Dell Air Lines has recently acquired Australian Puddle Jumpers, Inc., a small airline located in Sydney. The Australian dollar has been chosen by Dell as the functional currency for APJ. The Balance Sheet of APJ is given below as of Dec. 31, 2004 in Australian dollars. Assets Cash 200 A/R 240 Maintenance Supplies 180 Fixed Assets 280 Total Assets 900 Liabilities and Equity A/P 180 Common Stock 720 Total Liab & Equity 900 APJ’s income statement for the year ending Dec. 31, 2005 is expressed in Australian dollars as: Sales 3,500 Total Costs 2,900 Net Income 600 The Australian dollar has steadily depreciated against the U.S. dollar. At Dec. 31, 2004, the exchange rate was 2 Australian dollars = $1 but at Dec. 31, 2005, the exchange rate had deteriorated to 3 Australian dollars = $1. The Dec. 31, 2005 Balance Sheet for APJ is given in Australian dollars as follows: Assets Cash 441 A/R 330 Supplies 291 Fixed Assets 468 Total Assets 1,530 Liabilities and Equity A/P 210 Common Stock 720 Retained Earnings 600 Total Liab. & Equity 1,530 On APJ’s 2005 balance sheet, the level of common stock (not including retained earnings) in U.S. dollars would be: A) $288. B) $240. C) $196. D) $360. On APJ’s 2005 balance sheet, the level of retained earnings in U.S. dollars would be: A) $200. B) $240. C) $300. D) $345. On APJ’s 2005 balance sheet, the foreign currency translation adjustment in U.S. dollars would be: A) negative $220. B) negative $280. C) positive $160. D) negative $160.
- A 2) B (guessed) actually I got 230 3) C since I see the assets have doubled in value whch I am assuming to be due to inflation and at this rate cum inf for 3 yrs would be more than 100% and using temporal.
- A 2. B 3. D Using all current method as local currency = functional currency. For translating common stock and retained earnings I have used average exchange rate, however, actually it sould be historical rate which is not provided in this case. Also, I had one confusion which I want to discuss with you all. While calculating the average exchange rate I used average of AUD/ and then took the reciprocal for translation. However, I was wondering why can't we take the average of /AUD itself, this gives different results. Please provide a meaningful explantion for using average of AUD/ instead of /AUD. Thanks
- D - C/S is converted at historical rate 2) B = 600/avg rate for year (2.5) 3)D
retained earnings is the avg rate for this year because there was no R/E last year. i beleive it is normally previous R/E translated at current rate + current NI translated at avg rate.
- D Common Stock converted at historical rate which in this case would be .5 so, 360. 3. Flow effect = 600*(0.333 - avg(0.5,0.333)) = -60 Holding loss = 720*(.3333 - .5) = -100 So, D. 2. B
1)D 2)B 3)D
D B D one little difference from some answers i’ve seen- holding i get 600 ( 1/3 - 1/2.5) = -40 flow i get 720 (1/3 - 1/2) = -120 so -160 total as for this by pat- retained earnings is the avg rate for this year because there was no R/E last year. i beleive it is normally previous R/E translated at current rate + current NI translated at avg rate. is that right? if so, need to pencil that down in my notes.
- D, common stock (720/2=360) 2. B, RE (plug, 360-160+RE=440) 3. D, Cumulative translation adjustment (-160)
bannisja Wrote: ------------------------------------------------------- > D > B > D > one little difference from some answers i’ve seen- > > holding i get 600 ( 1/3 - 1/2.5) = -40 > flow i get 720 (1/3 - 1/2) = -120 > so -160 total > > as for this by pat- > retained earnings is the avg rate for this year > because there was no R/E last year. i beleive it > is normally previous R/E translated at current > rate + current NI translated at avg rate. > > is that right? if so, need to pencil that down in > my notes. Hi bannisja, Since the all current method apply in the above example I think we need to use the last year’s avg rate to translate last year’s R/E.
can someone explain RE. thanks,
DBD are the correct answers! You guys are all set to take the exam tomorrow!