On December 15, MSC Corporation acquires its first foreign affiliate by acquiring 100 percent of the net

Question:

On December 15, MSC Corporation acquires its first foreign affiliate by acquiring 100 percent of the net assets of the Armaselah Oil Company based in Saudi Arabia for 930,000,000 Saudi Arabian riyals.(SAR). At the time, the exchange rate was $1.00 = SAR3.750. The acquisition price is traceable to the following identifiable assets:

Cash SAR .......... 60,000,000

Inventory .........120,000,000

Fixed assets ........750,000,000

As a calendar-year company, MSC Corporation prepares consolidated financial statements every December 31. However, by the consolidation date, the Saudi Arabian riyal depreciates such that the new spot rate is $1.00 = SAR4.125.

Required:

a. Assuming no transactions took place before consolidation, what would be the translation gain or loss if Armaselah’s balance sheet were translated to dollars by the temporal rate method?

b. How does the translation adjustment affect MSC’s cash flows?

c. What adjustments to Armaselah’s accounts would you make to enable you to compare its financial statements with another company of comparable size in the same industry that is employing the current rate translation method per IAS21?

Financial Statements
Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial... Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial... Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may... Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...