Part III Foreign Currency Accounting Facts: Parent Co, a U.S. firm, paid $525,000 cash to acquire all of the stock of the British firm Sub Co when the book value of Sub's net assets was equal to fair value. This business combination occurred on December 31, 2020, when the exchange rate for British pounds was $1.50. During 2021 the British pound weakened against the U.S. dollar, resulting in a year- end current exchange rate of $1.40. Average exchange rates for 2021 were $1.45. Sub Co paid a 30,000 dividend to Parent Co on December 1, 2021 when the exchange rate was $1.42 per British pound. The only intercompany transaction between the firms was an $84,000 (56,000) noninterest-bearing advance by Sub Co to Parent Co that occurred on January 4, 2021 when the exchange rate was still $1.50. The advance is denominated in U.S. dollars. Sub Co's functional currency is British pounds, so the advance to Parent Co is a foreign currency transaction from Sub Co's perspective, but not to Parent Co because it is denominated in U.S. dollars. Sub Co's assets, liabilities and stockholder's equity at acquisition (i.e., December 31, 2020) were as follows: British Pounds Exchange Rate U.S. Dollars Assets Cash 140,000 $1.50 $210,000 Accounts receivable 40,000 1.50 60,000 Inventory 120,000 1.50 180,000 Plant assets 100,000 1.50 150,000 Less: Accumulated depreciation (20,000) 1.50 (30,000) Total assets 380,000 $570,000 Liabilities & Stockholder's Equity Accounts payable 30,000 $1.50 $45,000 Bonds payable 100,000 1.50 150,000 Common stock 200,000 1.50 300,000 Retained earnings 50,000 1.50 75,000 Total liabilities & stockholder's equity 380,000 $570,000 Sub Co adjusted its advance to Parent Co at year-end 2021 to reflect the $1.40 current exchange rate. Sub Co recorded an exchange gain because there is no evidence that the advance is of a long-term investment nature. The entry recorded on Sub Co's books was: Advance to parent Exchange gain To adjust receivable denominated in U.S. dollars (($84,000/$1.40) - 56,000) 3 DR CR 4,000 4,000 Parent Co. Required: In the Excel file "Case 1 - Advanced accounting topics" and the worksheet "Foreign Currency" you will find Sub Co's adjusted trial balance at December 31, 2021 in British pounds. Please prepare the following: Convert Sub Co's accounts to U.S. dollars showing the exchange rate and U.S. dollar amount for each account. Prepare Sub Co's December 31, 2021 financial statements in U.S. dollars: Balance Sheet (in classified format), Income Statement (in multiple-step format) and Statement of Retained Earnings. Prepare Sub Co's December 31, 2021 Statement of Cash Flows, assuming the following: - No plant assets were purchased or sold during 2021 - No bonds payable were issued (i.e., borrowed) or paid during 2021 - - No common stock was issued during 2021 No common stock was purchased from stockholders (i.e., treasury stock) - Any effects of foreign exchange rate changes are classified on the Statement of Cash Flows as "Effects of foreign exchange rate changes" (see the Discussion Case - FSA (Data) Excel file for an example of the format). 1 Foreign Currency Accounting 2 3 Sub Co Trial Balance in British Pounds 4 Debits 5 Cash 6 Accounts receivable 7 Inventory 8 Plant assets 9 Advance to parent 10 Cost of sales 11 Depreciation expense 12 Wages and salaries expense 13 Other expenses 14 Dividends declared B C 0 E F G Trial Balance Exchange Rate Trial Balance 110,000 $ 80,000 120,000 100,000 60,000 270,000 10,000 120,000 15 4 60,000 30,000 960,000 16 Credits 17 Accumulated depreciation, plant assets 30,000 18 Accounts payable 36,000 19 Bonds payable 100,000 20 Common stock 200,000 21 Retained earnings 50,000 22 Sales 540,000 23 Exchange gain (on the advance to parent) 4,000 24 960,000 25 26