Translation—Local Currency Is the Functional Currency

On January 1, 2008, a U.S. company purchased 100% of the outstanding stock of Ventana Grains, a company located in Latz City, New Zealand. Ventana Grains was organized on January 1, 1994. All the property, plant, and equipment held on January 1, 2008, was acquired when the company was organized. The business combination was accounted for as a purchase transaction. The 2008 financial statements for Ventana Grains, prepared in its local currency, the New Zealand dollar, are given here.

VENTANA GRAINS

Comparative Balance Sheets

January 1 and December 31, 2008

Jan. 1 Dec. 31

Cash and Receivables 500,000 880,000

Inventories 600,000 500,000

Land 400,000 400,000

Buildings (net) 650,000 605,000

Equipment (net) 465,000 470,000

Totals 2,615,000 2,855,000

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John Wiley & Sons, Inc.

724 Chapter 13 Translation of Financial Statements of Foreign Affiliates

Jan. 1 Dec. 31

Short-Term Accounts and Notes 295,000 210,000

Long-Term Notes (600,000 issued

September 1, 2000, 80,000 issued

July 1, 2008) 600,000 680,000

Common Stock 800,000 800,000

Additional Paid-in Capital 200,000 200,000

Retained Earnings 720,000 965,000

Total 2,615,000 2,855,000

VENTANA GRAINS

Consolidated Income and Retained Earnings Statement for the Year Ended December 31, 2008

Revenues 3,225,000

Cost of Goods Sold:

Beginning Inventory 600,000

Purchases 2,100,000

Goods Available for Sale 2,700,000

Less: Ending Inventory 500,000

Cost of Goods Sold 2,200,000

Gross Profit on Sales 1,025,000

Depreciation Expense 140,000

Other Expenses 540,000 680,000

Net Income 345,000

Jan. 1 Retained Earnings 720,000

Total 1,065,000

Less: Dividends Paid 100,000

Dec. 31 Retained Earnings 965,000

The account balances are computed in conformity with U.S. generally accepted accounting standards.

Other information is as follows:

1. Direct exchange rates for the New Zealand dollar on various dates 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 New Zealand dollars on July 1, 2008, by issuing a note for 80,000 New Zealand dollars and paying the balance in cash.

3. Sales were made and purchases and “Other Expenses” were incurred evenly throughout the year.

4. Depreciation for the period in New Zealand dollars was computed as follows:

Building 45,000

Equipment—Purchased before 1/1/2008 85,000

Equipment—Purchased July 1, 2008 10,000

John Wiley & Sons, Inc.

Problems 725

5. The inventory is valued on a FIFO basis. The beginning inventory was acquired when the exchange rate was $.7480. The ending inventory was acquired during the last four months of 2008.

6. Dividends of 50,000 New Zealand dollars were paid on July 1 and December 31.

Required:

A. Translate the financial statements into dollars assuming that the local currency of the foreign subsidiary was identified as its functional currency.

B. Prepare a schedule to verify the translation adjustment determined in requirement A.

Describe how the translation adjustment would be reported in the financial statements.