Alexander Corporation (a U.S.-based company) acquired 100 percent of a Swiss company for 8.2 million Swiss francs on December 20, Year 1. At the date of acquisition, the exchange rate was $0.70 per franc. The acquisition price is attributable to the following assets and liabilities denominated in Swiss francs:
Cash …………………................ 1,000,000
Inventory ……………................ 2,000,000
Fixed assets ……………............. 7,000,000
Notes payable …………….......... (1,800,000)
Alexander Corporation prepares consolidated financial statements on December 31, Year 1. By that date, the Swiss franc appreciated to $0.75. Because of the year-end holidays, no transactions took place between the date of acquisition and the end of the year.
Required:
a. Determine the translation adjustment to be reported on Alexander's December 31, Year 1, consolidated balance sheet, assuming that the Swiss franc is the Swiss subsidiary's functional currency? What is the economic relevance of this translation adjustment?
b. Determine the remeasurement gain or loss to be reported in Alexander's Year 1 consolidated income, assuming that the U.S. dollar is the functional currency. What is the economic relevance of this remeasurement gain or loss?