15. Brookhurst Company (a U.S.-based company) established a subsidiary in South Africa on January 1, Year 1, by investing 300,000 South African rand (ZAR) when the exchange rate was US$0.09/ZAR 1. On that date, the for- eign subsidiary borrowed ZAR 500,000 from local banks on a 10-year note to finance the acquisition of plant and equipment. The subsidiary's opening bal- ance sheet (in ZAR) was as follows: Cash Plant and equipment ........ Total .................. Balance Sheet January 1, Year 1 300,000 Long-term debt ......... 500.000 Capital stock ........... 800,000 Total ................. 500,000 300.000 800,000 During Year 1, the foreign subsidiary generated sales of ZAR 1,000,000 and net income of ZAR 110,000. Dividends in the amount of ZAR 20,000 were paid to the parent on June 1 and December 1. Inventory was acquired evenly throughout the year, with ending inventory acquired on November 15, Year 1. The subsidiary's ZAR financial statements for the year ended December 31, Year 1, are as follows: Balance Sheet December 31, Year 1 ZAR Cash ... 80,000 Receivables 150,000 Inventory 270,000 Plant and equipment (net). 450,000 Total assets 950,000 Accounts payable 80,000 Long-term debt. 500,000 Common stock 300,000 Retained earnings, 12/31/1 70,000 Total liabilities and stockholders' equity 950,000 Relevant exchange rates for Year 1 are as follows (US$ per ZAR): January 1, Year 1 .... $0.090 June 1, Year 1... 0.095 Average for Year 1.. 0.096 November 15, Year 1 0.100 December 1, Year 1 0.105 December 31, Year 1 0.110 Income Statement Year 1 Sales ......... Cost of goods sold Gross profit Depreciation expense. Other operating expenses Income before tax Income taxes Net income ZAR 1,000,000 (600,000) 400,000 (50,000) (150,000) 200.000 (90,000) 110,000 Statement of Retained Earnings Year 1 ZAR Retained earnings, 1/1/41 Net income Dividends Retained earnings, 12/31/1 Required: a. Translate the South African subsidiary's financial statements into U.S. dol- lars, assuming that the South African rand is the functional currency. Com- pute the translation adjustment by considering the impact of exchange rate changes on the subsidiary's net assets. b. Translate (remeasure) the South African subsidiary's financial statements into U.S. dollars, assuming that the U.S. dollar is the functional currency. Compute the translation adjustment (remeasurement gain or loss) by con- sidering the impact of exchange rate changes on the subsidiary's net mon- etary asset or liability position. 0 110,000 (40,000) 70,000 | Exchange Rates USDZAR January 1, Year 1 0.090 June 1, Year 1 0.095 Average for Year 1 0.096 November 15, Year 1 0.100 December 1, Year 1 0.105 December 31, Year 1 0.110
