Nama : Alya Fadilah Afdhal
Nim : 2201841476
Kelas : LG53
ASSIGNMENT 3
Translation—Local Currency Is the Functional Currency
On January 2, 2019, 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, 2019,
SFr Company reported a retained earnings balance of 480,000 francs. SFr’s
books are maintained in Swiss francs and are in conformity with U.S. generally
accepted accounting principles. Trial balances of the two companies as of
December 31, 2020, are presented here:
Other information related to the subsidiary follows:
1. Beginning inventory of 830,000 francs was acquired when the
exchange rate was $1.078.
2. Purchases made uniformly throughout 2020 were 2,520,000 francs.
3. The franc is identified as the subsidiary’s functional currency.
4. The subsidiary’s beginning (1/1/20) 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.
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8. The subsidiary declared and paid dividends of 375,000 francs on
September 2.
9. The following direct exchange rate quotations were available:
Required:
1. Prepare a translated balance sheet and combined statement of
income and retained earnings for the subsidiary.
2. Prepare a schedule to verify the translation adjustment.
3. 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.
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1
SFr Company
Workpaper to Translate Account
Balance of Foreign Subsidiary
December 31, 2020
Current rate method
Combined Statement of Income SFr Translatio Dollars
Statement and Retained Earnings n
Rate
Sales 3.775.000 1,085 4.095.875
Less:
Operating Expense
Cost Of Goods Sold 2.312.500 1,085 2.509.063
Depreciation expense 125.000 1,085 135.625
Other expense 818.750 1,085 888.344
Income tax expense 102.500 1,085 111.213
Net income 416.250 451.631
Retained Earnings 1/1 513.000 75.948
929.250 527.579
Less: div declared 375.000 1,09 408.750
Retained Earnings 12/31 554.250 118.829
Balance Sheet
Cash 962.500 1,10 1.058.750
Accounts Receivable 660.000 1,10 726.000
Inventories 1.037.500 1,10 1.141.250
Land 500.000 1,10 550.000
Buildings (net) 550.000 1,10 605.000
Equipment (net) 405.000 1,10 445.500
Total Assets 4.115.000 4.526.500
Accounts Payable 800.000 1,10 880.000
Short-term Notes Payable 650.750 1,10 715.825
Bonds Payable 850.000 1,10 935.000
Common Stock 960.000 1,07 1.027.200
Additional Paid-in Capital 300.000 1,07 321.000
Retained Earnings 554.250 118.829
Total Liabilities & Equity 4.115.000 3.997.854
Cumulative Translation - -
Adjustment (Credit) 528.645,8
Total 4.115.000 4.526.500
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2 Verification of the Translation Adjustment
SFr Translatio Dollars
n Rate
Exposed net asset position - 1/1
1.773.000 1,08 1.914.840
($960.000+$300.000+$513.000)
Adjustments for changes in net asset
position during the year:
Net income for the year 416.250 1,085 451.631
Dividends declared -375.000 1,09 -408.750
Net asset position translated using
rate in effect at date of transaction - 1.957.721
Exposed net asset position - 12/31 1.814.250 1,10 1.995.675
Change in cumulative translation
adjustment during the year - net 37.954
increase
Cumulative translation adjustment
(1/1) 36.462
Cumulative translation adjustment –
(12/31) 74.416
3 Ratios
Francs Dollars
Current Ratio 2,660,000/1,450,750= 1.83 2.926.000/1.595.825= 1.83
Debt to equity 2,300750/1814250= 1.27 2.530.825/1.995.675= 1.27
Gross profit 1.462.500/3.775.000= 38.7% 1.586.812,5/4.095.875= 38.7%
percentage
Net income to sales 416.250/3.775.000= 11.0% 451.631/4.095.875= 11.0%
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