Foreign Currency Translation

Chapter 10: Foreign currency translation

US corporations with subsidiaries in other countries must include these subsidiaries in their consolidated financial statements. In order to accomplish this, the financial statements of the foreign subsidiaries must be stated in terms of US dollars. If it is a normal practice of the foreign subsidiaries to prepare their financial statements in terms of a foreign currency, such statements must be converted into US dollars. The process of converting foreign currency financial statements into US dollar financial statements is commonly referred to as foreign currency translation.

I. Foreign Currency Translation Methods

From a practical standpoint, the process of converting foreign-currency financial statements into US-currency financial statements depends upon the business environment in which the foreign subsidiary operates.

If the foreign subsidiary operates in a business environment in which most transactions are based on a foreign currency and the subsidiary maintains its accounting records in the foreign currency, which translation method must be used, the current method, the temporal method, or neither method? Select one. If the foreign subsidiary operates in a business environment in which most transactions are based on a foreign currency, the translation method to be used in the conversion is the current method.

If the foreign subsidiary operates in a business environment in which the vast majority of transactions are based on US dollars but the subsidiary maintains its accounting records in the foreign currency, which translation method must be used, the current method, the temporal method, or neither method? Select one.

If the foreign subsidiary operates in a business environment in which the vast majority of transactions are based on US dollars, the translation method to be used in the conversion is the temporal method.

If the foreign subsidiary maintains its accounting records in US dollars, which translation method must be used, the current method, the temporal method, or neither method? Select one. If the foreign subsidiary maintains its accounting records in US dollars, no translation is needed because the resulting financial statements will already be in US dollars.

Complete the following table to summarize the translation options.

Business Environment Subsidiary’s Accounting Records Subsidiary’s Accounting Records (Functional Currency) in Foreign Currency in US Dollars Foreign currency Current method US Dollars No translation needed

Business Environment Subsidiary’s Accounting Records Subsidiary’s Accounting Records (Functional Currency) in Foreign Currency in US Dollars Foreign currency Current method No translation needed US Dollars Temporal method No translation needed A. Briefly describe the “current” method.

The current method is used when the foreign subsidiary is operating on a foreign currency basis and maintaining its accounting records on a foreign currency basis.

As a result, the subsidiary would be unaffected by any changes in the foreign currency exchange rate.

The current method is based on the idea that the foreign subsidiary operates as a relatively separate entity from the US parent company and keeps its accounting records in a foreign currency by choice.

In essence, the current method converts the foreign subsidiary’s financial data from a foreign currency basis to a US dollar basis as if the net assets of the foreign subsidiary were one individual investment of the parent company.

By using in its conversion process only one exchange rate for assets and liabilities and one exchange rate for income statement items, the current method maintains all balance sheet relationships and all income statement relationships reported in the foreign currency based financial statements. B. Briefly describe the “temporal” method.

The temporal method is used when the foreign subsidiary is operating on a dollar basis but maintaining its accounting records on a foreign currency basis.

As a result, the subsidiary would be affected by any changes in the foreign currency exchange rate.

The temporal method is based on the idea that the foreign subsidiary maintains very close ties with the US parent company and would keep its accounting records in US dollars if possible.

In essence, the temporal method converts the foreign subsidiary’s individual asset, liability, and stockholders’ equity accounts from a foreign currency basis to a US dollar basis as if the US dollar had been used in the foreign subsidiary’s accounting system at all times.

By using in its conversion process several different exchange rates for assets, liabilities, and income statement items, the temporal method usually does not maintain the balance sheet relationships and income statement relationships reported in the foreign currency based financial statements. II. Illustration of foreign currency translation.

During 2009, the foreign exchange rate of FC currency to US dollars was:

January 1 – February 28 1.10 (1 FC unit = 1.10 US dollars) March 1 - April 30 1.11 May 1 - June 30 1.12 July 1 - August 30 1.13 September 1 – October 31 1.14 November 1 – December 31 1.15 2009 average 1.125 Fourth quarter 2009 average 1.147

During 2010, the foreign exchange rate of FC currency to US dollars was:

September 1 - October 31 1.18 November 1 – December 31 1.19 2010 average 1.16

During 2009, a foreign subsidiary of the Lowell Corporation generated the account balances shown in the first two columns of the following table. The foreign subsidiary maintains its accounting records in Foreign Currency (FC) and uses the FIFO inventory method.

A. Converting a foreign subsidiary’s December 31, 2009 foreign currency accounting records to US dollars by applying the current method.

Using the foreign exchange rates on the previous page, insert the appropriate rates in the Translation Rate column of the table below. Once you insert the rates, check your work by multiplying the amounts in the FC column by the corresponding translation rates in the Translation Rate column to arrive at the amounts in the US $ column. Translation Account FC Rate US $ Cash 84,000 96,600 Accounts Receivable 188,000 216,200 Merchandise Inventory 430,000 494,500 Total Current Assets 702,000 807,300 Equipment (purchased 7/1/09) 900,000 1,035,000 Accumulated Depreciation, Equipment (40,000) (46,000) Total Property, Plant, and Equipment 860,000 989,000 Total Assets 1,562,000 1,796,300 Accounts Payable (310,000) (356,500) Total Current Liabilities (310,000) (356,500) Notes Payable (900,000) (1,035,000) Total Long-term Liabilities (900,000) (1,035,000) Total Liabilities (1,210,000) (1,391,500) Common Stock (10,000) (11,000) Additional Paid-in Capital, Common Stock (70,000) (77,000) Retained Earnings, 1/1/09 0 0 Dividends, 9/30/09 30,000 34,200 Sales (1,728,000) (1,944,000) Cost of Goods Sold 970,000 1,091,250 Operating Expenses (Cash) 240,000 270,000 Depreciation Expense, Equipment 40,000 45,000 Interest Expense 36,000 40,500 Income Taxes Expense 140,000 157,500 Cumulative Translation Adjustment 0 Total Stockholders' Equity (352,000) (404,800) Total Liabilities and Stockholders' Equity (1,562,000) (1,796,300) Translation Account FC Rate US $ Cash 84,000 1.15 C 96,600 Accounts Receivable 188,000 1.15 C 216,200 Merchandise Inventory 430,000 1.15 C 494,500 Total Current Assets 702,000 807,300 Equipment (purchased 7/1/09) 900,000 1.15 C 1,035,000 Accumulated Depreciation, Equipment (40,000) 1.15 C (46,000) Total Property, Plant, and Equipment 860,000 989,000 Total Assets 1,562,000 1,796,300 Accounts Payable (310,000) 1.15 C (356,500) Total Current Liabilities (310,000) (356,500) Notes Payable (900,000) 1.15 C (1,035,000) Total Long-term Liabilities (900,000) (1,035,000) Total Liabilities (1,210,000) (1,391,500) Common Stock (10,000) 1.10 H (11,000) Additional Paid-in Capital, Common Stock (70,000) 1.10 H (77,000) Retained Earnings, 1/1/09 0 0 Dividends, 9/30/09 30,000 1.14 H 34,200 Sales (1,728,000) 1.125 A (1,944,000) Cost of Goods Sold 970,000 1.125 A 1,091,250 Operating Expenses (Cash) 240,000 1.125 A 270,000 Depreciation Expense, Equipment 40,000 1.125 A 45,000 Interest Expense 36,000 1.125 A 40,500 Income Taxes Expense 140,000 1.125 A 157,500 Cumulative Translation Adjustment 0 (11,250) Total Stockholders' Equity (352,000) (404,800) Total Liabilities and Stockholders' Equity (1,562,000) (1,796,300)

Translation rate: A = average for the year, C = current, H = historical.

Calculate the Cumulative Translation Adjustment and insert it in the US $ column in the above table. Based on the data in the previous table, complete the following tables to determine some relationships resulting from the use of the current method.

Item as a Percentage of Sales FC US$ Sales 100.0% 100.0% Cost of Goods Sold 56.1% * Operating Expenses Net Income

Item as a Percentage of Sales FC US$ Sales 100.0% 100.0% Cost of Goods Sold 56.1% * 56.1% Operating Expenses 16.2% 16.2% Net Income 17.5% 17.5%

* 970,000 / 1,728,000 = .561

Item as a Percentage of Total Assets FC US $ Current Assets Total Assets 100.0% 100.0% Long-term Liabilities 57.6% * Stockholders' Equity Total Liabilities and Stockholders' Equity

Item as a Percentage of Total Assets FC US $ Current Assets 44.9% 44.9% Total Assets 100.0% 100.0% Long-term Liabilities 57.6% 57.6% * Stockholders' Equity 22.5% 22.5% Total Liabilities and Stockholders' Equity 100.0% 100.0%

* 1,035,000 / 1,796,300 = .576

Note from the above statistics that the financial statements' fundamental relationships did not change as a result of using the current method to translate the foreign currency data.

Calculation of 2009 translation adjustment: It is possible to calculate the translation adjustment directly, instead of calculating the “plug” figure as shown above in the table on page 4. Complete the following table to determine the translation adjustment for 2009.

Translation Item FC Rate US $ Net asset balance 1/1/09 80,000 1.10 H 88,000 Less: Net asset balance, 12/31/09 352,000 1.15 C 404,800 Total change in net assets 272,000 316,800

Change in net assets: Plus: Net income, 2009 Less: Dividends, 2009 Plus: Translation adjustment Total change in net assets 272,000 316,800

Translation Item FC Rate US $ Net asset balance 1/1/09 80,000 1.10 H 88,000 Less: Net asset balance, 12/31/09 352,000 1.15 C 404,800 Total change in net assets 272,000 316,800

Change in net assets: Plus: Net income, 2009 302,000 1.125 A 339,750 Less: Dividends, 2009 (30,000) 1.14 H (34,200) Plus: Translation adjustment 0 11,250 Total change in net assets 272,000 316,800

Briefly describe where the translation adjustment for a specific year would be reported in a company’s financial statements. Under the requirements for reporting comprehensive income, the current year’s translation adjustment (the change in the cumulative translation adjustment) would be excluded from net income but would be included in comprehensive income.

Briefly describe where the cumulative translation would be reported in a company’s financial statements.

The cumulative translation adjustment is reported as a separate component of stockholders' equity until the foreign subsidiary is sold. At that time, the cumulative translation adjustment must be removed from stockholders' equity and reported as part of the gain or loss on the sale of the foreign subsidiary. B. Converting a foreign subsidiary’s December 31, 2010 foreign currency accounting records to US dollars by applying the current method.

Using the foreign exchange rates on page 3, insert the appropriate rates in the Translation Rate column of the table on the next page. Once you insert the rates, check your work by multiplying the amounts in the FC column by the corresponding translation rates in the Translation Rate column to arrive at the amounts in the US $ column. Hint: Be particularly careful with the retained earnings, 1/1/10 balance. The US $ amount does not come from simply multiplying the FC amount by a specific translation rate.

Translation Account FC Rate US $ Cash 291,000 346,290 Accounts Receivable 240,000 285,600 Merchandise Inventory 470,000 559,300 Total Current Assets 1,001,000 1,191,190 Equipment (purchased 7/1/09) 900,000 1,071,000 Accumulated Depreciation, Equipment (80,000) (95,200) Total Property, Plant, and Equipment 820,000 975,800 Total Assets 1,821,000 2,166,990 Accounts Payable (320,000) (380,800) Total Current Liabilities (320,000) (380,800) Notes Payable (850,000) (1,011,500) Total Long-term Liabilities (850,000) (1,011,500) Total Liabilities (1,170,000) (1,392,300) Common Stock (10,000) (11,000) Additional Paid-in Capital, Common Stock (70,000) (77,000) Retained Earnings, 1/1/10 (272,000) Dividends, 9/30/10 33,000 38,940 Sales (1,901,000) (2,205,160) Cost of Goods Sold 1,067,000 1,237,720 Operating Expenses (Cash) 264,000 306,240 Depreciation Expense, Equipment 44,000 51,040 Interest Expense 40,000 46,400 Income Taxes Expense 154,000 178,640 Cumulative Translation Adjustment 0 Total Stockholders' Equity (651,000) (774,690) Total Liabilities and Stockholders' Equity (1,821,000) (2,166,990)

Translation Account FC Rate US $ Cash 291,000 1.19 C 346,290 Accounts Receivable 240,000 1.19 C 285,600 Merchandise Inventory 470,000 1.19 C 559,300 Total Current Assets 1,001,000 1,191,190 Equipment (purchased 7/1/09) 900,000 1.19 C 1,071,000 Accumulated Depreciation, Equipment (80,000) 1.19 C (95,200) Total Property, Plant, and Equipment 820,000 975,800 Total Assets 1,821,000 2,166,990 Accounts Payable (320,000) 1.19 C (380,800) Total Current Liabilities (320,000) (380,800) Notes Payable (850,000) 1.19 C (1,011,500) Total Long-term Liabilities (850,000) (1,011,500) Total Liabilities (1,170,000) (1,392,300) Common Stock (10,000) 1.10 H (11,000) Additional Paid-in Capital, Common Stock (70,000) 1.10 H (77,000) Retained Earnings, 1/1/10 (272,000) ** (305,550) Dividends, 9/30/10 33,000 1.18 H 38,940 Sales (1,901,000) 1.16 A (2,205,160) Cost of Goods Sold 1,067,000 1.16 A 1,237,720 Operating Expenses (Cash) 264,000 1.16 A 306,240 Depreciation Expense, Equipment 44,000 1.16 A 51,040 Interest Expense 40,000 1.16 A 46,400 Income Taxes Expense 154,000 1.16 A 178,640 Cumulative Translation Adjustment 0 (34,960) Total Stockholders' Equity (651,000) (774,690) Total Liabilities and Stockholders' Equity (1,821,000) (2,166,990)

Translation rate: A = average for the year, C = current, H = historical.

** Retained earnings, 1/1/10 in US dollars:

Retained earnings, 1/1/09 $0 Plus: 2009 net income $339,750 Less: 2009 dividends $34,200 Retained earnings, 1/1/10 $305,550

Calculation of 2010 translation adjustment: Complete the following table to determine the translation adjustment for 2010.

Translation Item FC Rate US $ Net asset balance 1/1/10 352,000 404,800 Less: Net asset balance, 12/31/10 651,000 774,690 Total change in net assets 299,000 369,890

Change in net assets: Plus: Net income, 2010 385,120 Less: Dividends, 2010 (38,940) Plus: Translation adjustment Total change in net assets 369,890 Translation Item FC Rate US $ Net asset balance 1/1/10 352,000 1.15 H 404,800 Less: Net asset balance, 12/31/10 651,000 1.19 C 774,690 Total change in net assets 299,000 369,890

Change in net assets: Plus: Net income, 2010 332,000 1.16 A 385,120 Less: Dividends, 2010 (33,000) 1.18 H (38,940) Plus: Translation adjustment 0 23,710 Total change in net assets 299,000 369,890

Complete the following table to verify the 12/31/10 cumulative translation adjustment:

2009 translation adjustment 2010 translation adjustment 12/31/10 cumulative translation adjustment ($34,960)

2009 translation adjustment ($11,250) 2010 translation adjustment ($23,710) 12/31/10 cumulative translation adjustment ($34,960)

C. Converting a foreign subsidiary’s December 31, 2009 foreign currency accounting records to US dollars by applying the temporal method.

Using the foreign exchange rates on page 3, insert the appropriate rates in the Remeasurement Rate column of the table below. Once you insert the rates, check your work by multiplying the amounts in the FC column by the corresponding remeasurement rates in the Remeasurement Rate column to arrive at the amounts in the US $ column. You must calculate the cost of goods sold on the following page before you complete the table below.

Remeasure- ment Account FC Rate US $ Cash 84,000 96,600 Accounts Receivable 188,000 216,200 Merchandise Inventory 430,000 493,210 Total Current Assets 702,000 806,010 Equipment (purchased 7/1/09) 900,000 1,017,000 Accumulated Depreciation, Equipment (40,000) (45,200) Total Property, Plant, and Equipment 860,000 971,800 Total Assets 1,562,000 1,777,810 Accounts Payable (310,000) (356,500) Total Current Liabilities (310,000) (356,500) Notes Payable (900,000) (1,035,000) Total Long-term Liabilities (900,000) (1,035,000) Total Liabilities (1,210,000) (1,391,500) Common Stock (10,000) (11,000) Additional Paid-in Capital, Common Stock (70,000) (77,000) Retained Earnings, 1/1/09 0 0 Dividends (9/30/09) 30,000 34,200 Sales (1,728,000) (1,944,000) Cost of Goods Sold 970,000 1,081,790 Operating Expenses (Cash) 240,000 270,000 Depreciation Expense, Equipment 40,000 45,200 Interest Expense 36,000 40,500 Income Taxes Expense 140,000 157,500 Remeasurement (Gain) or Loss 0 Total Stockholders' Equity (352,000) (386,310) Total Liabilities and Stockholders' Equity (1,562,000) (1,777,810)

Remeasure- ment Account FC Rate US $ Cash 84,000 1.15 C 96,600 Accounts Receivable 188,000 1.15 C 216,200 Merchandise Inventory 430,000 1.147 A4Q 493,210 Total Current Assets 702,000 806,010 Equipment (purchased 7/1/09) 900,000 1.13 H 1,017,000 Accumulated Depreciation, Equipment (40,000) 1.13 H (45,200) Total Property, Plant, and Equipment 860,000 971,800 Total Assets 1,562,000 1,777,810 Accounts Payable (310,000) 1.15 C (356,500) Total Current Liabilities (310,000) (356,500) Notes Payable (900,000) 1.15 C (1,035,000) Total Long-term Liabilities (900,000) (1,035,000) Total Liabilities (1,210,000) (1,391,500) Common Stock (10,000) 1.10 H (11,000) Additional Paid-in Capital, Common Stock (70,000) 1.10 H (77,000) Retained Earnings, 1/1/09 0 0 Dividends (9/30/09) 30,000 1.14 H 34,200 Sales (1,728,000) 1.125 A (1,944,000) Cost of Goods Sold 970,000 Below 1,081,790 Operating Expenses (Cash) 240,000 1.125 A 270,000 Depreciation Expense, Equipment 40,000 1.13 H 45,200 Interest Expense 36,000 1.125 A 40,500 Income Taxes Expense 140,000 1.125 A 157,500 Remeasurement (Gain) or Loss 0 16,500 Total Stockholders' Equity (352,000) (386,310) Total Liabilities and Stockholders' Equity (1,562,000) (1,777,810)

Remeasurement rate: A = average for the year, A4Q = average for the fourth quarter of the year, C = current, H = historical.

Complete the following table and insert the cost of goods sold in the table on the previous page. Remember the company uses the FIFO inventory method. Once you insert the cost of goods sold into the previous table, calculate the remeasurement (gain) or loss and insert it into the table. Remeasure- ment Item FC Rate US $ Beginning inventory, 1/1/09 0 0 Plus: Purchases Less: Ending inventory, 12/31/09 Cost of Goods Sold 970,000

Remeasure- ment Item FC Rate US $ Beginning inventory, 1/1/09 0 0 Plus: Purchases 1,400,000 1.125 A 1,575,000 Less: Ending inventory, 12/31/09 430,000 1.147 A4Q 493,210 Cost of Goods Sold 970,000 1,081,790

Complete the following tables to determine some relationships resulting from the use of the temporal method.

Item as a Percentage of Sales FC US$ Sales 100.0% 100.0% Cost of Goods Sold 56.1% 55.6% Operating Expenses 16.2% 16.2% Net Income 17.5% 17.1% Item as a Percentage of Sales FC US$ Sales 100.0% 100.0% Cost of Goods Sold 56.1% 55.6% Operating Expenses 16.2% 16.2% Net Income 17.5% 17.1%

Item as a Percentage of Total Assets FC US $ Current Assets Total Assets 100.0% 100.0% Long-term Liabilities Stockholders' Equity Total Liabilities and Stockholders' Equity Item as a Percentage of Total Assets FC US $ Current Assets 44.9% 45.3% Total Assets 100.0% 100.0% Long-term Liabilities 57.6% 58.2% Stockholders' Equity 22.5% 21.7% Total Liabilities and Stockholders' Equity 100.0% 100.0%

Note from the above statistics that the financial statements’ fundamental relationships did change as a result of using the temporal method to restate (translate) the foreign currency data.

Calculation of 2009 remeasurement gain or loss: It is possible to calculate the remeasurement gain or loss directly, instead of calculating the “plug” figure as shown above in the table on page 8. Complete the following table to determine the remeasurement gain or loss for 2009.

Translation Item FC Rate US $ Net monetary assets, 1/1/09 80,000 1.10 H 88,000 Net monetary assets, 12/31/09 (938,000) 1.15 C (1,078,700) Total change in net monetary assets (1,018,000) (1,166,700)

Change in monetary assets: Plus: Sales Less: Purchases Less: Cash expenses Less: Interest expense Less: Income taxes expense Less: Equipment purchase Less: Dividends Plus: Remeasurement Gain or (Loss) Total change in net monetary assets (1,018,000) (1,166,700) Translation Item FC Rate US $ Net monetary assets, 1/1/09 80,000 1.10 H 88,000 Net monetary assets, 12/31/09 (938,000) 1.15 C (1,078,700) Total change in net monetary assets (1,018,000) (1,166,700)

Change in monetary assets: Plus: Sales 1,728,000 1.125 A 1,944,000 Less: Purchases (1,400,000) 1.125 A (1,575,000) Less: Cash expenses (240,000) 1.125 A (270,000) Less: Interest expense (36,000) 1.125 A (40,500) Less: Income taxes expense (140,000) 1.125 A (157,500) Less: Equipment purchase (900,000) 1.13 H (1,017,000) Less: Dividends (30,000) 1.14 H (34,200) Plus: Remeasurement Gain or (Loss) 0 (16,500) Total change in net monetary assets (1,018,000) (1,166,700)

Briefly describe where the remeasurement gain or loss for a specific year would be reported in a company’s financial statements. The remeasurement gain or loss is reported as a separate component of net income.

Note that unlike the translation adjustment in the current method, the remeasurement gain or loss does affect the Lowell Corporation's consolidated income statement. More than likely, this explains why most companies use the current method for foreign currency translation.

III. Comparison of translated financial statements with remeasured financial statements. The following data relates to the US Corporation’s 2009 operations. Obtain the two missing items from the tables prepared earlier.

Translated: Remeasured: Current Temporal Account Method Method Cash 96,600 96,600 Accounts Receivable 216,200 216,200 Merchandise Inventory 494,500 493,210 Equipment 1,035,000 1,017,000 Accumulated Depreciation, Equipment (46,000) (45,200) Accounts Payable (356,500) (356,500) Notes Payable (1,035,000) (1,035,000) Common Stock (11,000) (11,000) Additional Paid-in Capital, Common Stock (77,000) (77,000) Retained Earnings, 1/1/09 0 0 Dividends 34,200 34,200 Sales (1,944,000) (1,944,000) Cost of Goods Sold 1,091,250 1,081,790 Operating Expenses (Cash) 270,000 270,000 Depreciation Expense, Equipment 45,000 45,200 Interest Expense 40,500 40,500 Income Taxes Expense 157,500 157,500 Cumulative Translation Adjustment 0 Remeasurement (Gain) or Loss 0 Totals 0 0

Translated: Remeasured: Current Temporal Account Method Method Cash 96,600 96,600 Accounts Receivable 216,200 216,200 Merchandise Inventory 494,500 493,210 Equipment 1,035,000 1,017,000 Accumulated Depreciation, Equipment (46,000) (45,200) Accounts Payable (356,500) (356,500) Notes Payable (1,035,000) (1,035,000) Common Stock (11,000) (11,000) Additional Paid-in Capital, Common Stock (77,000) (77,000) Retained Earnings, 1/1/09 0 0 Dividends 34,200 34,200 Sales (1,944,000) (1,944,000) Cost of Goods Sold 1,091,250 1,081,790 Operating Expenses (Cash) 270,000 270,000 Depreciation Expense, Equipment 45,000 45,200 Interest Expense 40,500 40,500 Income Taxes Expense 157,500 157,500 Cumulative Translation Adjustment (11,250) 0 Remeasurement (Gain) or Loss 0 16,500 Totals 0 0

Complete the US Corporation’s simplified income statement for the year ended December 31, 2009.

Translated: Remeasured: Current Temporal Account Method Method Revenues $1,944,000 $1,944,000 Expenses 1,604,250 1,594,990 0 Net Income $339,750

Translated: Remeasured: Current Temporal Account Method Method Revenues $1,944,000 $1,944,000 Expenses 1,604,250 1,594,990 Remeasurement loss 0 16,500 Net Income $339,750 $332,510 Complete the US Corporation’s simplified statement of retained earnings for the year ended December 31, 2009.

Translated: Remeasured: Current Temporal Account Method Method Retained Earnings, 1/1/09 $0 $0 Plus: Net Income, 2009 339,750 Less: Dividends, 2009 34,200 34,200 Retained Earnings, 12/31/09 $305,550

Translated: Remeasured: Current Temporal Account Method Method Retained Earnings, 1/1/09 $0 $0 Plus: Net Income, 2009 339,750 332,510 Less: Dividends, 2009 34,200 34,200 Retained Earnings, 12/31/09 $305,550 $298,310

Complete the US Corporation’s simplified condensed balance sheet as of December 31, 2009. Translated: Remeasured: Current Temporal Account Method Method Assets $1,796,300 $1,777,810 Liabilities 1,391,500 1,391,500 Stockholders' Equity Contributed Capital 88,000 88,000 Retained Earnings 305,550 298,310 0 Total Stockholders' Equity 404,800 386,310 Total Liabilities & Stockholders' Equity 1,796,300 1,777,810

Translated: Remeasured: Current Temporal Account Method Method Assets $1,796,300 $1,777,810 Liabilities 1,391,500 1,391,500 Stockholders' Equity Contributed Capital 88,000 88,000 Retained Earnings 305,550 298,310 Cumulative translation adjustment 11,250 0 Total Stockholders' Equity 404,800 386,310 Total Liabilities & Stockholders' Equity 1,796,300 1,777,810 Based on the US Corporation’s financial statements, briefly answer the following questions.

1. Why did the current method and temporal method result in different measures of net income?

The temporal method reports a remeasurement gain or loss on the income statement, while the current method does not.

2. Why did the current method and temporal method result in different measures of retained earnings?

The temporal method reports a remeasurement gain or loss on the income statement, while the current method does not. These different income measures carried over to the statement of retained earnings.

3. Why did the current method and temporal method result in different measures of assets, liabilities, and stockholders' equity?

The two methods may use different exchange rates to convert some assets, liabilities, and expenses. Also, the current method results in a separate, cumulative translation adjustment reported in stockholders' equity.