Palmerstown Company established a subsidiary in a foreign country on January 1, Year 1, by investing 8,000,000 pounds when the exchange rate was $1.00/pound. Palmerstown negotiated a bank loan of 4,000,000 pounds on January 5, Year 1, and purchased plant and equipment in the amount of 10,000,000 pounds on January 8, Year 1. Plant and equipment is depreciated on a straight-line basis over a 10-year useful life. The first purchase of inventory in the amount of 1,000,000 pounds was made on January 10, Year 1. Additional inventory of 12,000,000 pounds was acquired at three points in time during the year at an average exchange rate of $0.86/pound. Inventory on hand at year-end was acquired when the exchange rate was $0.83/pound. The first-in, first-out (FIFO) method is used to determine cost of goods sold. Additional exchange rates for the pound during Year 1 are as follows:

January 1-31, Year 1

$1.00

Average for Year 1

0.90

December 31, Year 1

0.80

The foreign subsidiary's income statement for Year 1 and balance sheet at December 31, Year 1, are as follows:

Income Statement

For the Year Ended December 31, Year 1

Pounds (in thousands)

Sales

15,000

Cost of goods sold

?9,000

Gross profit

6,000

Selling and administrative expenses

3,000

Depreciation expense

?1,000

Income before tax

2,000

Income taxes

600

Net income

1,400

Retained earnings, 1/1/Y1

0

Retained earnings, 12/31/Y1

1,400

Balance Sheet

At December 31, Year 1

Pounds (in thousands)

Cash

2,400

Inventory

4,000

Property, plant, and equipment

10,000

Less: Accumulated depreciation

(1,000)

Total assets

15,400

Current liabilities

2,000

Long-term debt

4,000

Contributed capital

8,000

Retained earnings

?1,400

Total liabilities and stockholders' equity

15,400

**attached below is the screenshot from the practice as well**

Januaryr 131. Year 1 .............................................................................................. $1.00 Average for Year 1 ________________________________________________________________________________________________ 090 December 31, Year 1 ______________________________________________________________________________________________ 0.80 The foreign subsidiary's income statement for Year 1 and balance sheet at December 31 , Year 1, are as follows: Income Statement For the Year Ended December 31, Year 1 Pounds [in thousands) Sales .................................................................................................... 15.01:\") Cost of goods sold ___________________________________________________________________________________________ M Gross prot ________________________________________________________________________________________________ 5,000 Sellingandadministrativeexpenses........................................____................................... 3.005 Depreciation expense _________________________________________________________________________________________ Income before tax ___________________________________________________________________________________________ 2,000 Income taxes _______________________________________________________________________________________________ Net income ................................................................................................ 1.400 Retained earnings, 1f1lY1 ______________________________________________________________________________________ _C|' Retained earnings, 121'31N1 ____________________________________________________________________________________ Balance Sheet At December 31, Year 1 Pounds [in thousands) Cash _____________________________________________________________________________________________________ 2,400 Inventory __________________________________________________________________________________________________ 4,000 Properly, plant, and equipment __________________________________________________________________________________ 10,001] Less: Accumulated depreciation __________________________________________________________________________________ 1,000) Total assets ______________________________________________________________________________________________ w Current liabilities ____________________________________________________________________________________________ 2,001] Long-tenTI debt _____________________________________________________________________________________________ 4,000 Contributed capital ___________________________________________________________________________________________ 3,000 Retained earnings ___________________________________________________________________________________________ E Total liabilities and stockholders' equity ___________________________________________________________________________ 15 400