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ACCTG 311

SEMESTER TWO 2022

Financial Accounting

QUESTION 1: Accounting for translation of foreign operations

NZ Parent company has New Zealand dollars (NZ$) as its functional currency and its group presentation currency. It established a U.S. Subsidiary some years ago. For the financial year ending

31 December 2022, you have been given the following information to enable you to translate the financial statements of U.S. Subsidiary from US$ into NZ$, in order to consolidate with the NZ Group financial statements.

• No additional shares have been issued since U.S. Subsidiary was established.

• OLD Plant and Equipment was purchased when U.S. Subsidiary was established. During the current year, U.S. Subsidiary acquired NEW Plant and equipment for US$600,000 in cash.

• Land was purchased when U.S. Subsidiary was established. During the year, U.S. Subsidiary sold a piece of land for US$500,000 cash. The carrying value of this piece of land was US$400,000 at the time of sale.

• Selling and other expenses and income tax expense were incurred evenly throughout the year.

• Relevant exchange rates and US$ financial statements are as follows:

Exchange rates	1NZ$ = US$
At date of subsidiary establishment	0.55
When OLD Plant and Equipment and land were purchased	0.55
When opening inventory was acquired	0.61
At the beginning of the financial year, 1 January 2022	0.57
When land was sold	0.50
Average rate for year to 31 December 2022	0.53
When NEW Plant and Equipment was purchased	0.51
When closing inventory was acquired	0.49
At dividend payment date	0.47
At the end of the financial year, 31 December 2022	0.45

U.S. Subsidiary Income Statement for the year ending 31 December 2022	US$
Sales	1,500,000
Opening inventory	250,000
Purchases	650,000
Closing inventory	200,000
Cost of good sales	-700,000
Gross Profit	800,000
Selling and other expenses	-150,000
Depreciation expense – OLD P&E	-90,000
Depreciation expense – NEW P&E	-50,000
Gain on sale of land	100,000
Net profit before tax	610,000
Income tax expense	-90,000
Net profit after tax	520,000
Opening retained earnings	500,000
Dividends	-120,000
Closing retained earnings	900,000

U.S. Subsidiary Balance Sheet as at 31 December 2022	US$
Assets
Cash	350,000
Accounts receivable	250,000
Inventory	200,000
*Total* *Current* *Assets*	800,000
OLD Plant & Equipment - Cost	1,000,000
OLD Plant & Equipment - Accumulated Depreciation	-300,000
NEW Plant & Equipment - Cost	600,000
NEW Plant & Equipment - Accumulated Depreciation	-50,000
TOTAL Plant & Equipment - Net	1,250,000
Land	500,000
*Total* *Non-current* *Assets*	1,*750,000*
*Total* *Assets*	2,550,000
Liabilities
Accounts payable	150,000
Bank loan	850,000
*Total* *Liabilities*	1,*000,000*
Equity = A-L	1,*550,000*
Share capital	650,000
Retained earnings	900,000
*Total* *equity*	1,*550,000*

Required:

(a) The Junior accountant states that the functional currency of U.S. Subsidiary has to be the U.S.

Dollars (US$). Do you think the Junior accountant’s statement is true? Explain your reasoning with reference to NZ IAS 21. [Maximum words: 200] (3 marks)

(b) Assume the paragraph 39 method of NZ IAS 21 is used to translate the US$ financial

statements into NZ$. The opening balance of “Foreign Currency Translation Reserve (FCTR) is NZ$-140,000 (i.e., on the debit side). Calculate the opening balance of Retained earnings in NZ$ on 1 January 2022 using the paragraph 39 method. (3 marks)

(c) Perform a reconciliation between the opening balance and the closing balance of the FCTR as at 31 December 2022 under the paragraph 39 method. (5 marks)

(d) Assume the paragraph 23 method of NZ IAS 21 is used to translate the US$ financial statements into NZ$. Calculate the following accounts from US$ to NZ$.