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1. In August, our company sells inventory to a customer in Germany, receivable in Euros (). The receivable is 200,000 and the exchange rate on the date of sale is $1.40:1. Payment is due in 60 days. Our company feels that the $US has been over-sold and is likely to rebound during the next 60 days, thus lowering the $US equivalent of the receivable. The current futures price for 90-day delivery of $1.35 reflects our view. Since we feel that the $US is likely to strengthen even more, we purchase a forward contract to sell Euros at $1.35 60 days hence. When the receivable is collected in 60 days, the exchange rate at that date is $1.25: 1. Assume the following data relating to the spot and forward rates for the $US vis--vis the Euro: August Sept. 30 October Spot rate $1.40 : 1 $1.30 : 1 $1.25 : 1 Forward Rate $1.35 : 1 $1.27 : 1 n/a Required: Prepare the journal entries to record the following: a. Account receivable and sale (ignore cost of goods sold) b. Adjusting entry on Sept. 30 c. Collection of the account receivable in October 2. Assume that our company owns a subsidiary operating in Great Britain. The subsidiary maintains is books in Pound sterling () as its functional currency. Following are the subsidiary's financial statements (in ) for the most recent year: Subsidiary (in ) Income statement: Sales Cost of goods sold Gross Profit Operating expenses Net income 5,100,000 (3,060,000) 2,040,000 (1,326,000) 714,000 Statement of retained earnings: BOY retained earnings Net income Dividends Ending retained earnings 2,677,500 714,000 (71,400) 3,320,100 Balance sheet: Assets Cash Accounts receivable Inventory PPE, net Total Assets 1,451,460 1,183,200 1,519,800 2,811,120 6,965,580 Liabilities and Stockholders' Equity Current Liabilities Long-term Liabilities Common Stock APIC Retained Earnings Cumulative translation adjustment Total Liabilities & Equity 864,960 2,015,520 340,000 425,000 3,320,100 6,965,580 Statement of cash flows: Net income 714,000 Change in Accounts Receivable (197,200) Change in Inventories (253,300) Change in Current Liabilities 144,160 Net cash flows from operating activities 407,660 Change in PPE, net (261,120) Net cash flows from investing activities (261,120) Change in long-term debt 335,920 Dividends (71,400) Net cash flows from financing activities 264,520 Net change in cash 411,060 Effect of exchange rate on cash Beginning cash 1,040,460 Ending cash 1,451,460 The relevant exchange rates for the $US value of the Euro () are as follows: BOY Rate EOY rate Avg. rate PPE purchase date rate LTD borrowing date rate Dividend rate Historical rate (Common Stock and APIC) $1.50 $1.65 $1.60 $1.57 $1.63 $1.64 $0.65 Required: a. Translate the subsidiary's, income statement, statement of retained earnings, balance sheet, and statement of cash flows from Pounds Sterling () into $US (assume that the BOY Retained Earnings for the subsidiary is $2,671,552. b. Compute the end Cumulative Translation Adjustment directly, assuming a BOY balance of $1,994,948. c. Refer to the selected financial statement accounts for the parent, below. Assume the following information: The purchase price for the subsidiary included an AAP asset relating to Land that the parent estimated was worth 400,000 more than book value on the subsidiary's balance sheet. The exchange rate in effect when the subsidiary was acquired was $1.15:1. i. ii. Compute the balance of the Equity Investment account of $7,200,415 on the parent's balance sheet. Prepare the consolidation spreadsheet for the year. Parent Income statement: Sales Cost of goods sold Gross Profit Equity income Operating expenses Net income $8,500,000 (5,950,000) 2,550,000 1,142,400 (1,615,000) $2,077,400 Statement of retained earnings: BOY retained earnings Net income Dividends Ending retained earnings $6,103,000 2,077,400 (244,120) $7,936,280 Balance sheet: Assets Cash Accounts receivable Inventory Equity Investment PPE, net Liabilities and Stockholders' Equity Current liabilities Long-term Liabilities Common Stock APIC Retained Earnings Cumulative Translation Adjustment $ 473,653 1,088,000 1,649,000 7,200,416 8,782,200 $19,193,269 $ 3,314,630 3,500,000 335,664 1,560,386 7,936,280 2,546,309 $19,193,269