Question

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 Inventory Property, plant & equipment Notes payable CHY 806,000 1,306,000 4,006,000 (2,112,000) 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? a positive Translation adjustment Homeasurement loss

Answer 1

PART – a)

Translation adjustment = [(Cash + Inventory + PPE)*$1.10] – [(Liabilities*$1.10) + (Stockholder’s equity*$1)]

= [(CHF 806,000 + CHF 1,306,000 + CHF 4,006,000)*$1.10] – [(CHF 2,112,000*$1.10) + (Total assets – liabilities)*$1]

= (CHF 6,118,000*$1.10) – [$2,323,200 + (Cash + Inventory + PPE – Notes payable)*$1]

= $6,729,800 – [$2,323,200 + (CHF 806,000 + CHF 1,306,000 + CHF 4,006,000 – CHF 2,112,000)*$1]

= $6,729,800 – [$2,323,200 + (CHF 4,006,000*$1)]

= $6,729,800 – ($2,323,200 + $4,006,000)

= $400,600

Thus, Translation adjustment is positive as it has increased the stockholder’s equity by $400,600.

PART – b)

Remeasurement loss = [(Cash*$1.10) + (Inventory*$1) + (PPE*$1)] – [(Liabilities*$1.10) + (Stockholder’s equity*$1)]

= [(CHF 806,000*$1.10) + (CHF 1,306,000*$1) + (CHF 4,006,000*$1)] – [(CHF 2,112,000*$1.10) + (Total assets – liabilities)*$1]

= ($886,600 + $1,306,000 + $4,006,000) – [$2,323,200 + (Cash + Inventory + PPE – Notes payable)*$1]

= $6,198,600 – ([$2,323,200 + (CHF 806,000 + CHF 1,306,000 + CHF 4,006,000 – CHF 2,112,000)*$1]

= $6,198,600 – [$2,323,200 + (CHF 4,006,000*$1)]

= $6,198,600 – ($2,323,200 + $4,006,000)

= – $130,600

The remeasurement loss is arised as the swiss subsidiary has the position of net monetary liability and swiss franc is increased by $0.10. The loss occurred is unrealized and will be realized if the swiss subsidiary will convert its swiss franc into dollars on 31^st December.