3. Foreign Currency Translation. Kingfield starts a subsidiary in a foreign country on January 1, 2015. The country's currency is the kumquat (KQ). To start this business, Kingfield invests 150,000 KQ. Of this amount, it spends 100,000 immediately to acquire land. Later, on April 1, it constructs a building and acquires equipment for 245,000 KQ. These investments were partially offset by the proceeds from an 180,000 KQ mortgage, also taken out on April 1. All subsidiary operational activities occur at an even rate throughout the year. A dividend was paid on June 1st. The currency exchange rate for the KQ for this year are as follows: January 1, 2015 April 1, 2015 June 1, 2015 Average 2015 December 31, 2015 $.85 $.83 $.81 $.80 $.78 For the purposes of translation, the functional currency has been identified as the KQ. a) On the next page, translate the KQ denominated financial statements to US dollars using the Current Rate method. b) On the second following page, first prepare a Statement of Cash flow for the foreign subsidiary in KQ, and then convert this Statement of Cash Flows to US Dollars using the Current Rate method. US $ Sales COGS Gross Profit Depreciation Expense Operating Expenses Net Income Income Statement For The Year Ended December 31, 2015 FX Rate 850,000 600,000 250,000 20,000 190,000 40,000 Statement of Retained Earnings For the Year Ended December 31, 2015 Beginning R/E Plus Net Income Less Dividends (Paid 6/1) Ending R/E 40,000 (10,000) 30,000 Cash Receivables Building and Equip Less: Accum. Depin Balance sheet As of December 31, 2015 40,000 135,000 245,000 (20,000) 100,000 500,000 Land Total Assets Accounts Payable Other Current Liabilities Mortgage payable Common Stock Retained Earnings Translation Gain or Loss Total Liab & S/E 86,000 54,000 180,000 150,000 30,000 500,000 Statement of Cash Flows For the Year Ended December 31, 2015 Exchange Rate KQ US$ 40,000 Cash Flows From Operations: Net Income Plus depreciation Increase in AR Increase in AP Increase in Other Liab's Total Cash From Operations Cash Flows From Investing: Purchase of Land Purchase of Bldg & Equip Total Cash From Investing Cash Flows from Financing: Sale of Stock Mortgage Payment of Dividends Total Cash From Financing Net Cash Flows Effect of FX rate on cash Plus Beginning of Year Cash = End of Year Cash