Question

Exercise 13-4 On January 1, 2014, Trenten Systems, a U.S.-based company, purchased a controlling interest in Grant Management Consultants located in Zurich, Switzerland. The acquisition was treated as a purchase transaction. The 2014 financial statements stated in Swiss francs are given below. GRANT MANAGEMENT CONSULTANTS Comparative Balance Sheets January 1 and December 31, 2014 Jan. 1 Dec. 31 Cash and Receivables 20,000 54,900 Net Property, Plant, and Equipment 40,700 36,400    Totals 60,700 91,300 Accounts and Notes Payable 30,400 32,200 Common Stock 19,900 19,900 Retained Earnings 10,400 39,200    Totals 60,700 91,300 GRANT MANAGEMENT CONSULTANTS Consolidated Income and Retained Earnings Statement for the Year Ended December 31, 2014 Revenues 73,800 Operating Expenses including Depreciation of 4,300 francs 30,100 Net Income 43,700 Dividends Declared and Paid 14,900 Increase in Retained Earnings 28,800 Direct exchange rates for Swiss franc are: Dollars per Franc January 1, 2014 $0.5987 December 31, 2014 0.5321 Average for 2014 0.5654 Dividend declaration and payment date 0.5810

(a) Translate the year-end balance sheet and income statement of the foreign subsidiary using the current rate method of translation. (Round answers to 0 decimal places, e.g. 5,125. Enter loss and debit cumulative translation adjustment using either a negative sign preceding the number e.g. -2,945 or parentheses e.g. (2,945).)

Swiss Francs Translation Rate onsolidated Income and Retained Earnings Statement Balance Shee Total

Answer 1

The current rate method differs from the temporal (historical) method in that assets and liabilities are translated at current exchange rates as opposed to historical ones.
The first step is to translate the income statement using the weighted-average exchange rate observed over the reporting period.
Next, assets and liabilities found on the balance sheet are translated at the current exchange rate. Note that issued capital stock is to be translated at the exchange rate observed on the date of issuance.
Retained earnings are adjusted for net income less dividends.
Finally, the balance sheet has to be re-balanced as a result of this accounting procedure. The Cumulative Translation Adjustment (CTA) is used as a plug-in figure that nets out the asset side of the balance sheet with the liabilities and equity side.
The CTA is treated as an unrealized gain or loss, which can subsequently be realized when the foreign subsidiary is sold or impaired.
GRANT MANAGEMENT CONSULTANTS
Consolidated Income and Retained Earnings Statement	A		B	C=A*B
for the Year Ended December 31, 2014	Swiss Francs	Remarks	Rate	$
Revenues	73,800.00	Average Rate	0.5654	41,727
Operating Expenses including Depreciation of 4,300 francs	30,100.00	Average Rate	0.5654	17,019
Net Income	43,700.00	Average Rate	0.5654	24,708
Retained Earnings as on Jan-1	10,400.00	Opening Rate	0.5987	6,226
	54,100.00			30,934.46
Dividends Declared and Paid	14,900.00	Dividend declaration and payment date	0.5810	8,657
	39,200.00			22,278
GRANT MANAGEMENT CONSULTANTS
Comparative Balance Sheets	A		B	C=A*B
December 31, 2014	Swiss Francs	Remarks	Rate	$
Cash and Receivables	54,900.00	Closing Rate	0.5321	29,212.29
Net Property, Plant, and Equipment	36,400.00	Closing Rate	0.5321	19,368.44
Totals	91,300.00			48,580.73
Accounts and Notes Payable	32,200.00	Closing Rate	0.5321	17,133.62
Common Stock	19,900.00	Opening/Issued Rate	0.5987	11,914.13
Retained Earnings	39,200.00			22,277.56
	91,300.00			51,325.31
Cumulative Translation Adjustment	-	Balancing Figure		(2,744.58)
Totals	91,300.00			48,580.73