Determine the appropriate exchange rate under the current rate method [translation] and temporal method [remeasurement]

(a) Current Rate Method (b) Temporal Method

Account Translation Remeasurement

Sales 20 A 20 A

Inventory 22 C 19 H

Equipment 22 C 13 H

Rent expense 20 A 20 A

Dividends 21 H 21 H

Notes receivable 22 C 22 C

Accumulated depreciation--equipment 22 C 13 H

Salary payable 22 C 22 C

Depreciation expense 20 A 13 H

C = current exchange rate, A = average exchange rate, H = Historical exchange rate

37. Translate [remeasure] foreign currency financial statements using U.S. GAAP and explain sign of translation adjustment [remeasurement gain/loss])

Part I (a). Czech koruna is the functional currencycurrent rate method

Exchange

KS Rate US$

Sales 25,000,000 0.035 875,000

Cost of goods sold (12,000,000) 0.035 (420,000)

Depreciation expenseequipment (2,500,000) 0.035 (87,500)

Depreciation expensebuilding (1,800,000) 0.035 (63,000)

Research and development expense (1,200,000) 0.035 (42,000)

Other expenses (including taxes) (1,000,000) 0.035 (35,000)

Net income 6,500,000 227,500

Retained earnings, 1/1/15 500,000 given 22,500

Dividends paid, 12/15/15 (1,500,000) 0.031 (46,500)

Retained earnings, 12/31/15 5,500,000 203,500

Cash 2,000,000 0.030 60,000

Accounts receivable 3,300,000 0.030 99,000

Inventory 8,500,000 0.030 255,000

Equipment 25,000,000 0.030 750,000

Accum. deprec.equipment (8,500,000) 0.030 (255,000)

Building 72,000,000 0.030 2,160,000

Accum. deprec.equipment (30,300,000) 0.030 (909,000)

Land 6,000,000 0.030 180,000

Total assets 78,000,000 2,340,000

Accounts payable 2,500,000 0.030 75,000

Long-term debt 50,000,000 0.030 1,500,000

Common stock 5,000,000 0.050 250,000

Additional paid-in capital 15,000,000 0.050 750,000

Retained earnings, 12/31/15 5,500,000 above 203,500 Translation adjustment - to balance (438,500)

Total liabilities and equities 78,000,000 2,340,000

Part I (b). U.S. dollar is the functional currencytemporal method

Exchange

KS Rate US$

Sales 25,000,000 0.035 875,000

Cost of goods sold (12,000,000) Sched.A (493,500)

Depreciation expenseequipment (2,500,000) Sched.B (118,000)

Depreciation expensebuilding (1,800,000) Sched.C (85,200)

Research and development expense (1,200,000) 0.035 (42,000)

Other expenses (including taxes) (1,000,000) 0.035 (35,000)

Income before remeasurement gain 6,500,000 101,300

Remeasurement gain, 2015 - 408,000

Net income 6,500,000 509,300

Retained earnings, 1/1/15 500,000 given 353,000

Dividends paid, 12/15/15 (1,500,000) 0.031 (46,500)

Retained earnings, 12/31/15 5,500,000 below 815,800

Cash 2,000,000 0.030 60,000

Accounts receivable 3,300,000 0.030 99,000

Inventory 8,500,000 0.032 272,000

Equipment 25,000,000 Sched.B 1,180,000

Accum. deprec.equipment (8,500,000) Sched.B (418,000)

Building 72,000,000 Sched.C 3,408,000

Accum. deprec.equipment (30,300,000) Sched.C (1,510,200)

Land 6,000,000 0.050 300,000

Total assets 78,000,000 3,390,800

Accounts payable 2,500,000 0.030 75,000

Long-term debt 50,000,000 0.030 1,500,000

Common stock 5,000,000 0.050 250,000

Additional paid-in capital 15,000,000 0.050 750,000

Retained earnings, 12/31/15 5,500,000 balance 815,800

Total liabilities and equities 78,000,000 3,390,800

Schedule ACost of goods sold

KS ER US$

Beginning inventory 6,000,000 0.043 258,000

Purchases 14,500,000 0.035 507,500

Ending inventory (8,500,000) 0.032 (272,000)

Cost of goods sold 12,000,000 493,500

Schedule BEquipment

KS ER US$

Old Equipmentat 1/1/14 20,000,000 0.050 1,000,000

New Equipmentacquired 1/3/15 5,000,000 0.036 180,000

Total 25,000,000 1,180,000

Accum. Depr.Old Equipment 8,000,000 0.050 400,000

Accum. Depr.New Equipment 500,000 0.036 18,000

Total 8,500,000 418,000

Deprec expenseOld Equipment 2,000,000 0.050 100,000

Deprec expenseNew Equipment 500,000 0.036 18,000

Total 2,500,000 118,000

Schedule CBuilding

KS ER US$

Old Buildingat 1/1/14 60,000,000 0.050 3,000,000

New Buildingacquired 3/5/15 12,000,000 0.034 408,000

Total 72,000,000 3,408,000

Accum. Depr.Old Building 30,000,000 0.050 1,500,000

Accum. Depr.New Building 300,000 0.034 10,200

Total 30,300,000 1,510,200

Deprec. expenseOld Building 1,500,000 0.050 75,000

Deprec. expenseNew Building 300,000 0.034 10,200

Total 1,800,000 85,200

Part II. Explanation of the negative translation adjustment in Part I (a), remeasurement gain in Part I (b).

The negative translation adjustment in Part I (a) arises because of two factors: (1) there is a net asset balance sheet exposure and (2) the Czech koruna has depreciated against the U.S. dollar during 2015 (from $.040 at 1/1/15 to $.030 at 12/31/15). A net asset balance sheet exposure exists because all assets are translated at the current exchange rate and exceed total liabilities which are also translated at the current exchange rate.

The remeasurement gain in Part I (b) arises because of two factors: (1) there is a net monetary liability balance sheet exposure and (2) the Czech koruna has depreciated against the U.S. dollar. Under the temporal method, Cash and Accounts Receivable are the only assets translated at the current exchange rate (total KS 5,300,000). Accounts Payable and Long-term Debt are also translated at the current exchange rate (total KS 52,500,000). Because the Czech koruna amount of liabilities translated at the current rate exceeds the Czech koruna amount of assets translated at the current rate, a net monetary liability balance sheet exposure exists.