Question

Sullivan's Island Company began operating a subsidiary in a foreign country on January 1, 2017, by investing capital in the amount of 52,000 pounds. The subsidiary immediately borrowed 140,000 pounds on a five-year note with 10 percent interest payable annually beginning on January 1, 2018. The subsidiary then purchased for 192,000 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 8,000 pounds per month. By year-end, rent payments totaling 80,000 pounds had been received, and 16,000 pounds was in accounts receivable. On October 1, 3,000 pounds was paid for a repair made to the building. The subsidiary transferred a cash dividend of 11,100 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 $ 2.60 = 1 Pound October 1, 2017 2.65 = 1 December 31, 2017 2.68 = 1 Average for 2017 2.64 = 1 Prepare a statement of cash flows in pounds for Sullivan's Island Company's foreign subsidiary and then translate these amounts into U.S. dollars. (Round your exchange rate answers to 2 decimal places. Amounts to be deducted and cash outflows should be indicated with minus sign.)

Answer 1

Sullivan’s Island Company Subsidiary

Statement of Cash Flows

      Pounds                                  U.S. Dollars

Operating Activities:                              

Net income                                                   59,800   (See below)          $ 157,872

plus: depreciation                                       19,200             x $2.64 A =        50,688

less: increase in accounts receivable (16,000)           x $2.64 A =    (42,240)

plus: increase in interest payable           14,000             x $2.64 A =        36,960

Cash flow from operations                       77,000                                      203,280

Investing Activities:

Purchase of building                              (192,000)           x $2.60 H =    (499,200)

Financing Activities:

Sale of common stock                               52,000            x $2.60 H =    135,200

Borrowing on note                                   140,000            x $2.60 H =   364,000

Dividends paid                                           (11,100)           x $2.68 H =      (29,748)    

     180,900                                    469,452

Increase in cash                                             65,900                                    173,532

Effect of exchange rate change on cash                                                        3,080

Cash, 1/1                                                                  -0-                                                -0-

Cash, 12/31                                                      65,900            x $2.68 C = $ 176,612

	Pounds
Revenue	96,000	(8000 x 12)
Less: Interest	14,000	(140000 x 10%)
Less: Depreciation	19,200	(192000/10)
Less: Repair	3,000
Net Income	59,800