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AFM391 Lecture Notes - Lecture 14: Spot Contract, Canadian Dollar, Income Statement

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lilacmouse857
28 Jun 2018
School
University of Waterloo
Department
Accounting & Financial Management
Course
AFM391
Professor
Robert Ducharme

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At the end of year 5,
Bonds Denominated in Foreign Currency
Translation of foreign currency debt into functional currency at the exchange rate on transaction dateo
Revaluation of foreign current obligation at the end of a period using exchange rate
o
Recognition of gain of loss from revaluation on the income statement
o
Interest is charged to expense at the average rate for the period, rather than the spot rate paid at time of
payment. The different is recognized as a gain or loss on the income statement.
o
Required rules-
Bond payable is recorded at Canadian Dollar equivalent using exchange rate on the date
-
Bond must be revalued at end of each reporting period
-
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Document Summary

Translation of foreign currency debt into functional currency at the exchange rate on transaction date. Revaluation of foreign current obligation at the end of a period using exchange rate. Recognition of gain of loss from revaluation on the income statement. Interest is charged to expense at the average rate for the period, rather than the spot rate paid at time of payment. The different is recognized as a gain or loss on the income statement. Bond payable is recorded at canadian dollar equivalent using exchange rate on the date. Bond must be revalued at end of each reporting period. Cash interest payments is determined using the spot rate on the date. Interest expense is determined using average rate for the period o. When the exchange rate makes the canadian value less than face value there is a gain because the obligation to pay is less. I"m 90% sure this is useless cuz no way i"m memorizing this.

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Related Questions

Sendelbach Corporation is a U.S.–based organization with operations throughout the world. One of its subsidiaries is headquartered in Toronto. Although this wholly owned company operates primarily in Canada, it engages in some transactions through a branch in Mexico. Therefore, the subsidiary maintains a ledger denominated in Mexican pesos (Ps) and a general ledger in Canadian dollars (C$). As of December 31, 2015, the subsidiary is preparing financial statements in anticipation of consolidation with the U.S. parent corporation. Both ledgers for the subsidiary are as follows:
Main Operation—Canada
Debit Credit
Accounts payable C$ 39,605
Accumulated depreciation 41,000
Buildings and equipment C$ 181,000
Cash 40,000
Common stock 64,000
Cost of goods sold 217,000
Depreciation expense 8,300
Dividends, 4/1/15 33,000
Gain on sale of equipment, 6/1/15 6,400
Inventory 93,000
Notes payable—due in 2018 83,000
Receivables 82,000
Retained earnings, 1/1/15 149,590
Salary expense 37,000
Sales 326,000
Utility expense 10,400
Branch operation 7,895
Totals C$ 709,595 C$ 709,595
Branch Operation—Mexico
Debit Credit
Accounts payable Ps 64,900
Accumulated depreciation 39,900
Building and equipment Ps 54,000
Cash 66,000
Depreciation expense 3,400
Inventory (beginning—income statement) 37,000
Inventory (ending—income statement) 35,000
Inventory (ending—balance sheet) 35,000
Purchases 71,000
Receivables 35,000
Salary expense 10,400
Sales 138,000
Main office 34,000
Totals Ps 311,800 Ps 311,800
Additional Information
•

The Canadian subsidiary’s functional currency is the Canadian dollar, and Sendelbach’s reporting currency is the U.S. dollar. The Canadian and Mexican operations are not viewed as separate accounting entities.
•

The building and equipment used in the Mexican operation were acquired in 2005 when the currency exchange rate was C$0.22 = Ps 1.
• Purchases should be assumed as having been made evenly throughout the fiscal year.
•

Beginning inventory was acquired evenly throughout 2014; ending inventory was acquired evenly throughout 2015.
•

The Main Office account on the Mexican records should be considered an equity account. This balance was remeasured into C$7,895 on December 31, 2015.
• Currency exchange rates for 1 Ps applicable to the Mexican operation follow:
Weighted average, 2014 C$ 0.27
January 1, 2015 0.29
Weighted average rate for 2015 0.31
December 31, 2015 0.32
•

The December 31, 2014, consolidated balance sheet reported a cumulative translation adjustment with a $50,950 credit (positive) balance.
• The subsidiary’s common stock was issued in 2004 when the exchange rate was $0.43 = C$1.
•

The subsidiary’s December 31, 2014, Retained Earnings balance was C$149,590.00, a figure that has been translated into US$71,043.
• The applicable currency exchange rates for 1 C$ for translation purposes are as follows:
January 1, 2015 US$ 0.70
April 1, 2015 0.69
June 1, 2015 0.68
Weighted average rate for 2015 0.67
December 31, 2015 0.65
a.

Remeasure the Mexican operation’s figures into Canadian dollars. (Hint: Back into the beginning net monetary asset or liability position.) (Input all amounts as positive values.)

Canadian Dollars
Debit Credit
Accounts payable 20,768
Accumulated depreciation 8,778
Building and equipment 11,880
Cash 21,120
Depreciation expense 748
Inventory (beginning—income statement) 9,990
Inventory (ending—income statement) 10,850
Inventory (ending—balance sheet) 10,850
Purchases 22,010
Receivables 11,200
Salary expense 3,224
Sales 42,780
Main office 7,895
Remeasurement loss 49
Total 91,071 91,071

b.

Prepare financial statements (income statement, statement of retained earnings, and balance sheet) for the Canadian subsidiary in its functional currency and Prepare consolidated financial statement in parent currency (that is U.S. dollars). (Round U.S. Dollar values to 2 decimal places. Amounts to be deducted and losses should be indicated with a minus sign.)

SENDELBACH CORPORATION
Financial Statements
For the Year Ended December 31, 2015
Canadian Dollar U.S. Dollar
Income Statement:
Sales C$ 368,780
Cost of goods sold
Gross profit C$ 368,780 $0.00
Salary expense
Utility expense
Depreciation expense
Gain on sale of equipment
Remeasurement loss
Net income C$ 368,780 $0.00
Statement of Retained Earnings:
Retained earnings, 1/1/15 C$
Net income
Dividends
Retained earnings, 12/31/15 C$ 0 $0.00
Balance Sheet:
Assets:
Cash C$
Receivables
Inventory
Buildings and equipment
Accumulated depreciation
Total assets C$ 0 $0.00
Liabilities and Equities:
Accounts payable C$
Notes payable
Common stock
Retained earnings
Total liabilities and equities C$ 0 $0.00

I figured out part A but need help with part B please!

Thank you in advance!!!

Please answer all parts of the problem.

Palmerstown Company established a subsidiary in a foreigncountry on January 1, Year 1, by investing 8 million pounds whenthe exchange rate was $1.00/pound. Palmerstown negotiated a bankloan of 4 million pounds on January 5, Year 1, and purchased plantand equipment in the amount of 10 million pounds on January 8, Year1. Plant and equipment is depreciated on a straight-line basis overa 10 year useful life. The first purchase of inventory in theamount of 1 million pounds was made on January 10, Year 1.Additional inventory of 12 million pounds was acquired at threepoints in time during the year at an average exchange rate of$0.86/pound. Inventory on hand at year-end was acquired when theexchange rate was $0.83/pound. The first-in, first-out (FIFO)method i sused to determine cost of goods sold. Additional exchangerates for the pound during Year 1 are as follows:

Jan 1-31, Year 1 - $1.00

Average, Year 1 - $.90

Dec 31, Year 1 - $.80

The foreign subsidiary's income statement for Year 1 and balancesheet at December 31, Year 1, are as follows:

IncomeStatement
Forthe Year Ended December 31, Year 1
Pounds
Sales 15,000
Costof goods sold 9,000
Gross profit 6,000
Selling/admin expense 3,000
Depreciation expense 1,000
Incomebefore tax 2,000
Income tax 600
Net income 1,400
Retained earnings, 1/1/Y1 -
Retained earnings, 12/31/Y1 1,400
BalanceSheet
December 31, Year 1
Pounds
Cash 2,400
Inventory 4,000
Fixed assets 10,000
Less: accumdepn (1,000)
Total assets 15,400
Currentliabilities 2,000
Long-termdebt 4,000
Contributedcapital 8,000
Retainedearnings 1,400
Translationadjustment
Totalliabilites/ 15,400
stockholders'equity

As the Controller for Palmerstown Company, you have evaluatedthe characteristics of the foreign subsidiary to determine that thepound is the subsidiary's functional currency.

1.) Use an electronic spreadsheet to translate the foreignsubsidiary's financial statements into US dollars at December 31,Year 1, in accordance with US GAAP. Insert a row in the spreadsheetafter retained earnings and before total liabilities andstockholders' eequity for the cumulative translation adjustment.Calculate the translation adjustment separately to erify the amountobtained as a balancing figure in the translation worksheet.

2.) Use an electronic spreadsheet to translate the foreignsubsidiary's financial statements into US dollars at December 31,Year 1, assuming that the US dollar is the subsidiary's functionalcurrency. Inserta row in the spreadsheet after depreciation expenseand before income before taxes for the remeasurementgain/(loss)

3.) Prepare a report for the chief executive offer ofPalmerstown Company summarizing the differences that will bereported in the Year 1 consolidated financial statements becausethe pound, rather than the US dollar, is the foreign subsidiary'sfunctional currency. In your repoert, discuss the relationshipbetween the current ratio, the debt-to-equity ration, and theprofit margin calculated form the foeign currency financialstatments and from the translated US dollar financial statements.Also, include a discussion of the meaning of the translated USdollar amounts for inventory and for fixed assets.

Please answer all parts of the problem.

Please answer all parts of the question.

Palmerstown Company established a subsidiary in a foreigncountry on January 1, Year 1, by investing 8 million pounds whenthe exchange rate was $1.00/pound. Palmerstown negotiated a bankloan of 4 million pounds on January 5, Year 1, and purchased plantand equipment in the amount of 10 million pounds on January 8, Year1. Plant and equipment is depreciated on a straight-line basis overa 10 year useful life. The first purchase of inventory in theamount of 1 million pounds was made on January 10, Year 1.Additional inventory of 12 million pounds was acquired at threepoints in time during the year at an average exchange rate of$0.86/pound. Inventory on hand at year-end was acquired when theexchange rate was $0.83/pound. The first-in, first-out (FIFO)method i sused to determine cost of goods sold. Additional exchangerates for the pound during Year 1 are as follows:

Jan 1-31, Year 1 - $1.00

Average, Year 1 - $.90

Dec 31, Year 1 - $.80

The foreign subsidiary's income statement for Year 1 and balancesheet at December 31, Year 1, are as follows:

IncomeStatement
Forthe Year Ended December 31, Year 1
Pounds
Sales 15,000
Costof goods sold 9,000
Gross profit 6,000
Selling/admin expense 3,000
Depreciation expense 1,000
Incomebefore tax 2,000
Income tax 600
Net income 1,400
Retained earnings, 1/1/Y1 -
Retained earnings, 12/31/Y1 1,400
BalanceSheet
December 31, Year 1
Pounds
Cash 2,400
Inventory 4,000
Fixed assets 10,000
Less: accumdepn (1,000)
Total assets 15,400
Currentliabilities 2,000
Long-termdebt 4,000
Contributedcapital 8,000
Retainedearnings 1,400
Translationadjustment
Totalliabilites/ 15,400
stockholders'equity

As the Controller for Palmerstown Company, you have evaluatedthe characteristics of the foreign subsidiary to determine that thepound is the subsidiary's functional currency.

1.) Use an electronic spreadsheet to translate the foreignsubsidiary's financial statements into US dollars at December 31,Year 1, in accordance with US GAAP. Insert a row in the spreadsheetafter retained earnings and before total liabilities andstockholders' eequity for the cumulative translation adjustment.Calculate the translation adjustment separately to erify the amountobtained as a balancing figure in the translation worksheet.

2.) Use an electronic spreadsheet to translate the foreignsubsidiary's financial statements into US dollars at December 31,Year 1, assuming that the US dollar is the subsidiary's functionalcurrency. Inserta row in the spreadsheet after depreciation expenseand before income before taxes for the remeasurementgain/(loss)

3.) Prepare a report for the chief executive offer ofPalmerstown Company summarizing the differences that will bereported in the Year 1 consolidated financial statements becausethe pound, rather than the US dollar, is the foreign subsidiary'sfunctional currency. In your repoert, discuss the relationshipbetween the current ratio, the debt-to-equity ration, and theprofit margin calculated form the foeign currency financialstatments and from the translated US dollar financial statements.Also, include a discussion of the meaning of the translated USdollar amounts for inventory and for fixed assets.

Please answer all parts of the question.