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Basic Question 1 of 6
Bean Inc. started 2004 with two assets: Cash of Y30,000 and land which originally cost Y50,000 when acquired on June 30, 2002. On August 18, 2004 the company rendered services to a customer for Y80,000, an amount that was immediately paid in cash. On November 15, 2004, the company incurred an operating expense of Y26,000, which was immediately paid. No other transactions occurred during the year. Currency exchange rates were as follows:
Assume that this company is a Japanese subsidiary of an American company. Also assume that the U.S. dollar is the functional currency of the parent and the subsidiary so that remeasurement is required. What is the remeasurement gain or loss for 2004?
User Contributed Comments 18
| User | Comment |
|---|---|
| aero | What about the land??? |
| jammi | land is not a monetary asset so it is not remeasured. |
| tengo | I am a little confused - land is remearured but at the historical rate do it does not contribute to the gain or loss but even in the notes example land is part of remeasurment. When a trial balance is struck at year end is not the remeasurement made at the current rate at 12/31/2004 - .0102 for monetary assets? |
| danlan2 | Why land does not contribute to the gain or loss? I think prior to rate change, it was 50000*0.0102, and it is now 50000*0.0080 |
| danlan2 | land should always use historic rate, which is 0.0084. |
| yly14 | so the sale was counted as an increase in cash but the expense was counted as a increase in AP, correct? Otherwise wouldn't they be converted with the ave. rate since they are income statement items? |
| bmeisner | Also, why isn't previous cash revalued at Dec 31, 2004? I don't believe this falls under beginning R/E (revenue/expense?), does it? |
| creativemny | On the income statement all revenues and expenses use the exchange rate on the date received or expensed. Balance Sheet cash uses the exchange rate at the balance sheet date. The difference is the remeasurement gain. In some cases the average exchange rate is used for income statement items when the flows are more or less even - in essence mimicking the average exchange rate. |
| HenryQ | Please note the two 'immediately', which suggests revenue and expense are done at historical rates instead of average rates. |
| josepe | On page 176 of the CFA textbook: "COGS and depreciation expense are translated at historical rates [under the temporal method], whereas all other revenues and expenses are translated at the weighted-average exchange rate for the period." So in this example, the 80,000 in services and the 26,000 in operating expense should be translated at the weighted average rate of 0.0098, shouldn't they? |
| AusPhD | josepe: In practice, yes, because we assume that revenues/expenses occur evenly throughout the year. In this example we can identify the specific dates on which these transactions took place, so we use the exchange rate as of that date. |
| tiptop | Land is supposed to be exchanged at the historical exchange rate thus on 30th of June 2002. Cash is supposed to be converted at the current rate (spot rate on the balance sheet date). Revenues and expenses don't have anything to do with remeasurement gain/loss. Therefore, in comparison to the balance sheet of 1st of January 2004 under temporal method which has total assets equal to $652 and the balance sheet of 31st of January 2004 which has a value of $706, we witness a gain of $54 which has to be recognized on the income statement. |
| seemabose | Correction to the above comment: Remeasurement gain = {30,000x(0.0102-0.0084)+80,000(0.0102-0.0090)-26,000(0.0102-0.0096)} = 134.4 |
| aravinda | Should not teh cash (30000Y) be translated at the current exchange rate as of dec 31 2004? |
| vishnya | Thank you, seemabose. Finally, all clear. |
| berns23 | monetary asset cash should be based on current rate 31/12/04. Am I missing something? |
| davidt876 | yes berns you're right. and cash is being valued at the end of the period in the answer. what they are effectively saying is: conversion g/l = end_cash*end_rate - (start_cash*start_rate + cash_trans*rate_on_date_of_trans) **to save time we normally use: cash_trans*average_period_rate i know the temptation is to say: conversion g/l = (end_cash*end_rate) - (end_cash*start_rate) but no! now you're doing all sorts of crazy stuff. Bean Inc. did not hold 84k at the start of the year and you're assuming cash_trans=0 during the period. it's not an accurate reflection of the underlying reality. whereas the first equation, and the answer, are a much more accurate reflection of what happened in real life. if you put the figures through a constructed B/S and I/S you'll see that there are no issues with the answer. i assumed no retained earnings at the start of the year and the only implication is that common stock has an implied historical conversion rate of 0.008150 - which doesn't seem ridiculous given the exchange rate when bean inc. bought land its land |
| davidt876 | sorry, when i say "conversion g/l" i really mean "cash conversion g/l" |
I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
Barnes
Learning Outcome Statements
compare the current rate method and the temporal method, evaluate how each affects the parent company's balance sheet and income statement, and determine which method is appropriate in various scenarios;
calculate the translation effects and evaluate the translation of a subsidiary's balance sheet and income statement into the parent company's presentation currency;
CFA® 2025 Level II Curriculum, Volume 2, Module 12.