On December 18, 2011, Stephanie Corporation acquired 100 percent of a Swiss company for 3.7 million Swiss francs (CHF), which is indicative of fair value. At the acquisition date, the exchange rate was $0.70 = CHF 1. On December 18, 2011, the fair values of the subsidiary’s assets and liabilities were:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . CHF 500,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . 1,000,000
Fixed assets . . . . . . . . . . . . . . . . . . . . . . 3,000,000
Notes payable . . . . . . . . . . . . . . . . . . . . (800,000)
Stephanie prepares consolidated financial statements on December 31, 2011. By that date, the Swiss franc has appreciated to $0.75 = 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, 2011, 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 2011 consolidated net income, assuming that the U.S. dollar is the functional currency. What is the economic relevance of this remeasurement gain or loss?
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