Case 7-1 Columbia Corporation Columbia Corporation, a U.S.-based company, acquired a 100 percent interest in Swoboda Company in Lodz, Poland, on January 1, Year 1, when the exchange rate for the Polish zloty (PLN) was $0.25. The financial statements of Swoboda as of December 31, Year 2, two years later, are as follows: BALANCE SHEET December 31, Year 2 Assets Cash PLN 1,000,000 Accounts receivable (net) Inventory Equipment Less: Accumulated depreciation Building Less: Accumulated depreciation Land 1,650,000 4,250,000 12,500,000 (4,250,000) 36,000,000 (15,150,000) 3,000,000 PLN 39,000,000 Total assets Llabilitles and Stockholders' Equity Accounts payable Long-term debt Common stock Additional paid-in capital Retained earnings Total liabilities and stockholders' equity PLN 1,250,000 25,000,000 2,500,000 7,500,000 2,750,000 PLN 39,000,000 STATEMENT OF INCOME AND RETAINED EARNINGS For the Year Ending December 31, Year 2 Sales Cost of goods sold Depreciation expense-equipment Depreciation expense-building Research and development expense Other expenses (including taxes) Net income Plus: Retained earnings, 1/1/42 Less: Dividends, Year 2 Retained earnings, 12/31/42 PLN 12,500,000 (6,000,000) (1,250,000) (900,000) (600,000) (500,000) PLN 3,250,000 250,000 (750,000) PLN 2,750,000 Additional information: The January 1, Year 2, beginning inventory of PLN 3,000,000 was acquired on December 15, Year 1, when the exchange rate was $0.215. Purchases of inventory dur- ing Year 2 were acquired uniformly throughout the year. The December 31, Year 2, ending inventory of PLN 4,250,000 was acquired evenly throughout the fourth quarter of Year 2 when the exchange rate was $0.16. All fixed assets were on the books when the subsidiary was acquired except for PLN 2,500,000 of equipment, which was acquired on January 3, Year 2, when the exchange rate was $0.18, and PLN 6,000,000 in buildings, which were acquired on August 5, Year 2, when the exchange rate was $0.17. Equipment is depreciated on a straight-line basis over 10 years. Buildings are depreciated on a straight-line basis over 40 years. A full year's depreciation is taken in the year of acquisition. Dividends were declared and paid on December 15, Year 2, when the exchange rate was $0.155. Other exchange rates for Year 2 are: January 1 Average for the year December 31 $0.200 0.175 0.150 Required: 1. Translate Swoboda's financial statements into U.S. dollars in accordance with U.S. GAAP at December 31, Year 2, using the following scenarios. a. Assume the Polish zloty is the functional currency. The December 31, Year 1, retained earnings amount that appeared in Swoboda's translated financial statements was $56,250. The December 31, Year 1, cumulative translation adjustment that appeared in Swoboda's translated balance sheet was negative $506,250. b. Assume the U.S. dollar is the functional currency. The December 31, Year 1, retained earnings amount that appeared in Swoboda's remeasured financial statements was $882,500. c. Assume the same scenario described in (b) except Swoboda has no long-term debt. Instead, Swoboda has common stock of PLN 10,000,000 and additional paid-in capital of PLN 25,000,000. The December 31, Year 1, retained earnings amount that appeared in Swoboda's remeasured financial statements was negative $367,500. 2. Explain why the sign of the translation adjustments in (la), (lb), and (10) is positive or negative