On January 1, Year 1, Thunderbird Corporation, a U.S.-based company, acquired a 100 percent interest in Impala International Inc., a manufacturer based in Malaysia. On January 1, Year 1, the exchange rate for the Malaysian Ringgit (RM) was $0.25. Impala’s financial statements as of December 31, Year 2 (two years later) are as follows:

Impala International Inc.

Balance Sheet

December 31, Year 2

Assets

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RM 1,000,000

Accounts receivable (net) . . . . . . . . . . . . . . . . . . . . . 1,650,000

Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,250,000

Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,500,000

Less: Accumulated depreciation . . . . . . . . . . . . . . . . (4,250,000)

Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,000,000

Less: Accumulated depreciation . . . . . . . . . . . . . . . . (15,150,000)

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000,000

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . RM 39,000,000

Liabilities and Stockholders’ Equity

Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . RM 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 . . . . RM 39,000,000

Statement of Income

For the Year Ending December 31, Year 2

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RM 12,500,000

Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,000,000)

Depreciation expense—equipment . . . . . . . . . . . . . . (1,250,000)

Depreciation expense—building. . . . . . . . . . . . . . . . . (900,000)

Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (600,000)

Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (500,000)

Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RM 3,250,000

Statement of Retained Earnings

For the Year Ending December 31, Year 2

Retained earnings, 1/1/Y2 . . . . . . . . . . . . . . . . . . . . . RM 250,000

Add: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,250,000

Less: Dividends, Year 2. . . . . . . . . . . . . . . . . . . . . . . . (750,000)

Retained earnings, 12/31/Y2. . . . . . . . . . . . . . . . . RM 2,750,000

Additional Information

Inventory

• On January 1, Year 2, the inventory balance was RM 3,000,000 and was acquired on December 15, Year 1, when the exchange rate was $0.215. Purchases of inventory during Year 2 were made uniformly throughout the year. The December 31, Year 2, ending inventory of RM 4,250,000 was acquired evenly throughout the fourth quarter of Year 2 when the exchange rate was $0.16.

PP&E

• Impala’s Land and Buildings were already on the books when the subsidiary was acquired on January 1, Year 1. Of the equipment, RM 10,000,000 was on the books when the subsidiary was acquired, and RM 2,500,000 of equipment was purchased on January 3, Year 2 when the exchange rate was $0.18. Equipment is depreciated on a straight-line basis over 10 years, and a full year’s depreciation is taken in the year of acquisition.

Dividends

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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.200

Average for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.175

December 31. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.150

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1. Translate (remeasure) Impala’s financial statements into U.S. dollars in accordance with U.S. GAAP at December 31, Year 2 assuming the Riggnit is the functional currency. The December 31, Year 1, retained earnings that appeared in Impala’s translated (remeasured) financial statements was $56,250.

2. Translate (remeasure) Impala’s financial statements into U.S. dollars in accordance with U.S. GAAP at December 31, Year 2 assuming the U.S. dollar is the functional currency. The December 31, Year 1, retained earnings that appeared in Impala’s translated (remeasured) financial statements was $882,500.

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 during the period.

4. Calculate and present the following ratios for Impala at December 31, Year 2 using (a) the RM-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? Explain.