Biscayne International Inc.

(A Wholly-Owned Subsidiary of Motorworks, Inc.)

Statement of Income

For the Year Ended December 31, 2019

Sales CHF 30,000,000

Cost of goods sold (18,000,000)

Selling and administrative expense (6,000,000)

Depreciation expense (2,000,000)

Income taxes (1,200,000)

Net income CHF 2,800,000

Statement of Retained Earnings

For the Year Ending December 31, 2019

Retained earnings, 1/1/2019 CHF 500,000

Add: Net Income 2,800,000

Less: Dividends (500,000)

Retained earnings, 12/31/2019 CHF 2,800,000

Balance Sheet

December 31, 2019

Cash CHF 4,800,000

Accounts Receivable 2,000,000

Inventory 8,000,000

Machinery and Equipment 20,000,000

Less: accumulated depreciation (4,000,000)

Total Assets CHF 30,800,000

Current liabilities CHF 4,000,000

Long-term debt 8,000,000

Contributed capital 16,000,000

Retained earnings 2,800,000

Total Liabilities and Stockholders' Equity CHF 30,800,000

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Background

As the Controller for Motorworks, Inc., your team is preparing the Company's consolidation of financial statements as of December 31, 2019. You just received the 22019 financial statements for Biscayne International Inc., a wholly-owned subsidiary based in Zurich, Switzerland. Biscayne's financial statements for 2019 are denominated in Swiss Francs (CHF) and are presented above.

Motorworks, Inc. acquired Biscayne for CHF 16,000,000 on January 1, 2018 (two years ago) when the exchange rate was $0.98. Biscayne borrowed CHF 8,000,000 on January 5, 2018 when the exchange rate was $0.95 and immediately purchased Machinery and Equipment for CHF 20,000,000. Machinery and Equipment is depreciated on a straight-line basis using a ten-year life.

On January 1 2019, the inventory balance was CHF 6,000,000 and was acquired on December 15, 2018 when the exchange rate was $1.02. Purchases of inventory during 2019 were made uniformly throughout the year. The December 31, 2019 ending inventory of CHF 8,000,000 was acquired evenly throughout the fourth quarter of 2019 when the average exchange rate was $0.83.

Dividends of CHF 500,000 were declared and paid on December 15, 2019 when the exchange rate was $0.85.

Additional exchange rates during 2019 are as follows:

January 1 $1.00

Average 0.90

December 31 0.80

Required:

Using Excel, complete the questions below following the format in the text. Where appropriate, show your calculations to ensure partial credit.

Note: This is not a group case. The work submitted must be your own.

1. Assume that CHF is the functional currency. Translate (remeasure) Biscayne's financial statements into U.S. dollars at December 31, 2019. (Also, assume that the December 31, 2018 retained earnings that appeared in Biscayne's translated (remeasured) financial statements was $550,000).

2. Assume that the U.S. Dollar is the functional currency. Translate (remeasure) Biscayne's financial statements into U.S. dollars at December 31, 2019. (Also, assume that the December 31, 2018 retained earnings that appeared in Biscayne's translated (remeasured) financial statements was $950,000).

3. Explain why the translation adjustments in No.1 and No.2 above are positive or negative. Your response should include the relationship between net asset/liability exposures and movements in FX rates as we illustrated in class.

4. Calculate and present the following ratios for Biscayne at December 31, 2019 using (a) the original CHF-denominated financial statements, (b) the U.S.-dollar financial statements in No. 1 above, and (c) the U.S.-dollar financial statements in No. 2 above:

Current Ratio

Total Liabilities to Total Equity

Profit Margin (Net Income/Sales)

What relationships are apparent in these calculations? In other words, which method (Current or Temporal) provides results that are more consistent with ratios calculated using the foreign currency? (Briefly explain).