Question

Sullivan's Island Company began operating a subsidiary in a foreign country on January 1, 2017, by investing capital in the amount of 104,000 pounds. The subsidiary immediately borrowed 250,000 pounds on a five-year note with 8 percent interest payable annually beginning on January 1, 2018. The subsidiary then purchased for 354,000 pounds a building that had a 10-year expected life and no salvage value and is to be depreciated using the straight-line method. Also on January 1, 2017, the subsidiary rented the building for three years to a group of local attorneys for 9,100 pounds per month. By year-end, rent payments totaling 91,000 pounds had been received, and 18,200 pounds was in accounts receivable. On October 1, 4,600 pounds was paid for a repair made to the building. The subsidiary transferred a cash dividend of 11,450 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:

January 1, 2017	$	2.10	=	1 Pound
October 1, 2017		2.15	=	1
December 31, 2017		2.18	=	1
Average for 2017		2.14	=	1

Prepare an income statement, statement of retained earnings, and balance sheet for this subsidiary in pounds and then translate these amounts into U.S. dollars.

Answer 1

Income statement
	LCU	Exchange	US dollars
		Rate
Rent revenue	109200	2.14	233688
	(9100*12)
Less: Expenses
Interest expenses	20000	2.14	42800
	(250000*8%)
Repair expenses	4600	2.15	5850
Depreciation expenses	35400	2.14	47936
	(354000/10)
Total expenses	60000		96586
Net income	49200		137102
Statement of retained earnings
	LCU	Exchange	US dollars
		Rate
Balance as on Jan 1.	0		0
Add: Net income	49200		137102
	49200		137102
Less: Dividend paid	11450	2.18	24961
Balance as on Dec 31.	37750		112141
Balance sheet
	LCU	Exchange	US dollars
		Rate
Cash (Note:1)	74950	2.18	163391
Accounts receivable	18200	2.18	39676
Building	354000	2.18	771720
Accumulated depreciation	-35400	2.18	-77172
Total assets	411750		897615
Interest payable	20000	2.18	43600
Note payable	250000	2.18	545000
Common stock	104000	2.1	218400
Retained earnings	37750		112141
Translation adjustment (Balancing figure)			-21526
Total liabilities	411750		897615