Question

Wick Corporation has a Mexican subsidiary that had the following balance sheet at December 31, 20X1 (stated in millions of pesos):

(millions of pesos)
Cash		300
Accounts receivable		125
Inventory		400
Property and equipment		1,950
Total assets		2,775
Accounts payable		280
Long-term debt		1,200
Common equity		1,295
Total liabilities and equity		2,775

At December 31, 20X1, it took 19.66 pesos to buy one U.S. dollar. At December 31, 20X2, it took only 19.50 pesos to buy one U.S. dollar because the peso had strengthened during the year. None of the amounts on Wick’s subsidiary’s balance sheet deviated substantially from the December 31, 20X1, amounts during the year.

Required:

1. If the subsidiary’s financial statements are translated under the current rate method, will there be a gain or loss related to translation adjustments and will it be recognized in net income or in other comprehensive income?
2. If the subsidiary’s financial statements are remeasured under the temporal method, will there be a gain or loss related to translation adjustments and will it be recognized in net income or in other comprehensive income?

Answer 1

1.

Under Current rate method-

1.All the Monetary & Non monetray assets & Liabilities are measured at current rate.

2. Equity is to be valued at the Historical cost.

3.Difference will be transferred to Cumulative Translation Adjustment as a separate componenet of Equity.(Other comprehensive income).

Balnace Sheet as on Dec, 31,20X2
	Amount(Pesos Million)	Exchange conversion rate	Amount(US$ Million))
Cash	300	19.50/US$	15.385
Accounts Receivable	125	19.50/US$	6.410
Inventory	400	19.50/US$	20.513
Property Plany & Equipment	1950	19.50/US$	100.000
Total Assets	2775		142.308
Accounts Payable	280	19.50/US$	14.359
Long term Debt	1200	19.50/US$	61.538
Common Equity	1295	19.66/US $	65.870
Cumulative Translation Adjustment (OCI reserve-Gain)			0.54
Total Liab. & Equity	2775		142.307

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2.

Under Temporal rate method-

1.All the Monetary assets and liabilities are measured at current rate.

2.All the Non -Monetary assets and liabilities are measured at Historical Rate.

2. Equity is to be valued at the Historical cost.

3.Difference will be transferred to Cumulative Translation Adjustment as a Gain or loss in Net Income or P/L.

Balnace Sheet as on Dec, 31,20X2
	Amount(Pesos Million)	Exchange conversion rate	Amount(US$ Million))
Cash	300	19.50/US$	15.385
Accounts Receivable	125	19.50/US$	6.410
Inventory	400	19.66/US$	20.346
Property Plany & Equipment	1950	19.66/US$	99.186
Total Assets	2775		141.327
Accounts Payable	280	19.50/US$	14.359
Long term Debt	1200	19.50/US$	61.538
Common Equity	1295	19.66/US $	65.870
Cumulative Translation Adjustment (P/L)(Loss)			-0.44
Total Liab. & Equity	2775		141.327