Solutions Manual: Company Accounting 10e

Solutions Manual
to accompany
Company Accounting 10e

prepared by
Ken Leo
John Hoggett
John Sweeting
Jeffrey Knapp
Sue McGowan
© John Wiley & Sons Australia, Ltd 2015

Solutions manual to accompany Company Accounting 10e
Chapter 17 – Disclosure: translation of financial

statements
REVIEW QUESTIONS
1. What is the purpose of translating financial statements from one currency to
another?
Para 3 of AASB 121 notes 2 areas of application:

 Translation of results and financial position of foreign operations for the purpose of
including those results in the consolidated financial statements of a group, or to allow
an investor to equity account for these results.
 Translation of an entity’s results and financial position into another currency for
presentation purposes
2. What is meant by ‘functional currency’?
Para 8 of AASB 121 defines functional currency as “the currency of the primary economic
environment in which the entity operates”.
3. What is the rationale behind the choice of an exchange rate as an entity’s

functional currency?
One of the objectives of the translation process is to provide information that is generally
compatible with the expected economic effects of an exchange rate change on an entity’s
cash flows and equity. A parent entity that has an investment in a foreign subsidiary has
assets under its control that are exposed to a change in the exchange rate. Capturing the
extent of this exposure should be reflected in the choice of exchange rate.
Where a subsidiary acts simply as a conduit for the parent’s transactions, then the
consolidation approach must treat the foreign currency statements of the subsidiary as
artefacts that must be translated into the currency of the parent.
Where the subsidiary is not just a conduit for the parent, but the latter is dependent on its own
economic environment then the choice of exchange rate must reflect the fact that the
functional currency is that of the subsidiary not the parent.
4. What guidelines are used to determine the functional currency of an entity?
See paragraphs 9-12 of AASB 121 and section 17.2.3 of the text, particularly Tables 2-4.
© John Wiley and Sons Australia Ltd 2015 17.2

Chapter 17: Disclosure: translation of financial statements
5. How are statement of profit or loss and other comprehensive income items
translated from the local currency into the functional currency?
Income and expenses: these are translated at the rate current at the date the transaction
occurred.
Dividends paid: these are translated at the rate current at the date of payment.
Dividends declared: these are translated at the rate current at the date of declaration
Transfers to/from reserves: for internal transfers, the rates applicable are those existing when
the amounts transferred were originally recognised in equity.
6. How are statement of financial position items translated from the local currency
into the functional currency?
Para 23 of AASB 121:
- foreign currency monetary items are translated using the closing rate
- non-monetary items that are measured in terms of historical cost in a foreign currency
are translated using the exchange rate at the date of the transaction
- non-monetary items that are measured at fair value in a foreign currency are translated
using the exchange rates at the date when the value was determined.
Assets: Classify as monetary or non-monetary. Translate monetary assets at the current rate
existing at end of reporting period. For non-monetary assets, use the rate current at the date at
which the recorded amount for the asset was entered into the accounts.
Liabilities: Classify liabilities into monetary and non-monetary. Use the same principles as
for assets.
Share capital: if on hand at acquisition, use the rate at acquisition date. If arising subsequent
to acquisition, use the rate at date of issue.
Other reserves: If on hand at acquisition date, use the rate at that date. For reserves created
by internal transfer, use the rate at date the amounts transferred were originally recognised in
equity.
Retained earnings: If on hand at acquisition date, use the rate at that date. Post-acquisition
profits are carried forward balances.
7. How are foreign exchange gains and losses calculated when translating from local
currency to functional currency?
Exchange differences arise from translating the foreign operation’s monetary items at current
rates while the non-monetary items are translated using an historical rate. For non-monetary
items exchange differences arise only when they are sold or exchanged. Hence, exchange
differences are calculated by examining movements in the monetary items over the period.
8. What is meant by ‘presentation currency’?
Paragraph 8 of AASB 121 states that presentation currency is the currency in which the
financial statements are presented.

9. How are statement of profit and loss and other comprehensive income items
translated from functional currency to presentation currency?
Income and expenses: These are translated at the rates current at the applicable transaction
dates.
Dividends paid: These are translated at the rates current when the dividends were paid.
Dividends declared: These are translated at the rates current when the dividends are declared.
10. How are statement of financial position items translated from functional currency
to presentation currency?
Assets: Current rates at the end of the reporting period are used
Liabilities: Current rates at the end of the reporting period are used
Share capital: If on hand at acquisition date, the rate at acquisition date is used
Other reserves: If on hand at acquisition date, use the rate at that date. For reserves created
by internal transfer, use the rate at date the amounts transferred were originally recognised in
equity.
Retained earnings: If on hand at acquisition date, use the rate at that date. Post-acquisition
profits are carried forward balances
11. What causes a foreign currency translation reserve to arise?
A foreign currency translation reserve will arise when the financial statements are translated
into the presentation currency. It arises because income and expense items are translated at
dates of the transactions and not the closing rate, and in the case of a net investment in a
foreign operation where the opening net assets are translated at an exchange rate different
from the closing rate.
12. Why are gains/losses on translation taken to a foreign currency translation reserve
rather than to profit and loss for the period?
According to paragraph 41 of AASB 121, these exchange differences have little or no direct
effect on the present and future cash flows from operations. Movements in the foreign
currency translation reserve are, however, shown as part of other comprehensive income for
the period.
13. The accounts listed below are for a wholly owned foreign subsidiary. In the space
provided indicate the exchange rate that would be used to translate the accounts
into Australian dollars. Use the following letters to indicate the appropriate
exchange rate:
H — historical exchange rate

C — current exchange rate at the end of the current period
A — average exchange rate for the current period.

A$ is Foreign currency is
functional currency functional currency
Cash C C
Prepaid expenses H C
Equipment H C
Goodwill H C
Accounts payable C C
Inventory – cost H C
Inventory – NRV C C
Capital H H
Sales A A
Depreciation expense H C
14. Discuss the differences in the translation process when translating from a local
currency to a functional currency compared with translating from a functional
currency to a presentation currency.
Note para 23 for functional currency translation
Note para 39 for presentation translation
In relation to the income statement, there is little difference in that in both cases, most
revenues and expenses are translated at the average rate for the period. Differences will occur
in relation to depreciation.
In relation to share capital, no differences occur in translation.
In relation to the statement of financial position, there is no difference in translation of the

monetary items as current rates are always used. With non-monetary items, functional
currency translation for items measured in terms of historical cost are translated at historical
rates, while for presentation translation current rates are used. For non-monetary items
measured at fair value, current rates are always used.
Note that for a functional currency translation, exchange differences on monetary items are
recognised in profit or loss [para 28] while presentation translation results in exchange
differences being recognised in other comprehensive income [para 39]

CASE STUDIES
Case Study 1 Financial reporting

In Note 1 (p. 72) of the 2012 annual report of the Qantas Group, the following
information is provided:
Translation of Foreign Operations

Assets and liabilities of foreign operations, including controlled entities and investments in
associates and jointly controlled entities, are translated to the functional currency at the
rates of exchange prevailing at balance date. The income statements of foreign operations are
translated to the functional currency at rates approximating the foreign exchange rates
prevailing at the dates of the transactions. Exchange differences arising on translation are
recognised in other comprehensive income and are presented within equity in the foreign
currency translation reserve.
Required
Explain this note to a reader of the Qantas report.
This note is concerned with the financial statements of foreign entities controlled by Qantas.
These financial statements have probably been prepared in a currency other than the A$.
The note does not tell us anything about the functional currencies of the overseas operations
but is concerned with the translation of the foreign operations’ financial statements into A$s
so they can be included in the consolidated financial statements of the Qantas Group.
The method used to translate a functional currency into a presentation currency involves the
following translation process:
Assets: Rates of exchange at balance date (current rates) are used
Liabilities: Rates of exchange at balance date (current rates) are used
Other reserves: If on hand at acquisition date, the rate at that date is used. For reserves
created by internal transfer, the rate at the date the amounts transferred were originally
recognised in equity is used.
Retained earnings: If on hand at acquisition date, the rate at that date is used. Post-acquisition
Revenues/expenses: Rates approximating the foreign exchange rates at the dates of the
transactions are used – probably an average rate is used.
Under this translation method, exchange differences arise because the opening net assets are
translated at a rate different from the closing rate while revenues/expenses are translated at
rates different from the closing rate. These exchange differences are not recognised in profit
or loss. They are recognised in other comprehensive income and transferred to a foreign
currency translation reserve account.

Case Study 2 Financial reporting
In its 2011 annual report (p. 98) Wesfarmers notes that the functional currency and
presentation currency of Wesfarmers Ltd and its Australian subsidiaries are the
Australian dollar. In Note 32 it lists its overseas subsidiaries and their functional
currencies. These include Bunnings (NZ) Ltd for which the functional currency is the
New Zealand dollar (NZD), and Wesfarmers Kleenheat Elpiji Ltd for which the
functional currency is the Bangladesh taka (BDT).
Required
Discuss the translation process that will occur so that these subsidiaries can be included
in the consolidated financial statements of Wesfarmers Ltd.
The foreign operations are being prepared in their functional currencies, generally the
currency of the country in which the country operates e.g. NZ or Bangladesh.
In order to include the financial statements prepared in a functional currency other than the
A$, they must be translated into the presentation currency of A$. This process involves the
following translation process:
Assets: Rates of exchange at balance date (current rates) are used
Liabilities: Rates of exchange at balance date (current rates) are used
Other reserves: If on hand at acquisition date, the rate at that date is used. For reserves
created by internal transfer, the rate at the date the amounts transferred were originally
recognised in equity is used.
Retained earnings: If on hand at acquisition date, the rate at that date is used. Post-acquisition
Revenues/expenses: Rates approximating the foreign exchange rates at the dates of the
transactions are used – probably an average rate is used.
Under this translation method, exchange differences arise because the opening net assets are
translated at a rate different from the closing rate while revenues/expenses are translated at
rates different from the closing rate. These exchange differences are not recognised in profit
or loss. They are recognised in other comprehensive income and transferred to a foreign
currency translation reserve account.

Case Study 3 Determination of functional currency
In relation to the following case situations, discuss the choice of a functional currency.
Case A
A Malaysian operation manufactures a product using Malaysian materials and labour.
Specialised equipment and senior operations staff are supplied by its Australian parent.
Reimbursement invoices for these services are denominated in the Malaysian ringgit.
The product is sold in the Malaysian market at a price, denominated in Malaysian
ringgit, which is determined by competition with similar locally produced products. The
foreign operation retains sufficient cash to meet wages and day-to-day operating costs
with the remainder being remitted to the Australian parent. The receipt of dividends
from the foreign operation is important to the parent’s cash management function.
Long-term financing is arranged and serviced by the parent.
Case B
A Korean operation is a wholly-owned subsidiary of an Australian company which
regards the operation as a long-term investment, and thus takes no part in the day to-
day decision making of the operation. The operation purchases parts from various non-
related Australian manufacturers for assembly by Korean labour. The finished product
is exported to a number of countries but Australia is the major market. Consequently,
sales prices are determined by competition within Australia.
In answering this question reference must be made to:

- the definition of functional currency in para 8, particularly noting the need to
identify the “primary economic environment”
- the factors in pars 9 -11 if AASB 121, with para 9 containing the primary
indicators
Case A
The choice for functional currency is the Australian $ or the Malaysian Ringgit
Note:
- Malaysian materials and labour are used
- Specialised equipment & senior op. staff are supplied by Australia
but invoices denominated in ringgit
- selling prices are determined by local competition
- dividends are paid to Australian parent
- parent arranges long-term finance
Relating this to AASB 121:

Para 9(a)(i): the ringgit influences sales prices, and is the currency in which goods and
services are settled
Para 9(a)(ii): the ringgit is the currency whose competitive forces and
regulations mainly determine sales prices
para 9(b) the ringgit is the currency that mainly influences labour, material
and other costs
Para 10 financing is provided in A$

Para 11 the activities are not an extension of the parent
The cash flows from the activities of the foreign operation do affect

the cash flows of the reporting entity
The primary indicators are those in para 9. Even though some of the indicators noted in
para 11 relate to the A$, it is concluded here that the functional currency is the Malaysian
ringgit.
Case B
Note: - the operation is a long-term investment of the parent
- parent does not participate in daily management decisions of the
subsidiary
- inputs are from Australia and based on $A
- labour costs are Korean currency
- sales revenue is denominated in A$
Para 9(a)(i) A$ mainly influences sales prices

Para 9(a)(ii) Australian competitive forces & regulations affect sales prices
Para 9(b) A$ influences material inputs while Korean currency influences
labour costs
based on para 9, the functional currency is the Korean currency.


In relation to the following case situations, discuss whether you regard the reporting
entity as exposed to foreign exchange gains and losses in relation to the foreign entity.
Case A
A foreign operation extracts mineral ores that are shipped to Australia for processing at
the parent entity’s smelters. All senior personnel at the foreign operation are parent
entity employees. Monthly invoices for ore supplied to the parent are denominated in
US dollars. The parent entity pays these invoices with US dollars obtained by selling its
finished product to US customers, thus taking advantage of a natural hedge. Payments
to the foreign operation cover all running costs but long-term financing is provided by
the parent entity.
Case B
A foreign operation extracts a mineral product that it exports worldwide. The sales
price is subject to daily fluctuations. The Australian parent regards the operation as an
investment only but the extreme volatility of the foreign operation’s sales prices impacts
on the price of the parent’s shares on the Australian stock exchange because the
investment in the foreign operation is one of the parent’s significant assets.
Exposure to gains and losses relates to the potential losses an entity could incur in relation to
its holding of net assets in a foreign location if there were a change in the exchange rate.
Case A
the foreign operation holds net assets namely extractive net assets offshore
ore supplied is denominated in US$
senior personnel probably paid in A$
processing occurs in Australia
customers are resident in US
long-term financing is provided from Australia
The functional currency is the US$. In relation to exposure to foreign exchange gains and
losses, by holding net assets offshore, the Australian parent is exposed to foreign exchange
gains and losses on the worth of that investment in A$. The exposure is lessened by the loan
to the subsidiary
Case B
The parent has an offshore investment. The parent is then exposed to foreign exchange gains
and losses in relation to the relative worth of the net assets held offshore. The worth of the
shares held by the parent will be affected by any change in the foreign exchange rate between
the two countries.
In general, regardless of whether the functional currency is the parent or the foreign
subsidiary, provided there are assets held offshore, the wealth of the parent is affected by
movements in exchange rates when it holds assets offshore. Where the functional currency is
that of the parent, accounting under AASB 121 does not report changes in the worth of the
non-monetary assets.


In relation to the following case situations, discuss which currency is the functional
currency of the foreign entity.
Case A
An Indonesian operation manufactures a product using Indonesian materials and
labour. Patented processes and senior operations staff are supplied by its Australian
parent. Reimbursement invoices for these services are denominated in Indonesian
rupiah. The product is sold in the Indonesian market at a price, denominated in rupiah,
that is determined by competition with similar locally produced products. The
Indonesian operation remits all revenue to the Australian parent, retaining only
sufficient cash to meet wages and day-to-day operating costs. The receipt of cash from
the Indonesian operation is important to the parent’s cash management function. Long-
term financing is arranged and serviced by the parent.
Case B
A New Zealand operation is a wholly-owned subsidiary of an Australian company. The
parent regards the operation as a long-term investment and all financial and
operational decisions are made by New Zealand management. The New Zealand
operation purchases parts from various non-related Australian manufacturers for
assembly in New Zealand. The finished product is exported to a number of countries
with Australia as the major market. Consequently, sales prices are determined by
competition within Australia.

 the definition of functional currency in para 8, particularly noting the need to identify
the “primary economic environment”
 the factors in pars 9 -11 if AASB 121, with para 9 containing the primary indicators
Case A
The functional currency is either Indonesian rupiah or Australian dollars
Note: Indonesian materials and labour are used

Processes & staff supplied from Australia but denominated in A$
Product is sold in rupiah determined by local competition
All profits remitted to Australia
Financing provided by parent
Para 9(a) Rupiah influences sales prices

Indonesian competitive forces & regulations affect sales prices
Para 9(b) some costs are denominated in A$ and others in rupiah
Para 10(a) financing is in A$
Para 10(b) operating activities usually retained in rupiah
Para 11 Activities have a significant degree of autonomy
Transactions not a high proportion of foreign operations activities
Cash flows do affect Australian parent

In general expect functional currency to be Indonesian rupiah, particularly given influence of

para 9.
Case B
The functional currency is either the NZ$ of the A$
Note: Managed from NZ

Parts are supplied from Australia
Assembly is in NZ
Australia is major market
Sales prices determined by Australian market forces
Para 9(a) A$ influences sales prices

Australian competitive forces & regulations affect sales prices
Para 9(b) Input costs are mixed A$ and NZ$
Para 11 Not much autonomy for NZ operation
Expect functional currency is the Australian dollar.


Foreign Ltd is a Queensland software developer that specialises in software that
controls the operations of open cut mining. To exploit opportunities in the US market,
the firm has established a wholly-owned subsidiary operating in Atlanta, Georgia. The
operations of the subsidiary (Opencut Inc.) essentially involve the marketing of software
initially developed in Australia but which is further developed by the US subsidiary to
suit the special requirements of particular US customers. Foreign Ltd does not charge
Opencut Inc. for the software successfully amended and marketed in the United States.
At this stage no dividends have been paid by Opencut Inc; however, it is expected that
dividends will commence within 12 months. With respect to working capital, Opencut
Inc. has a ‘revolving credit’ agreement (overdraft facility) with the Bank of Georgia,
which has been guaranteed by the Australian parent.
Required
Discuss the process of translating the financial statements of Opencut Inc. for
consolidation with Foreign Ltd.
Step 1 is to determine the functional currency which is either the A$ of the US$
Note: product is developed in Australia

Further costs of development and marketing occur in the US
Sales are to US customers
Finance is provided in US dollars
Para 9(a) the US$ influences sales prices

The US is the country whose regulations and competitive forces
determine the sales price
Para 9(b) the main input costs are in A$
Para 10 finances are in US$
Receipts from operating activities are retained in US$
Para 11 Not a great deal of autonomy
The primary economic environment in which an entity operates is normally the one in which
it primarily generates and expends cash. In this example, the country in which the cash is
generated is the US, while the country in which it expends the most cash for developing the
product is Australia.
Given that further costs are incurred in the US (and proportion is unknown), and the fact that
financing is based on US$, the functional currency is probably the US dollar.


Victory Ltd is an Australian company with two overseas subsidiaries, one in Indonesia
and the other in South Korea. The Indonesian subsidiary has as its major activity the
distribution in Indonesia of Victory Ltd’s products. It has been agreed that the
subsidiary will, for a period of time, retain all profits in order to expand its distribution
network in Indonesia. In the past it has remitted most of its profits to the Australian
parent company.
The South Korean subsidiary has been established to manufacture a range of products
for the South-East Asian market. There is also an expectation that it could in the future
become the major manufacturing plant for Victory Ltd and provide a supply of
products for the Australian market.
Required
Based on the above, determine the functional currency of the foreign subsidiaries.
Explain your choice.

 the definition of functional currency in para 8, particularly noting the need to identify
the “primary economic environment”
 the factors in pars 9 -11 if AASB 121, with para 9 containing the primary indicators
In relation to the Indonesian subsidiary:

 products are supplied from Australia
 profits may be retained in Indonesia
 sales are made in Indonesia
Note:
Para 9 the Indonesian currency influences sales prices and Indonesia is the country
whose competitive forces and regulations mainly determine sales prices.
The Australian dollar mainly influences input costs
Para 10 the Indonesian rupiah is the currency in which receipts from operating
activities are usually retained
Para 11 the activities of the foreign operation are carried out as an extension of the
reporting entity
It is concluded that the functional currency is the Australian dollar.
In relation to the South Korean subsidiary:

 products are manufactured in South Korea
 sales are made in south-east Asia, maybe including Korea
 plant could supply products for sale in Australia in future
Note:
Para 9: Not sufficient information is given to determine where major sales occur, but
indications are that sales are made in many Asian countries
The South Korean currency influences input costs
Para 10 receipts from operating activities are kept in South Korean currency
Para 11 Subsidiary is not just an extension of parent

Functional currency is South Korean currency. It’s unlikely that this would change even if
eventually sales of products are made in Australia, as the latter would be only one of the
markets serviced by the subsidiary.

PRACTICE QUESTIONS
Question 17.1 Translation into functional currency
Sydney Ltd is a manufacturer of sheepskin products in Australia. It is a wholly-owned

subsidiary of a Hong Kong company, Wan Chai Ltd. The following assets are held by
Sydney Ltd at 30 June 2017:
Exchange rate
on acquisition
Cost Useful life Acquisition date
Plant A$ (years) date (A$1 HK$)
Tanner 40 000 5 10/8/13 5.4
Benches 20 000 8 8/3/15 5.8
Presses 70 000 7 6/10/16 6.2
Plant is depreciated on a straight-line basis, with zero residual values. All assets
acquired in the first half of a month are allocated a full month’s depreciation.
Inventory:
 At 1 July 2016, the inventory on hand of $25 000 was acquired during the last
month of the 2015–16 period.
 Inventory acquired during the 2016–17 period was acquired evenly throughout
the period. Total purchases of $420 000 were acquired during that period.
 The inventory of $30 000 on hand at 30 June 2017 was acquired during June
2017.
Relevant exchange rates (quoted as A$1 HK$) are as follows:
Average for June 2016 7.2

1 July 2016 7.0
Average for 2016–17 7.5
Average for June 2017 7.7
30 June 2017 7.8
Required
1. Assuming the functional currency for Sydney Ltd is the A$, calculate:
(a) the balances for the plant items and inventory in HK$ at 30 June 2017
(b) the depreciation and cost of sales amounts in the statement of profit or
loss and other comprehensive income for 2016–17.
2. Assuming the functional currency is the HK$, calculate:
(a) the balances for the plant items and inventory in HK$ at 30 June 2017
(b) the depreciation and cost of sales amounts in the statement of profit or
loss and other comprehensive income for 2016–17.
1. The functional currency for Sydney Ltd is the A$

a).
Plant:
A$ Rate HK$ HK$
Tanner 40 000 7.8 312 000
Accumulated depreciation
(40 000 x 1/5 x 47/12) 31 333 7.8 244 400 67 600
Benches 20 000 7.8 156 000


(20 000 x 1/8 x 28/12) 5 833 7.8 45 500 110 500
Presses 70 000 7.8 546 000

(70 000 x 1/7 x ¾) 7 500 7.8 58 500 487 500
665 600
Inventory 30 000 7.8 234 000
b).
Depreciation:
Tanner: 1/5 x 40 000 8 000 7.5 60 000

Benches: 1/8 x 20 000 2 500 7.5 18 750
Presses: 7 500 7.5 56 250 135 000
Cost of sales:
Opening stock 25 000 7.2 180 000
Purchases 420 000 7.5 3 150 000
445 000 3 330 000
Closing stock 30 000 7.7 231 000
415 000 3 099 000
2. The functional currency for Sydney Ltd is the HK$

a).
Plant:
A$ Rate HK$ HK$
Tanner 40 000 5.4 216 000
(40 000 x 1/5 x 47/12) 31 333 5.4 169 200 46 800
Benches 20 000 5.8 116 000

(20 000 x 1/8 x 28/12) 5 833 5.8 33 832 82 168
Presses 70 000 6.2 434 000

(70 000 x 1/7 x ¾) 7 500 6.2 46 500 387 500
516 468
Inventory 30 000 7.7 231 000
b).
Depreciation:
Tanner: 1/5 x 40 000 8 000 5.4 43 200

Benches: 1/8 x 20 000 2 500 5.8 14 500
Presses: 7 500 6.2 46 500 104 200
Cost of sales:
Opening stock 25 000 7.2 180 000
Purchases 420 000 7.5 3 150 000
445 000 3 330 000
Closing stock 30 000 7.7 231 000
415 000 3 099 000

Question 17.2 Translation into presentation currency

Canberra Ltd, an Australian company, acquired all the issued shares of Washington
Ltd, a US company, on 1 January 2016. At this date, the net assets of Washington Ltd
are shown below.
US$
Property, plant and equipment 155 000
Accumulated depreciation (30 000)
125 000
Cash 10 000
Inventory 20 000
Accounts receivable 10 000
Total assets 165 000
Accounts payable 15 000
Net assets 150 000
The trial balance of Washington Ltd at 31 December 2016 was:
US$ US$
Dr Cr
Share capital 100 000
Retained earnings 50 000
Sales 90 000
Accumulated depreciation – plant and 45 000
equipment 155 000
Property, plant and equipment 40 000
Inventory 12 000
Cash
Cost of sales 30 000

Depreciation 15 000
Other expenses 30 000 ______
327 000 327 000
Additional information
1. No property, plant and equipment were acquired in the 2016 period.
2. All sales and expenses were acquired evenly throughout the period. The
inventory on hand at the end of the year was acquired during December 2016.
3. Exchange rates were (A$1 US$):
1 January 2016 0.52
31 December 2016 0.60
Average for December 0.58
2016 0.56
Average for 2016
4. The functional currency for Washington Ltd is the US dollar.
Required
1. Prepare the financial statements of Washington Ltd at 31 December 2016 in the
presentation currency of Australian dollars.
2. Verify the translation adjustment.

3. Discuss the differences that would occur if the functional currency of

Washington Ltd were the Australian dollar.
4. If the functional currency were the Australian dollar, calculate the translation
adjustment.
1. Functional currency is the US$ - Presentation currency is the A$
US$ rate A$
Sales 90 000 1/0.56 160 714
Cost of sales:
Opening stock 20 000 1/0.52 38 462
Purchases 55 000 1/0.56 98 214
75 000 136 676
Closing stock 45 000 1/0.56 80 357
Cost of sales 30 000 56 319
Gross profit 60 000 104 395
Expenses:
Depreciation 15 000 1/0.56 26 786
Other 30 000 1/0.56 53 571
45 000 80 357
Profit for the period 15 000 24 038
Retained earnings at 1/1/16 50 000 1/0.52 96 154
Retained earnings at 31/12/16 65 000 120 192
Share capital 100 000 1/0.52 192 308
Foreign currency translation reserve ______ (37 500)
Total equity 165 000 275 000
Property, plant & equipment 155 000 1/0.60 258 333
Accumulated depreciation 45 000 1/0.60 75 000
110 000 183 333
Accounts receivable 40 000 1/0.60 66 667
Inventory 45 000 1/0.60 75 000
Cash 12 000 1/0.60 20 000
207 000 345 000
Accounts payable 42 000 1/0.60 70 000
Net assets 165 000 275 000
2. Verifying the foreign currency translation reserve
Profit as translated 24 038

Profit x closing rate: 15 000 x 1/0.60 25 000
Translation gain 962
Opening net assets 150 000

Opening net assets x opening rate (150 000 x 1/0.52) 288 462
Opening net assets x closing rate (150 000 x 1/0.6) 250 000
Translation loss (38 462)
Total foreign currency translation reserve (37 500)

Question 17.2 (Cont’d)

3. Functional currency is the A$
US$ rate A$
Sales 90 000 1/0.56 160 714
Cost of sales:
Opening stock 20 000 1/0.52 38 462
Purchases 55 000 1/0.56 98 214
75 000 136 676
Closing stock 45 000 1/0.58 77 586
Cost of sales 30 000 59 090
Expenses:
Depreciation 15 000 1/0.52 28 846
Other 30 000 1/0.56 53 571
45 000 82 417
Profit 15 000 19 207
Foreign currency translation loss (1 877)
Profit 17 330
Retained earnings at 1/1/16 50 000 1/0.52 96 154
Retained earnings at 31/12/16 65 000 113 484
Share capital 100 000 1/0.52 192 308
Total equity 165 000 305 792
Property, plant & equipment 155 000 1/0.52 298 077

Accumulated depreciation 45 000 1/0.52 86 538
110 000 211 539
Inventory 45 000 1/0.58 77 586
Cash 12 000 1/0.60 20 000
207 000 375 792
Net assets 165 000 305 792
Differences in calculations when functional currency is A$ not US$:

 closing stock / inventory: this is to be translated using the average rate for the period during which it
was purchased, that is, average rate for December 2016.
 Recognition of FCT Gain or Loss:
o when translating the financial reports into functional currency, this is to be recognised in
profit or loss as a FCT Gain or Loss;
o when translating the financial reports into presentation currency this is to be recognised in
other comprehensive income and shown as a FCT Reserve in Equity.
4. Verification of translation adjustment

US$ rate change gain/(loss)
Net monetary assets at 1 January 2016 5 000 (1/0.6 – 1/0.52) (1 282)
Increases: sales 90 000 (1/0.6 – 1/0.56) (10 714)
95 000 (11 996)
Decreases:
Purchases 55 000 (1/0.6 – 1/0.56) 6 548
Expenses 30 000 (1/0.6 – 1/0.56) 3 571
85 000 10 119
Net monetary assets at 31 December 2016 10 000 (1 877)

Question 17.3 Translation of financial statements into functional currency

Perth Ltd, a company incorporated in Australia, acquired all the issued shares of
Victoria Peak Ltd, a Hong Kong company, on 1 July 2016. The trial balance of Victoria
Peak Ltd at 30 June 2017 was:
HK$ HK$
Dr Cr
Retained earnings (1/7/16) 240 000
General reserve 100 000
Payables 160 000
Deferred tax liability 120 000
Current tax liability 20 000
Provisions 80 000
Sales 610 000
Proceeds on sale of land 250 000
Accumulated depreciation – plant 340 000
Plant 920 000
Land 400 000
Cash 240 000
Inventory at 1 July 2016 60 000
Purchases 260 000
Depreciation – plant 156 000
Carrying amount of land sold 200 000
Income tax expense 50 000
Other expenses 134 000 ________
2 720 000 2 720 000
1. Exchange rates based on equivalence to HK$1 were:
A$
1 July 2016 0.20
8 October 2016 0.25
1 December 2016 0.28
1 January 2017 0.30
2 April 2017 0.27
30 June 2017 0.22
Average during last quarter 2016– 0.24
17 0.26
Average 2016–17
2. Inventory was acquired evenly throughout the year. The closing inventory of
HK$60 000 was acquired during the last quarter of the year.
3. Sales and other expenses occurred evenly throughout the year.
4. The Hong Kong tax rate is 20%.
5. The land on hand at the beginning of the year was sold on 8 October 2016. The
land on hand at the end of the year was acquired on 1 December 2016.
6. Movements in plant over 2016–17 were:
Plant at 1 July 2016 HK$ 600 000
Acquisitions – 8 October 2016 200 000
– 2 April 2017 120 000

Plant at 30 June 2017 920 000

Depreciation on plant is measured at 20% per annum on cost. Where assets are
acquired during a month, a full month’s depreciation is charged.
7. The functional currency of the Victoria Peak Ltd is the Australian dollar.
Required
1. Prepare the financial statements of Victoria Peak Ltd in Australian dollars at 30
June 2017.
1.
HK$ Rate A$
Sales 610 000 0.26 158 600
Cost of sales:
Opening inventory 60 000 0.20 12 000
Purchases 260 000 0.26 67 600
320 000 79 600
Closing inventory 60 000 0.24 14 400
260 000 65 200
Proceeds of land sold 250 000 0.25 62 500

Carrying amount of land sold 200 000 0.20 40 000
Gain on sale 50 000 22 500
400 000 115 900
Expenses:
Depreciation:
Full year: (600 000x0.2) 120 000 0.20 24 000
8/10: (200 000 x 0.2) x 9/12 30 000 0.25 7 500
2/4: (120 000 x 0.2) x 3/12 6 000 0.27 1 620
Other 134 000 0.26 34 840
290 000 67 960
110 000 47 940
FC translation gain/(loss) 31 140
Profit before income tax 79 080
Income tax expense 50 000 0.26 13 000
Profit 60 000 66 080
Retained earnings (op) 240 000 0.20 48 000
Retained earnings (cl) 300 000 114 080
Share capital 800 000 0.20 160 000
General reserve 100 000 0.20 20 000
1 200 000 294 080
Plant: Held for full year 600 000 0.20 120 000
Purchased 8/10 200 000 0.25 50 000
Purchased 2/4 120 000 0.27 32 400
Accumulated depreciation (184 000) 0.20 (36 800)
(120 000) 0.20 (24 000)
(30 000) 0.25 (7 500)
(6 000) 0.27 (1 620)
Land 400 000 0.28 112 000
Inventory 60 000 0.24 14 400
Cash 240 000 0.22 52 800

Accounts receivable 300 000 0.22 66 000

Total assets 1 580 000 377 680
Payables 160 000 0.22 35 200
Deferred tax liability 120 000 0.22 26 400
Current tax liability 20 000 0.22 4 400
Provisions 80 000 0.22 17 600
Total liabilities 380 000 0.22 83 600
Net assets 1 200 000 294 080
2. Verification of translation adjustment
Net monetary assets at 1/7/16 464 000 * 0.22 – 0.20 9 280

Increases:
Sales 610 000 0.22 – 0.26 (24 400)
Proceeds – land 250 000 0.22 – 0.25 (7 500)
1 324 000 (22 620)
Decreases:
Purchases 260 000 0.22 – 0.26 10 400
Land 400 000 0.22 – 0.28 24 000
Plant 200 000 0.22 – 0.25 6 000
120 000 0.22 – 0.27 6 000
Expenses 134 000 0.22 – 0.26 5 360
Tax 50 000 0.22 – 0.26 2 000
1 164 000 53 760
Net monetary assets at 30/6/17 160 000 31 140
The verification process requires the calculation of the difference between the closing rate and the applied
or opening rate.
* opening balance sheet was:
Capital 800 000

1 140 000
Plant 600 000
Accumulated depreciation **(184 000)
Land 200 000
Inventory 60 000
Net monetary assets 464 000
1 140 000
**
= Accumulated depreciation at the end of the financial period $(340 000)
Add back the Depreciation for the current financial period 156 000
= Accumulated depreciation at the beginning of the financial period $(184 000)


On 1 July 2015, Adelaide Ltd, an Australian company, acquired shares in Mong Kok
Ltd, a company based in Hong Kong. At this date, the equity of Mong Kok Ltd was:
HK$
At 30 June 2016 and 2017 respectively, the retained earnings balances of Mong Kok Ltd
were HK$400 000 and HK$450 000 respectively. All transactions occurred evenly
throughout these years. The internal financial statements of the two companies at 30
June 2017 were as follows:
Statements of Profit or Loss and Other Comprehensive Income

Adelaide Ltd Mong Kok
A$ Ltd
HK$
Sales 700 000 595 000
Cost of sales 300 000 400 000
400 000 195 000
Expenses 210 200 100 000
189 800 95 000
Dividend revenue 12 000 —
Profit before income tax 201 800 95 000
Tax expense 51 800 20 000
Profit 150 000 75 000
Retained earnings as at 1/7/17 750 000 450 000
900 000 525 000
Dividend paid 100 000 25 000
Statements of Financial Position

Adelaide Ltd Mong Kok
A$ Ltd
HK$
Current assets 311 520 250 000
Shares in Cantonese Ltd 288 480 —
Property, plant and equipment (net) 700 000 500 000
Patents and trademarks 100 000 150 000
Total assets 1 400 000 900 000
Liabilities 100 000 100 000
Net assets 1 300 000 800 000
Equity:
Share capital 500 000 200 000
General reserve — 100 000
Retained earnings 800 000 500 000
Total equity 1 300 000 800 000

1. The dividend paid by Mong Kok Ltd was paid on 1 May 2018.
2. Some relevant exchange rates are:
1 July 2015 HK$1 $A0.80

Average 2015–16 0.82
1 July 2016 0.85
Average 2016–17 0.88
1 July 2017 0.90
Average 2017–18 0.85
1 May 2018 0.80
30 June 2018 0.78
Required
Translate the financial statements of Mong Kok Ltd as at 30 June 2018 into the
presentation currency of Australian dollars, assuming that the functional currency is
the Hong Kong dollar.
Translated accounts of Mong Kok Ltd as at 30 June 2018
HK$ Exchange A$
Rate
Sales 595 000 0.85 505 750

Cost of sales 400 000 0.85 340 000
195 000 165 750
Expenses 100 000 0.85 85 000
95 000 80 750
Tax expense 20 000 0.85 17 000
Retained earnings (1/7/17) 450 000 366 000
525 000 429 750
Dividend paid 25 000 0.8 20 000
Retained earnings (30/6/18) 500 000 409 750
Share capital 200 000 0.8 160 000
General reserve 100 000 0.8 80 000
FCTR _______ (25 750)
800 000 624 000
Current assets 250 000 0.78 195 000

Property, plant & equipment (net) 500 000 0.78 390 000
Patents and trademarks 150 000 0.78 117 000
900 000 702 000
Liabilities 100 000 0.78 78 000
800 000 624 000


Foreign Currency Translation Reserve (FCTR) at 30 June 2018
2015-16
Opening net investment = HK$(200 000 + 100 000 + 300 000)
= HK$600 000
Profit for the period = R.E.30/6/16 HK$400 000 - R.E.1/7/15 HK$300 000
= HK$100 000
FCTR at 30 June 2016 = 600 000(0.85 - 0.8) + 100 000 (0.85 - 0.82)
= A$33 000 (credit)
2016-17
= HK$700 000
Profit for the period = R.E.30/6/17 HK$450 000 - R.E.30/6/16 HK$400 000
= HK$50 000
FCTR change = 700 000(0.9 - 0.85) + 50 000 (0.9 - 0.88)
= $36 000 (credit)
Hence at 30 June 2017, the FCTR has a credit balance of $69 000.
2017-18

= HK$750 000
Profit for the period = HK$75 000
Dividend = HK$25 000
FCTR change = 750 000(0.78 - 0.9) + 75 000 (0.78 - 0.85)
– 25 000 (0.78 - 0.8)
= $(94 750) (debit)
The balance of the FCTR at 30 June 2018 is then $(25 750).
Retained earnings balance at 1 July 2017
Retained earnings (1/7/15) = HK$300 000 x 0.8

= A$240 000
Profit 2015-16 = HK$100 000 x 0.82
= A$82 000
Profit 2016-17 = HK$50 000 x 0.88
= A$44 000
Retained earnings (1/7/17) = A$366 000

Lion Ltd is an international company resident in Singapore. It acquired the issued

shares of an Australian company, Brisbane Ltd, on 1 July 2016 for A$700 000.
At 30 June 2017, the following information was available about the two companies:
Lion Ltd Koala Ltd

S$ A$
Provisions 45 000 30 000
Payables 14 000 40 000
Sales 620 000 310 000
Dividend revenue 6 400 0
Accumulated depreciation – plant 210 000 160 000
1 785 400 1 060 000
Cash 92 100 30 000
Accounts receivable 145 300 115 000
Inventory 110 000 80 000
Shares in Brisbane Ltd 336 000 0
Buildings (net) 84 000 220 000
Plant 420 000 400 000
Cost of sales 390 000 120 000
Depreciation – plant 85 000 40 000

Tax expense 23 000 15 000
Other expenses 50 000 10 000
Dividend paid 20 000 10 000
Dividend provided 30 000 20 000
1 785 400 1 060 000
1. Sales, purchases and other expenses were incurred evenly throughout the 2016–
17 period. The dividend was paid by Brisbane Ltd on 1 January 2017, while the
dividend was declared on 30 June 2017.
2. Brisbane Ltd acquired A$100 000 additional new plant on 1 January 2017. Of
the depreciation charged in the 2016–17 period, A$8000 related to the new plant.
3. The rates of exchange between the Australian dollar and the Singapore dollar
were (expressed as A$1 S$0.6):
1 July 2016 0.60

1 December 2016 0.64
1 January 2017 0.68
30 June 2017 0.70
Average for the 2016–17 period 0.65
4. The functional currency of Brisbane Ltd is the Australian dollar.
Required
1. Translate the financial statements of Brisbane Ltd into Singapore dollars for
inclusion in the consolidated financial statements of Lion Ltd.

1. Translation of subsidiary’s accounts into S$

A$ Rate S$
Sales 310 000 0.65 201 500
Cost of sales 120 000 0.65 78 000
Gross profit 190 000 123 500
Depreciation – plant 40 000 0.65 26 000
Other expenses 10 000 0.65 6 500
50 000 32 500
Profit before tax 140 000 91 000
Tax expense 15 000 0.65 9 750
Profit 125 000 81 250
Retained earnings 1/7/16 170 000 0.6 102 000
295 000 183 250
Dividend paid 10 000 0.68 6 800
Dividend provided 20 000 0.7 14 000
30 000 20 800
Retained earnings 30/6/17 265 000 162 450
Share capital 350 000 0.6 210 000
Foreign currency translation
reserve -- 58 050
Provisions 30 000 0.7 21 000
Payables 40 000 0.7 28 000
685 000 479 500
Cash 30 000 0.7 21 000
Inventory 80 000 0.7 56 000
Buildings (net) 220 000 0.7 154 000
Plant 400 000 0.7 280 000
685 000 479 500
2. Verification of FCTR
Opening net investment = A$520 000 (SC 350 000 + RE 170 000)
Opening net investment x opening rate = 520 000 x 0.6
= S$312 000
Opening net investment x closing rate = 520 000 x 0.7
= S$364 000
Exchange gain = S$52 000
Change in equity of subsidiary = A$125 000 – (10 000 + 20 000)

= A$95 000
Change in equity as translated = 81 250 – (6 800 + 14 000)
= S$60 450
Change in equity x closing rate = 95 000 x 0.7
= S$66 500
Exchange gain = S$6 050
Net FCTR = S$52 000 + S$6 050
= S$58 050

Question 17.6 Different functional currencies

On 1 July 2016, an Australian company, Toowoomba Ltd, acquired all the issued
capital of a Swedish company, Stockholm Ltd, for $997 400. At the date of acquisition,
the equity of Stockholm Ltd consisted of:
Krona (K)
The internal financial statements of Stockholm Ltd at 30 June 2017 are shown below.
Statement of Profit or Loss and Other Comprehensive Income

K K
Revenues 2 585 000
Cost of sales:
Opening stock 600 000
Purchases 1 800 000
2 400 000
Closing stock 580 000 1 820 000
Gross profit 765 000
Expenses:
Depreciation 125 000
Other 270 000 395 000
Profit for the period 170 000
Retained earnings as at 1 July 2016 635 000
805 000
Dividend paid 100 000
Retained earnings as at 30 June 2017 705 000
Statement of Financial Position

1/7/16 30/6/17
K K
Current assets
500 000 Cash and receivables 500 000
600 000 Inventory 580 000
1 100 000 Total current assets 1 080 000
Non-current assets
300 000 Land 300 000
700 000 Buildings 700 000
(100 000) Accumulated depreciation (130 000)
800 000 Plant 900 000
(235 000) Accumulated depreciation (330 000)
1 465 000 Total non-current assets 1 440 000
2 565 000 Total assets 2 520 000
350 000 Current liabilities 235 000
Non-current liabilities
580 000 Notes – issued September 2016 580 000
930 000 Total liabilities 815 000

1 635 000 Net assets 1 705 000

Equity
800 000 Share capital 800 000
200 000 General reserve 200 000
635 000 Retained earnings 705 000
1 635 000 Total equity 1 705 000
1. Exchange rates for the Swedish krona were as follows:
1 krona =
$A
1 July 2016 0.54
Average 2016–17 0.52
January 2017 0.52
30 June 2017 0.50
Average for the last 4 months of the 2016– 0.51
17 period
2. Stockholm Ltd acquired additional plant for K100 000 on 1 January 2017 by issuing
a note for K80 000 and paying the balance in cash.
3. Sales, purchases and other expenses were incurred evenly through the year.
4. Depreciation for the period in krona was as follows:
Buildings $30 000
Plant
– acquired before 1 July 2016 85 000
– acquired 1 January 2017 10 000
5. The inventory is valued on a FIFO basis. The opening stock was acquired when the
exchange rate was 0.54, and the closing stock was acquired during the last 4 months of
the 2016–17 period.
6. Dividends of K50 000 were paid on 2 July 2016 and 1 January 2017.
7. The tax rate for Stockholm Ltd is 25%.
Required
1. Translate the accounts of the foreign subsidiary, Stockholm Ltd, into Australian
dollars at 30 June 2017, assuming:
(a) the functional currency is the Swedish krona, and the presentation currency
is the Australian dollar
(b) the functional currency is the Australian dollar, as is the presentation
currency.
2. Verify the translation adjustments in requirement 1.
1. Translation of accounts
(a) Translation from functional currency (K) to presentation currency ($A)
K'000 K'000 K'000 $'000

Revenue 2 585 0.52 1 344
Cost of sales:
Opening stock 600 0.54 324
Purchases 1 800 0.52 936

2 400 1 260
Closing stock 580 0.51 296
Cost of sales 1 820 964
Depreciation 125 0.52 65
Other expenses 270 0.52 140
395 205
370 175
Income tax expense 200 0.52 104
Retained earnings as at 1/7/016 635 0.54 343
805 414
Dividend paid 50 0.54
50 100 0.52 53
Retained earnings as at 30/6/17 705 361
Share capital 800 0.54 432
General reserve 200 0.54 108
Foreign Currency Translation
Reserve ____ (48)
$1 705 $853
Cash & receivables 500 0.5 250

Inventory 580 0.5 290
Land 300 0.5 150
Buildings 700 0.5 350
Accumulated depreciation (130) 0.5 (65)
Plant 900 0.5 450
2 520 1 260
Current liabilities 235 0.5 117

Notes 580 0.5 290
815 407
Net assets $1 705 $853

2 (a) Proof of Foreign Currency Translation Reserve
Change in net investment

Opening net assets = K1 635
Opening net assets x ending exchange rate = 1 635 x 0.5
= $818
Opening net assets x beginning exchange rate = 1 635 x 0.54
= $883
Translation loss = $(65)
Income statement items

Change in retained earnings = K705 - K635
= K70
Change x ending exchange rate = K70 x 0.5
= $35
Change as translated = $361 - $343
= $18
Translation gain = $17
Balance of FCTR = $(65) + $17

= $(48)

1. (b) Translation from local currency (K) to functional currency (A$A)

K'000 K'000 $'000
Revenue 2 585 0.52 1 344
Cost of sales:
Opening stock 600 0.54 324
Purchases 1 800 0.52 936
2 400 1 260
Closing stock 580 0.51 296
Cost of sales 1 820 964
Depreciation 115 0.54 62
10 0.52 5
Other expenses 270 0.52 140
395 207
370 173
Foreign Exchange Gain 15
188
Income tax expense 200 0.52 104
Retained earnings as at 1/7/16 635 0.54 343
805 427
Dividend paid 50 0.54 27
50 0.52 26
100 53
Retained earnings as at 30/6/17 705 374
Share capital 800 0.54 432
General reserve 200 0.54 108
1 705 914
Cash & receivables 500 0.50 250

Inventory 580 0.51 296
Land 300 0.54 162
Buildings 700 0.54 378
Plant 800 0.54 432
100 0.52 52
(10) 0.52 (5)
2 520 1 322
Current liabilities 235 0.5 118

Notes 580 0.5 290
815 408
Net Assets $1 705 $914

2. (b) Proof of exchange gain

K'000 K'000
Gain/(loss)
Net Monetary Assets at 1/7/16 *(430) (0.54 - 0.5) 17
Increases: Sales 2 585 (0.52 - 0.5) (52)
2155 (35)
Decreases:
Purchases 1 800 (0.52 - 0.5) 36
Other expenses 270 (0.52 - 0.5) 5
Income tax expense 200 (0.52 - 0.5) 4
Dividends 50 (0.54 - 0.5) 2
50 (0.52 - 0.5) 1
Acquisition of plant 100 (0.52 - 0.5) 2
$2 470 $50
Net Monetary Assets at 30/6/17 (315)
Foreign Exchange Gain 15

(Any difference is due to rounding)
*Opening statement of financial position:
Share Capital 800 000

General Reserve 200 000
Retained Earnings 635 000
1 635 000
Inventory 600 000

Land 300 000
Building (net) 600 000
Plant (net) 565 000
Net Monetary Assets *430 000
1 635 000

On 1 January 2016, an Australian company, Darwin Ltd, formed a company, New York
Ltd, in the United States to sell Australian products such as boomerangs and cuddly
koalas and kangaroos. The initial capital was US$500 000. On 1 February 2017, a lease
was signed on a shop for US$20 000, payable on the first day of each month. On 15
February, store furnishings were acquired for $448 000; these were expected to have a
useful life of 4 years. On 10 June 2016, more fittings were acquired at a cost of $124 000,
again with an expected life of 4 years.
1. Where non-current assets are acquired during a month, a full month’s depreciation is
applied.
2. The tax rate in the United States is 20%, while the tax rate in Australia is 30%.
3. The functional currency for New York Ltd is the Australian dollar.
4. Exchange rates for the financial year were (A$1 US$):
1 January 2016 0.60

1 February 0.63
15 February 0.64
10 June 0.66
30 June 0.65
Average for first half year 0.63
30 September 0.66
1 December 0.69
Average for second half year 0.65
31 December 2016 0.70
5. Sales in the first half of the year amounted to $210 000.
6. Expenses, other than depreciation, leases costs, and purchases, in the first half of the
year amounted to $60 000.
8. Financial information relating to New York Ltd for the year ending 31 December
2016 is:
US$
Sales revenue 680 000
Closing inventory 20 000
Accumulated depreciation – furniture and fittings 120 750
1 360 750
Lease expenses 220 000
Purchases 230 000
Inventory 20 000
Other expenses 150 000
Depreciation – furniture and fittings 120 750
Furniture and fittings 572 000
Cash 14 600
1 360 750

Required
Translate the financial statements of New York Ltd into Australian dollars for inclusion
in the consolidated financial statements of Southern Ltd at 31 December 2016.
1. Translation into A$
US$ rate A$
Sales
First half 210 000 1/0.63 333 333
Second half 470 000 1/0.65 723 077
680 000 1 056 410
Cost of sales:
Purchases
First half 60 000 1/0.63 95 238
Second half 170 000 1/0.65 261 538
230 000 356 776
Closing inventory 20 000 1/0.65 30 769
210 000 326 007
Gross profit 470 000 730 403
Expenses:
Depreciation: fittings 102 667 1/0.64 160 417
18 083 1/0.66 27 398
Other expenses 60 000 1/0.63 95 238
90 000 1/0.65 138 462
Leases expenses (20000x5mths) 100 000 1/0.63 158 730
(20000x6mths) 120 000 1/0.65 184 615
490 750 764 860
Trading loss (20 750 (34 457)
Foreign currency translation loss (656 615)
Loss for the period (20 750) (91 072)
Share capital 500 000 1/0.60 833 333

Retained earnings (20 750) (91 072)
479 250 742 261
Cash 14 600 1/0.7 20 857

Fittings 448 000 1/0.64 700 000
124 000 1/0.66 187 879
Accumulated depreciation (102 667) 1/0.64 (160 417)
(18 083) 1/0.66 (27 398)
Inventory 20 000 1/0.65 30 769
Total assets 519 250 799 404
Net assets 479 250 742 261

Question 17.7 (cont’d)

Verification of translation loss
US$ rate change gain/(loss)
Net monetary assets at 1/1/16 500 000 1/0.7 – 1/0.6 (119 047)
Increases: sales- 210 000 1/0.7 – 1/0.63 (33 333)
470 000 1/0.7 – 1/0.65 (51 648)
1 180 000 (204 028)
Decreases:
Acquisition of furniture 448 000 1/0.7 – 1/0.64 60 000
124 000 1/0.7 – 1/0.66 10 736
Purchases 60 000 1/0.7 – 1/0.63 9 523
170 000 1/0.7 – 1/0.65 18 683
Lease expenses 100 000 1/0.7 – 1/0.63 15 873
120 000 1/0.7 – 1/0.65 13 186
Other expenses 60 000 1/0.7 – 1/0.63 9 524
90 000 1/0.7 – 1/0.65 9 891
1 172 000 147 416
Net monetary assets at 31/12/16 8 000 (56 612)
(rounded)

Question 17.8 Translation to presentation currency

On 1 July 2017, Melbourne Ltd, an Australian company, acquired the issued shares of
Memphis Ltd, a company incorporated in the United States. The draft statement of
profit or loss and other comprehensive income and statement of financial position of
Memphis Ltd at 30 June 2018 was as follows:
US$ US$
Sales revenues 1 600 000
Cost of sales:
Opening inventory 140 000
Purchases 840 000
980 000
Closing inventory 280 000 700 000
Expenses:
Depreciation 90 000
Other 270 000 360 000
Profit 340 000
Retained earnings as at 1 July 2017 200 000
540 000
Dividend paid 120 000
Dividend declared 200 000 320 000
Retained earnings as at 30 June 2018 220 000
2018 2017
US$ US$
Current assets:
Inventory 280 000 140 000
Accounts receivable 20 000 130 000
Cash 20 000 570 000
Total current assets 320 000 840 000
Non-current assets:
Patent 80 000 80 000
Plant 720 000 600 000
Accumulated depreciation (130 000) (80 000
Land 500 000 300 000
Buildings 920 000 820 000
Accumulated depreciation (120 000) (80 000)
Total non-current assets 1 970 000 1 640 000
Total assets 2 290 000 2 480 000
Current liabilities:
Provisions 500 000 620 000
Accounts payable 320 000 940 000
Total current liabilities 820 000 1 560 000
Non-current liabilities:
Loan from Echidna Ltd 530 000 —
Total liabilities 1 350 000 1 560 000
Net assets 940 000 920 000

Equity:
Retained earnings 220 000 200 000
Total equity 940 000 920 000
On 1 January 2018, Memphis Ltd acquired new plant for US$120 000. This plant is
depreciated over a 5-year period.
On 1 April 2018, Memphis Ltd acquired US$200 000 worth of land.
On 1 October 2017, Memphis Ltd acquired US$100 000 worth of new buildings. These
buildings are depreciated evenly over a 10-year period.
The interim dividend was paid on 1 January 2018 while the dividend payable was
declared on 30 June 2018.
Sales, purchases and expenses occurred evenly throughout the period. The inventory on
hand at 30 June 2018 was acquired during June 2018.
The loan of US$530 000 from Melbourne Ltd was granted on 1 July 2017. The interest
rate is 8% per annum. Interest is paid on 30 June and 1 January each year.
On consolidation, the partial goodwill method is used.
The exchange rates for the financial year were as follows:
US$1
A$
1 July 2017 2.00
1 October 2017 1.80
1 January 2018 1.70
1 April 2018 1.60
30 June 2018 1.50
Average June 2018 1.52
Average for 2017–18 1.75
Required
1. If the functional currency for Memphis Ltd is the US dollar, prepare the
financial statements of Memphis Ltd at 30 June 2018 in the presentation
currency of the Australian dollar.
2. Verify the foreign currency translation adjustment.
1. Translation to presentation currency

US$ Exchange A$
rate
Sales 1 600 000 1.75 2 800 000
Cost of sales:
Opening stock 140 000 2.00 280 000
Purchases 840 000 1.75 1 470 000
980 000 1 750 000
700 000 1 324 400
Gross profit 900 000 1 475 600
Depreciation:
Plant -Old 38 000 1.75 66 500
Plant -New 12 000 1.60 19 200
Buildings - Old 32 500 1.75 56 875

Buildings -New 7 500 1.75 13 125

Interest 21 200 1.70 36 040
21 200 1.50 31 800
Other expenses 227 600 1.75 398 300
360 000 621 840
Profit before income tax 540 000 853 760
Retained earnings at 1 July 2017 200 000 2.00 400 000
540 000 903 760
Dividend paid 120 000 1.70 204 000
Dividend declared 200 000 1.50 300 000
320 000 504 000
Retained earnings at 30 June 2018 220 000 2.00 399 760
Share capital 720 000 2.00 1 440 000
Foreign Currency Translation Reserve (429 760)
Loan from Melbourne Ltd 530 000 1.50 795 000
Provisions 500 000 1.50 750 000
Accounts payable 320 000 1.50 480 000
2 290 000 3 435 000
Inventory 280 000 1.50 420 000
Cash 20 000 1.50 30 000
Plant 720 000 1.50 1 080 000
Land 500 000 1.50 750 000
Buildings 920 000 1.50 1 380 000
2 290 000 3 435 000

Question 17.8 (cont’d)

2. Verification of translation adjustment:
Movement in retained earnings = US$220 000 – US$200 000

= US$20 000
Movement x closing rate = 20 000 x 1.50
= A$30 000
Movement as translated = A$399 760 – A$400 000
= A$(240)
Translation gain = A$30 240
Net investment at 1 July 2017 = US$920 000

Net investment x opening rate = 920 000 x 2.00
= A$1 840 000
Net investment x closing rate = 920 000 x 1.50
= A$1 380 000
Translation loss = A$(460 000)
Total translation loss = A$(429 760)


Use the information in question 17.8.
Required
1. If the functional currency for Memphis Ltd is the Australian dollar, prepare the
financial statements of Memphis Ltd at 30 June 2018 in the functional currency.
2. Verify the foreign currency translation adjustment.
1. Translation into functional currency of A$
US$ Exchange A$
rate
Sales 1 600 000 1.75 2 800 000
Cost of sales:
Opening stock 140 000 2.00 280 000
Purchases 840 000 1.75 1 470 000
980 000 1 750 000
700 000 1 324 400
Gross profit 900 000 1 475 600
Depreciation:
Plant -Old 38 000 2.00 76 000
Plant -New 12 000 1.70 20 400
Buildings - Old 32 500 2.00 65 000
Buildings -New 7 500 1.80 13 500
Interest 21 200 1.70 36 040
21 200 1.50 31 800
Other expenses 227 600 1.75 398 300
360 000 641 040
834 560
Foreign Exchange Gain/(Loss) 449 140
Profit before income tax 540 000 1 283 700
Retained earnings at 1 July 2017 200 000 2.00 400 000
540 000 1 333 700
Dividend paid 120 000 1.70 204 000
Dividend declared 200 000 1.50 300 000
320 000 504 000
Retained earnings at 30 June 2018 220 000 2.00 829 700
Share capital 720 000 2.00 1 440 000
Loan from Melbourne Ltd 530 000 1.50 795 000
Provisions 500 000 1.50 750 000
Accounts payable 320 000 1.50 480 000
2 290 000 4 294 700


Inventory 280 000 1.52 425 600
Cash 20 000 1.50 30 000
Patent 80 000 2.00 160 000
Plant 600 000 2.00 1 200 000
120 000 1.70 204 000
(12 000) 1.70 (20 400)
Land 300 000 2.00 600 000
200 000 1.60 320 000
Buildings 820 000 2.00 1 640 000
100 000 1.80 180 000
(7 500) 1.80 (13 500)
2 290 000 4 294 700
2. Verification of Translation Adjustment

US$ Gain/(loss)
Net monetary assets at 1 July 2017 (860 000) 1.50 – 2.00 430 000
Increases:
Sales - inventory 1 600 000 1.50 – 1.75 (400 000)
740 000 30 000
Decreases:
Plant 120 000 1.50 – 1.70 24 000
Land 200 000 1.50 – 1.60 20 000
Buildings 100 000 1.50 – 1.80 30 000
Purchases 840 000 1.50 – 1.75 210 000
Other expenses 227 600 1.50 – 1.75 56 900
Interest 21 200 1.50 – 1.70 4 240
21 200 1.50 – 1.50 -
Income tax expense 200 000 1.50 – 1.75 50 000
Dividend paid 120 000 1.50 – 1.70 24 000
Dividend declared 200 000 1.50 – 1.50 ____-
2 050 000 419 140
Net monetary assets at end (1 310 000) 449 140

Solutions Manual: Company Accounting 10e

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© John Wiley & Sons Australia, Ltd 2015

Chapter 17 – Disclosure: translation of financial

Para 3 of AASB 121 notes 2 areas of application:

2. What is meant by ‘functional currency’?

3. What is the rationale behind the choice of an exchange rate as an entity’s

4. What guidelines are used to determine the functional currency of an entity?

© John Wiley and Sons Australia Ltd 2015 17.2

Para 23 of AASB 121:

8. What is meant by ‘presentation currency’?

© John Wiley and Sons Australia Ltd 2015 17.3

11. What causes a foreign currency translation reserve to arise?

H — historical exchange rate

© John Wiley and Sons Australia Ltd 2015 17.4

Note para 23 for functional currency translation

Note para 39 for presentation translation

In relation to share capital, no differences occur in translation.

In relation to the statement of financial position, there is no difference in translation of the

© John Wiley and Sons Australia Ltd 2015 17.5

Case Study 1 Financial reporting

Translation of Foreign Operations

© John Wiley and Sons Australia Ltd 2015 17.6

Case Study 2 Financial reporting

© John Wiley and Sons Australia Ltd 2015 17.7

Case Study 3 Determination of functional currency

In answering this question reference must be made to:

Relating this to AASB 121:

Para 10 financing is provided in A$

© John Wiley and Sons Australia Ltd 2015 17.8

the cash flows of the reporting entity

Para 9(a)(i) A$ mainly influences sales prices

based on para 9, the functional currency is the Korean currency.

© John Wiley and Sons Australia Ltd 2015 17.9

Case Study 4 Determination of functional currency

© John Wiley and Sons Australia Ltd 2015 17.10

Case Study 5 Determination of functional currency

In answering this question reference must be made to:

The functional currency is either Indonesian rupiah or Australian dollars

Note: Indonesian materials and labour are used

Para 9(a) Rupiah influences sales prices

© John Wiley and Sons Australia Ltd 2015 17.11

In general expect functional currency to be Indonesian rupiah, particularly given influence of

The functional currency is either the NZ$ of the A$

Note: Managed from NZ

Para 9(a) A$ influences sales prices

Expect functional currency is the Australian dollar.

© John Wiley and Sons Australia Ltd 2015 17.12

Case Study 6 Determination of functional currency

Note: product is developed in Australia

Para 9(a) the US$ influences sales prices

© John Wiley and Sons Australia Ltd 2015 17.13

Case Study 7 Determination of functional currency

In answering this question reference must be made to:

In relation to the Indonesian subsidiary:

It is concluded that the functional currency is the Australian dollar.

In relation to the South Korean subsidiary:

© John Wiley and Sons Australia Ltd 2015 17.14

© John Wiley and Sons Australia Ltd 2015 17.15

Question 17.1 Translation into functional currency

Sydney Ltd is a manufacturer of sheepskin products in Australia. It is a wholly-owned

Average for June 2016 7.2

1. The functional currency for Sydney Ltd is the A$