Diekmann Company, a U.S.-based company, acquired a 100 percent interest in Rakona A.S. i...

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 (Kc? s) was $0.05. Rakona’s financial statements as of December 31, 2011, two years later, follow:

Additional Information

• The January 1, 2011, beginning inventory of Kc?s 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 Kc?s 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 Kc?s 5,000,000 of equipment acquired on January 3, 2011, when the exchange rate was $0.036, and Kc?s 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 Kc? s 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 Kc? s 20,000,000 and additional paid-in capital of Kc? s 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).