ACT 3050 Lecture Notes - Lecture 7: Accounts Receivable, Financial Statement, Preferred Stock
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On December 18, 2017, Stephanie Corporation acquired 100 percent of a Swiss company for 4.0 million Swiss francs (CHF), which is indicative of book and fair value. At the acquisition date, the exchange rate was $1.00 = CHF 1. On December 18, 2017, the book and fair values of the subsidiary’s assets and liabilities were:
| Cash | CHF | 820,000 | |
| Inventory | 1,320,000 | ||
| Property, plant & equipment | 4,020,000 | ||
| Notes payable | (2,140,000 | ) | |
Stephanie prepares consolidated financial statements on December 31, 2017. By that date, the Swiss franc has appreciated to $1.10 = CHF 1. Because of the year-end holidays, no transactions took place prior to consolidation.
A. Determine the translation adjustment to be reported on Stephanie’s December 31, 2017, consolidated balance sheet, assuming that the Swiss franc is the Swiss subsidiary’s functional currency. What is the economic relevance of this translation adjustment?
B. Determine the remeasurement gain or loss to be reported in Stephanie’s 2017 consolidated net income, assuming that the U.S. dollar is the functional currency. What is the economic relevance of this remeasurement gain or loss?
Sendelbach Corporation is a U.S.-based organization with operations throughout the world. One of its subsidiaries is headquartered in Toronto. Although this wholly owned company operates primarily in Canada, it engages in some transactions through a branch in Mexico. Therefore, the subsidiary maintains a ledger denominated in Mexican pesos (Ps) and a general ledger in Canadian dollars (C$). As of December 31, 2017, the subsidiary is preparing financial statements in anticipation of consolidation with the U.S. parent corporation. Both ledgers for the subsidiary are as follows:
| Main Operation—Canada | |||||
| Debit | Credit | ||||
| Accounts payable | C$ | 41,555 | |||
| Accumulated depreciation | 42,000 | ||||
| Buildings and equipment | C$ | 182,000 | |||
| Cash | 41,000 | ||||
| Common stock | 65,000 | ||||
| Cost of goods sold | 218,000 | ||||
| Depreciation expense | 8,400 | ||||
| Dividends, 4/1/17 | 34,000 | ||||
| Gain on sale of equipment, 6/1/17 | 6,500 | ||||
| Inventory | 94,000 | ||||
| Notes payable—due in 2020 | 84,000 | ||||
| Receivables | 83,000 | ||||
| Retained earnings, 1/1/17 | 150,590 | ||||
| Salary expense | 38,000 | ||||
| Sales | 327,000 | ||||
| Utility expense | 10,500 | ||||
| Branch operation | 7,745 | ||||
| Totals | C$ | 716,645 | C$ | 716,645 | |
| Branch Operation—Mexico | |||||
| Debit | Credit | ||||
| Accounts payable | Ps | 67,500 | |||
| Accumulated depreciation | 40,000 | ||||
| Building and equipment | Ps | 55,000 | |||
| Cash | 66,500 | ||||
| Depreciation expense | 3,500 | ||||
| Inventory (beginning—income statement) | 38,000 | ||||
| Inventory (ending—income statement) | 35,500 | ||||
| Inventory (ending—balance sheet) | 35,500 | ||||
| Purchases | 72,000 | ||||
| Receivables | 36,000 | ||||
| Salary expense | 10,500 | ||||
| Sales | 139,000 | ||||
| Main office | 35,000 | ||||
| Totals | Ps | 317,000 | Ps | 317,000 | |
Additional Information
The Canadian subsidiary’s functional currency is the Canadian dollar, and Sendelbach’s reporting currency is the U.S. dollar. The Canadian and Mexican operations are not viewed as separate accounting entities.
The building and equipment used in the Mexican operation were acquired in 2007 when the currency exchange rate was C$0.21 = Ps 1.
Purchases of inventory were made evenly throughout the fiscal year.
Beginning inventory was acquired evenly throughout 2016; ending inventory was acquired evenly throughout 2017.
The Main Office account on the Mexican records should be considered an equity account. This balance was remeasured into C$7,745 on December 31, 2017.
Currency exchange rates for 1 Ps applicable to the Mexican operation follow:
| Weighted average, 2016 | C$ | 0.26 |
| January 1, 2017 | 0.28 | |
| Weighted average rate for 2017 | 0.30 | |
| December 31, 2017 | 0.31 | |
The December 31, 2016, consolidated balance sheet reported a cumulative translation adjustment with a $51,950 credit (positive) balance.
The subsidiary’s common stock was issued in 2004 when the exchange rate was $0.44 = C$1.
The subsidiary’s December 31, 2016, retained earnings balance was C$150,590, an amount that has been translated into U.S.$70,363.
The applicable currency exchange rates for 1 C$ for translation purposes are as follows:
| January 1, 2017 | US$ | 0.70 |
| April 1, 2017 | 0.69 | |
| June 1, 2017 | 0.68 | |
| Weighted average rate for 2017 | 0.67 | |
| December 31, 2017 | 0.65 | |
Remeasure the Mexican operation’s account balances into Canadian dollars. (Note: Back into the beginning net monetary asset or liability position.)
Prepare financial statements (income statement, statement of retained earnings, and balance sheet) for the Canadian subsidiary in its functional currency, Canadian dollars.
Translate the Canadian dollar functional currency financial statements into U.S. dollars so that Sendelbach can prepare consolidated financial statements.
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Req A
Remeasure the Mexican operation’s account balances into Canadian dollars. (Note: Back into the beginning net monetary asset or liability position.) (Input all amounts as positive values.)
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b. Prepare financial statements (income statement, statement of retained earnings, and balance sheet) for the Canadian subsidiary in its functional currency, Canadian dollars.
c. Translate the Canadian dollar functional currency financial statements into U.S. dollars so that Sendelbach can prepare consolidated financial statements.
(Round U.S. Dollar values to 2 decimal places. Amounts to be deducted and losses should be indicated with a minus sign.)
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