Tran 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 purchase price was based on the following assets and

Tran 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 purchase 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…

3-1. If the DKK is the functional currency for the subsidiary, determine the translation adjustment for Tran’s year end consolidated financials. Show your work.

3-2. What is the economic relevance of this adjustment in 3-1?

3.3. If the US Dollar is the functional currency, determine the translation adjustment for Tran’s year end consolidated financials. Show your work.

3-4. What is the economic relevance of this adjustment in 3-3?

3-5.How can companies protect them selves from having to report large currency translation adjustments?

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