I cannot explain why they are not using the The beginning U.S. dollar value of Giant’s retained earnings was $2,600,000. to Calculate the ending retained earnings used to calculate the CTA. I’ve tried to arrange this problem so that it is easier to read. Giant Company is a U.S. Company with a subsidiary, Grande, Inc., that operates in Mexico. Giant Company uses either the temporal or the current rate method of foreign currency translation for its subsidiaries. Grande, Inc., began operations January 1, 2012. Common Stock and Fixed Assets were acquired January 1, 2011. Inventory is accounted for under the last in, first out (LIFO) cost flow assumption, with a slow rate of turnover. The beginning U.S. dollar value of Giant’s retained earnings was $2,600,000. The inventory in the January 1, 2012, Balance Sheet was acquired on January 1, 2012. Assume that Giant Company considers the Mexican peso to be both the local currency and the functional currency of Grande, Inc. The cumulative translation adjustment (CTA) for 2012 is closest to??? Solution: Since the LC=FC = Current Method is used! All items on income are translated using the average rate you then proceed to translated all the items on the Balance sheet at the appropriate rates No simplicity sake i’ve used the solution below ***ISSUE**** Once the balance sheet is calculated you arrive at a Retained earnings figure (the translated figure using balance sheet date) Now you must calculate the CTA, which is the different between Re calculated after translating the bs and the RE you calculate with Beg Re + NI -div = End Re ***in the problem they tell you : The beginning U.S. dollar value of Giant’s retained earnings was $2,600,000.: In my head, you would use it to calculate the ending retained earnings. incorrect: 2,600,000(Beg UsD RE) + 550,000(Translated NI)-0(div)= 3,150,000 With that Calculated RE, I would net from the Balance sheet end RE to calculated the CTA Balance sheet (Translated to USD) Total Assets = 13,000,000 Total Liabilited + Equity = 15,700,00 Retained Earnings = (2,700,000) Calc Retained Earnigns = 3,150,000 CTA = 5,850,000 = **WRONG** - in the correct solution - they exclude : The beginning U.S. dollar value of Giant’s retained earnings was $2,600,000. **Correct solution** 0(Beg UsD RE) + 550,000(Translated NI)-0(div)= 550,000 Total Assets = 13,000,000 Total Liabilited + Equity = 15,700,00 Retained Earnings = (2,700,000) Calc Retained Earnigns = 550,000 CTA = 3,250,000 **Correct** **mind Blown***
Still proves hard to follow: Was this from a QBank? Wiley? Schewser? CFAI? Old Mock? If you want to point me to the source I’ll take a look
i’ll send you the questions --> what’s your email
Sent!
Not sure if the issue is resolved but from what I read above, you are confusing with Giant and Grande RE. Why you would take into account Giant RE while calculating Grande CTA? Also, my reasoning is confirmed because Grande Started operations in 2012 so no REs at beginning of the year.
Thanks,
Chintan