Diekmann Company, a U.S.-based company, acquired a 100 percent interest in Rakona A.S. in the Czech Republic on January 1, 2010, when the exchange rate for the Czech koruna (Kčs) was $0.05. Rakona’s financial statements as of December 31, 2011, two years later, follow:
Balance Sheet December 31, 2011 | |
Assets |
|
Cash | Kčs 2,000,000 |
Accounts receivable (net) | 3,300,000 |
Inventory | 8,500,000 |
Equipment | 25,000,000 |
Less: Accumulated depreciation | (8,500,000) |
Building | 72,000,000 |
Less: Accumulated depreciation | (30,300,000) |
Land | 6,000,000 |
Total assets | Kčs78,000,000 |
Liabilities and Stockholders’ Equity |
|
Accounts payable | Kčs2,500,000 |
Long-term debt | 50,000,000 |
Common stock | 5,000,000 |
Additional paid-in capital | 15,000,000 |
Retained earnings | 5,500,000 |
Total liabilities and stockholders’ equity | Kčs 78,000,000 |
Income Statement For Year Ending December 31, 2011 | |
Sales | Kčs 25,000,000 |
Cost of goods sold | (12,000,000) |
Depreciation expense—equipment | (2,500,000) |
Depreciation expense—building | (1,800,000) |
Research and development expense | (1,200,000) |
Other expenses (including taxes) | (1,000,000) |
Net income | Kčs 6,500,000 |
Plus: Retained earnings, 1/1/11 | 500,000 |
Less: Dividends, 2011 | (1,500,000) |
Retained earnings, 12/31/11 | Kčs 5,500,000 |
Additional Information
• The January 1, 2011, beginning inventory of Kčs 6,000,000 was acquired on December 18, 2010, when the exchange rate was $0.043. Purchases of inventory were acquired uniformly during 2011. The December 31, 2011, ending inventory of Kčs 8,500,000 was acquired in the latter part of 2011 when the exchange rate was $0.032. All fixed assets were on the books when the subsidiary was acquired except for Kčs 5,000,000 of equipment acquired on January 3, 2011, when the exchange rate was $0.036, and Kčs 12,000,000 in buildings acquired on March 5, 2011, when the exchange rate was $0.034. Straight-line depreciation is 10 years for equipment and 40 years for buildings. A full year’s depreciation is taken in the year of acquisition.
• Dividends were declared and paid on December 15, 2011, when the exchange rate was $0.031.
• Other exchange rates for 1 Kčs follow:
January 1, 2011 | $0.040 |
Average 2011 | 0.035 |
December 31, 2011 | 0.030 |
Part I. Translate the Czech koruna financial statements at December 31, 2011, in the following three situations:
a. The Czech koruna is the functional currency. The December 31, 2010, U.S. dollar-translated balance sheet reported retained earnings of $22,500. The December 31, 2010, cumulative translation adjustment was negative $202,500 (debit balance).
b. The U.S. dollar is the functional currency. The December 31, 2010, Retained Earnings account in U.S. dollars (including a 2010 remeasurement gain) that appeared in Rakona’s remeasured financial statements was $353,000.
c. The U.S. dollar is the functional currency. Rakona has no long-term debt. Instead, it has common stock of (Kčs) 20,000,000 and additional paid-in capital of (Kčs) 50,000,000. The December 31, 2010, U.S. dollar-translated balance sheet reported a negative balance in retained earnings of $147,000 (including a 2010 remeasurement loss).
Part II. Explain the positive or negative sign of the translation adjustment in Part I(a) and explain why a remeasurement gain or loss exists in Parts I(b) and I(c).
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