ch15 - Chapter 15 - Solutions Overview: Problem Length {S}...

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Chapter 15 - Solutions Overview: Problem Length Problem #’s {S} 4, 5, 7, 12 {M} 1 - 3, 6, 9, 10, 13 -15 {L} 8, 11 1.{M}a. Because the functional currency of Nippon MT is the yen, the current rate method should be used to translate the yen financial statements into US dollars, the reporting currency. b. See Exhibit 15S-1 (page 2) for income statement and balance sheet translation. c. The lower value of the yen relative to the US dollar reduced the earnings of Nippon MT after translation into dollars as the (average) current exchange rate is used to translate all income statement components. d. The alternative method is the temporal method, which would be required if Nippon MT Operated in a highly inflationary economy, or Was highly integrated with Master Toy, requiring the use of the US dollar as its functional currency e. Under the temporal method, nonmonetary assets and liabilities (such as inventories and fixed assets) are translated at the historical rate. Monetary assets and liabilities are translated at the current rate. Income statement items related to nonmonetary assets and liabilities (such as COGS and depreciation expense) are translated using historical rates while those related to monetary assets and liabilities are translated at the average rate for the period. The temporal and current rate methods also differ in the definition of the currency exposure: the net monetary position of the foreign unit is the measure of risk under the temporal method whereas the net assets (that is, the stockholders’ equity) delineate the exposure when the current rate method is used. 15-1
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The different definition of exposure and the dissimilar exchange rates used to translate various assets and liabilities generate disparate amounts of translation gain or loss. These amounts are also displayed in different financial statements; the temporal method reports translation gain or loss in the income statement whereas the current rate method reports the gain or loss is a component of other comprehensive income. Exhibit 15S-1. Nippon MT (thousands) Exchange rate Statement of Income and Retained Earnings Yen Dollars Rate Explanation Sales 700,000 $ 5,000 140 Average rate Expenses Cost of sales 280,000 2,000 140 Average rate Depreciation 126,000 900 140 Average rate Selling, general, and administrative 77,000 550 140 Average rate Total expenses 483,000 $ 3,450 Income before taxes 217,000 $ 1,550 Income taxes (98,000) (700) 140 Average rate Net income 119,000 $ 850 Retained earnings December 31, 1997 250,000 2,000 Given 369,000 $ 2,850 Dividends (58,000) (400) 145 Rate when paid Retained earnings December 31, 1998 311,000 $ 2,450 Balance Sheet Assets Cash and receivables 60,000 $ 400 150 Year-end rate Inventory 180,000 1,200 150 Year-end rate Land 200,000 1,333 150 Year-end rate Fixed assets 346,000 2,307 150 Year-end rate Total assets 786,000 $ 5,240 150 Year-end rate Liabilities and stockholders equity Liabilities 300,000 2,000 150 Year-end rate Capital stock 175,000 1,750 100 Given Retained earnings 311,000 2,450 Computed above Cumulative translation adjustment (960) Plug 1 Total liabilities and stockholders' equity 786,000 $ 5,240 1 Assets – liabilities – capital stock – retained earnings.
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ch15 - Chapter 15 - Solutions Overview: Problem Length {S}...

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