Question

Ealing Company began operations as a new subsidiary of Fundamental Company, a U.S. Corporation, on January 2, 2018, by issuing common stock for 180,000 foreign currency units (FCU). Ealing immediately borrowed 35,000 FCU with a 10-year, 10% note, interest payable annually on January 1. On the same date, Ealing bought a building for 200,000 FCU. The building was to be depreciated for 20 years on a straight-line basis with a residual value of 40,000 FCU. During the year, the building was rented for 9,000 FCU per month. At year's end, all rent had been collected. On May 1 a repair on the building of 15,000 FCU was completed and paid for. Land for a parking lot was acquired for 30,000 FCU in cash on June 1. A dividend of 20,000 FCU was declared and paid on December 1. Exchange rates for the year were as follows: January 2, 2018 1 FCU = $.30 May 1, 2018 1 FCU = .37 June 1, 2018 1 FCU = .38 November 1, 2018 1 FCU = .41 December 1, 2018 1 FCU = .39 December 31, 2018 1 FCU = .35 average for 2018 1 FCU = .36 Fundamental company determined that the FCU was the functional currency and translation using the current rate method was appropriate for consolidation. Calculate the translation adjustment for 2018. (You might remember that the translation adjustment uses the net assets approach, not the net monetary assets approach.).

Answer 1

Net income = Rent revenue – Depreciation – Interest – Repair

= (FUC 9,000*12) – [(FUC 200,000 – FUC 40,000)/20 years] – (FCU 35,000*10%) – FUC 15,000

= FUC 108,000 – FUC 8,000 – FUC 3,500 – FUC 15,000

= FUC 81,500

Net income at exchange rate = Rent revenue – Depreciation – Interest – Repair

= (FUC 9,000*12*0.36) – [(FUC 200,000 – FUC 40,000)/20 years]*0.36 – (FCU 35,000*10%*0.36) – (FUC 15,000*0.37)

= $38,880 – $2,880 – $1,260 – $5,550

= $29,190

Closing retained earnings = Opening retained earnings – Dividend + Net income

                                          = $0 – (FUC 20,000*0.39) + $29,190

                                          = $29,190 – $7,800

                                          = $21,390

Closing net assets at current rate of exchange = (Common stock + Net income – Dividend)*0.35

= (FUC 180,000 + FUC 81,500 – FUC 20,000)*0.35

= (FUC 241,500*0.35)

= $84,525

Closing net assets (in $) = Common stock + Net income – Dividend

= (FUC 180,000*0.3) + $29,190 – (FUC 20,000*0.39)

= $54,000 + $29,190 – $7,800

= $75,390

Translation gain = Closing net assets at current rate of exchange – Closing net assets (in $)

                           = $84,525 – $75,390

                           = $9,135