Palmerstown Company

Topics: Balance sheet, Generally Accepted Accounting Principles, Asset Pages: 5 (1045 words) Published: April 9, 2013
Case 8-2 Palmerstown Company

Exchange Rates| $/pound|
January 1, Year 1| 1.00 |
January 1-31, Year 1| 1.00 |
Average Year 1| 0.90 |
When inventory purchases made| 0.86 | When ending inventory acquired| 0.83| December 31, Year 1| 0.80 |

1. Pound is the functional currency – Current rate method

| | Exchange| |
| Pounds| Rate| U.S. $|
Sales| 15,000 | 0.900 | 13,500 | Cost of goods sold| (9,000)| 0.900 | (8,100)| Gross profit| 6,000 | | 5,400 | Selling and administrative expense| (3,000)| 0.900 | (2,700)| Depreciation expense| (1,000)| 0.900 | (900)| Income before tax| 2,000 | | 1,800 | Income taxes| (600)| 0.900 | (540)| Net income| 1,400 | | 1,260 | Plus: Retained earnings, 1/1/Y1| - | | - | Retained earnings, 12/31/Y1| 1,400 | | 1,260 | | | | |

Cash| 2,400 | 0.800 | 1,920 | Inventory| 4,000 | 0.800 | 3,200 | Fixed assets| 10,000 | 0.800 | 8,000 | Less: accumulated depreciation| (1,000)| 0.800 | (800)| Total assets| 15,400 | | 12,320 | | | | |

Current liabilities| 2,000 | 0.800 | 1,600 | Long-term debt| 4,000 | 0.800 | 3,200 | Contributed capital| 8,000 | 1.000 | 8,000 | Retained earnings| 1,400 | from above| 1,260 | Translation adjustment| - | from below| (1,740)| Total| 15,400 | | 12,320 |

Case 8-2 Palmerstown Company (continued)

Calculation of Cumulative Translation Adjustment

| | Exchange| |
| Pounds| Rate| U.S. $|
Net assets, 1/1/Y1| 8,000 | 1.000 | 8,000 | Net income, Year 1| 1,400 | 0.900 | 1,260 | Net assets, 12/31/Y1| 9,400 | | 9,260 | | | | |

Net assets, 12/31/Y1 at current exchange rate| 9,400 | 0.800 | 7,520 | Translation adjustment, Year 1 (negative)| | 1,740 |

2. U.S. dollar is the functional currency – Temporal method

| | Exchange| |
| Pounds| Rate| U.S. $|
Sales| 15,000 | 0.900 | 13,500 | Cost of goods sold| (9,000)| Sched. A| (8,000)| Gross profit| 6,000 | | 5,500 | Selling and administrative expense| (3,000)| 0.900 | (2,700)| Depreciation expense| (1,000)| 1.000 | (1,000)| Remeasurement gain (loss)| - | from below| 180 | Income before tax| 2,000 | | 1,980 | Income taxes| (600)| 0.900 | (540)| Net income| 1,400 | | 1,440 | Plus: Retained earnings, 1/1/Y1| - | | - | Retained earnings, 12/31/Y1| 1,400 | | 1,440 | | | | |

Cash| 2,400 | 0.800 | 1,920 | Inventory| 4,000 | 0.830...
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