Company bought each of a Danish company for 8 million kroner (DKK) on 21st Dec, Year 1. On 21st December, the exchange rate was $0.70 per DKK. The purchase price was based on the subsequent assets and liabilities, denominated in DKK.
Cash 1,000,000
Inventory 2,000,000
Plant Assets 7,000,000
Note payable (1,800,000)
Tran has a 12/31 balance sheet date. On 12/31/Y1, the DKK had appreciated to $0.75. Since the purchase date was so close to the end year, management had given all employees those 10 between the purchase and year-end off for the holidays-which means no transaction occurred.
1. If the DKK is the functional currency for the subsidiary, evaluate the translation adjustment for Tran's yearend consolidated financials.
2. Evaluate the economic relevance of this adjustment in 1?
3. If the US Dollar is the functional currency, compute the translation adjustment for Tran's yearend consolidated financials.
4. Evaluate the economic relevance of this adjustment in 3?
5. How will companies protect themselves from having to report large currency translation adjustments?