Question

Remeasurement of financial statements Assume that your company owns a subsidiary operating in Canada. The subsidiary has adopted the Canadian Dollar (CAD) as its functional currency. Your parent company operates this subsidiary like a division or a branch office, making all of its operating decisions, including pricing of its products. You conclude, therefore, that the functional currency of this subsidiary is the $US and that its financial statements must be remeasured prior to consolidation. Following are the subsidiary’s financial statements (in CAD) for the most recent year:

	(in CAD)
Beginning inventory	2,346,750
Purchases	6,139,350
Ending inventory	(2,816,100)
Cost of goods sold	5,670,000
Land	2,058,840
Building	3,780,000
Accum. deprec.-building	(1,890,000)
Equipment	2,520,000
Accum. deprec.-equipment	(1,260,000)
Property, plant, and equipment (PPE), net	5,208,840
Depreciation expense-building	189,000
Depreciation expense-equipment	252,000
Depreciation expense	441,000

	(in CAD)
Income Statement:
Sales	9,450,000
Cost of goods sold	(5,670,000)
Gross profit	3,780,000
Operating expenses	(2,016,000)
Depreciation	(441,000)
Net income	1,323,000
Statement of retained earnings:
BOY retained earnings	4,961,250
Net income	1,323,000
Dividends	(132,300)
Ending retained earnings	6,151,950
Balance Sheet:
Assets
Cash	2,689,470
Accounts receivable	2,192,400
Inventory	2,816,100
Property, plant, and equipment (PPE), net	5,208,840
Total assets	12,906,810
Liabilities and stockholders' equity
Current liabilities	1,602,720
Long-term liabilities	3,734,640
Common stock	630,000
APIC	787,500
Retained earnings	6,151,950
Total liabilities and equity	12,906,810

The relevant exchange rates for the $US value of the Canadian Dollar (CAD) are as follows:

BOY rate	$0.70
EOY rate	$0.76
Avg. rate	$0.73
Dividend rate	$0.75
Historical rates:
Beginning inventory	$0.70
Land	$0.74
Building	$0.74
Equipment	$0.74
Historical rate (common stock and APIC)	$0.60

For parts a. and b. below, use a negative sign with answers to indicate a reduction.

a. Remeasure the subsidiary’s income statement, statement of retained earnings, and balance sheet into $US for the current year (assume that the BOY Retained Earnings is $3,840,619).

Round all answers in the "In US Dollars" column to the nearest dollar.

	(in CAD)	Remeasure -ment Rate	In US Dollars
Beginning inventory	2,346,750	Answer	$Answer
Purchases	6,139,350	Answer	Answer
Ending inventory	(2,816,100)	Answer	Answer
Cost of goods sold	5,670,000		$Answer
Land	2,058,840	Answer	$Answer
Building	3,780,000	Answer	Answer
Accum.deprec.—building	(1,890,000)	Answer	Answer
Equipment	2,520,000	Answer	Answer
Accum.deprec.—equipment	(1,260,000)	Answer	Answer
Property, plant, and equipment (PPE), net	5,208,840		$Answer
Depreciation expense—building	189,000	Answer	$Answer
Depreciation expense—equipment	252,000	Answer	Answer
Depreciation expense	441,000		$Answer
Income statement:
Sales	9,450,000	Answer	$Answer
Cost of goods sold	(5,670,000)		Answer
Gross profit	3,780,000		Answer
Operating expenses	(2,016,000)	Answer	Answer
Depreciation	(441,000)		Answer
AnswerRemeasurement gainRemeasurement loss			Answer
Net income	1,323,000		$Answer
Statement of retained earnings:
BOY retained earnings	4,961,250		$Answer
Net income	1,323,000		Answer
Dividends	(132,300)	Answer	Answer
Ending retained earnings	6,151,950		$Answer
Balance sheet:
Assets
Cash	2,689,470	Answer	$Answer
Accounts receivable	2,192,400	Answer	Answer
Inventory	2,816,100		Answer
Property, plant, and equipment (PPE), net	5,208,840		Answer
Total assets	12,906,810		$Answer
Liabilities and stockholders’ equity
Current liabilities	1,602,720	Answer	$Answer
Long-term liabilities	3,734,640	Answer	Answer
Common stock	630,000	Answer	Answer
APIC	787,500	Answer	Answer
Retained earnings	6,151,950		Answer
Total liabilities and equity	12,906,810		$Answer

b. Compute the remeasurement gain or loss directly assuming BOY net monetary assets of CAD (1,617,840), a net monetary liability.

Round all answers to the nearest dollar.

Change in net monetary assets: _____________ $Answer Change net monetary assets x (EOY - Avg exchange rate) Answer ______________ Answer ______________ $Answer

Answer 1

B)