# CTA Kaplan Mock 3. Vol 2 AM

Following are International Oilfield’s (subsidiary) balance sheets at the end of 2015 and 2016:

LCU in mln 2016 2015

Cash and rec 120 216

Inventory 631.3 650.4

Equipment 820.7 693.6

Liab (all monetary) 600 600

Cap Stk 350 350

Retaine Earnings 622 610

At the end of 2016, International Oilfield’s retained earnings account was equal to \$525 million and, to date, no dividends have been paid. All of International Oilfield’s capital stock was issued at the end of 2013.

Q : Compute the cumulative translation adjustment reported on Continental Supply’s consolidated balance sheet at the end of 2016, assuming International Oilfield is a relatively self-contained and independent operation of Continental Supply.

-\$227 million.

\$200 million.

\$200 million.

Solution : Under the current rate method, gains and losses that occur as a result of the translation process do not show up on the income statement but are instead accumulated in a balance sheet account called the cumulative translation adjustment account (CTA). The translation gain or loss in each year is calculated and added to the account, acting like a running total of translation gains and losses. The CTA is simply an equity account on the balance sheet.

To compute the CTA for Continental’s balance sheet, force the accounting equation (A = L + E) to balance with the CTA; [(120 million cash and receivables + 631.3 million inventory + 820.7 million equipment - 600 million liabilities) / 1.50] - \$350 million capital stock - \$525 retained earnings = -\$227 million. The LCU 350 capital stock was issued at the end of 2013 at an exchange rate of LCU 1 = \$1. The \$525 retained earnings figure was given in the text.

My question: Why are we given two different amounts for Retained Earnings and how are we supposed to know which one to use?

You are given two figures in two different currencies:

LCU 622

USD 525

Since retained earnings is accumulated at a mixed rate over many years (I think only 2 in this case), you cannot convert directly to USD and need to used the given USD amount.

Thank you so much!