Kashmir Enterprises, an Indian carpet manufacturer, begins the calendar year with the following Indian rupee (INR) balances:

Cash	920,000	Accounts payable	420,000
Inventory	640,000	Owners’ equity	1,140,000
	$1,560,000		$1,560,000

During the first week in January, the company acquires additional manufacturing inventories costing INR 2,400,000 on account and a warehouse for INR3,200,000 paying INR800,000 down and signing a 20-year, 10 percent note for the balance. The warehouse (assume no salvage value) is depreciated straight-line over the period of the note. Cash sales were INR6,000,000 for the year; selling and administrative expenses, including office rent, were INR1,200,000. Payments on account totaled INR2,200,000, while inventory on hand at year-end was INR480,000. Except for interest expense paid on December 31, all other cash receipts and payments took place uniformly throughout the year.

On January 1, the U.S. dollar/rupee exchange rate was $.025 = INR 1; at yearend it was $.02 = INR 1. The average exchange rate during the year was $.022. The Indian consumer price index rose from 128 to 160 by December 31, averaging 144 during the year. At the new financial statement date, the cost to replace inventories had increased by 30 percent; the cost to rebuild a comparable warehouse (based on the construction cost index) was approximately INR4,480,000.

Required

Now assume that management at Kashmir Enterprises’ U.S. headquarters wants to see the Indian rupee statements in U.S. dollars. Two price-level foreign currency translation procedures are requested. The first is to translate Kashmir’s unadjusted rupee statements to dollars (use the current-rate method) and then restate the resulting dollar amounts accounting for U.S. inflation (the U.S. general price level at the financial statement date was 108, up 8 percent from the previous year). The second is to restate the Indian rupee statements accounting for inflation (using the historical-cost constant rupee model), then translate the adjusted amounts to dollars using the current rate. Comment on which of the two resulting sets of dollar statements you prefer for use by American readers. (The U.S. general price level averaged 104 during the year.)

Answer rating: 100% (QA)

Translating and Restating Method Translating to Dollars Exchange rate Ja... View the full answer