Columbia Corporation, a U.S.-based company, acquired a 100 percent interest in Swoboda Company in Lodz, Poland, on January 1, Year 1, when the exchange rate for the Polish zloty (PLN) was $0.25. The financial statements of Swoboda as of December 31, Year 2, two years later, are as follows:
Balance Sheet December 31, Year 2
Assets
CashPLN 1,000,000
Accounts receivable (net) 1,650,000
Inventory 4,250,000
Equipment12,500,000
Less: Accumulated depreciation (4,250,000)
Building 36,000,000
Less: Accumulated depreciation (15,150,000)
Land3,000,000
Total assets……………………………… PLN 39,000,000
Liabilities and Stockholders' Equity
Accounts payable PLN 1,250,000
Long-term debt25,000,000
Common stock2,500,000
Additional paid-in capital 7,500,000
Retained earnings2,750,000
Total liabilities and stockholders' equity….. PLN 39,000,000
Statement of Income and Retained Earnings
For the Year Ending December 31, Year 2
SalesPLN 12,500,000
Cost of goods sold(6,000,000)
Depreciation expense—equipment(1,250,000)
Depreciation expense—building(900,000)
Research and development expense(600,000)
Other expenses (including taxes)(500,000)
Net income…………………………….. PLN 3,250,000
Plus: Retained earnings, 1/1/Y2 250,000
Less: Dividends, Year 2(750,000)
Retained earnings, 12/31/Y2PLN 2,750,000
Additional information:
• The January 1, Year 2, beginning inventory of PLN 3,000,000 was acquired on December 15, Year 1, when the exchange rate was $0,215. Purchases of inventory during Year 2 were acquired uniformly throughout the year. The December 31, Year 2, ending inventory of PLN 4,250,000 was acquired evenly throughout the fourth quarter of Year 2 when the exchange rate was $0.16.
• All fixed assets were on the books when the subsidiary was acquired except for PLN 2,500,000 of equipment which was acquired on January 3, Year 2 when the exchange rate was $0.18 and PLN 6,000,000 in buildings which was acquired on August 5, Year 2, when the exchange rate was $0.17. Equipment is depreciated on a straight-line basis over 10 years. Buildings are depreciated on a straight-line basis over 40 years. A full year's depreciation is taken in the year of acquisition.
Dividends were declared and paid on December 15, Year 2, when the exchange rate was $0,155.Other exchange rates for Year 2 are:
January 1 $0,200
Average for the year 0.175
December 31 0.150
Required
1. Translate Swoboda's financial statements into U.S. dollars in accordance with U.S. GAAP at December 31, Year 2:
a. Assuming the Polish zloty is the functional currency. (The December 31, Year 1, retained earnings that appeared in Swoboda's translated financial statements was $56,250. The December 31, Year 1, cumulative translation adjustment that appeared in Swoboda's translated balance sheet was negative $506,250.)
b. Assuming the U.S. dollar is the functional currency. (The December 31, Year 1, retained earnings that appeared in Swoboda's remeasured financial statements was $882,500.)
c. The same as (b) except Swoboda has no long-term debt. Instead, Swoboda has common stock of PLN 10,000,000 and additional paid-in capital of PLN 25,000,000. The December 31, Year 1, retained earnings that appeared in Swoboda's remeasured financial statements was negative $367,500.
2. Explain why the sign of the translation adjustments in (la), (lb), and (lc) is positive or negative.