Packstone Inc. owns a subsidiary in England. The subsidiary?s functional currency is the pound. Therefore, translation is necessary in order to prepare consolidated financial statements. The subsidiary began 2004 with 500,000 pounds in cash and no other assets or liabilities. On March 1, the subsidiary used 100,000 pounds to purchase equipment. On April 20, the subsidiary used cash to purchase merchandise inventory costing 80,000 pounds. This merchandise was sold on May 16 for 120,000 pounds in cash. On November 1, the subsidiary paid a cash dividend to Packstobe in the amount of 60,000 pounds and recorded depreciation on the equipment for the year of 50,000 pounds. The appropriate exchange rates were as follows (spot rate = USD/Pound): What is the translation adjustment to be reported in the stockholders’ equity section of the consolidated balance sheet under the all-current method?
can you list the exchange rates in the problem? historical, ave, current, historical on div date, etc…
Probably a net loss/negative adjustment to equity looking at the income statement numbers, but by how much, it all depends on the exchange rates.
flow effect is probably negative holding effect depends on the exchange rates. So at this point i don’t think we can say if CTA is +ve or -ve.
With the Current method you translate the Income statement first to get the Net Income figure. You use this to find out the retaining earnings figure in dollars Ending Ret Earnings = Beg RetEarn + Net Income - Dividends (to get Net Income, you can tkae Net Income in Gbp and translate using the average exchange rate as all Income Statement items are translated using the average rate. Note dividends will be translated at their historical rate) Now translate the B/Sheet (asssets &liab at current rate, common stock at rate when issued), adding in this calculated Ret Earnings figure. The balance sheet will not balance, you add in a CTA adjustment (which is what the qn is asking for) to equity to make Assets -Liab = Equity. With the current method - its all in the name. All B/S items transfered by current method and all I/S items at average rate. Exceptions are equity and dividends - these are at historical rates. I’d say give the question a go.
Jan 1 2004: 1.48 March 1 2004: 1.50 April 20 2004:1.52 May 16, 2004: 1.55 Nov 1, 2004: 1.53 Dec 31, 2004: 1.56 Average for 2004:1.60
Correct Answer: $37,600 credit. Only changes in the net assets have an impact on the calculation of the translation adjustment. The equipment purchase does not change net assets since the increase in the equipment account is offset by the reduction in the cash account. The sale of inventory increases net assets by the amount of the gross profit. (I don’t understand why for Deprecation, it used exchange rate: 1.54, seems not in the list of exchange rates. )
Is there no more information in the question? As its not clear what the net income figure is. we have sales 120k Cost of goods sold -80k But nothing else… They cant pay a 60k div out of the net of those two. Looking at the exchange rates, the pound strengthened (you get more dollars for your pound), which would mean that using the current method - which always gives you a net asset exposure - the CTA adjustment would be positive, as you will make a gain.