Question

Tea Inc, an 80% subsidiary of Karkade Ple set up on 1 January 2018, prepares its accounts in the currency "S". The financial statements of Tea as at 31 December 2018 are given as follows: Statement of financial position as at 31 December 2018 Fixed assets Less accumulated depreciation Net book value Stock Other net current assets Current assets Long-term liabilities 8% debentures 10.800 (2,400) 8,400 24,000 6,600 30,600 (18.000) 21.000 15.000 9,000 Share capital Profit for the year Dividends paid (3.000) 21.000 Statement of comprehensive income for the year ended 31 December 2018 36,000 Turnover Cost of sales Opening stock Purchases Closing stock Gross profit General expenses Depreciation 21,600 21,000 (24.000) (18.600) 17,400 (600) (2,400) (3.000) 14,400 (5.400) 9,000 Profit before tax Tax Profit after tax The exchange rates are given as follows: Date Sto £ 1 January 2018 3 Ordinary shares issued and opening stock purchased 1 March 2018 5 Fixed assets purchased 1 September 2018 6 Closing stock for 2018 bought 31 December 2018 8 Dividends paid Average 2018 7 Required: (a) Translate the statement of financial position for Tea Inc using the closing rate method. Explain how the foreign exchange difference arises under the closing rate method. (b) Translate the statement of financial position for Tea Inc using the temporal method. Explain how the foreign exchange difference arises under the temporal method.

solve only b please using temporaral mathod

Answer 1

b.

Conversion of financial statements using Temporal method.

TEA INC.
Statement of financial position as at 31 December 2018
	$	Exchange Rate	₤
Fixed assets	10,800	5	54,000
Less: accumulated depreciation	(2,400)	8	(19,200)
Net book value	8,400		34,800
Stock	24,000	6	144,000
Other net current assets	6,600	7	46,200
Current assets	30,600		190,200
Long term liabilities
8% debentures	(18,000)	7	(126,000)
	21,000		99,000
Share capital	15,000	3	45,000
Profit for the year	9,000		117,600
Dividends paid	(3,000)	8	(24,000)
Exchange rate adjustments			(39,600)
	21,000	11	99,000
Statement of comprehensive income for the year ended 31 December 2018
	$	Exchange Rate	₤
Turnover	36,000	7	252,000
Cost of sales
Opening stock	21,600	3	64,800
Purchases	21,000	7	147,000
Closing stock	(24,000)	6	(144,000)
	18,600		67,800
Gross profit	17,400		184,200
General expenses	(600)	7	(4,200)
Depreciation	(2,400)	8	(19,200)
	(3,000)	15	(23,400)
Profit before tax	14,400	15	160,800
Tax	(5,400)	8	(43,200)
Profit after tax	9,000		117,600
Under temporal method,monetary assets are converted at the rates prevailing on
the balance sheet date and all other non-monetary assets or liabilities are
converted at the rate on which they were created or incurred.
Since, different exchange rates are applied to convert functional currency balances
into reporting currency of the subsidiary company,the difference in the conversion
rate used to convert a particular asset or liability and the conversion rate on the
reporting (balance sheet) date, foreign exchange difference arises on conversion
which is adjusted against the net income of the parent company at the time of
consolidation.