Question
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
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
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
-------------------------------------------------------------------------------------------------------------------------------
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.
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.
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.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started