CFA Practice Question

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CFA Practice Question

Packstone Inc. owns a subsidiary in England. The subsidiary's functional currency is the pound. Therefore, translation is necessary in order to prepare consolidated financial statements. The subsidiary began 2004 with 500,000 pounds in cash and no other assets or liabilities. On March 1, the subsidiary used 100,000 pounds to purchase equipment. On April 20, the subsidiary used cash to purchase merchandise inventory costing 80,000 pounds. This merchandise was sold on May 16 for 120,000 pounds in cash. On November 1, the subsidiary paid a cash dividend to Packstobe in the amount of 60,000 pounds and recorded depreciation on the equipment for the year of 50,000 pounds. The appropriate exchange rates were as follows (spot rate = USD/Pound):

What is the translation adjustment to be reported in the stockholders' equity section of the consolidated balance sheet under the all-current method?
Correct Answer: $37,600 credit

Only changes in the net assets have an impact on the calculation of the translation adjustment. The equipment purchase does not change net assets since the increase in the equipment account is offset by the reduction in the cash account. The sale of inventory increases net assets by the amount of the gross profit.

User Contributed Comments 22

User Comment
aero How do i find 430????
aero Ok I find, and how about depreciation????
billou depreciation does not change net assets
malina Can somebody explain how do we get 430K?, and next why are we using the rate of 1.54 for depreciation expense and how did we calculate it?
Xiaochao y use 1.54 for depreciation?
lockedin 500,000 + (120,000 - 80,000) - 60,000 - 50,000 = 430,000.
Don't know where 1.54 came from...
robbjm30 believe 1.54 is an error, think should be 1.53 since that was day depreciation was recorded on
PaulChia i think the rate for depreciation should be 1.50 since the equipment was purchased on March 01. Does anybody know the answer for sure?
yly14 1.54 is the average exchange from the acquiring of the equipment at 1.52 to the ending exchange at 1.56.
PhiWong The only dispute here was the depreciation rate use should be, an average of 1.5 and 1.56, at 1.53 fx rate. The machine acquired on the March 1 NOT Apr 20. The final fx adj balance will be (670,000 - 740,000 + 106,300) 37,100.
ehc0791 focus on net asset:
holding gains: 500K(1.56 - 1.48) = 40K
net asset changes during the year: 70K(=430 - 500)
the flow effect: -70K(1.6 - 1.56) = -2.8K
total gain = 40k-2.8k = 37.2K
seemabose Translation Adjustment = (End. Cash Bal.) - (Beg Cash Bal. + Gain on Sales - Dep. Exp. - Div. Paid) = (430,000x1.56) - {(500,000x1.48) + (40,000x1.55) - (50,000x(1.56+1.50)/2) - (60,000x1.53)} = 37,100 CR
Yurik74 My guess for 1.54 rate is that it's weighted average:
1.50*(20 April - 1 March)+1.52*(16 May - 20 April)+ .... Then diveded by 305 (31 Dec - 1 Mar). Final result is 1.535311, rounding gives 1.54
Leese Am I missing something? Why is the cash balance translated at the historical rate and not the current rate? Aren't we using the all current method?
REITboy Why aren't we using the 4/20 rate for COGS and the 5/16 rate for Sales?

= -80(1.52) + 120(1.55) = 64,400

We have specific dates for acquisition of inventory and subsequent sales -- why not use them since we can use historical or average rates for sales & inventory costs.
joywind I guess the reason behind 1.55 for the gain is that: sales & COGS can be seen together to use the gain from the transaction with the rate the transaction of the gain is from.
Although i am concerned about this misleading way to combine them. I guess this is probably some sort of convention?
swt326 I'm also confused on why we translated cash at historical rate, is it because that is our beginning cash balance?
philjoe the gross profit calculation doesn't make sense. merchandise was purchased on different date than it was sold, so shouldn't we use two exchange rates?
daverco 430,000 = 500,000 (cash) + 120,000 (sale for cash) - 80,000 (inventory sold) - 60,000 (dividend) - 50,000 (depreciation)
MOARMIXE Income Statement items are translated at the average exchange rate unless you have a transaction recorded on a specific date. The depreciation charge uses the average the year, or in this case since the fixed asset was purchased (1.5 (purchase date) + 1.56)/2 = 1.54
MOARMIXE Ignore my comment...
davidt876 phill joe, the purchase of an asset with cash doesn't change the overall value of net assets. one asset (cash) just gets converted into another asset (inventory). so you use the rate on the day you sold the inventory - because that's when additional cash came in

depreciation threw me. thought (still think) it should be end rate? what about where only assets (net of depreciation) are shown?
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