Question

n 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	817,000
Inventory		1,317,000
Property, plant & equipment		4,017,000
Notes payable		(2,134,000	)

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.

1. 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?

2. 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 ec relevance of this remeasurement gain or loss

Translation adjustment	positive	$ ____
Remeasurement loss	____

Answer 1

Answer:

a.

Translation adjustment

Positive

$401,700

Calculation:

Translation	CHF		US$
Beginning net assets [817,000+1,317,000+4,017,000-2,134,000]	4,017,000	1.00	4,017,000
Ending net assets at current exchange rate	4,017,000	1.10	4,418,700
Translation adjustment (positive)			(401,700)
Translation adjustment	Positive		401,700

The translation adjustment increases stockholders equity by $400,000.

The positive translation adjustment occurs because the Swiss subsidiary has a net asset position of CHF 4017,000 and the Swiss franc appreciates by $.10 [CHF 4017,000 x $.10 = $401,700].

It would only be a profit if Stephanie sell this for CHF4,017,000 on December 31 and then convert the sales proceeds to dollars at the exchange rate of $1.10 per Swiss franc.

b.

Answer:

Remeasurement loss

-131,700

Calculation:

Remeasurement	CHF		US$
Beginning net liabilities [817,000-2,134,000]	(1,317,000)	1.00	(1,317,000)
Ending net liabilities at current exchange rate	(1,317,000)	1.10	(1,448,700)
			131,700
Remeasurement loss			-131,700

The remeasurement loss arises because the Swiss subsidiary has a net monetary liability position of CHF1,317,000

(Cash CHF 817,000 - Notes payable CHF 2,134,000) = CHF1,317,000

Swiss franc has appreciated by $.10 [CHF1,317,000 x $.10 = $131,700].

There is loss which is unrealized and it wil be realized when the Swiss subsidiary convert Swiss franc cash into dollars on December 31.

Hence, they will be realizing a transaction gain of $81,700 [CHF 817,000 * .10]

Also parent pay off the Swiss franc notes payable using dollars, hence realizing transaction loss of $213,400 [CHF 2,134,000 * .10]