PROBLEM 13-3 TranslationLocal Currency Is the Functional Currency

On January 2, 2014, P Company, a U.S.-based company, acquired for 2,000,000 francs an 80% interest in

SFr Company, a Swiss company. On January 2, 2014, SFr Company reported a retained earnings balance of

480,000 francs. SFrs books are maintained in francs and are in conformity with U.S. generally accepted accounting

principles. Trial balances of the two companies as of December 31, 2015, are presented here:

P Company SFr Company

Debits (Dollars) (Francs)

Cash 500,200 962,500

Accounts Receivable 516,400 660,000

Inventories (FIFO cost) 627,800 1,037,500

Investment in SFr Company 300,000

Land 450,000 500,000

Buildings (net) 610,000 550,000

Equipment (net) 290,000 405,000

Dividends Declared 200,000 375,000

Cost of Goods Sold 2,720,000 2,312,500

Depreciation Expense 210,000 125,000

Other Expense 914,000 818,750

Income Tax Expense 100,000 102,500

Totals 7,438,400 7,848,750

P Company SFr Company

Credits (Dollars) (Francs)

Accounts Payable 540,000 800,000

Short-term Notes Payable 300,000 650,750

Bonds Payable 700,000 850,000

Common Stock 800,000 960,000

Additional Paid-in Capital 300,000 300,000

Retained Earnings, 1/1 544,400 513,000

Sales 4,200,000 3,775,000

Dividend Income 54,000

Totals 7,438,400 7,848,750

Other information related to the subsidiary follows:

1. Beginning inventory of 830,000 francs was acquired when the exchange rate was $.165.

2. Purchases made uniformly throughout 2015 were 2,520,000 francs.

3. The franc is identified as the subsidiarys functional currency.

4. The subsidiarys beginning (1/1/15) retained earnings and cumulative translation adjustment (credit) in

dollars were $75,948 and $36,462, respectively.

5. All plant assets were acquired before the parent obtained a controlling interest in the subsidiary.

6. Sales are made and all expenses are incurred uniformly throughout the year.

7. The ending inventory was acquired during the last quarter.

8. The subsidiary declared and paid dividends of 375,000 francs on September 2.

9. The following direct exchange rate quotations were available:

Date of subsidiary acquisition $.15

Average for 2014 .156

January 1, 2015 .17

September 2, 2015 .18

December 31, 2015 .19

Average for the 4th quarter, 2015 .185

Average for 2015 .176

Required:

A. Prepare a translated balance sheet and combined statement of income and retained earnings for the subsidiary.

B. Prepare a schedule to verify the translation adjustment.

C. Compute the following ratios based on the franc and the U.S. dollar financial statements.

(1) Current ratio.

(2) Debt to equity.

(3) Gross profit percentage.

(4) Net income to sales.

With the US dollar being the functional currency

D. Convert the accounts of the foreign subsidiary, assuming that the U.S. dollar is the functional currency of

both companies. For this problem assume that the subsidiarys beginning (1/1/15) retained earnings balance

in the translated balance sheet is $76,660.

E. Prepare a schedule to verify the translation gain or loss, assuming a 637,000 franc net exposed liability position

at the beginning of the year.