Question

Assume that our company owns a subsidiary operating in Switzerland. The subsidiary has adopted the Swiss Franc (CHF) as its functional currency. Our company operates this subsidiary like a division or branch office, making all of its operating decisions, including pricing its products. We conclude, therefore, that the functional currency of this subsidiary is the $US and that its financial statements must be remeasured prior to consolidation. Following are the subsidiary’s financial statements (in CHF) for the most recent year:

Income statement:
Sales	3,000,000
Cost of goods sold	-2,321,500
Gross profit	678,500
Operating expenses	-252,000
Depreciation	-225,000
Remeasurement gain or loss
Net income	201,500
Statement of retained earnings:
BOY retained earnings	1,506,500
Net income	201,500
Dividends	-75,000
Ending retained earnings	1,633,000
Balance sheet:
Assets
Cash	850,000
Accounts receivable	1,273,300
Inventory	650,000
PPE, net	927,000
Total Assets	3,700,300
Liabilities and Stockholders’ Equity
Current Liabilities	250,000
Long-term Liabilities	1,097,300
Common Stock	220,000
APIC	500,000
Retained Earnings	1,633,000
Total Liabilities & Equity	3,700,300

Our subsidiary also reports the following additional financial statement information (in CHF):

Beginning inventory	450,000
Purchases	2,521,500
Ending inventory	-650,000
Cost of Goods Sold	2,321,500
Land	52,000
Building	750,000
Accumulated Depreciation—Building	-500,000
Equipment	1,250,000
Accumulated Depreciation—Equipment	-625,000
PPE, net	927,000
Depreciation expense—Building	100,000
Depreciation expense—Equipment	125,000
Depreciation expense	225,000

The relevant exchange rates for the $US value of the Swiss Franc (CHF) are as follows:

BOY Rate	$0.60
EOY rate	$0.80
Avg. rate	$0.70
Dividend rate	$0.77
Historical rates:
Beginning inventory	$0.60
Land	$0.35
Building	$0.35
Equipment	$0.45
Historical rate (Common Stock and APIC)	$0.20

Required: Remeasure the subsidiary’s income statement, statement of retained earnings, and balance sheet into $US for the current year (assume that the BOY Retained Earnings is $1,100,000).

Answer 1

A.

Income Statement                 in US$
Sales	2100000
Cost Of Goods Sold	-1515050
Gross Profit	584950
Operating expenses	-176400
Depreciation	-91250
Foreign Exchange Gain	24200
Net Income	341500

B.

Statement of retained earnings      in US$
BOY Retained Earnings	1100000
Net Income	341500
Dividends	-57750
Ending Retained Earnings	1383750

C.

Balance Sheet          in US$
Assets
Cash	680000
Accounts Receivable	1018640
Inventory	520000
PPE, Net	386950
Total Assets	2605590
Liabilities and Retained Earnings
Current Liabilities	200000
Long term Liabilities	877840
Common Stock	44000
APIC	100000
Retained Earnings	1383750
Total Liabilities and Equity	2605590

Workings:

Particulars	In CHF	Rate	In US$
Sales	3000000	0.7	2100000
Cost Of Goods Sold	2321500		-1515050
Gross Profit	678500		584950
Operating expenses	252000	0.7	-176400
Depreciation	225000		-91250
Foreign Exchange Gain			24200
Net Income	201500		341500
Statement of retained earnings:
BOY Retained Earnings	1506500		1100000
Net Income	201500		341500
Dividends	-75000	0.77	-57750
Ending Retained Earnings	1633000		1383750
Assets
Cash	850000	0.8	680000
Accounts Receivable	1273300	0.8	1018640
Inventory	650000	0.8	520000
PPE, Net	927000		386950
Total Assets	3700300		2605590
Liabilities and Retained Earnings
Current Liabilities	250000	0.8	200000
Long term Liabilities	1097300	0.8	877840
Common Stock	220000	0.2	44000
APIC	500000	0.2	100000
Retaind Earnings	1633000		1383750
Total Liabilities and Equity	3700300		2605590
Additional Info
Beginning Inventory	450000	0.6	270000
Purchases	2521500	0.7	1765050
Ending Inventory	-650000	0.8	-520000
Cost Of Goods Sold	2321500		1515050
Land	52000	0.35	18200
Building	750000	0.35	262500
Accumulated Depreciation - Building	-500000	0.35	-175000
Equipment	1250000	0.45	562500
Accumulated Depreciation - Equipment	-625000	0.45	-281250
PPE, Net	927000		386950
Depreciation - Building	100000	0.35	35000
Depreciation - Equipment	125000	0.45	56250
Depreciation Expense	225000		91250