Accounting Problem 13 1 Translation Local Currency Functional Currency January 1 2008 Us C Q17781950

ACCOUNTING Problem 13-1 Translation—Local Currency Is theFunctional Currency On January 1, 2008, a U.S. company purchased100% of the outstanding stock of Ventana Grains, a company locatedin Latz City, New Zealand. Ventana Grains was organized on January1, 1994. All the property, plant, and equipment held on January 1,2008, was acquired when the company was organized. The businesscombination was accounted for as a purchase transaction. The 2008financial statements for Ventana Grains, prepared in its localcurrency, the New Zealand dollar, are given here.
VENTANA GRAINS Comparative Balance Sheets January 1 and December31, 2008 Jan. 1 Dec. 31 Cash and Receivables 500,000 880,000Inventories 600,000 500,000 Land 400,000 400,000 Buildings (net)650,000 605,000 Equipment (net) 465,000 470,000 Totals 2,615,0002,855,000 Jan. 1 Dec. 31 Short-Term Accounts and Notes 295,000210,000 Long-Term Notes (600,000 issued September 1, 2000, 80,000issued July 1, 2008) 600,000 680,000 Common Stock 800,000 800,000Additional Paid-in Capital 200,000 200,000 Retained Earnings720,000 965,000 Total 2,615,000 2,855,000 VENTANA GRAINSConsolidated Income and Retained Earnings Statement for the YearEnded December 31, 2008 Revenues 3,225,000 Cost of Goods Sold:Beginning Inventory 600,000 Purchases 2,100,000 Goods Available forSale 2,700,000 Less: Ending Inventory 500,000 Cost of Goods Sold2,200,000 Gross Profit on Sales 1,025,000 Depreciation Expense140,000 Other Expenses 540,000 680,000 Net Income 345,000 Jan. 1Retained Earnings 720,000 Total 1,065,000 Less: Dividends Paid100,000 Dec. 31 Retained Earnings 965,000 The account balances arecomputed in conformity with U.S. generally accepted accountingstandards. Other information is as follows:
1. Direct exchange rates for the New Zealand dollar on variousdates were: Date Exchange Rate
January 1, 1994 $.8011
September 1, 2004 .5813
January 1, 2008 .7924.
July 1, 2008 .7412
December 31, 2008 .7298
Average for 2008 .7480
Average for the last four months of 2008 .7476
2. Ventana Grains purchased additional equipment for 100,000 NewZealand dollars on July 1, 2008, by issuing a note for 80,000 NewZealand dollars and paying the balance in cash.
3. Sales were made and purchases and “Other Expenses” wereincurred evenly throughout the year.
4. Depreciation for the period in New Zealand dollars wascomputed as follows: Building 45,000 Equipment—Purchased before1/1/2008 85,000 Equipment—Purchased July 1, 2008 10,000
5. The inventory is valued on a FIFO basis. The beginninginventory was acquired when the exchange rate was $.7480. Theending inventory was acquired during the last four months of2008.
6. Dividends of 50,000 New Zealand dollars were paid on July 1and December 31.
Required: A. Translate the financial statements into dollarsassuming that the local currency of the foreign subsidiary wasidentified as its functional currency. B. Prepare a schedule toverify the translation adjustment determined in requirement A.Describe how the translation adjustment would be reported in thefinancial statements.
 
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