Chapter 12 Extra Problem

International Company will translate (convert) the Korean subsidiarys financial statements into dollars before preparing the consolidation. To do so they go thru a process where the Korean subsidiarys financial statements are remeasured into the Korean subsidiarys functional currency and then translated into dollars (the Parent Companys reporting currency). Since the Korean subsidiary does most of its business in Yen (Japan) the functional currency is the Japanese Yen.

In this problem the Korean subsidiarys books are kept in South Korean Won. These amounts must be remeasured into the functional currency the Japanese Yen. This process uses the temporal method of translation.

The temporal method calls for:

Cash and accounts receivable are translated at the current rate.

Inventory is translated at its historic cost.

Cost of goods sold is translated at the historic cost of the inventory.

Depreciation expense is translated at the historic cost of the building.

Equity is translated at its historic rate

The remeasurement process results in a foreign currency gain or loss that is applied to net income in the translation gain/loss.

Once the Korean Won are remeasured into Japanese Yen they then must be translated ifrom the Japanese Yen into the reporting currency American Dollars. This conversion uses the current rate of to translate from the functional currency to the reporting currency. This results in a foreign currency adjustment. This adjustment gain or loss from translation is called a translation adjustment and is shown as other comprehensive income. Other comprehensive may be shown as a separate section of the income statement, a separate comprehensive income statement or part of retained earnings.

The current rate method calls for:

Assets and liabilities are translated at the current exchange rate; equity is translated at historical rates.

Revenues and expenses which occur evenly throughout the period are translated at the average-for-the-period exchange rate. Income items, such as gains and losses, which are the result of a discrete event, are translated at the actual exchange rate on the date of occurrence.

	International Company (an American Company) owns a Korean subsidiary. The Korean subsidiary does most of its
	business in YEN (Japan). Convert the Korean subsidiarys Financial Statements into the reporting currency.
	Korean Company Financial Statements
	For the Year Ending December 31,200X
		South Korean Won	Rate	Japanese Yen	Rate	American Dollar
	Income Statement
	Sales	100,000
	Cost of Goods Sold	(60,000)
	Operating Expenses	(20,000)
	Depreciation Expense	(10,000)
	Translation Gain/Loss
	Net Income	20,000
	Statement of Retained Earnings
	Beginning Retained Earnings	70,000
	Net Income	20,000
	Ending Retained Earnings	90,000
	Balance Sheet
	Cash	130,000
	Inventory	140,000
	Building	820,000
	Total Assets	1,090,000
	Current Liabilities	60,000
	Long Term Debt	340,000
	Total Liabilities	400,000
	Common Stock	200,000
	Paid In Capital	400,000
	Retained Earnings	90,000
	Translation Adjustment
	Total Equity	690,000
	Total Liabilities and Equity	1,090,000
	Currency Rates
	Historic Rate - Begin Retained Earning:	1 South Korean Won		=	.0714000 Japanese Yen
	Historic:	1 South Korean Won		=	.0715122 Japanese Yen
	Average:	1 South Korean Won		=	.0732161 Japanese Yen
	Current:	1 South Korean Won		=	.0740619 Japanese Yen
	Historic:	1 Japanese Yen		=	.0105200 American Dollar
	Average:	1 Japanese Yen		=	.0103221 American Dollar
	Current:	1 Japanese Yen		=	.0119671 American Dollar