Accounting for autonomous foreign operation To better compete with low-cost imports, Sachs, a German footwear manufacturer, sets up a shoemaking company in an emerging economy, Pacifica, in January year 1, and invests 300 million pesos

(A20 million) in it. Sachs Pacifica breaks even in its first year of trading. Its balance sheet at the end of year 1 is shown below (amounts are in millions of pesos).

Balance sheet, end-year 1 Property and equipment 250 Share capital 300 Inventories 70 Accounts receivable 50 Cash 30 Debt and other monetary liabilities 100 Total assets 400 Total equities 400 Sachs Pacifica trades profitably in year 2. Its financial statements for the year are set out in Exhibit 15.5.
Information about the movement in the peso/euro exchange rate during years 1 and 2 is also given in the exhibit. Sachs follows international standards in accounting for foreign operations.
Required Assume Sachs Pacifica is an autonomous unit for foreign currency translation purposes. Translate its year 2 accounts from pesos into euros.
Explain the reason for the change in the carrying amount of the investment. Why has it increased from A20 million at the start of year 2 to A21.52 million by the end?AppenedixLO1

Transcribed Image Text:

Exhibit 15.5 Sachs Pacifica: annual accounts and key exchange rate data for year 2 (currency amounts in millions of pesos) Sales revenue Less: Sachs Pacifica Income statement, year 2 Cost of goods sold: 500 Beginning inventory Production costs - Ending inventory Depreciation Other expenses Net profit Property and equipment Inventories Accounts receivable Cash Total assets * Start year 2, at net book value Purchases at 1/1 - Depreciation End year 2, NBV Balance sheet, end-year 2 70 310 -80 -300 -120 8| 270* Share capital 300 80** Profit for year 40 60 40 Debt and other monetary liabilities 110 450 Total equities 450 250 60 -40 270 **Purchased/produced in 4th quarter, year 2. Exchange rate information: Year 1 1/1 Year 2 1/1 Average 4th qtr 31/12 Pesos to the euro 15 15 16.1 16 15.8 (There was no change in the exchange rate during year 1.)