The following information relates to questions
On 1 January 20X3, Claudia Ltd, an Australian company, acquired 80% of the shares of Saskia Ltd, a New Zealand company, for A$2 498 000. At that date the share capital of Saskia was NZ$2 million and the retained earnings were NZ$1 440 000.

All the assets and liabilities of Saskia were recorded at fair value except for land, for which the fair value was NZ$200 000 higher than the carrying amount and equipment, for which the fair value was NZ$80 000 higher than the carrying amount. The undervalued equipment had a further 4-year life. The tax rate in New Zealand is 25%.

Exchange rates are as follows:
$\begin{array}{ll}
1 \text { January 20X3 } & \mathrm{A} \$ 1.00=\mathrm{NZ} \$ 1.20 \
31 \text { December 20X3 } & \mathrm{A} \$ 1.00=\mathrm{NZ} \$ 1.40 \
\text { Average for the year } & \mathrm{A} \$ 1.00=\mathrm{NZ} \$ 1.30
\end{array}$
-The adjustment to the foreign currency translation reserve on 31 December 20X3 relating to the revaluation of the land if the functional currency of Saskia is Australian dollars dollars is:
A) 5 953 debit
B) 5 953 credit
C) 17 857 debit
D) 17 857 credit

Question

The following information relates to questions 
On 1 January 20X3, Claudia Ltd, an Australian company, acquired 80% of the shares of Saskia Ltd, a New Zealand company, for A$2 498 000.  At that date the share capital of Saskia was NZ$2 million and the retained earnings were NZ$1 440 000.

All the assets and liabilities of Saskia were recorded at fair value except for land, for which the fair value was NZ$200 000 higher than the carrying amount and equipment, for which the fair value was NZ$80 000 higher than the carrying amount. The undervalued equipment had a further 4-year life. The tax rate in New Zealand is 25%.

Exchange rates are as follows:
$\begin{array}{ll}
1 \text { January 20X3 } & \mathrm{A} \$ 1.00=\mathrm{NZ} \$ 1.20 \
31 \text { December 20X3 } & \mathrm{A} \$ 1.00=\mathrm{NZ} \$ 1.40 \
\text { Average for the year } & \mathrm{A} \$ 1.00=\mathrm{NZ} \$ 1.30
\end{array}$
-The adjustment to the foreign currency translation reserve on 31 December 20X3 relating to the revaluation of the land if the functional currency of Saskia is Australian dollars dollars is:
A) 5 953 debit
B) 5 953 credit
C) 17 857 debit
D) 17 857 credit

Quizplus · Accepted Answer

The adjustment for the revaluation of the land in the foreign currency translation reserve is a credit because the Australian dollar has depreciated against the New Zealand dollar from the acquisition date to the reporting date. The land's fair value was NZ$200,000 higher than its carrying amount at acquisition. Since the functional currency is Australian dollars, this increase in value needs to be translated at the year-end exchange rate. The appreciation in the land's value in NZD terms results in a larger increase when translated back into AUD at the year-end rate due to the AUD's depreciation (from 1.20 to 1.40 NZD per AUD). This results in a credit to the foreign currency translation reserve, reflecting an unrealized gain due to the exchange rate movement.

The Following Information Relates to Questions on 1 January

The Following Information Relates to Questions
on 1 January