Victoria Company established a subsidiary in Brazil on January 1, 2011. The subs
ID: 2358704 • Letter: V
Question
Victoria Company established a subsidiary in Brazil on January 1, 2011. The subsidiary begins the year with 1,200,000 Brazilian reals (BRL) in cash and no other assets or liabilities. It immediately used BRL 700,000 to acquire equipment. Inventor costing BRL 300,000 is acquired evenly throughout the year and sold for BRL 450,000 cash. A dividend of BRL 50,000 is paid to the parent on Oct 1, 2011. Depreciation on the equipment for the year is BRL 70,000. Currency exchange rates between the U.S. Dollar and BRL for 2011 are as follows:
1/1 U.S.$0.55
10/1 $0.52
12/31 $0.45
Average for the year $0.50
Required: Determine the amount of remeasurement los under the temporal method to be recognized in the Year 2011 consolidated income statement.
Explanation / Answer
Alright, so two important things you need to note are: we are working with an income statement not a balance sheet, as reporting for the two differ in some ways, and that we are using the temporal method. First rule, anything that appears solely on the income statement uses the average weighted value for the year. For example, in this instance, sales of 450,000 are reported at the average weighted value, that will be discussed later. The first thing we need to restate is the value of the equipment. On the day we got the equipment we acquired we debited equipment and credited cash for $385,000 (700,000*0.55). Now, equipment is always reported at historical cost, as it is a fixed asset, therefore, no adjustment is involved. Furthermore, inventory is also a fixed asset and will be reported at 150,000 (300,000*0.50), the 0.50 is used since it is acquired evenly throughout the year. However, there is no re-measurement involved since it is a fixed asset. Now sales is an item that appears solely on the income statement. Now, we know that we are going to use the weighted average method to translate sales. Thus sales are worth 450,000 BRL=$225,000 (450000*0.50). Now, the worth of the $ at the end of the year is $0.45, and yet the sales were reported at $0.50. So, now that the dollar is worth more, as less of a dollar gets us more BRL at the end of a year, we must recognize a loss in the value of our sales. This is recognized by finding the new value of the BRL in terms of dollars or 450,000*0.45=$202,500. Now the rule for a subsidiary of a U.S. company is we must convert everything to dollar amounts, so the loss to recognize in terms of sales is $22,500 (225000-202500). Thus we will debit sales revenue and credit loss due to foreign currency translation for $22,500, and is put in terms of the dollar amount since the consolidated financial statement will be in dollar amounts since the parent company is in the U.S.. that is the answer. However, if you need to convert the other two transactions, a dividend and a depreciation expense I will explain how to do those as well, even though it will be shown that no adjustment results because of these. A dividend under the temporal method can be viewed like cash or an accounts payable. When the liability for the dividend is incurred by the company, which assuming the company paid the dividend on Oct. 1, 2011, that would mean the dividend was declared probably a month in advance. Which means that it was originally recorded at 50,000 BRL when the dollar was worth $0.55. Now, monetary issuance are recorded at the current exchange rate. So, the value of the dividend payable was $27,500 (0.55*50,000) and now it is worth $26,000 (0.52*50,000), thus credit loss due to currency translation for $15,000 and debit cash for $15,000. HOWEVER, since this is a consolidated income statement between a company and its subsidiary the gain and loss offset each other and therefore no change occurs. For depreciation expense of 70,000 BRL the rule for depreciation is even though it is an expense it is directly linked to a non-monetary item, or in this case the equipment, Now, this is not adjusted since by being linked it follows the adjustment rules for the item it is linked with, and equipment is never adjusted. Hope this helps
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.