Question 4

XYZ company (an US based company) established a subsidiary in South Africa on January 1, Year 1, by investing 300,000 South African rand when the exchange rate was USD $0.09/ZAR 1. On that date, the foreign subsidiary borrowed ZAR 500,000 from local banks on a 15-year note to finance the acquisition of plant and equipment. The subsidiarys opening balance sheet (in ZAR) was as follows:

Balance sheet January 1, Year 1

Items	ZAR	Items	ZAR
Cash	300000	Long-term debt	500000
PPE	500000	Capital stock	300000
Total	800000	Total	800000

During Year 1, the foreign subsidiary generated sales of ZAR 1,000,000 and net income of ZAR 110,000. Dividends in the amount of ZAR 20,000 were paid to the parent on June 1 and December 1. Inventory was acquired evenly throughout the year, with ending inventory acquired on November 15, Year 1. The subsidiarys ZAR financial statements for the year ended December 31, Year 1, are as follows:

Income statement year 1

	ZAR
Sales	1000000
Cost of goods sold	(600000)
Gross profit	400000
Depreciation expenses	(50000)
Other operating expenses	(150000)
Income before tax	200000
Income taxes	(90000)
Net income	110000

Statement of retained earnings Year 1

	ZAR
Retained earnings 1/1/Y1	0
Net income	110000
Dividends	(40000)
Retained earnings 31/12/Y1	70000

Balance sheet 31/12, Year 1

Cash	80000
Receivables	150000
Inventory	270000
PPE (net)	450000
Total assets	950000
Accounts payable	80000
Long-term debt	500000
Common stock	300000
Retained earnings 31/12/Y1	70000
Total liabilities and stockholders'equity	950000

Relevant exchange rates for year 1 are as follows (USD$ per ZAR):

January 1, Year 1: 0.090

June 1, Year 1: 0.095

Average for Year 1: 0.096

November 15, Year 1: 0.1

December 1, year 1: 0.105

December 31, Year 1: 0.110

Requirement:

Translate the South African subsidiarys financial statements into US dollars assuming that the South African rand is the functional currency. Compute the translation adjustment by considering the impact of exchange rate changes on the subsidiarys net assets.