Question

Sullivan's Island Company began operating a subsidiary in a foreign country on January 1, 2017, by investing capital in the amount of 64,000 pounds. The subsidiary immediately borrowed 150,000 pounds on a five-year note with 6 percent interest payable annually beginning on January 1, 2018. The subsidiary then purchased for 214,000 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 8,100 pounds per month. By year-end, rent payments totaling 81,000 pounds had been received, and 16,200 pounds was in accounts receivable. On October 1, 2,600 pounds was paid for a repair made to the building. The subsidiary transferred a cash dividend of 11,950 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 $ 2.20 = 1 Pound
October 1, 2017 2.25 = 1
December 31, 2017 2.28 = 1
Average for 2017 2.24 = 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 Rate	US dollars
	Rent revenue			97200	2.24	217728
				(8100*12)
	Less: Expenses
	Interest expenses			9000	2.24	20160
				(150000*6%)
	Repair expenses			2600	2.25	5850
	Depreciation expenses			21400	2.24	47936
				(214000/10)
	Total expenses			33000		73946
	Net income			64200		143782
			Statement of retained earnings
				LCU	Exchange Rate	US dollars
	Balance as on Jan 1.			0	0	0
	Add: Net income			64200		143782
				64200		143782
	Less: Dividend paid			11950	2.28	27246
	Balance as on Dec 31.			52250		116536
			Balance sheet
				LCU	Exchange Rate	US dollars
	Cash (Note:1)			66450	2.28	151506
	Accounts receivable			16200	2.28	36936
	Building			214000	2.28	487920
	Accumulated depreciation			-21400	2.28	-48792
	Total assets			275250		627570
	Interest payable			9000	2.28	20520
	Note payable			150000	2.28	342000
	Common stock			64000	2.2	140800
	Retained earnings			52250		116536
	Translation adjustment (Balancing figure)					7714
	Total liabilities			275250		627570