 Hello, and welcome to this session. This is Professor Farhad and this session we would look at CPA questions that deal with foreign currency adjustments and translation. These topics are covered in financial accounting and reporting CPA exam. And on my website, I cover those topics in details, in depth in my advanced accounting, as well as international accounting. So if you are looking for more, and I'm for sure you're going to be looking for more unless you are competent in this topic. You will need to go to my advanced accounting and I have two chapters about this topic and in my international accounting. I have three chapters plus illustrations plus examples. So you want to make sure when you go into the CPA exam, you are comfortable with foreign currency adjustments and translation. As always, I would like to remind you to connect with me on LinkedIn. If you haven't done so, YouTube is where you would need to subscribe. I have 1,700 plus accounting, auditing, tax, finance, as well as Excel tutorial. If you like my lectures, please like them, share them, subscribe to the channel, put them in playlists. If they benefit you, it means they might benefit other people. Share the wealth, connect with me on Instagram, on my website, farhadlectures.com. And this is where you have access to my advanced accounting course, international accounting. And one subscription gives you access to everything, as well as 2000 plus CPA questions. If you're looking to improve your CPA score, 10 to 15 points, if you're looking to supplement or complement your accounting courses, check out my website. Let's take a look at the first question to have a kind of a basic understanding of this topic. By looking at these questions, you're not going to be able to learn everything, but you'll be able to find out, what am I lacking? What do I know? Test yourself. And this is the purpose of taking exams to find out what you don't know. What you know is not really beneficial for you. If you know something, then there is no value to it because you already know it. The value is when you find out, I am lacking somewhere, then you can zoom in to find out, what are you lacking and what can you do about that issue? So let's take a look at the first question. Let's take a look at the first question. With regard to the foreign currency accounting, which of the following are included in the determination of net income for the period? So here they're given us two type of adjustments. They're given us remeasurement adjustments as well as translation adjustment. And the question is, the first thing you need to know is where does the remeasurement adjustment appears and where does the translation adjustment appears? Because that's important. If you don't know where do they appear, then you can do the computation correctly, but if you don't know where do they appear, do they appear in net income? Do they appear in OCI? Then you will get the question incorrect. So that's the first thing. For example, do you know where does the remeasurement adjustment appear? Well, you need to know that the remeasurement adjustment appears on the income statement. Therefore, it goes into the determination of net income. That's what you have to know. Just basically memorizing, but when you are dealing with the remeasurement, it involves many steps. But the most important step to know is, do you know that it goes on the income statement? Therefore, the answer is A. Where does the translation adjustment appears? We're going to find out soon. Let's take a look at this question. Sue industries has international subsidiaries in Asia. These industries enter into contract in both US dollar as well as local currencies. In year 13, Sue industries experience a remeasurement loss and a translation gain of 36,000. As a result of this conversion, what would Sue industries report and accumulated other comprehensive income? Simply put, you are giving two things. You are giving remeasurement loss and you are giving translation gain. They're asking you which of these two will appear in accumulated other comprehensive income. Let's take a look at this prior question. In this prior question, we already determined that remeasurement adjustment, which is either remeasurement gain or remeasurement loss, are reported in the income statement. Therefore, here translation. Do you know where the, so we already know. The 55,000 cannot be the answer because the 55,000 we already know that remeasurement is income statement. Therefore, the question becomes, do you net them? Do you net 36 and 55 and you don't net them? You don't net them. So in case some people say, okay, let me net them. Well, you don't net them. Then with so simply put, the question becomes, do you know where translation gains go? Well, translation goes into A O C I accumulated other comprehensive income. Therefore, the answer is the, now, I already told you this and you have to know this. That's easy. That's easy peasy. Translation gains go into O C I. But what I want to tell you is when you have to know the steps to perform translation, because you could see this as a simulation, you could, or you could see translation in a multiple choice question. All what I'm asking you here to know, do you know where the translation go? Do you know where the remeasurement goes? So those are simple concepts. But when you practice them, you need to know much, much more. And that's why I refer you to Farhat Lectures. Because when you take a CPA course, they might spend 15 minutes or 20 minutes explaining remeasurement and explaining translation. That's it. Or maybe half an hour about both topics. On my website, I spend two to three hours in each course. And in my international accounting, I spent four to five hours because because I go over several examples in the tales and I'm talking hours, not minutes. In this way, you have a good understanding. Walk into the walking into the exam. You have full confidence if they throw anything at you. Let's take a look at this question, which of the following would result in a purchasing power decline purchasing power decline? What does that mean? It means you are losing your purchasing power. You are losing your purchasing power. And when would you lose your purchasing power? Think about it. Will you lose your purchasing power when there is inflation? So if you have money, if you have $100 today, and this $100 can buy you, let's assume the cup, the cup of coffee is for $2 at Wawa, you'll be able to buy 50 cups of coffee. Okay. What happened if the cups of coffee at Wawa goes to $3? So we have inflation. What's going to happen to your $100? It's going to buy you less than 50 cups of coffee. So you would lose purchasing power. It will buy you less than 50. You know, you can take 100 divided by 3, but it'll buy you less than 50. So which of the following would result in a purchasing power decline? Holding monetary asset. Monetary asset means money. Think of it as money, cash, in a period of deflation. Oh, no, no, no. If you hold money and there's deflation, deflation is the opposite of inflation. Deflation means the cup of coffee at Wawa goes from $2 to $1. Now you can buy 100 cups. Would you lose, would you lose, would you lose decline in purchasing power? On the contrary, so A is out. Holding monetary asset in a period of inflation, that's exactly what I said. If you have money and prices go up, inflation means the prices of things go up, then you would lose purchasing power. I would say B is the answer. Holding monetary liabilities in a period of inflation, that's good. That's good. Actually, you don't decline. That's good for you. If you're holding monetary liability, it means simply put, you have a loan at the bank and let's assume you have a loan and you have a loan for $100,000. That's a liability. You have to pay the loan. Suddenly, inflation kicks in. Now as a result, your employer increase your salary by 20% because you need to keep up with inflation. Now you have more money coming in to you in form of salary or if you're selling product, you can raise your prices, but your loan of $100,000 is fixed. It stays the same. Now you're making more money because of inflation, but your liability is fixed. Now you are better off. It's going to result in a purchasing power improvement. Why? Because now you could pay off your loan quickly and have more money for other things. That's the good thing about holding monetary liability in a period of inflation. That's the good thing. That's the good thing. Let's take a look at this question. On October 5th, year 13, Griffin purchased merchandise from an affiliate in Taiwan for $20,000 when the spot rate was 0.65. Griffin paid the bill in February, year 14 when the spot rate was 0.74. The spot rate was 0.80 on December 31, 2013. So notice we have three different dates. So you have to be very careful. We have October 5th. This is the date of purchase. This is when we made the purchase. We have December 31st end of period, end of the accounting period. And we have the payment that happens on, February. They don't tell us when in February. February is the payment. So in this question, in this problem, before I read the question, they could be asking about three different things. So it's very important to look at what you are given. Okay, but it's okay. Now we read it. What amount should the Griffin report as a foreign currency transaction gain or loss in its income statement? So transaction gains and losses goes on to the income statement for December 31st, year 2013. So simply put, now we know we have to zoom in on this date because we're giving three different dates. Because we are giving three different dates, it was a little bit not confusing. We have to know what are we being asked. We're being asked for the gain on the loss on the eve of December 31st. So what does that mean? Well, let's go through this journal entry and see what we will have to do in this problem. And I like to walk you through the journal entry. So this way you understand this topic because this is a good example for illustration purposes because I can go over the examples and show you exactly what we are doing on the three different dates because they could ask you the question in a different way. So this way you are comfortable with this. Let's start with October 5th. What happened on October 5th? You made the purchase. You purchased 20,000 worth of merchandise from Taiwan and the spot rate on that date was 0.65. So what happened is this on that date, you're going to debit your inventory. Your inventory it's going to be your inventory it's going to be $13,000 because based on the spot rate on that date and you will credit accounts payable of $13,000. Now remember this accounts payable in a foreign currency because you have to pay in Taiwanese dollar. Let's fast forward till December 31st. December 31st what you have to do you have to sit down and ask yourself what happened to my to that investment in accounts payable to that foreign currency. So you have basically you have an investment and it's another investment a payment. So you have in a sense it's an investment in this foreign currency because an investment could go up or it could go down. So what happened on December 31st if we take $20,000 we multiply it by 0.8 the rate is 0.8 I believe the rate is 0.8 in December 31st the rate is 0.8 and what's going to happen is now you are responsible for paying $16,000. Now what happened to your to your liability is $16,000 hold on a second my liability is $16,000 that's bad for me it means I have a loss from foreign currency transaction fc is foreign currency transaction in the amount of $3,000 why because I need to increase my accounts payable by $3,000. Now my accounts payable so if I'm looking if I'm looking at my accounts payable initially it was I had $13,000 obligation now I have to make it $16,000 so I have to add $3,000. So my liability now as of December 31st is $16,000 and I booked the loss of I booked the loss of $3,000 in my on the income statement so remember this goes in the income statement and they're telling you on this problem sometimes the question could be where does this loss or gain goes it goes on the income statement. So simply put we answer the question right there because they're asking us about December 31st December 31st we have a loss and the loss is $3,000 they could also ask you what happened what is the loss or the gain year 2014 when we pay it in February because remember we we don't pay it until year 2014 let's see what happened on year 2014 in year 2014 this spot rate when we paid it was 74 look in year 2014 was 74 so when we were ready to pay this bill we'll take $20,000 times 0.74 and let's get a calculator to compute this so if we take $20,000 times 0.74 it's $14,800 now I oh when I write the check I write the check only for $14,800 for a liability of $16,000 what does that mean well let's see what does that mean well on the books I owed $16,000 I only have to pay $14,800 I have a gain of $1,200 what does that mean it means on that date this is the date of the payment here's what I would do I will credit cash $14,800 I will debit my accounts payable $16,000 because I have I paid it I'm no longer responsible for everything therefore I have to reduce it down to zero the difference between those two is a gain from foreign currency transaction and the gain is $1,200 the gain is $1,200 now you could be asked what is the net gain or loss for the whole transaction well notice here there is no $1,200 answer so they're not asking us about this but they could ask you what is the net gain or loss on the whole transaction well we had a loss of $3,000 a gain of $2,200 the overall is a net loss of $1,800 so notice the net loss of $1,800 is there as the answer to see but that's not the question so you have to be very careful what you are being asked in a question like this and again these topics are covered in my advanced accounting as well as international accounting so it's very important it's very important that you visit my website if you want additional material additional explanation because in a CPA course they assume you know this they assume you know it and they would review it with you I don't assume anything I will sit down and explain this as this is the first time in your college classroom and the problem with this topic it's one of two things you never took an international accounting course or advanced accounting or when you took them they did not cover those chapters or if they cover those chapters the teacher did not did not do a good job and if the teacher did not do a good job you were not mature enough to pay attention because it was your senior year and you were ready to go no problem visit my website to make up for all those missed time good luck study hard stay safe especially during those coronavirus days