Question
Charles Edward Company established a subsidiary in a foreign country on January 1, 2016, by investing FC 3,200,000 when the exchange rate was FC 3.5
Charles Edward Company established a subsidiary in a foreign country on January 1, 2016, by investing FC 3,200,000 when the exchange rate was FC 3.5 to one U.S. dollar. No income was earned and no dividends were paid during that year, nor the next. In 2018, Charles Edward negotiated a bank loan of FC 1,000,000 on January 5, and purchased plant and equipment in the amount of FC 4,800,000 on January 8, 2018. No dividends were paid during 2018. Additional exchange rates per $1 during the year 2018 follow:
January 1-31, 2018 | FC 3.15 |
Average 2018 | FC 3.25 |
December 31, 2018 | FC 3.30 |
The foreign subsidiarys income statement for 2018 and balance sheet at December 31, 2018, follow:
INCOME STATEMENT | ||
For the Year Ended December 31, 2018 | ||
FC (in thousands) | ||
Sales | FC | 13,5000 |
Selling expense | (675) | |
Depreciation expense |
| (1,200) |
Income before tax | 11,625 | |
Income taxes |
| (4,000) |
Net income | 7,625 | |
Retained earnings, 1/1/2018 | 0 | |
Retained earnings, 12/31/2018 | FC | 7,625 |
BALANCE SHEET | ||
As of December 31, 2018 | ||
FC (in thousands) | ||
Cash | FC | 8,500 |
Property, plant & equipment | 4,800 | |
Less: accumulated depreciation | (1,200) | |
Total assets | FC | 12,100 |
Current liabilities | FC | 275 |
Long-term debt | 1,000 | |
Contributed capital | 3,200 | |
Retained earnings | 7,625 | |
Total liabilities and stockholders' equity | FC | 12,100 |
- Using a spreadsheet, translate the foreign subsidiarys FC financial statements into U.S. dollars at December 31, 2018, in accordance with U.S. GAAP. Calculate the necessary translation adjustment that arises because of this translation using the net assets approach.
- Using a spreadsheet, remeasure the foreign subsidiarys FC financial statements into U.S. dollars at December 31, 2018, assuming that the U.S. dollar is the subsidiarys functional currency. Calculate the necessary remeasurement gain or loss that arises because of this remeasurement using the net monetary assets/liabilities approach.
- In a table, summarize the differences that will be reported in the companys 2018 current ratio, debt-to-equity ratio, profit margin, and return on equity and comment on the differences noted.
HINT: Round your exchange rates to two decimal points, when necessary, or calculate the effect on the translation/remeasurement strictly using formulas.
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