Ran Company bought all of a Danish company for 8 million kroner (DKK) on Dec 21, Year 1. On December 21, the exchange rate was $0.70 per DKK. The prucahse price was based on the following 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, determine the translation adjustment for Tran's yearend consolidated financials. Show your work.
2. What is the economic relevance of this adjustment in 1?
3. If the US Dollar is the functional currency, determine the translation adjustment for Tran's yearend consolidated financials. Show your work.
4. What is the economic relevance of this adjustment in 3?
5. How can companies protect them selves from having to report large currency translation adjustments?