Complete two exercises in accounting for foreign currency transactions and translating financial statements from a foreign currency into U.S. dollars. Introduction In today’s global economy
Complete two exercises in accounting for foreign currency transactions and translating financial statements from a foreign currency into U.S. dollars.
Introduction
In today's global economy, many companies conduct business in currencies other than the currency in which they report. Goods are often imported or exported with prices stated in a foreign currency. For the purpose of reporting, foreign currency balances must be stated in the company's reporting currency. That is done by multiplying the foreign currency by an exchange rate.
To restate foreign currency balances, accountants consider two questions:
- What is the appropriate exchange rate for converting foreign currency balances?
- How does one account for changes in the exchange rate?
Companies often engage in foreign currency hedging activities in order to avoid any adverse impacts of exchange rate changes. As a result, accountants must determine how to account for these hedging activities.
Many U.S. companies have significant financial interests in foreign countries. As a result, the way in which foreign currency is translated into U.S. dollars is significant. The two major issues related to the translation process are:
- Which translation method to use.
- Where to report the resulting translation adjustment in the consolidated financial statements.
Translation methods differ based on whether accounts are translated at the current exchange rate or at historical rates. Accounts that are translated at the current exchange rate are exposed to translation adjustment. Different translation methods result in different concepts of balance sheet exposure.
Preparation
The following resources are required to complete the assessment.
Complete the problems in the Assessment 3 Problems document using the related template, both of which are linked in the Required Resources for this assessment. All financial information and applicable instructions are provided.
Problem 1: Foreign Currency Borrowing
- Journalize foreign currency borrowing transactions.
- Determine the effective cost of borrowing.
Problem 2: Financial Statement Translation
- Prepare financial statements in LCU units.
- Translate financial statement amounts to U.S. dollars.
- Compute translation adjustments.
Competencies Measured
By successfully completing this assessment, you will demonstrate your proficiency in the course competencies through the following assessment scoring guide criteria:
- Competency 2: Evaluate the influence of global money markets on financial statements.
- Journalize foreign currency borrowing transactions.
- Determine the effective cost of borrowing.
- Prepare financial statements in LCU units.
- Translate financial statement amounts to U.S. dollars.
- Compute translation adjustments.
- Competency 5: Communicate in a manner that is professional and consistent with expectations for professionals in the field of accounting.
- Communicate results from accounting calculations accurately and clearly.
Foreign Currency
Problem 1
Part A
Date |
Account Title |
Credit |
Debit |
Part B
|
Year |
Interest Expense |
Foreign Exchange Loss |
Total |
Financial Statement Translation
Prepare financial statements for a foreign subsidiary and then translate them into U.S. dollars. The first item has been completed for you as an example.
Broadmore Company Subsidiary
Income Statement
Exchange Rate |
Krone |
Exchange Rate |
U.S. Dollars |
|
Rent revenue |
120,00 |
X $1.80 A = |
$216,000 |
|
Interest expense |
|||
|
Depreciation expense |
|||
|
Repair expense |
|
||
|
Net income |
Statement of Retained Earnings
|
|
Krone |
Exchange Rate |
U.S. Dollars |
|
Retained earnings |
|||
|
Net income |
|||
|
Dividends paid |
|||
|
Retained earnings, 12/31 |
Balance Sheet
|
Krone |
Exchange Rate |
U.S. Dollars |
|
|
Cash |
|||
|
Accounts receivable |
|||
|
Building |
|||
|
Accumulated depreciation |
|||
|
Total assets |
|||
|
Interest payable |
|||
|
Note payable |
|||
|
Common stock |
|||
|
Retained earnings |
|||
|
Translation adjustment |
|||
|
Total liabilities and equities |
Computation of Translation Adjustment
|
Krone |
Exchange Rate |
U.S. Dollars |
|
|
Beginning net assets |
|||
|
Increase in net assets: Issued common stock |
|||
|
Increase in net assets: Net income |
|||
|
Decrease in net assets: Dividends paid |
|||
|
Ending net assets |
|||
|
Ending net assets at current exchange rate |
|||
|
Translation adjustment (negative) |
2
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Remove or Replace: Header Is Not Doc Title
Assessment 3: Foreign Currency
Problem 1
On September 30, 2018, Dolphin Company negotiated a two-year, 1,000,000 Euro loan from a German bank at an interest rate of 2 percent per year. Dolphin makes interest payments annually on September 30 and will repay the principal on September 30, 2020. Dolphin prepares U.S.-dollar financial statements and has a December 31 year end.
a. Prepare all journal entries related to this foreign currency borrowing assuming the following exchange rates for 1 Euro:
· September 30, 2018 $0.115
· December 31, 2018 0.120
· September 30, 2019 0.135
· December 31, 2019 0.140
· September 30, 2020 0.165
b. Determine the effective cost of borrowing in dollars in each of the three years 2018, 2019, and 2020.
Problem 2
Broadmore Company began operating a subsidiary in a foreign country on January 1, 2018, by acquiring all of its common stock for 80,000 krones, which was equal to fair value. This subsidiary immediately borrowed 200,000 krones on a five-year note with 10 percent interest payable annually beginning on January 1, 2019. The subsidiary then purchased for 280,000 krones a building that had a 10-year anticipated life and no salvage value and is to be depreciated using the straight-line method. The subsidiary rented the building for three years to a group of local doctors for 10,000 krones per month. By year-end, payments totaling 100,000 krones had been received. On October 1, 8,000 krones were paid for a repair made on that date. The subsidiary transferred a cash dividend of 10,000 krones back to Broadmore on December 31, 2018.
The functional currency for the subsidiary is the krone. Currency exchange rates for 1 krone
follow:
· January 1, 2015 $1.90 = 1 krone
· October 1, 2015 1.75 = 1 krone
· Average for 2015 1.80 = 1 krone
· December 31, 2015 1.70 = 1 krone
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