Exercise 2 Worksheet: Financial Statement Translation "On January 1, 2015, Broadmore Incorporated began operating a subsidiary company in Denmark by purchasing all of the subsidiarys common stock for a fair value of 80,000 krones. The subsidiary immediately borrowed 200,000 krones on a five-year, 10% note. Interest on the note is payable yearly on January 1, starting in 2016. The subsidiary then paid 280,000 krones to purchase a building that had an anticipated life of 10 years, with no salvage value. The straight-line method will be used to depreciate the building. The subsidiary rented the building for three years at 10,000 krones per month. By the end of the year, the subsidiary had received payments totaling 100,000 krones. On October 1, 8,000 krones were paid for a building repair completed on the same date. On December 31, 2015, the subsidiary transferred a cash dividend of 10,000 krones to Broadmore.

The subsidiarys functional currency is the krone. The currency exchange rates for one krone are shown below:

January 1, 2015 . . . . . . . . . . . . . . . . $2.00 = 1 krone

October 1, 2015 . . . . . . . . . . . . . . . . $1.85 = 1 krone

Average for 2015. . . . . . . . . . . . . . . .. $1.90 = 1 krone

December 31, 2015 . . . . . . . . . . . . . .$1.80 = 1 krone

Prepare, in krones, an income statement (Table 1), a statement of retained earnings (Table 2), and a balance sheet (Table 3) for the subsidiary. Translate all amounts into U.S. dollars. The first item has been completed for you as an example.

" Broadmore Company Subsidiary

Table 1: Income Statement

Account Krone Conversion US Dollars

Rent revenue $120,000 x $1.90 A = $228,000

Interest expense

Depreciation expense

Repair expense

Net income Table 2: Statement of Retained Earnings

Account Krone Conversion U.S. Dollars

Retained earnings, 1/1

Net income

Dividends paid

Retained earnings, 12/31

Table 3: Balance Sheet

Account Krone Conversion U.S. Dollars

Cash

Accounts receivable

Building Accumulated depreciation

Total assets

Interest payable

Note payable

Common stock

Retained earnings

Translation adjustment

Total liabilities and equities

Computation of Translation Adjustment

Beginning net assets

Increase in net assets:

Issued common stock

Net income

Decrease in net assets:

Dividends paid

Ending net assets

" Ending net assets at current exchange rate"

Translation adjustment (negative)