Chapter 9 – Reporting Foreign Operations

CHAPTER 9
Reporting Foreign Operations

SOLUTIONS TO PROBLEMS
P9-1

a. Translated statements of financial position:

(I) Current rate (II) Temporal

Cash H 40,000 @$1.60 $64,000 @$1.60 $64,000
Accounts receivable 20,000 @$1.60 32,000 @$1.60 32,000
Inventory (at market) 120,000 @$1.60 192,000 @$1.60 192,000
Capital assets 400,000 @$1.60 640,000 @$1.30 520,000
Accumulated (160,000) @$1.60 (256,000) @$1.30 (208,000)
depreciation
Long-term note 100,000 @$1.60 160,000 @$1.60 160,000
receivable

Total assets H520,000 $832,000 $760,000

Accounts and notes H80,000 @$1.60 $128,000 @$1.60 $128,000

payable
Bonds payable 300,000 @$1.60 480,000 @$1.60 480,000
Common shares 140,000 @$1.10 154,000 @$1.10 154,000
Cumulative translation 70,000 (2,000)
gain (loss)

Total equities H520,000 $832,000 $760,000

b.

I) Accounting exposure: H 140,000 Dr. H 100,000 Cr.

Net amounts translated at current rate = net assets net liabilities

II) Additional gain or loss from an

increase $35,000 gain $25,000 loss
 Chapter 9 – Reporting Foreign Operations

P9-2
(a) (b)
Current rate Temporal method
@ $0.82 rates amount

Sales $2,460,000 $0.82 $2,460,000

Cost of goods sold:
Beginning inventory 164,000 0.74 148,000
Purchases 820,000 0.82 820,000
984,000 968,000
Ending inventory 328,000 0.85 340,000
656,000 628,000

Depreciation 246,000 0.62 186,000

Other operating expenses 738,000 0.82 738,000
Interest expense 164,000 0.82 164,000
Total expenses 1,804,000 1,716,000
Net income (before exchange
gains or losses) $ 656,000 $ 744,000

Note: The interest, like all expenses, is translated at the rate in effect when the expense is
incurred, rather than when it is paid.

P9-3

a. (I) Functional Currency is the Canadian dollar

Loss on monetary items—bond (to net income):

Exchange Translated
Nominal Rates Amounts

Opening €9,000,000 1.20 $10,800,000

Closing 9,000,000 1.65 14,850,000
Current year’s loss $ 4,050,000

Translated Financial Statements

Statement of Comprehensive Income
Year ended December 31, 20X5

Exchange Translated
Nominal Rates Amounts
Revenue €1,000,000 1.40
 Chapter 9 – Reporting Foreign Operations

Expenses:
Interest expense 990,000 1.40
Other expense 10,000 1.40
Monetary loss — see above 4,050,000
1,000,000 5,450,000
Income (loss) € 0 $(4,050,000)

Statement of Financial Position

December 31, 20X5

Cash — —
Land €12,000,000 1.20 $14,400,000
$14,400,000

Bond €9,000,000 1.65 $14,850,000

Common shares 3,000,000 1.20 3,600,000
Retained earnings (deficit) — (4,050,000)
$14,400,000

a. (II) Functional Currency is the Euro

Translation Gain on Net Assets (to other comprehensive income)

Exchange Translated
Nominal Rate Amounts

Net assets, opening €3,000,000 1.20 $3,600,000

closing 3,000,000 1.65 4,950,000
Exchange gain $1,350,000

Translated Financial Statements

Statement of Comprehensive Income
Year ended December 31, 20X5

Exchange Translated
Nominal Rate Amounts
 Chapter 9 – Reporting Foreign Operations

Revenue €1,000,000 1.40 $1,400,000

Expenses:
Interest expense 990,000 1.40 1,386,000
Other expense 10,000 1.40 14,000
€1,000,000 1,400,000
Income € 0 $ 0

Statement of financial position

December 31, 20X5

Cash —
Land 12,000,000 1.65 $19,800,000
$19,800,000
Bond 9,000,000 1.65 $14,850,000
Common shares 3,000,000 1.20 3,600,000
Translation gain/loss* see above 1,350,000
$19,800,000
* Reported as a separate component of shareholder’s equity under ASPE, or in Other
Comprehensive Income under IFRS.

b. Economic exposure is the impact of changes in the relative values of the currencies on the earnings
ability of the foreign subsidiary. The foreign debt is hedged by the foreign non-monetary land
investment if Euro proceeds from the sale of the land in five years are adequate to pay off the Euro debt.
Therefore, reflecting an exchange loss on the bond (temporal method) does not reflect economic
exposure.

The current-rate method better reflects economic exposure. Investco Ltd. is exposed to
the extent of its net asset investment (€ 3,000,000 at historic values) and in fact
enjoyed favourable unrealized exchange gains on this investment during 20X5, a year
during which the Canadian dollar was depreciating relative to the Euro.

c. According to IFRS, the German subsidiary’s functional currency is the Euro because:
• there is no interrelationship between the day-to-day activities of the German
subsidiary and the Canadian parent
• the activities of the German subsidiary are financed by debt and rental inflows
denominated in the Euro
• the Euro debt will be repaid out of Euro proceeds from the sale of the land in five
years.
In effect, there is no exposure of the Canadian parent to short-term fluctuations in the
Euro exchange rate and it would be inappropriate to include unrealized foreign
exchange gains or losses in the Canadian parent’s income for each of the five years.
Therefore, the current-rate method would be required.

P9-4
 Chapter 9 – Reporting Foreign Operations

a.
(I) Equipment (₤7,500 × 1.40) $ 10,500
(II) Accumulated amortization
1st purchase (₤3,000/10 × 2 × 1.40) $ 840
2nd purchase (₤4,500/10 × 1.40) 630
Total 1,470

(III) Amortization expense

[(₤3,000/10 + ₤4,500/10) × 1.47] $ 1,103

b.
(I) Equipment
1st purchase (₤3,000 × 1.55) $ 4,650
2nd purchase (₤4,500 × 1.63) 7,335
Total $11,985

(II) Accumulated amortization

1st purchase (₤3,000/10 × 2 × 1.55) $ 930
2nd purchase (₤4,500/10 × 1.63) 734
Total $ 1,664
 Chapter 9 – Reporting Foreign Operations

P9-5

a.
Maple Limited
Statement of Financial Position
December 31, 20X9
(Canadian dollars)

Cash (US$100,000 × 1.40) $ 140,000

Accounts receivable (US$200,000 × 1.40) 280,000
Inventory [(US$180,000 × 1.38) + (US$120,000 × 1.35)] 410,400
Equipment—net (US$1,100,000 × 1.17) 1,287,000
$2,117,400

Accounts payable (US$250,000 × 1.40) $ 350,000

Bonds payable (US$700,000 × 1.40) 980,000
Common shares (US$100,000 × 1.17) 117,000
Retained earnings (to balance) 670,400
$2,117,400

b. Bonds payable, end of year (US$700,000 × 1.40) $980,000

Bonds payable, beginning of year
(US$700,000 × 1.31) 917,000
Exchange loss $ 63,000

c. Items subject to exchange rate exposure (= shareholders’ equity):

US$ Rate C$

Beginning $ 710,000 1.31 $ 930,100

Net income 200,000 1.34 268,000
Dividends (160,000) 1.36 (217,600)
Calculated 980,500
Actual $ 750,000 1.40 1,050,000
Exchange gain (credit to cumulative translation adjustment) $ 69,500

d. No, this is not a valid statement. The capital assets are reported at historical cost less
accumulated amortization in the US dollar balance sheet. When a historical cost in
US dollars is multiplied by a current rate, the resulting amount is not a current value
of the capital asset in Canadian dollars. To get a current value in Canadian dollars, the
current value in US dollars of the capital assets is multiplied by the current rate.

[CGA]
 Chapter 9 – Reporting Foreign Operations

P9-6
a. Translation of Financial Statements by Current-Rate Method, 20X5

Calculation of financial statement Local Exchange Translated

translation gain Currency Rate Amounts
(SF) (C$)

Net assets, January 1, 20X5 195,000 0.94 183,300

Add: Net Income 150,000 0.99 148,500
Less: Dividends (70,000) 0.98 (68,600)
Derived balance 263,200
Net assets, December 31, 20X5 275,000 1.02 280,500
Translation gain for 20X5 17,300

Statement of Comprehensive Income Local Exchange Translated

Year ended December 31, 20X5 Currency Rate Amounts
(SF) (C$)

Sales 500,000 0.99 495,000

Cost of goods sold 280,000 0.99 277,200
Gross profit 220,000 217,800
Amortization expense 50,000 0.99 49,500
Other expenses 20,000 0.99 19,800
Income 150,000 148,500
20X5 Translation Gain 17,300

Statement of Financial Position Local Exchange Translated

At December 31, 20X5 Currency Rate Amounts
(SF) (C$)

Cash 120,000 1.02 122,400

Accounts receivable 85,000 1.02 86,700
Inventory 80,000 1.02 81,600
Equipment, net 250,000 1.02 255,000
535,000 545,700

Accounts payable 60,000 1.02 61,200

Bonds payable 200,000 1.02 204,000
Common shares 100,000 0.94 94,000
Retained earnings 175,000 Calculated* 169,200
535,000 528,400
Cumulative Translation Gain 17,300

*Calculation of retained earnings

 Chapter 9 – Reporting Foreign Operations

Beginning retained earnings, 20X5 95,000 0.94 89,300

Add: Net Income 150,000 0.99 148,500
Less: Dividends (70,000) 0.98 (68,600)
Ending retained earnings, 20X5 175,000 169,200

Calculation of translation gain/loss on FVIs

Beginning goodwill [(200 ÷ 0.80) – 195) 55,000 0.94 51,700
Impairment during year none -
Derived value 51,700
Ending goodwill 55,000 1.02 56,100
Translation gain 4,400

b. Translation of Financial Statements by Temporal Method, 20X5

Calculation of financial statement Local Exchange Translated

translation loss Currency Rate Amounts
(SF) (C$)

Net monetary liabilities, January 1, 20X5 (165,000) 0.94 (155,100)

Add: Sales 500,000 0.99 495,000
Less: Purchases (280+80-60) 300,000 0.99 (297,000)
Less: Other expenses 20,000 0.99 (19,800)
Less: Dividends (70,000) 0.98 (68,600)
Derived balance (45,500)
Net monetary liabilities, December 31, 1.02
(55,000) (56,100)
20X5
Translation loss for 20X5 (10,600)

Statement of Comprehensive Income Local Exchange Translated

Year ended December 31, 20X5 Currency Rate Amounts
(SF) (C$)

Sales 500,000 0.99 495,000

Beginning inventory 60,000 0.94 56,400
Purchases 300,000 0.99 297,000
Ending inventory (80,000) 1.00 (80,000)
Cost of goods sold 280,000 273,400
Gross profit 220,000 221,600
Amortization expense 50,000 0.94 47,000
Other expenses 20,000 0.99 19,800
Income 150,000 154,800
20X5 Translation Loss (include in
(10,600)
consolidated income)
 Chapter 9 – Reporting Foreign Operations

Statement of Financial Position Local Exchange Translated

At December 31, 20X5 Currency Rate Amounts
(SF) (C$)

Cash 120,000 1.02 122,400

Accounts receivable 85,000 1.02 86,700
Inventory 80,000 1.00 80,000
Equipment, net 250,000 0.94 235,000
535,000 524,100

Accounts payable 60,000 1.02 61,200

Bonds payable 200,000 1.02 204,000
Common shares 100,000 0.94 94,000
Retained earnings 175,000 Calculated* 175,500
535,000 534,700
Cumulative Translation Loss (include in
(10,600)
consolidated R.E.)

*Calculation of retained earnings

Beginning retained earnings, 20X5 95,000 0.94 89,300
Add: Net Income 150,000 See above 154,800
Less: Dividends (70,000) 0.98 (68,600)
Ending retained earnings, 20X5 175,000 175,500

P9-7

a. It appears that the functional currency of Soul’s operations is the Swiss Franc,
based on the following:
 Inventory is purchased from suppliers in Switzerland.
 Sales prices are largely immune to changes in exchange rates.
 Sales prices are determined largely by local competition.

b. Translation of Financial Statements by Temporal Method, 20X15

Calculation of financial statement Local Exchange Translated

translation loss Currency Rate Amounts
(SF) (C$)

Net monetary liabilities, January 1, 20X15 (95,000) 0.86 (81,700)

Add: Sales 850,000 0.91 773,500
Less: Purchases (500+110-80) (530,000) 0.91 (482,300)
 Chapter 9 – Reporting Foreign Operations

Less: Other expenses (245,000) 0.91 (222,950)

Less: Dividends (30,000) 0.94 (28,200)
Derived balance (41,650)
Net monetary liabilities, December 31, 0.96
(50,000) (48,000)
20X15
Translation loss for 20X15 (6,350)

Statement of Comprehensive Income Local Exchange Translated

Year ended December 31, 20X15 Currency Rate Amounts
(SF) (C$)

Sales 850,000 0.91 773,500

Beginning inventory 80,000 0.86 68,800
Purchases 530,000 0.91 482,300
Ending inventory (110,000) 0.95 (104,500)
Cost of goods sold 500,000 446,600
Gross profit 350,000 326,900
Amortization expense 30,000 0.86 25,800
Other expenses 245,000 0.91 222,950
Income 75,000 78,150
20X15 Translation Loss (include in
(6,350)
consolidated income)

Statement of Financial Position Local Exchange Translated

At December 31, 20X15 Currency Rate Amounts
(SF) (C$)

Cash 80,000 0.96 76,800

Accounts receivable 140,000 0.96 134,400
Inventory 110,000 0.95 104,500
Equipment, net 250,000 0.86 215,000
580,000 530,700

Accounts payable 150,000 0.96 144,000

Bonds payable 120,000 0.96 115,200
Common shares 140,000 0.86 120,400
Retained earnings 170,000 Calculated* 157,450
580,000 537,050
Cumulative Translation Loss (include in
(6,350)
consolidated R.E.)

*Calculation of retained earnings

Beginning retained earnings, 20X15 125,000 0.86 107,500
Add: Net Income 75,000 See above 78,150
 Chapter 9 – Reporting Foreign Operations

Less: Dividends (30,000) 0.94 (28,200)

Ending retained earnings, 20X15 170,000 157,450

c. Translation of Financial Statements by Current-Rate Method, 20X15

Calculation of financial statement Local Exchange Translated

translation gain Currency Rate Amounts
(SF) (C$)

Net assets, January 1, 20X15 265,000 0.86 227,900

Add: Net Income 75,000 0.91 68,250
Less: Dividends (30,000) 0.94 (28,200)
Derived balance 267,950
Net assets, December 31, 20X15 310,000 0.96 297,600
Translation gain for 20X15 29,650

Statement of Comprehensive Income Local Exchange Translated

Year ended December 31, 20X15 Currency Rate Amounts
(SF) (C$)

Sales 850,000 0.91 773,500

Cost of goods sold 500,000 0.91 455,000
Gross profit 350,000 318,500
Amortization expense 30,000 0.91 27,300
Other expenses 245,000 0.91 222,950
Income 75,000 68,250
20X15 Translation Gain 29,650

Statement of Financial Position Local Exchange Translated

At December 31, 20X15 Currency Rate Amounts
(SF) (C$)

Cash 80,000 0.96 76,800

Accounts receivable 140,000 0.96 134,400
Inventory 110,000 0.96 105,600
Equipment, net 250,000 0.96 240,000
580,000 556,800

Accounts payable 150,000 0.96 144,000

Bonds payable 120,000 0.96 115,200
Common shares 140,000 0.86 120,400
Retained earnings 170,000 Calculated* 147,550
 Chapter 9 – Reporting Foreign Operations

580,000 527,150
Cumulative Translation Gain 29,650

*Calculation of retained earnings

Beginning retained earnings, 20X15 125,000 0.86 107,500
Add: Net Income 75,000 0.91 68,250
Less: Dividends (30,000) 0.94 (28,200)
Ending retained earnings, 20X15 170,000 147,550

Calculation of translation gain/loss on FVIs

Beginning goodwill [(300 – 265) 35,000 0.86 30,100
Impairment during year none -
Derived value 30,100
Ending goodwill 35,000 0.96 33,600
Translation gain 3,500

[CGA]

P9-8
a.
SJC Ltd.
Translated Statement of Comprehensive Income
Year ended December 31, 20X6

Exchange
US$ Rate C$
Sales 5,000,000 1.25 6,250,000

Opening inventory 1,800,000 1.20 2,160,000

Purchases 3,500,000 1.25 4,375,000
Goods available 5,300,000 6,535,000
Closing inventory (2,100,000) 1.28 (2,688,000)
Cost of goods sold 3,200,000 3,847,000
2,403,000
Amortization expense 350,000 1.20 420,000
Bond interest expense 240,000 1.25 300,000
Other expenses 470,000 1.25 587,500
Foreign exchange loss (1) 167,000
Net income 740,000 928,500

Notes:
(1) Calculation of Foreign Exchange Loss:
Exchange
US$ Rate C$
Net monetary position, (2,050,000) (2,460,000
 Chapter 9 – Reporting Foreign Operations

December 31, 20X5 (2) 1.20 )

Changes during 20X6
Sales 5,000,000 1.25 6,250,000
Purchases (3,500,000) 1.25 (4,375,000)
Bond interest expense (240,000) 1.25 (300,000)
Other expenses (470,000) 1.25 (587,500)
Dividends (50,000) 1.27 (63,500)
Plant and equipment (600,000) 1.30 (780,000)
Net changes 140,000 144,000
Calculated net monetary position,
December 31, 20X6 (2,316,000)
Actual net monetary position,
December 31, 20X6 (1,910,000) (3) 1.30 (2,483,000)
Foreign exchange loss, 20X6 (167,000)
(2) $250,000 + $1,100,000 – $400,000 – $3,000,000 = $(2,050,000)
(3) $300,000 + $1,350,000 – $560,000 – $3,000,000 = $(1,910,000)

b.
(I) Accounts receivable
$1,350,000 × $1.30 = $1,755,000

(II) Plant and equipment (net)

US$ (3,000,000 – 250,000 – 100,000) (1.20) + US$600,000 (1.30) =
C$3,960,000

(III) Bonds payable

US$3,000,000 × 1.30 = C$3,900,000

c.
(I) Plant and equipment
US$3,250,000 × 1.30 = $4,225,000

(II) Common shares

US$1,500,000 × 1.20 = $1,800,000

(III) Retained earnings

Opening retained earnings (US$1,250,000 × 1.20) = $1,500,000
Net income (US$740,000 × 1.25) = 925,000
Dividends (US$(50,000) × 1.27) = (63,500)
$2,361,500

d.
Calculation of translation gain on FVIs Local Translated
Exchange
Currency Amounts
Rate
(US $) (C$)
 Chapter 9 – Reporting Foreign Operations

FVIs, January 1, 20X6 [(5,000÷0.8) – 2,750] 3,500,000 1.20 4,200,000

Less: Amortization on patents (1,000 ÷ 5yrs) 200,000 1.25 (250,000)
Derived balance 3,950,000
FVIs, December 31, 20X6 3,300,000 1.30 4,290,000
Translation gain for 20X6 340,000

e. Questions that could be asked about the operation of SJC to help establish its functional currency
include:

1. What is the currency that influences the selling prices for its goods and services? (IFRS
note that this will often be the currency in which prices are denominated and settled.)
2. What is the currency of the country whose competitive forces and regulations determine
the selling prices for its goods and services?
3. What is the currency that influences its costs of providing goods and services? (IFRS note
that this will often be the currency in which these costs are denominated and settled.)

[CGA]

P9-9

a.

Port should translate SuperSpan’s financial statements into Canadian dollars using the
temporal method. Two facts that support this conclusion are:
• SuperSpan makes its sales based on prices determined by the worldwide market.
• SuperSpan imports a significant amount of wood from Canadian timber firms.

b. Current-rate Method
 Calculation of translation loss Local Currency Exchange Translated
(€) rate amounts (C $)
     
Net Assets Jan 1, 20X7 700,000 1.45 1,015,000
Add: Net Income for 20X7 120,000 1.42 170,400
Less: Dividends for 20X7 (40,000) 1.41 (56,400)
Add: Additional shares issued in 20X7 400,000 1.44 576,000
Derived balance     1,705,000
Actual balance 1,180,000 1.40 1,652,000
Translation loss for 20X7     53,000

Statement of Comprehensive Income

Year ended December 31, 20X7
 Chapter 9 – Reporting Foreign Operations

Sales 2,100,000 1.42 2,982,000

Cost of goods sold 1,600,000 1.42 2,272,000
Gross Profit 500,000   710,000
Selling and administrative 145,000 1.42 205,900
Bond interest expense 30,000 1.42 42,600
Amortization 125,000 1.42 177,500
Income before income taxes 200,000   284,000
Income taxes 80,000 1.42 113,600
Net income in 20X7 120,000   170,400
Translation loss for 20X7(include in consolidated OCI)     (53,000)

Statement of Financial Position

At December 31, 20X7

Cash 300,000 1.40 420,000

Accounts receivable 350,000 1.40 490,000
Inventory 500,000 1.40 700,000
Equipment, net 575,000 1.40 805,000
  1,725,000   2,415,000
       
Accounts payable 145,000 1.40 203,000
Bonds payable 400,000 1.40 560,000
Common shares (1) 900,000   1,336,000
Cumulative OCI (2) (99,000)
Retained earnings (3) 280,000   415,000
  1,725,000   2,415,000

(1) Common shares

Original shares 500,000 1.52 760,000
Shares issued in 20X7 400,000 1.44 576,000
1,336,000

(2) Calculation of cumulative translation loss

Net Assets Jan 1, 20X6 (700 – 150) 550,000 1.52 836,000
Add: Net Income for 20X6 150,000 1.50 225,000
Less: Dividends for 20X6 0 0
Derived balance     1,061,000
Actual balance 700,000 1.45 1,015,000
Translation loss for 20X6     (46,000)
Translation loss for 20X7 above (53,000)
Cumulative translation loss (99,000)
 Chapter 9 – Reporting Foreign Operations

(3) Retained earnings

Retained earnings January 1, 20X6 (200 – 150) 50,000 1.52 76,000
Add: Net income 20X6 150,000 1.50 225,000
Retained earnings December 31, 20X6 200,000 301,000
Add: Net income 20X7 120,000 1.42 170,400
Less: Dividends 20X7 (40,000) 1.41 (56,400)
Retained earnings December 31, 20X7 280,000 415,000

c. Temporal Method
     
 Calculation of translation loss Local Currency Exchange Translated
(€) rate amounts (C $)
Monetary Items:      
Balance January 1, 20X7 (250+325-200-400) (25,000) 1.45 (36,250)
Changes during 20X7:      
Sales revenue 2,100,000 1.42 2,982,000
Inventory purchases (1,600+500-425) (1,675,000) 1.42 (2,378,500)
Selling and administrative (145,000) 1.42 (205,900)
Bond interest expense (30,000) 1.42 (42,600)
Income tax expense (80,000) 1.42 (113,600)
Dividends paid (40,000) 1.41 (56,400)
Issue of common shares 400,000 1.44 576,000
Purchase of equipment (400,000) 1.44 (576,000)
Derived balance     148,750
Balance Dec 31, 20X7(300+350-145-400) 105,000 1.40 147,000
Net translation loss for 20X7     1,750

Statement of Comprehensive Income

Year ended December 31, 20X7

Sales 2,100,000 1.42 2,982,000

Cost of goods sold (1) 1,600,000   2,292,500
Gross Profit 500,000   689,500
Selling and administrative 145,000 1.42 205,900
 Chapter 9 – Reporting Foreign Operations

Bond interest expense 30,000 1.42 42,600

Amortization (2) 125,000   188,000
Income before income taxes 200,000   253,000
Income taxes 80,000 1.42 113,600
Translation loss for 20X7     (1,750)
Net income in 20X7 120,000   137,650

Statement of Financial Position

At December 31, 20X7

Cash 300,000 1.40 420,000

Accounts receivable 350,000 1.40 490,000
Inventory 500,000 1.43 715,000
Equipment, net (3) 575,000   844,000
  1,725,000   2,469,000
       
Accounts payable 145,000 1.40 203,000
Bonds payable 400,000 1.40 560,000
Common shares (4) 900,000   1,336,000
Retained earnings (5) (includes translation losses) 280,000   370,000
  1,725,000   2,469,000

(1) Cost of goods sold

Opening inventory 425,000 1.48 629,000
Purchases 1,675,000 1.42 2,378,500
Closing inventory 500,000 1.43 715,000
Cost of goods sold 3,200,000 2,292,500

(2) Amortization expense

Acquired 20X1 100,000 1.52 152,000
Acquired 20X7 25,000 1.44 36,000
188,000
(3) Equipment net, calculation      
New equipment [400 – (400 ÷ 8 × .5)] 375,000 1.44 540,000
Old equipment (575 – 375) 200,000 1.52 304,000
      844,000

(4) Common shares

Original shares 500,000 1.52 760,000
Shares issued in 20X7 400,000 1.44 576,000
1,336,000

(5) Retained earnings

Retained earnings January 1, 20X6 (200 – 150) 50,000 1.52 76,000
Add: Net income 20X6 (plug to balance) 150,000 (plug) 212,750
 Chapter 9 – Reporting Foreign Operations

Retained earnings December 31, 20X6 200,000 288,750

Add: Net income 20X7 120,000 Above 137,650
Less: Dividends 20X7 (40,000) 1.41 (56,400)
Retained earnings December 31, 20X7 280,000 370,000

[CGA]

P9-10

a.
Calculation of net exchange gain / loss for 20X2—Temporal method

P Rate CDN$
Net monetary items:
Opening balance 5,000,000 0.10 $ 500,000
Revenues 3,200,000 0.12 384,000
Operating expenses (2,200,000) 0.12 (264,000)
Capital assets (4,900,000) 0.11 (539,000)
Dividends (200,000) 0.13 (26,000)
Derived balance 55,000
Actual balance, December 31, 20X2 900,000 0.14 126,000
Net exchange gain for 20X2 $ 71,000

Calculation of cumulative exchange gain—current-rate method

Analysis of change in net assets:

p 5,000,000 January 2, 20X2 (0.14-0.10) $ 200,000

700,000 Net income (0.14-0.12) 14,000
(200,000) Dividends (0.14-0.13) (2,000)
p 5,500,000 Cumulative exchange gain $ 212,000

An alternative calculation is as follows:

P Rate CDN$
Net assets:
Opening balance 5,000,000 0.10 $ 500,000
Add: Net income 700,000 0.12 84,000
Less: Dividends (200,000) 0.13 (26,000)
Derived balance 558,000
Actual balance, December 31, 20X2 5,500,000 0.14 770,000
Cumulative exchange gain for 20X2 $ 212,000

b.

GC Company
 Chapter 9 – Reporting Foreign Operations

Statement of Comprehensive Income

Year Ended December 31, 20X2

(i) (ii)
(f.c. = peso) (f.c. =
Cdn $)
Current-rate Temporal
(Dr) Cr: P Rate CDN $ Rate CDN $

Revenues 3,200,000 0.12 384,000 0.12

384,000
Amortization expense (300,000) 0.12 (36,000) 0.11
(33,000)
Operating expenses (2,200,000) 0.12 (264,000) 0.12
(264,000)
Exchange gain (loss) (note 1) 71,000
Total expenses (2,500,000) (300,000) (226,000)
Net income 700,000 84,000 158,000

Note 1: Gain on monetary items—see above

GC Company
Statement of Financial Position
December 31, 20X2

(f.c. = peso) (f.c. = C$)

Current-rate Temporal
(Dr.) Cr. P Rate C$ Rate C$

Current monetary items 2,800,000 0.14

0.14 392,000
Capital assets 4,900,000 0.14
0.11 539,000
Accumulated amortization (300,000) 0.14
0.11 (33,000)
Total assets 7,400,000 1,036,000 898,000

(Dr.) Cr.
Current monetary liabilities 900,000 0.14
0.14 126,000
Long-term debt 1,000,000 0.14
0.14 140,000
Common shares 5,000,000 0.10
0.10 500,000
 Chapter 9 – Reporting Foreign Operations

Retained earnings 700,000 0.12

— 158,000
Less: dividends (200,000) 0.13
0.13 (26,000)
OCI-Cumulative exchange gain 212,000 —
Total equities 7,400,000 1,036,000 898,000

[CGA]

P9-11

20X7 20X6
Accounts receivable—translated at the
current rate at each year-end:
42,200 LCU/1.6 $26,375
37,000 LCU/1.8 $20,556
Less allowance for uncollectible accounts:
2,200 LCU/1.6 (1,375)
2,000 LCU/1.8 (1,111)
$25,000 $19,445

Inventories—translated at date of purchase:

80,000 LCU/1.8 (June 20X7) $44,444
75,000 LCU/2.1 (June 20X6) $35,714

Capital assets— translated at date of purchase:

24,000 LCU/2.1 (January 1, 20X6) $11,429 $11,429
140,000 LCU/2.1 (January 1, 20X6) 66,667 66,667
30,000 LCU/1.6 (July 1, 20X7) 18,750 —
96,846 78,096

Less accumulated depreciation:

14,000 LCU/2.1 (for 20X6) (6,667) (6,667)
14,000 LCU/2.1 (for 20X7) (6,667)
3,000 LCU/1.6 (for 20X7) (1,875) —
$81,637 $71,429

Long-term debt—translated at the current rate:

100,000 LCU/1.6 $62,500
120,000 LCU/1.8 $66,667

Common shares—translated at historical rate:

50,000 LCU/2.1 $23,810 $23,810
 Chapter 9 – Reporting Foreign Operations

P9-12

Note: The statement of comprehensive income is in the solution to P9-2.

a. Statements of financial position, current-rate method:

20X3 20X2

Cash $0.87 $ 174,000 $0.77 $ 385,000

Accounts receivable 0.87 348,000 0.77 231,000
Inventory 0.87 348,000 0.77 154,000
Land 0.87 435,000
Equipment (net) 0.87 1,479,000 0.77 1,540,000
$2,784,000 $2,310,000

Accounts payable 0.87 $ 435,000 0.77 $ 308,000

Bonds payable 0.87 1,566,000 0.77 1,386,000
Common shares 0.52 260,000 0.52 260,000
Retained earnings 0.67 201,000 0.67 201,000
Retained earnings—20x 47,000**
Translation gain 275,000 155,000
$2,784,000 $2,310,000

**Retained earnings—20X3:
Net income, 20X3 CF800,000 $0.82 $ 656,000
Dividends, 20X3 (700,000) $0.87 (609,000)
Increase, 20X3 CF100,000 $ 47,000

b. Statements of financial position, temporal method:

20X3 20X2

Cash $0.87 $ 174,000 $0.77 $ 385,000

Accounts receivable 0.87 348,000 0.77 231,000
Inventory 0.85 340,000 0.74 148,000
Land 0.87 435,000
Equipment (net) 0.62 1,054,000 0.62 1,240,000
$2,351,000 $2,004,000

Accounts payable 0.87 $ 435,000 0.77 $ 308,000

Bonds payable 0.87 1,566,000 0.77 1,386,000
Common shares 0.52 260,000 0.52 260,000
Retained earnings 336,000* 0.67 201,000
Translation gain (loss) (246,000) (151,000)
$2,351,000 $2,004,000
 Chapter 9 – Reporting Foreign Operations

*Retained earnings:
Balance, December 31, 20X2 CF300,000 $0.67 $ 201,000
Net income, 20X3 800,000 P9-2 744,000
Dividends, 20X3 (700,000) $0.87 (609,000)
Balance, December 31, 20X3 CF400,000 $ 336,000

c. Translation gain or loss, 20X3:

(1) Current-rate method:

Shareholders’ equity:
Beginning balance = CF800,000 ($0.87 – $0.77) = $ 80,000 gain
Net income = CF800,000 ($0.87 – $0.82) = 40,000 gain
$120,000 gain
(Alternative calculation)
Current-rate method: CF × $

Net assets, January 1, 20X3 $800,000 0.77 $616,000

Changes during the year
Net Income 800,000 0.82 656,000

Dividends (700,000) 0.87 (609,000)

Expected balance, December 31 663,000
Actual net assets,
December 31 (900,000) 0.87 783,000
Exchange gain $120,000

Proof:

Cumulative Translation Gain December 31 20X2 $155,000

Add: Translation Gain for 20X3 120,000
Cumulative Translation Gain December 31 20X3 275,000

(2) Temporal method

CF × $

Net monetary items, January 1, 20X3 (1,400,000) 0.77 $(1,078,000)

Changes during the year
Sales 3,000,000 0.82 2,460,000
Purchases (1,000,000) 0.82 (820,000)
Other operating expenses (900,000) 0.82 (738,000)
Interest expense (200,000) 0.82 (164,000)
Purchase of land (500,000) 0.87 (435,000)
Dividends (700,000) 0.87 (609,000)
 Chapter 9 – Reporting Foreign Operations

(306,000)
Expected balance, December 31 (1,384,000)
Actual net monetary items,
December 31 (1,700,000) 0.87 (1,479,000)
Exchange loss $ 95,000

Proof:

Cumulative Translation Loss December 21 20X2 $(151,000)

Add: Translation Loss for 20X3 ( 95,000)
Cumulative Translation loss December 31 20X3 (246,000)

P9-13

a. SEQEA would be translated using the current-rate method because the materials and
labour for the manufacturing operations are obtained from local sources and the plant
was financed with a loan from a Swedish bank.

b. Current-rate method

Local
Account Currency Translated
(SEK) Exchange rate amounts (C $)

(I) Other expenses 3,850,000 0.18 693,000

(II) Inventory 200,000 0.15 30,000

(III) Common shares 100,000 0.24 24,000

(IV) Financial Statement

Translation gain or loss for 20X15:
Net Assets:
Balance January 1, 20X15 (1) 1,530,000 0.20 306,000
Changes during 20X15
Net income 500,000 0.18 90,000
Dividends paid (2) (325,000) 0.15 (48,750)
Derived balance 347,250
Actual balance (3) 1,705,000 0.15 255,750
Net translation loss for 20X15 91,500

FVI Translation Loss for 20X15

Goodwill January 1 20X15 1,000,000 0.20 200,000
No Changes During Year ___ _____
Derived Balance 200,000
 Chapter 9 – Reporting Foreign Operations

Goodwill December 31 20X15 1,000,000 0.15 150,000

Net Translation Loss for 20X15 50,000

Total Translation Loss for 20X15 (91,500 + 50,000) 141,500

Notes:
1: 1,430,000 + 100,000 = 1,530,000
2: 1,430,000 + 500,000 – 1,605,000 = 325,000
3: 1,605,000 + 100,000 = 1,705,000

c. Temporal method

Account (SEK) Exchange rate C$

(I) Cost of goods sold
Beginning inventory 180,000 0.21 37,800
Purchases 4,020,000 0.18 723,600
Ending Inventory (200,000) 0.16 (32,000)
4,000,000 729,400

(II) Amortization expense

New plant 5,000 0.20 1,000
Other assets 145,000 0.24 34,800
150,000 35,800

(III) Monetary assets 2,400,000 0.15 360,000

(IV) Non-monetary liabilities 195,000 0.17 33,150

(V) Translation gain or loss for 20X15:

Monetary Items:
Balance January 1, 20X15 (1) (330,000) 0.20 (66,000)
Changes during 20X15:
Sales revenue (2) 8,525,000 0.18 1,534,500
Inventory purchases (4,020,000) 0.18 (723,600)
Other expense (3,850,000) 0.18 (693,000)
Dividends paid (325,000) 0.15 (48,750)
Derived balance 3,150
Actual balance (3) 0 0.15 0
Net translation loss for 20X15 3,150

Notes:
1: 2,170,000 – 2,500,000 = (330,000)
 Chapter 9 – Reporting Foreign Operations

2: Sales revenue + change in deferred revenue (non-monetary liability) =

8,500,000 + [195,000 – 170,000] = 8,525,000
3: 2,400,000 – 2,400,000 = 0

4: There is no translation gain or loss on the goodwill FVI because it continues to

be translated at the historical rate.