Charles Edward Company established a subsidiary in a foreign country on January 1,2009, by investing FC 3,200,000 when the exchange rate was $0.50/FC. Charles Edward negotiated a bank loan of FC 3,000,000 on January 5, 2009, and purchased plant and equipment in the amount of FC 6,000,000 on January 8, 2009. It depreciated plant and equipment on a straight-line basis over a 10-year useful life. It purchased its beginning inventory of FC 1,000,000 on January 10, 2009, and acquired additional inven¬ tory of FC 4,000,000 at three points in time during the year at an average exchange rate of S0.43/FC. It uses the first-in, first-out (FIFO) method to determine cost of goods sold. Additional exchange rates per FC 1 during the year 2009 follow:

January 1-31,2009.$0.50 LO6 Average 2009.0.45 December 31, 2009.0.38 The foreign subsidiary’s income statement for 2009 and balance sheet at December 31,2009, follow:

INCOME STATEMENT For the Year Ended December 31, 2009 FC (in thousands)

Sales. FC 5,000 Cost of goodssold. 3,000 Grossprofit. 2,000 Sellingexpense. 400 Depreciationexpense. 600 Income beforetax. 1,000 Incometaxes. 300 Netincome. 700 Retained earnings,1/1/09. -0-

Retained earnings, 12/31/09. FC 700 BALANCE SHEET At December 31, 2009 FC (in thousands)

Cash. FC 1,000 Inventory. 2,000 Fixedassets. 6,000 Less: Accumulated depreciation. (600)

Totalassets. FC 8,400 Currentliabilities. FC 1,500 Long-termdebt. 3,000 Contributedcapital. 3,200 Retainedearnings. 700 Total liabilities and stockholders'equity. FC 8,400 As the controller for Charles Edward Company, you have evaluated the characteristics of the foreign sub¬ sidiary to determine that the FC is the subsidiary’s functional currency.

Required

a. Use an electronic spreadsheet to translate the foreign subsidiary’s FC financial statements into U.S. dollars at December 31, 2009, in accordance with SFAS 52. Insert a row in the spreadsheet after retained earnings and before total liabilities and stockholders’ equity for the cumulative translation adjustment. Calculate the translation adjustment separately to verify the amount obtained as a bal¬ ancing figure in the translation worksheet.

b. Use an electronic spreadsheet to remeasure the foreign subsidiary’s FC financial statements in U.S. dollars at December 31, 2009, assuming that the U.S. dollar is the subsidiary’s functional currency. Insert a tow in the spreadsheet after depreciation expense and before income before taxes for the remeasurement gain (loss).

c. Prepare a repoit for James Edward, CEO of Charles Edward, summarizing the differences that will be reported in the company’s 2009 consolidated financial statements because the FC, rather than the U.S. dollar, is the foreign subsidiary’s functional currency. In your report, discuss the relationship between the current ratio, the debt-to-equity ratio, and profit margin calculated from the FC financial state¬ ments and from the translated U.S. dollar financial statements. Also discuss the meaning of the trans¬ lated U.S. dollar amounts for inventory and for fixed assets.