Question

Fenwicke Company organized and began operating a subsidiary in a foreign country on January 1, 2015, by investing LCU 40,000. This subsidiary immediately borrowed LCU 100,000 on a 5-year note with 10 percent interest payable annually beginning on January 1, 2016. The subsidiary then purchased for LCU 140,000 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 5,000 per month. By year-end, payments totaling LCU 50,000 had been received. On October 1, LCU 4,000 was paid for a repair made on that date. The subsidiary transferred a cash dividend of LCU 5,000 back to Fenwicke on December 31, 2015. The functional currency for the subsidiary is the LCU. Currency exchange rates for 1 LCU follow:

January 1, 2015 . . . . . . . . . . . . . . . . . . . . . . .	$2.00 = 1 LCU
October 1, 2015 . . . . . . . . . . . . . . . . . . . . . . .	1.85 = 1
Average for 2015 . . . . . . . . . . . . . . . . . . . . . .	1.90 = 1
December 31, 2015 . . . . . . . . . . . . . . . . . . . .	1.80 = 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.

Answer 1

The Income Statement of Fenwick Subsidiary for the Year

                                  The income statement

Particulars	Amount in LCU	Amount in $
The Rent Revenue	60,000	1,14,000
Less: Expenses
Depreciation	14,000	26,600
Interest	10,000	,,19,000
Repairs	4,000	7,400
Total	28,000	53,000
Net Income	32,000	61,000
The Statement of Retained Earnings
Particulars	Amount in LCU	Amount in $
The Retained Earnings	0	0
Net Income	32,000	61,000
Cash Dividend	5,000	9,000
Retained Earnings Closing Balance	27,000	52,000

Balance Sheet of Fenwick Subsidiary

Particulars	Amount in LCU	Amount in $
Cash	41,000	73,800
The Account Receivable	0	0
The Building	1,40,000	2,80,000
The Accumulated Depreciation	(14,000)	(26,600)
Total Assets	1,67,000	3,27,200
The Interest Payable
note Payable	1,00,000	2,00,000
The Common Stock	40,000	80,000
The Retained Earnings	27,000	52,000
The Translation Adjustment	0	(4,800)
	1,67,000	3,27,200

Assumptions

1 The Income statement conversions are taken on Average Rate.

2The Repairs as per details given occurred only once and exchange rate for specific date available, specific rate has been taken.

3. For Balance Sheet items rate prevailing on the purchase date had been considered.

4. Full rent for 12 months has been received before year end.

5. The Interest on note payable has been paid on 31st December itself.