Question

Yang Corporation starts a foreign subsidiary on January 1 by investing 25,000 rand. Yang owns all of the shares of the subsidiary’s common stock. The foreign subsidiary generates 50,000 rand of net income throughout the year and pays no dividends. The rand is the foreign subsidiary’s functional currency. Currency exchange rates for 1 rand are as follows: January 1 $0.25 = 1 rand Average for the year 0.28 = 1 December 31 0.31 = 1 In preparing consolidated financial statements, what translation adjustment will Yang report at the end of the current year?

Answer 1

Yang will report a translation adjustment of $9,375 in its consolidated financial statements.

Step-by-step explanation:

Here's how to calculate the translation adjustment:

Measure the net assets of the foreign subsidiary at the end of the year using the closing exchange rate:

Net assets at year-end = 50,000 rand * 0.31 USD/rand = $15,500 USD

Remeasure the initial investment using the average exchange rate for the year:

Initial investment in rand terms = 25,000 rand

Initial investment in USD terms = 25,000 rand * 0.28 USD/rand = $7,000 USD

Calculate the translation gain/loss:

Translation gain/loss = Net assets at year-end - Remeasured initial investment

Translation gain/loss = $15,500 USD - $7,000 USD = $8,500 USD

Adjust for the dividend paid:

Since the subsidiary paid no dividends, the translation gain/loss remains unchanged.

Therefore, Yang will report a translation adjustment of $8,500. However, since the rand strengthened over the year (meaning the USD cost of each rand decreases), the adjustment will be reported as a gain. This gain increases Yang's consolidated net income by $8,500.

Note: This calculation assumes that Yang uses the full translation method for foreign subsidiaries. Other translation methods might lead to different adjustment amounts.

Answer 2

$3,000 credit

Step-by-step explanation:

Given the followin currency exchange rates for 1 rand are as follows:

January 1 $0.25 = 1 rand

Average for the year 0.28 = 1

December 31 0.31 = 1

Net income conversion Investment using January 1 rate = 50,000 rand × $0.25 = $12,500

Net income conversion Investment using December 31 rate = 50,000 rand × $0.31 = $15,500

Credit (Debit) = $15,500 - $12,500 =$3,000

Therefore, the translation adjustment that Yang will report at the end of the current year is $3,000 credit since the difference is positive.