Question

Brown Inc. started 2017 with the following balance sheet in the local currency unit (LCU):

Assets                                                                          Liabilities & Equity

Cash                            30,000 LCU                          Liabilities                                                       0 LCU

Land                            70,000 LCU                          Owner’s Capital                                  100,000 LCU

Total Assets                100,000 LCU                          Total Liabilities & Equity                   100,000 LCU

The land was acquired on February 1, 2012.

The following transactions occurred in 2017:

On June 5, Brown Inc. rendered services to a customer for 50,000 LCU for cash.

On November 1, the company incurred a 20,000 LCU operating expense paid in cash.

Currency exchange rates for 1 LCU were as follows:

February 1, 2012	1 LCU = $0.23
January 1, 2017	1 LCU = $0.24
June 5, 2017	1 LCU = $0.25
November 1, 2017	1 LCU = $0.26
Average for 2017	1 LCU = $0.27
December 31, 2017	1 LCU = $0.28

Required:

Assume that Brown Inc. is a foreign subsidiary of a U.S. multinational company that uses the U.S. dollar as its reporting currency. Assume also that the LCU is the subsidiary’s functional currency.

What is the translation adjustment for this subsidiary for the year 2017? (5 points)

On which financial statement is the translation adjustment? (2 points)

Answer 1

Cumulative Translation Adjustment:

1. A cumulative translation adjustment (CTA) is an entry in the comprehensive income section of a translated balance sheet summarizing the gains/losses resulting from varying exchange rates over time.

Calculation of Translation adjustment to be made:

1. Calculation of Net Assets as on 1 Jan 2017 of Brown Inc.

Particulars	Amount(LCU)
Total Assets	100000
(-)Liabilities	0
Net Assets	100000

*Considering that Retained earnings is “0” at beginning

1. Calculation of Net income for 2017.

Particulars	Actual Amount(LCU)
Sales	50000
(-)Operating Expenses	20000
Net Income	30000

1. Calculation of Translation Adjustment

Particulars	Amount(LCU)	Exchange Rate	Amount(USD)
Net Assets(1-01-2017)	100000	0.28	28000
Net Income(For 2017)	30000	0.27	8100
Net Assets(31-12-2017)	130000		36100
Exchange total assets to USD	130000	0.28	36400
Translation Adjustment			300

*P&L Items to be translated using average exchange rate

*Balance sheet items using current rate

• 1) The translation adjustment for subsidiary is 300 USD
• 2) The translation adjustment should be on consolidated financial statements.
• Translation adjustment has to be shown on both income statement and also in balance sheet of consolidated financial statements.