| Course | ACC-6020 Advanced Accounting |
|---|---|
| Module | Module 7 |
| Paper type | Written Assignment 7: foreign currency transactions and financial statements translation |
| Length | About 748 words, 5 pages |
| Format | APA 7 student paper |
| School | Thomas Edison State University |
| Program | M.S. in Management in Accounting |
| Updated | October 2026 |
Free sample paper for ACC 6020 Module 7
Yen Payables and a Euro Subsidiary: Exchange Gains in Income and Translation Gains in Equity at Ridgewood Instruments
Student Name
M.S. in Management in Accounting, Thomas Edison State University
ACC-6020: Advanced Accounting
Mentor Name
Month Day, Year
Yen Payables and a Euro Subsidiary: Exchange Gains in Income and Translation Gains in Equity at Ridgewood Instruments
Introduction
Exchange rate changes affect a U.S. company in two different ways. Transactions denominated in a foreign currency, such as buying on credit from a foreign supplier, create receivables or payables whose dollar value changes until they are settled; those changes are transaction gains and losses in net income. A foreign subsidiary that keeps its books in another currency must have its statements translated into dollars for consolidation; the resulting adjustment goes to other comprehensive income, because the subsidiary's operations have not produced dollar cash flows (Jeter & Chaney, 2011).
Problem 1: A Yen-Denominated Purchase
On November 1, 2026, Ridgewood bought precision bearings from a supplier in Osaka for ¥30,000,000, payable February 1, 2027. Spot rates were:
The inventory stays at $204,000, its cost on the purchase date; later rate changes affect only the payable. Because the yen strengthened before year end, the dollar cost of the debt rose and Ridgewood reports a $6,000 loss in 2026. The yen then weakened before payment, producing a $9,000 gain in 2027. Overall, Ridgewood paid $3,000 less than it recorded in inventory, but the effect is split across two years. A forward contract or option could have fixed the dollar cost at the start, which is why many importers hedge.
Ridgewood could have removed this exposure by buying yen forward on November 1 for delivery on February 1. With hedge accounting, gains on the forward would offset the losses on the payable in earnings, leaving the bearings' dollar cost fixed at the forward rate.
| Date | Dollars per yen | Payable in dollars |
|---|---|---|
| November 1, 2026 | $0.0068 | $204,000 |
| December 31, 2026 | 0.0070 | 210,000 |
| February 1, 2027 | 0.0067 | 201,000 |
| Date | Entry | |
| November 1, 2026 | Debit Inventory $204,000; credit Accounts Payable $204,000 | |
| December 31, 2026 | Debit Foreign Exchange Loss $6,000; credit Accounts Payable $6,000 | |
| February 1, 2027 | Debit Accounts Payable $210,000; credit Cash $201,000 and Foreign Exchange Gain $9,000 |
Problem 2: Translating Ridgewood Europe
Ridgewood Europe GmbH, a sales and service subsidiary in Stuttgart, uses the euro as its functional currency because it earns and spends euros. The current rate method puts the balance sheet at the closing rate, the income statement at the year's average and paid-in capital at the rates in force when it was contributed, while retained earnings roll forward from earlier translations. At the start of 2026 there was no cumulative translation adjustment.
The translated net assets are $3,300,000, while the translated equity accounts other than the adjustment total $3,144,000, so the cumulative translation adjustment is a $156,000 credit. It arose because the euro strengthened against the dollar during the year, raising the dollar value of Ridgewood's net investment in euros. The adjustment is reported in other comprehensive income for 2026 and accumulates in equity until Ridgewood sells or liquidates the subsidiary, when it is reclassified to net income.
The adjustment accumulates in equity and is moved into net income only if Ridgewood sells or substantially liquidates the subsidiary.
| December 31, 2026 | Euros | Rate | Dollars |
|---|---|---|---|
| Total assets | €5,000,000 | $1.10 current | $5,500,000 |
| Total liabilities | 2,000,000 | 1.10 current | 2,200,000 |
| Common stock | 2,000,000 | 1.05 historical | 2,100,000 |
| Retained earnings, January 1 | 600,000 | Carried forward | 612,000 |
| Net income for 2026 | 400,000 | 1.08 average | 432,000 |
| Cumulative translation adjustment | None | Balancing amount | 156,000 |
| Total liabilities and equity | €5,000,000 | | $5,500,000 |
Translation or Remeasurement?
If Ridgewood Europe's functional currency were the dollar, for example because it simply resold Ridgewood's products and remitted all cash to New Jersey, its euro records would be remeasured by the temporal method instead: monetary items at current rates, nonmonetary items such as inventory and equipment at historical rates, and the resulting gain or loss reported in net income. The choice of functional currency, based on the subsidiary's cash flows, sales prices, financing and dependence on the parent, therefore decides whether currency effects reach earnings.
| Method | When used | Where the adjustment goes |
|---|---|---|
| Current rate translation | Functional currency is the foreign currency | Other comprehensive income |
| Temporal remeasurement | Functional currency is the parent's currency | Net income |
What the Adjustment Means
Louis (2003) found that for manufacturing firms the translation adjustment was not associated with changes in firm value in the way the current rate method assumes, raising questions about what the adjustment measures. For Ridgewood's investors, the $156,000 indicates that euro assets are worth more in dollars today, not that the subsidiary performed better; its performance is the $432,000 of translated net income (Financial Accounting Standards Board [FASB], 1981).
References
Financial Accounting Standards Board. (1981). Foreign currency translation (Statement of Financial Accounting Standards No. 52).
Jeter, D. C., & Chaney, P. K. (2011). Advanced accounting (5th ed.). John Wiley & Sons.
Louis, H. (2003). The value relevance of the foreign translation adjustment. The Accounting Review, 78(4), 1027-1047. https://doi.org/10.2308/accr.2003.78.4.1027
What the ACC 6020 Module 7 instructions ask for
Foreign currency deals and the translation of a foreign subsidiary's statements are the topic of Module 7's written set. Expect to record purchases and sales denominated in foreign currencies with exchange gains and losses at year end and settlement, sometimes with forward contracts used as hedges, to determine a subsidiary's functional currency, and to translate statements by the current rate method or remeasure them by the temporal method, computing the translation adjustment or remeasurement gain. These amounts were drafted for this page; they use the invented parent from earlier assignments with a new yen payable and a euro subsidiary. Typical prompts pair a purchase invoiced in euros with a translation exercise for a foreign subsidiary whose functional currency is its local one.
Inside the ACC 6020 Module 7 example
The introduction distinguishes transaction effects from translation effects and says where each goes. Problem 1 tabulates the rates and dollar amounts of the payable, records the purchase, the year-end adjustment and the settlement and explains why inventory stays at its original cost. Problem 2 translates the subsidiary's balance sheet in a table that shows the euro amount, the rate used and the dollar result for each line, derives the cumulative translation adjustment as the balancing figure and explains why it arose. A comparison of translation and remeasurement follows, and a closing section interprets the adjustment for investors, with research on its value relevance. A closing note compares the temporal method.
ACC 6020 Module 7 rubric: what earns full marks
Currency problems count within the 50 percent that written assignments supply. Mentors check that each purchase or sale is booked at the day's spot rate, that monetary items are adjusted at each year end and at settlement with gains and losses in income, that the functional currency determination is reasoned, that the right rates are applied to each translated account and that the translation adjustment is computed and placed in other comprehensive income. Tables that show the rate beside each amount make the work easy to verify. Separating the transaction gain or loss from the translation adjustment, and saying where each is reported, is the distinction mentors look for first. Mentors also check that the translation adjustment goes to other comprehensive income, not to net income.
Common ACC 6020 Module 7 mistakes, and how to avoid them
Students lose marks by revaluing inventory and other nonmonetary items when rates move, and by putting equity accounts at the closing rate. Only monetary items are remeasured in transactions. Match each line to its rate: closing for the balance sheet, average for income items, original for paid-in capital. Decide the functional currency first, since it determines whether translation or remeasurement applies. Record the rate used for every line of the translated statements. A free first sample of your own ACC-6020 Module 7 problems is available on request.
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ACC 6020 Module 7 questions, answered
Where can I find a free ACC 6020 Module 7 sample paper?
The foreign currency assignment for Ridgewood is shown above: a yen payable with exchange losses and gains, a euro subsidiary translated by the current rate method and the translation adjustment.
Where do foreign currency transaction gains and losses go?
Into net income, as the dollar value of foreign currency receivables and payables changes before settlement.
What is the cumulative translation adjustment?
The balancing amount from translating a foreign subsidiary's statements at different rates, parked in other comprehensive income and carried in a separate equity account.
What rates are used in the current rate method?
Closing rate for the balance sheet, the year's average for income and expense lines and the original rates for paid-in capital.
When is the temporal method used?
When the foreign unit really operates in dollars, its books are remeasured and the resulting gain or loss hits net income.