South Seas Inc, a subsidiary of Seven Seas Inc., reported its most recent performance in its local currency (LC) which is the functional currency. The reporting currency of Seven Seas is the U.S. dollar (USD). The current exchange rate is 2LC/USD, the historic exchange rate is 2.5LC/USD, and the average exchange over the past year is 2.2LC/USD. South Seas also paid a dividend of 16,000LC at year end, at which time the exchange rate was 2LC/USD. Revenues 520,000 Cost of Goods Sold (COGS) 225,000 SG&A 100,000 Depreciation 80,000 Income Taxes 46,000 Net Income 69,000 (all amounts LC) Last year Seven Seas reported balance sheet retained earnings of 90,000 USD for its South Seas subsidiary. How much retained earnings will Seven Seas report for its South Seas subsidiary on the balance sheet? A) 121,364 USD. B) 8,000 USD. C) 23,364 USD. D) 113,364 USD.
I take D. all of the revs translate @ ave rate so NI = 69,000/2.2 = 31,363.63636 Divs translate at the rate when they got paid, so 2lc/us, or 8k subtracted, gets you to 23,363.63. Add that to the 90k you had beginning of year and whammo you’re at answer D?
NI = 69000/2.2 = 31363.6363 D= 16000/2 = 8000 RE(E) = RE(B) + NI - D RE(E) = 90000 + 31363.6363 - 8000 = 113363.6363 USD= D EDIT: removed unwanted crap
c by process of elimination
It’s easy if you know FSA. Tougher if you don’t.
guys the currency must be usd/lc not the other way- I think that is the trick here
nevermind I thought they were asking for the change in retained earnings
i’ll take d too then
I got D
Nah. dinesh and bannisja have it right with D. As per Qbank: Dividends are translated at the rate 2LC/USD. Therefore, the 16,000 LC dividend is equivalent to 16,000LC / 2 = 8,000 USD. Net income less dividends equals the current period retained earnings of 23,364 USD (= 31,364 USD - 8,000 USD). The balance sheet retained earnings is the sum of last year’s and the current period’s retained earnings or 113,364 USD (90,000 + 23,364). (retained came from previous q) I just detected a bug in Schweser’s Qbank. If you get 0% on a Study Session, you can’t click through to see which Readings you were tested on! Hopefully that’s a bug I can avoid in future. FSA needs a big review from the beginning methinks.
just a question, I know for the all current the dividends are at the historic rate. That would be true for temporal method too right?
D…same as bannisja and dinesh’s calcs
^^…ok was posting while answer was being posted… but glad to know i remmeber my transl stuff !
deep2002 yes
deep2002 Wrote: ------------------------------------------------------- > just a question, I know for the all current the > dividends are at the historic rate. That would be > true for temporal method too right? yes
I also got D, thanks to cpk’s summary that I learned. now let’s change functional currency to USD. How would the answer be different?
ooof…maratikus why you gotta make us do this? don’t feel like calculating…but here’s what I’d do. dividends - same conversion Revenues 520,000 convert at average Cost of Goods Sold (COGS) 225,000 - convert at historical ( based on when it was bought) SG&A 100,000 - convert at average Depreciation 80,000 - convert at historical Income Taxes 46,000 - hmmm…- calculate based on above subtotal Net Income 69,000 - mixed rate, based on above subtotal - taxes (all amounts LC) Thus old retained earnings + New net income figure - Dividends it’s past 1 am at night in my hometown…let’s see how well my brains work…
you assuming inventory was bought evenly throughout year, beg, or end? (aka how do you want me to play COGS)
^^ i assumed it was bought beg, but yeah…you’d translate based on what it said…
way to go, mumukada!