Question

Temporal and Current Rate Methods Translation methods illustrated U.S. Inc. owns Juarez, SA, a subsidiary in Mexico which was established January 1, 2010. Juarez's balance sheet items as of 12/31/10, in pesos: Cash Accounts rec. Inventory Fixed assets Accum. depr. 1,000 2,000 2,500 8,000 1,000 Accounts payable Long-term debt Capital stock Retained earnings 2,000 6,000 3,000 1,500 Learning Objective 4 8-11

in the last picture, how did they find the COGS? use the formula ( beg inventory + purchases - ending inventory )

Answer 1

The COGS in the last picture will be calculated as follows under the temporal method:

The Formula for COGS= Beg inventory + purchases-ending inventory

Firstly we will calculate all the figures in Mexican peso.

Beg inventory has been said to be zero.

Ending inventory as on Dec 31,2010 is 2500peso

Now to calculate the purchases for the current year we have been provided the COGS as 14000. So the purchases can be calculated by readjusting the above formula for COGS and solving for purchases.

Purchases= COGS+ ending inventory – beg inventory

                   = 14000+2500-0

                   = 16500peso

Now we will convert the Mexican peso into dollars($) as per the available exchange rates.

So as there is no beg inventory there will be no conversion.

The purchases will be remeasured using the average rate(0.095) for the year 2010 as the rule of translation under the temporal method. As the purchases were made evenly throughout the year making the above conversion rate at the time of purchase effective for remeasurement.

So the purchases = 16500peso*0.095 = $1567.5

The closing inventory will be remeasured using the average rate(0.09) during the last quarter of 2010 as the rule of translation under the temporal method. As the closing inventory consists of goods acquired in last quarter making the above rate for conversion effective for closing inventory remeasurement.

So the closing inventory= 2500peso*0.09 = $225

So the COGS in $ terms = 0+1567.5-225 = $1342.5 Rounded off $1343