £                                                   20,000

Accounts receivable-net 70,000

Inventories 50,000

Equipment 800,000

Cost of sales 350,000

Depreciation expense 80,000

Operating expenses 100,000

Dividends 30,000

Total £1,500,000

Credits

Accumulated depreciation £ 330,000

Accounts payable 70,000

Capital stock 400,000

Retained earnings 100,000

Sales 600,000

Total £1,500,000

REQUIRED with calculation:

1. Prepare a translation worksheet to convert Sooth's December 31, 2008, adjusted trial balance into U.S.

2. Prepare journal entries on Pylon's books to account for the investment in Sooth for 2008.

3. Directly compute the translation gain or loss.

P 13-5 Remeasurement worksheet

Philip Corporation, a U.S. firm, acquired 100% of Stuart Corporation's outstanding stock at book value on January 1, 2008, for $112,000. Stuart is a New Zealand company, and its functional currency is the U.S. dollar. The exchange rate for New Zealand dollars (NZ$) was $0.70 when Philip acquired its interest. Stuart's stockholders' equity on January 1, 2008, consisted of NZ$150,000 capital stock and NZ$10,000 retained earnings. The adjusted trial balance for Stuart at December 31, 2008, is as follows:

Debits

Cash                                                      NZ$ 15,000

Accounts receivable—net 60,000

Inventories 30,000

Prepaid expenses 10,000

Land 45,000

Equipment 60,000

Cost of sales 120,000

Depreciation expense 12,000

Other operating expenses 28,000

Dividends 20,000

Total                                                      NZ$400,000

Credits

Accumulated depreciation           NZ$ 22,000

Accounts payable 18,000

Capital stock 150,000

Retained earnings 10,000

Sales 200,000

Total NZ$400,000

ADDITIONAL INFORMATION

1. Prepaid expenses (supplies) of NZ$18,000 were on hand when Philip acquired Stuart. Other operating expenses include NZ$8,000 of these supplies that were used in 2008. The remaining NZ$10,000 of sup-plies is on hand at year-end.

2. The NZ$120,000 cost of sales consists of NZ$50,000 inventory on hand at January 1, 2008, and NZ$100,000 in purchases during the year, less NZ$30,000 ending inventory that was acquired when the exchange rate was $0.66.

3. The NZ$60,000 of equipment consists of NZ$50,000 included in the business combination and NZ$10,000 purchased during 2008, when the exchange rate was $0.68. A depreciation rate of 20% is applicable to all equipment for 2008.

4. Exchange rates for 2008 are summarized as follows:

Current exchange rate January 1, 2008                                   $0.70

Exchange rate when new equipment was acquired 0.68

Average exchange rate for 2008 0.67

Exchange rate for December 31, 2008, inventory 0.66

Exchange rate for dividends 0.66

Current exchange rate December 31, 2008 0.65

REQUIRED with calculation:

Prepare a worksheet to premeasure the adjusted trial balance of Stuart Corporation into U.S. dollars at December 31, 2008.