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. Impalas 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 expenseequipment . . . . . . . . . . . . . . (1,250,000) Depreciation expensebuilding. . . . . . . . . . . . . . . . . (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 1

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 Impalas 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 years 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 ------------------------------------------------------------------------------------------------------------------------------- Required: Using an Excel Spreadsheet, complete the following four questions following the format in the text. Where appropriate, show your calculations to ensure partial credit. Note: This is not a group case. The work submitted must be your own. QUESTION 1. Translate (remeasure) Impalas 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 Impalas translated (remeasured) financial statements was $56,250. USE CURRENT RATE METHOD QUESTION 2. Translate (remeasure) Impalas 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 Impalas translated (remeasured) financial statements was $882,500. USE TEMPORAL METHOD QUESTION 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. QUESTION 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.