Question #22

Translation of the local currency means the current rate method is applied. The current ratio is current assets divided by current liabilities. The current assets and the current liabilities are both translated at the current rate. This leads to the ratio remaining the same in terms of both the local currency and the presentation currency. (Module 10.4, LOS 10.d) Dell Air Lines has recently acquired Australian Puddle Jumpers, Inc., a small airline located in Sydney. The Australian dollar has been chosen by Dell as the functional currency for APJ. The Balance Sheet of APJ is given below as of Dec. 31, 2004 in Australian dollars. Assets Liabilities and Equity Cash 200 A/P 180 A/R 240 Common Stock 720 Maintenance Supplies 180 Fixed Assets 280 Total Assets 900 Total Liab & Equity 900 APJ's income statement for the year ending Dec. 31, 2005 is expressed in Australian dollars as: Sales 3,500 Total Costs 2,900 Net Income 600 The Australian dollar has steadily depreciated against the U.S. dollar. At Dec. 31, 2004, the exchange rate was 2 Australian dollars = $1 but at Dec. 31, 2005, the exchange rate had deteriorated to 3 Australian dollars = $1. The Dec. 31, 2005 Balance Sheet for APJ is given in Australian dollars as follows: Assets Liabilities and Equity Cash 441 A/P 210 A/R 330 Common Stock 720 Supplies 291 Retained Earnings 600 Fixed Assets 468 Total Assets 1,530 Total Liab. & Equity 1,530