Question

Problem 4

As of December 31, 2020 Big USA Company owns a foreign subsidiary (Taco) based in Mexico. Big is in the process of preparing consolidated financial statements and must translate the trial balance of Taco to U.S. Dollars. Selected financial information of Taco in pesos is presented below.

                                                                                       Pesos

Inventory 12/31/20                                                  300,000

Purchases in 2020                                                    2,600,000

Inventory 12/31/19                                                    420,000

Equipment purchased as follows

            1/1/18                                                                        250,000                                   

            Purchases during 2018                                            150,000

            Purchases during 2019                                            350,000

            Purchases during 2020                                           620,000

All equipment is depreciated over 8 years on a straight-line basis with a full year taken in year of acquisition.

The inventory turnover rate is 90 days.

Relevant Exchange Rates                           Pesos per dollar

                        

1/1/18                                                                                    8.0

Average Rates 2018                                                  8.5

Average Rate            2019                                                    9.3

Average Rate 2020                                                   9.8

Rate 4^thquarter 2019                                                            8.9

Rate 4^thquarter 2020                                                           9.6

Current rate 12/31/18                                                         8.9

Current Rate 12/31/19                                                        9.2

Current Rate 12/31/20                                                        9.9

REQUIRED (In US Dollars)

1. Assuming the U.S. Dollar is functional currency determine following

            Cost Goods Sold for 2020

            Balance in Equipment 12/31/20

            Balance in Accumulated Depreciation 12/31/20

            Depreciation Expense – 2020

2. Assuming the Peso is functional currency determine following

            Cost Goods Sold for 2020

            Balance in Equipment 12/31/20

            Balance in Accumulated Depreciation 12/31/20

            Depreciation Expense – 2020

Answer 1

Answer:

Assuming the Peso is functional currency, as on December 31, 2020

Cost of Goods sold = Opening Inventory + Purchase - Closing Inventory

= 420,000 Pesos + 2,600,000 Pesos - 300,000 Pesos

= 2,720,000 Pesos

Cost of Goods sold(USD) = 2,720,000 Pesos / Average rate of 9.8 = $277,551.02

Refering the below W1,

Balance in Equipment 12/31/20 = 1,055,000 Pesos / Closing Rate of 9.9 = $106,565.70

Depreciation Expense – 2020 = 171,250 Pesos / Average rate of 9.8 = $17,474.49

Balance in Accumulated Depreciation 12/31/20 = 315,000 Pesos ( 50,000 + 93,750 + 171,250 )

Balance in Accumulated Depreciation 12/31/20(USD) = 315,000 Pesos / Closing Rate of 9.9 = $31,818.182

W1:

YEAR		Total Balance	Remaining Useful life(Years)	Depreciation Expense	Cosing Balance
	On 01-01-2018	250000	8	31250	218750
2018	Purchase during 2018	150000	8	18750	131250
	Total	400000		50000	350000
	On 01-01-2018	218750	7	31250	187500
2019	Purchase during 2018	131250	7	18750	112500
	Purchase during 2019	350000	8	43750	306250
	Total	700000		93750	606250
	On 01-01-2018	187500	6	31250	156250
	Purchase during 2018	112500	6	18750	93750
2020	Purchase during 2019	306250	7	43750	262500
	Purchase during 2020	620000	8	77500	542500
	Total	1226250		171250	1055000

Assuming the U.S. Dollar is functional currency, as on December 31, 2020

Note : Inventory Turnover rate is 90 Days i.e, One Quarter. Therfore assuming the company follows FIFO method, Inventory value of Pesos is been converted into USD using the 4th quarter Exchange rate.

Cost of Goods sold = Opening Inventory + Purchase - Closing Inventory

  = (420,000 Pesos / Rate4th quarter 2018) + (2,600,000 Pesos / Average rate 2020) - (300,000 Pesos / Rate 4th quarter 2019)

= (420,000 Pesos / 8.9) + (2,600,000 Pesos / 9.8) - (300,000 / 9.6)

= $281,247.13

Refering the below W2,

Balance in Equipment 12/31/20 = $114,143.61

Depreciation Expense – 2020 = $ 18,724.60

Balance in Accumulated Depreciation 12/31/20 = $35,653.16 ( $6,112.13 + $10,816.43 + $18,724.60 )

W2:

YEAR			Exchage Rate (Peso/USD)	Opening Balance (USD)	Remaining Useful life(Years)	Depreciation Expense(USD)	Cosing Balance(USD)
	On 01-01-2018	250000	8.0	31250.00	8	3906.25	27343.75
2018	Purchase during 2018	150000	8.5	17647.06	8	2205.88	15441.18
	Total					6112.13	42784.93
	On 01-01-2018			27343.75	7	3906.25	23437.50
2019	Purchase during 2018			15441.18	7	2205.88	13235.29
	Purchase during 2019	350000	9.3	37634.41	8	4704.30	32930.11
	Total					10816.43	69602.90
	On 01-01-2018			23437.50	6	3906.25	19531.25
	Purchase during 2018			13235.29	6	2205.88	11029.41
2020	Purchase during 2019			32930.11	7	4704.30	28225.81
	Purchase during 2020	620000	9.8	63265.31	8	7908.16	55357.14
	Total					18724.60	114143.61