Question

Boston Company organized and began operating a subsidiary in a foreign country on January 1, 2015, by investing LCU 46,000. This subsidiary immediately borrowed LCU 115,000 on a five-year note with 7 percent interest payable annually beginning on January 1, 2016. The subsidiary then purchased for LCU 161,000 a building that had a 10-year anticipated life and no salvage value and is to be depreciated using the straight-line method. Also on January 1, the subsidiary rents the building for three years to a group of local doctors for LCU 4,000 per month. By year-end, payments totaling LCU 40,000 had been received. On October 1, LCU 2,700 was paid for a repair made on that date. The subsidiary transferred a cash dividend of LCU 4,200 back to Boston on December 31, 2015. The functional currency for the subsidiary is the LCU. Currency exchange rates for 1 LCU follow:

January 1, 2015	$	2.30	=	1 LCU
October 1, 2015		2.25	=	1
Average for 2015		2.10	=	1
December 31, 2015		1.90	=	1

Prepare an income statement, statement of retained earnings, and balance sheet for this subsidiary in LCU and then translate these amounts into U.S. dollars. (Amounts to be deducted should be indicated by a minus sign.)

Answer 1

Ans. Step 1:-

BOSTON COMPANY SUBSIDIARY Income Statement For the Year Ended December 31, 2015
	LCU	x	Exchange Rate	=	U.S. Dollars
Rent Revenue (4,000 x 12) (A)	48,000	x	2.10	=	100,800
Less: Expenses
Interest expenses (115,000 x 7%)	8,050	x	2.10	=	16,905
Repairs expenses	2,700	x	2.25	=	6,075
Depreciation expenses (161,000/10)	16,100	x	2.30	=	37,030
Total expenses (B)	26,850				60,010
Net Income (A - B)	21,150				40,790

Step 2:-

BOSTON COMPANY SUBSIDIARY Statement of Retained Earnings For the Year Ended December 31, 2015
	LCU	U.S. Dollars
Retained earnings, Jan 1.	0	0
Net income	21,150	40,790
Balance	21,150	40,790
Less:- Cash Dividend	4,200	7,980
Retained earnings, Dec 31.	16,950	32,810

Cash Dividend=4,200 x 1.90=7,980

Step:- 3

BOSTON COMPANY SUBSIDIARY Balance Sheet For the Year Ended December 31, 2015
	LCU	x	Exchange Rate	=	U.S. Dollars
Assets:
Cash (W. Note)	33,100	x	1.90	=	62,890
Account receivable	8,000	x	1.90	=	15,200
Building	161,000	x	2.30	=	370,300
Less:- Accumulated Depreciation	16,100	x	2.30	=	(37,030)
Total Assets	186,000				411,360
Liabilities and Equities:
Interest payable	8,050	x	1.90	=	15,295
Note payable	115,000	x	1.90	=	218,500
Common stock	46,000	x	2.30	=	105,800
Retained earnings	16,950			=	32,810
Translation Adjustment (Bal. Fig)	-				38,325
Total Liabilities and Equities	186000				411,360

Working Notes:-

Cash
Common stock	46,000
Note payable	115,000
Rent revenue collected	40,000
Less:- Building	(161,000)
Less:- Repairs	(2,700)
Less:- Cash dividends	(4,200)
Cash balance as on Dec 31, 2015	33,100