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)

1,650,000

Inventory

4,250,000

Equipment

12,500,000

Less: Accumulated depreciation

(4,250,000)

Building

36,000,000

Less: Accumulated depreciation

(15,150,000)

Land

3,000,000

Total assets

PLN 39,000,000

Liabilities and Stockholders Equity

Accounts payable

PLN 1,250,000

Long-term debt

25,000,000

Common stock

2,500,000

Additional paid-in capital

7,500,000

Retained earnings

2,750,000

Total liabilities and stockholders equity

PLN 39,000,000

Statement of Income and Retained Earnings

For the Year Ending December 31, Year 2

Sales

PLN 12,500,000

Cost of goods sold

(6,000,000)

Depreciation expenseequipment

(1,250,000)

Depreciation expensebuilding

(900,000)

Research and development expense

(600,000)

Other expenses (including taxes)

(500,000)

Net income

PLN 3,250,000

Plus: Retained earnings, 1/1/Y2

250,000

Less: Dividends, Year 2

(750,000)

Retained earnings, 12/31/Y2

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 during 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 years depreciation is taken in the year of acquisition.

page 326Dividends 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

$0.200

Average for the year

0.175

December 31

0.150

Required:

Translate Swobodas financial statements into U.S. dollars in accordance with U.S. GAAP at December 31, Year 2, using the following scenarios.

Assume the Polish zloty is the functional currency. The December 31, Year 1, retained earnings amount that appeared in Swobodas translated financial statements was $56,250. The December 31, Year 1, cumulative translation adjustment that appeared in Swobodas translated balance sheet was negative $506,250.

Assume the U.S. dollar is the functional currency. The December 31, Year 1, retained earnings amount that appeared in Swobodas remeasured financial statements was $882,500.

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 Swobodas remeasured financial statements was negative $367,500.

Explain why the sign of the translation adjustments in (1a), (1b), and (1c) is positive or negative.