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Foreign Currency Translation

The document discusses the foreign currency translation method for a company with a subsidiary in Singapore. It provides an example calculation of the cumulative translation adjustment for the subsidiary's financial statements from 2020 to 2021. The calculation involves converting the subsidiary's asset, liability, shareholder's equity, and retained earnings balances to the parent company's currency using the appropriate exchange rates and accounting for foreign currency gains and losses. In this example, the cumulative translation adjustment amount for 2021 is $1,818,750.

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129 views3 pages

Foreign Currency Translation

The document discusses the foreign currency translation method for a company with a subsidiary in Singapore. It provides an example calculation of the cumulative translation adjustment for the subsidiary's financial statements from 2020 to 2021. The calculation involves converting the subsidiary's asset, liability, shareholder's equity, and retained earnings balances to the parent company's currency using the appropriate exchange rates and accounting for foreign currency gains and losses. In this example, the cumulative translation adjustment amount for 2021 is $1,818,750.

Uploaded by

Ground Zero
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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1

Foreign Currency Translation


Current Rate / Closing Rate Method
Element Rate

Assets Closing Rate

Liabilities Closing Rate

Shareholder’s Equity Historical Rate

Revenue / Expense Average Rate

Illustration:
Cleared Company owns a subsidiary in Singapore whose Statement of Financial Position in
Singapore Dollars for the last two years follow:

December 31, 2020 December 31, 2021

Cash $ 90,000 $ 75,000

Receivables 367,500 442,500

Inventory 480,000 510,000

PPE, Net 765,000 690,000

Total Assets 1,702,500 1,717,500

Accounts Payable $ 165,000 $ 225,000

Long Term Debt 967,500 855,000

Ordinary Shares 345,000 345,000 Retained Earnings 225,000 292,500 Total

Liabilities and SHE 1,702,500 1,717,500

Relevant Exchange Rates are as follow:


January 01, 2020 $ 1 = P 45

December 31, 2020 $ 1 = P 42.5

December 31, 2021 $ 1 = P 47.5

ACCT 108 Accounting for Business Combinations (Apostol, P.A.)


College of Business Studies, Don Honorio Ventura State University
2
Average 2020 $ 1 = P 43.75

September 12, 2020 $ 1 = P 40

Cleared Company formed the subsidiary on January 01, 2016. Income of the subsidiary was
earned throughout the years and the subsidiary declared dividends worth $ 15,000 on
September 12, 2020 and none was declared during 2021.

How much is the cumulative translation adjustment for 2021?

Step 1: Convert the Total Assets to Peso using the Closing Rate
= 1,717,500 x 47.5
= 81,581,250

Step 2: Convert the Total Liabilities to Peso using the Closing Rate
= 1,080,000 x 47.5
= 51,300,000

Step 3: Convert the Ordinary Share Capital to Peso using the Historical Rate
= 345,000 x 45
= 15,525,000

Step 4: Compute for the Retained Earnings


2020 Income - Workback Method
= 225,000 + 15,000 (Declared Dividends)
= 240,000 x 43.75 (Average Rate of 2020)
= 10,500,000

2020 Dividends
= 15,000 x 40 (Spot Rate)
= 600,000

2021 Income
= 292,500 - 225,000 (2020 RE)
= 67,500 x 45 (Average Rate of 2021)
= 3,037,500

Retained Earnings is computed as


2020 Income 10,500,000
Less: Dividends 600,000
Plus: 2021 Income 3,037,500
RE 12,937,500

ACCT 108 Accounting for Business Combinations (Apostol, P.A.)


College of Business Studies, Don Honorio Ventura State University
3

Step 5: Complete the Balance Sheet


Element Amount

Total Assets P 81,581,250

Liabilities 51,300,000

Ordinary Share Capital 15,525,000

Retained Earnings 12,937,500

Cumulative Translation 1,818,750

Total Liabilities and SHE 81,581,250

Reference/s
● Millan, Z.V. (2021). Accounting for Business Combinations (Advanced Accounting 2).
● Dayag, A.J. (2021). Advanced Financial Accounting. Good Dreams Publishing. ●
Guerrero, P., Peralta, J.. (2017). Volume 2 Advanced Financial Accounting.

ACCT 108 Accounting for Business Combinations (Apostol, P.A.)


College of Business Studies, Don Honorio Ventura State University

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