Question

Sullivan's Island Company began operating a subsidiary in a foreign country on January 1,2017, by investing capital in the amount of 75,000 pounds. The subsidiary immediately borrowed 160,000 pounds on a five-year note with 10 percent interest payable annually beginning on January 1, 2018. The subsidiary then purchased for 235,000 pounds a building that had a 10-year expected life and no salvage value and is to be depreciated using the straight-ine method. Also on January 1, 2017, the subsidiary rented the building for three years to a group of local attorneys for 8,100 pounds per month. By year-end, rent payments totaling 81,000 pounds had been received, and 16,200 pounds was in accounts receivable. On October 1, 4,800 pounds was paid for a repair made to the building. The subsidiary transferred a cash dividend of 13,400 pounds back to Sullivan's Island Company on December 31, 2017. The functional currency for the subsidiary is the pound. Currency exchange rates for 1 pound follow $2.501 Pound Danuary 1, 2017 October 1, 2017 December 31, 2017 Average for 2017 2.551 2.581 2.541 Prepare a statement of cash flows in pounds for Sullivan's Island Company's foreign subsidiary and then translate these amounts into U.S. dollars. (Round your exchange rate answers to 2 decimal places. Amounts to be deducted and cash outflows should be indicated with minus sign.) Statement of Cash Flows Pounds Exchange Rate Operating Activities Net income Add: Depreciation expenses Less: Increase in accounts receivable Add: Increase in interest payable 2.54 Cash flow from operating activities Investing Activities Purchase of building Cash flow from investing activities Financing Activities 2.50 2.50 2.58 Capital contribution Borrowing on note Dividends Cash flow from financing activities Increase in cash Effect of exchange rate change on cash Beginning balance in cash Ending balance in cash

Answer 1

Solution:

Given that the following information about

Sullivan's Island company began operating a subsidary in a foreign country on January 1, 2017.

Sullivan's Island Company Subsidiary
Income Statement
	POUNDS	Exchange Rate	U.S. Dollars
Rent revenue(80,000+16,000)	97,200	$2.54 A	246,888
Interest expense (160,000 × 10%)	-16,000	$2.54 A	-40,640
Depreciation expense (235,000/10)	-23,500	$2.54 A	-59,690
Repair expense	-4,800	$3.55*H	-17,040
Net income	52,900		129,518

Sullivan's Island Company Subsidiary
Statement of Cash Flows
	POUNDS	Exchange Rate	U.S. Dollars
Operating Activities:
Net income	52,900		129,518
plus: depreciation	23,500	$2.54 A	59,690
less: increase in accounts receivable	-16,200	$2.54 A	-40,500
plus: increase in interest payable	16,000	$2.54 A	40,640
Cash flow from operations	76,200		189,348
Investing Activities:
Purchase of building	-235,000	x $2.50 H =	-587,500
Financing Activities:
Sale of common stock	75,000	x $2.50 H =	187,500
Borrowing on note	160,000	x $2.50 H =	400,000
Dividends paid	-13,400	x $2.58 H =	-34,572
	221,600		552,928
Increase in cash	62,800		154,776
Effect of exchange rate change on cash			-7,248
Beginning cash balance	-0-		-0-
Ending Cash balance	62,800	x $2.58 C =	162,024