International Company will translate (convert) the Korean subsidiary’s financial statements into dollars before preparing the consolidation. To do so they go thru a process where the Korean subsidiary’s financial statements are remeasured into the Korean subsidiary’s functional currency and then translated into dollars (the Parent Company’s 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 subsidiary’s 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 subsidiary’s 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
Cost of Goods Sold (60,000)
Operating Expenses (20,000)
Depreciation Expense (10,000)
Net Income 20,000
Statement of Retained Earnings
Beginning Retained Earnings 70,000
Net Income 20,000
Ending Retained Earnings 90,000
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
Total Equity 690,000
Total Liabilities and Equity 1,090,000
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
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