ACC$337-$ Roosevelt University

Chapter $7$

Palmerstown Company established a subsidiary in a foreign country on January $1,$ Year $1.$

The pound is the functional currency for the foreign subsidiary.

The following details the dates for specific transactions:

Transaction Date Exchange Rate

Invested $8,000$ pounds January $11\mathrm{.}00$

Negotiated a bank loan of $4,000$ pounds January $5$

Purchased plant and equipment of $10,000$ pounds January $8$

Purchased inventory of $1,000$ pounds January $10$

Purchased inventory of $12,000$ pounds Three points during year $0\mathrm{.}86$

Inventory on hand at year$-$end $0\mathrm{.}83$

Relevant U$.$S$.$ dollar $($$$)$ exchange rates for the pound during Year $1$ are as follows:

January $1-31,$ Year $11\mathrm{.}00$

Average for Year $10\mathrm{.}90$

December $31,$ Year $10\mathrm{.}80$

$1.$ Translate the financial statements using the Current Rate Method.

Income Statement Year $1$

Pounds Exchange Rate US $

Sales $15,000$

Cost of goods sold $9,000$

Gross profit $6,000$

Selling and administrative expenses $3,000$

Depreciation expense $1,000$

Income before tax $2,000$

Income taxes $600$

Net income $1,400$

Statement of Retained Earnings Year $1$

Retained earnings, $1/1/$Y$1-$

Net income $1,400$

Dividends $-$

Retained earnings, $12/31/$Y$21,400$

Balance Sheet December $31,$ Year $2$

Pounds Exchange Rate $

Cash $2,400$

Inventory $4,000$

Plant and equipment $10,000$

Less: accumulated depreciation $(1,000)$

Total assets $15,400$

Current liabilities $2,000$

Long$-$term debt $4,000$

Contributed capital $8,000$

Retained earnings $1,400$

Translation adjustment $-$

Total liabilities and stockholders' equity $15,400$

$2.$ Compute the translation adjustment for Year $1$ and for Year $2$ and reconcile these amounts to the

cumulative translation adjustment reported on the translated balance sheet at December $31,$ Year $2.$

Pounds Exchange Rate U$.$S$.$ $ Translation adjustment

Net assets, $1/1/$Y$18,000$

Net income, Year $11,400$

Net assets, $12/31/$Y$19,400$

Net assets, $12/31/$Y$1$ at current exchange rate $9,400$

Translation adjustment, Year $1$