Translation-Local Currency Is the Functional Currency 107 (This problem is a continuation of the illustration presented in the chapter.) 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. SFr's books are maintained in francs and are in conformitv with U.S. generallv accepted accounting p : sre: 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 subsidiary's functional currency. 4. The subsidiary's 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: 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. Chapter 13 Translation of Financial Statements of Foreign Affiliates 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