5-101-076
REV.MARCH 18, 2003
TEACHING NOTE
Machinery International (A)
This case is based on an implementation example presented by Ernst & Young in Financial
Reporting Developments, Foreign Currency Translation, FASB Statement No. 52. The explanation
accompanying the illustration is reproduced below.
Teaching Strategy
The most successful teaching approach is to start by asking the student to identify the appropriate
functional currency to use (the Deutsche mark, since the company does most of its business in this
currency) and to explain the DM130,719 transaction loss. This gets the class thinking about Deutsche
marks and their relationship to the U.S. dollar during the period of the case. It also helps the class to
appreciate that the dollar denominated debts value is fixed in dollars. If you plan to get through the
case in one period, do not spend too much time on these "warm-up" questions.
Next, the class should work its way through Exhibits TN-1, TN-2, and TN-3, assuming the
Deutsche mark is the functional currency. These exhibits, in the form they are in the case, should be
put on the main board(s) prior to class. The class should fill in the missing data. The various side
calculations (computing cost of goods sold, etc.) should be done on side boards. The students should
be able to get the translation "plugs" correct. At this stage, do not try to get explanations of the
"plugs." The purpose of this particular part of the exercise is to get the students to understand how
electing the Deutsche mark or the U.S. dollar as the functional currency changes the restatement
methodology used and the handling of the balance sheet restatement gains or losses.
To give the class a break from calculations, the instructor might want to focus on question 4 at this
point. That is, discuss the impact of the functional currency choice on key ratios and levels of
profitability.
The class should end with a discussion of question 5.
________________________________________________________________________________________________________________
, 101-076 -2-
Exhibit TN-1 A.B. Deutz GmbH Balance Sheet, December 31, 2000
Functional U.S. Dollar Functional Deutsche Mark
Deutsche Marks Exchange Ratea U.S. Dollars Exchange Ratea U.S. Dollars
Assets
Current assets
Cash DM 575,000 .510 $293,250 .510 $293,250
Certificate of deposit 1,960,784d .510 1,000,000 .510 1,000,000
Accounts receivable 1,685,000 .510 859,350 .510 859,350
Inventories 1,600,000 .534c 854,400 .510 816,000
5,820,784 3,007,000 2,968,600
Property and equipment 2,250,000 .529b 1,190,250 .510 1,147,500
Accumulated depreciation 260,000 .529b 137,540 .510 132,600
1,990,000 1,052,710 1,014,900
DM7,810,784 $4,059,710 $3,983,500
Liabilities and stockholders’ equity
Current liabilities
Accounts payable DM1,745,625 .510 $890,269 .510 $ 890,269
Due to parent 2,941,176d .510 1,500,000 .510 1,500,000
4,686,801 2,390,269 2,390,269
Long-term debt 2,000,000 .510 1,020,000 .510 1,020,000
Deferred income taxes 45,000 .510 22,950 .510 22,950
Stockholders’ equity
Capital stock 600,000 .529b 317,400 .529b 317,400
Paid-in capital 200,000 .529b 105,800 .529b 105,800
Retained earnings 278,983 e 203,291 203,291
Equity adjustment from translation (76,210)j
1,078,983 626,491 550,281
DM7,810,784 $4,059,710 $3,983,500
REV.MARCH 18, 2003
TEACHING NOTE
Machinery International (A)
This case is based on an implementation example presented by Ernst & Young in Financial
Reporting Developments, Foreign Currency Translation, FASB Statement No. 52. The explanation
accompanying the illustration is reproduced below.
Teaching Strategy
The most successful teaching approach is to start by asking the student to identify the appropriate
functional currency to use (the Deutsche mark, since the company does most of its business in this
currency) and to explain the DM130,719 transaction loss. This gets the class thinking about Deutsche
marks and their relationship to the U.S. dollar during the period of the case. It also helps the class to
appreciate that the dollar denominated debts value is fixed in dollars. If you plan to get through the
case in one period, do not spend too much time on these "warm-up" questions.
Next, the class should work its way through Exhibits TN-1, TN-2, and TN-3, assuming the
Deutsche mark is the functional currency. These exhibits, in the form they are in the case, should be
put on the main board(s) prior to class. The class should fill in the missing data. The various side
calculations (computing cost of goods sold, etc.) should be done on side boards. The students should
be able to get the translation "plugs" correct. At this stage, do not try to get explanations of the
"plugs." The purpose of this particular part of the exercise is to get the students to understand how
electing the Deutsche mark or the U.S. dollar as the functional currency changes the restatement
methodology used and the handling of the balance sheet restatement gains or losses.
To give the class a break from calculations, the instructor might want to focus on question 4 at this
point. That is, discuss the impact of the functional currency choice on key ratios and levels of
profitability.
The class should end with a discussion of question 5.
________________________________________________________________________________________________________________
, 101-076 -2-
Exhibit TN-1 A.B. Deutz GmbH Balance Sheet, December 31, 2000
Functional U.S. Dollar Functional Deutsche Mark
Deutsche Marks Exchange Ratea U.S. Dollars Exchange Ratea U.S. Dollars
Assets
Current assets
Cash DM 575,000 .510 $293,250 .510 $293,250
Certificate of deposit 1,960,784d .510 1,000,000 .510 1,000,000
Accounts receivable 1,685,000 .510 859,350 .510 859,350
Inventories 1,600,000 .534c 854,400 .510 816,000
5,820,784 3,007,000 2,968,600
Property and equipment 2,250,000 .529b 1,190,250 .510 1,147,500
Accumulated depreciation 260,000 .529b 137,540 .510 132,600
1,990,000 1,052,710 1,014,900
DM7,810,784 $4,059,710 $3,983,500
Liabilities and stockholders’ equity
Current liabilities
Accounts payable DM1,745,625 .510 $890,269 .510 $ 890,269
Due to parent 2,941,176d .510 1,500,000 .510 1,500,000
4,686,801 2,390,269 2,390,269
Long-term debt 2,000,000 .510 1,020,000 .510 1,020,000
Deferred income taxes 45,000 .510 22,950 .510 22,950
Stockholders’ equity
Capital stock 600,000 .529b 317,400 .529b 317,400
Paid-in capital 200,000 .529b 105,800 .529b 105,800
Retained earnings 278,983 e 203,291 203,291
Equity adjustment from translation (76,210)j
1,078,983 626,491 550,281
DM7,810,784 $4,059,710 $3,983,500
