Question

Translation of financial statements (2 years)

Assume that your company owns a subsidiary operating in Germany. The subsidiary conducts most of its business activities in the European Economic Union and maintains it books in the Euro as its functional currency. Following are the subsidiary's financial statements (in €) for the prior and most recent years:

The relevant exchange rates for the $US value of the Euro (€) are as follows:

	Prior Year	Current Year
BOY rate	$1.29	$1.21
EOY rate	$1.21	$1.15
Avg. rate	$1.25	$1.18
PPE purchase date rate		$1.17
LTD borrowing date rate		$1.17
Dividend rate	$1.22	$1.16
Historical rate (common stock and APIC)	$1.41	$1.41

a. Translate the subsidiary's income statement, statement of retained earnings, and balance sheet into $US for both years (assume that the BOY Retained Earnings for the prior year is $468,000).

Instructions:

• Round translated answers to the nearest whole number.
• Use negative signs with answers that are reductions (COGS, expenses, dividends, cash outflows, losses, etc.).

Prior Year

Income Statement:	(In €)	Translation Rate	(In $)
Sales	€ 1,950,000	Answer	Answer
Cost of goods sold	(1,170,000)	Answer	Answer
Gross Profit	780,000		Answer
Operating expenses	(507,000)	Answer	Answer
Net income	€ 273,000		Answer
Statement of retained earnings:
BOY retained earnings	€ 982,800		$ 468,000
Net income	273,000		Answer
Dividends	(27,300)	Answer	Answer
Ending retained earnings	€ 1,228,500		Answer
Balance sheet:
Assets
Cash	€ 248,300	Answer	Answer
Accounts receivable	452,400	Answer	Answer
Inventory	581,100	Answer	Answer
PPE, net	1,399,000	Answer	Answer
Total assets	€ 2,680,800		Answer
Liabilities and stockholders' equity
Current liabilities	€ 330,700	Answer	Answer
Long-Term liabilities	770,600	Answer	Answer
Common Stock	156,000	Answer	Answer
APIC	195,000	Answer	Answer
Retained earnings	1,228,500		Answer
Cumulative translation adjustment			Answer
Total liabilities & equity	€ 2,680,800		Answer

Current Year

Income Statement:	(In €)	Translation Rate	(In $)
Sales	€ 2,340,000	Answer	Answer
Cost of goods sold	(1,404,000)	Answer	Answer
Gross profit	936,000		Answer
Operating expenses	(608,400)	Answer	Answer
Net income	€ 327,600		Answer
Statement of retained earnings:
BOY retained earnings	€ 1,228,500		Answer
Net income	327,600		Answer
Dividends	(32,700)	Answer	Answer
Ending retained earnings	€ 1,523,400		Answer
Balance sheet
Assets
Cash	€ 666,000	Answer	Answer
Accounts receivable	542,800	Answer	Answer
Inventory	697,300	Answer	Answer
PPE, net	1,289,800	Answer	Answer
Total assets	€ 3,195,900		Answer
Liabilities and stockholders' equity
Current liabilities	€ 396,800	Answer	Answer
Long-term liabilities	924,700	Answer	Answer
Common stock	156,000	Answer	Answer
APIC	195,000	Answer	Answer
Retained earnings	1,523,400		Answer
Cumulative translation adjustment			Answer
Total liabilities & equity	€ 3,195,900		Answer
Statement of cash flows:
Net income	€ 327,600		Answer
Change in accounts receivable	(90,400)	Answer	Answer
Change in inventories	(116,200)	Answer	Answer
Change in current liabilities	66,100	Answer	Answer
Net cash flows from operating activities	187,100		Answer
Change in PPE, net	109,200	Answer	Answer
Net cash flows from investing activities	109,200		Answer
Change in long-term debt	154,100	Answer	Answer
Dividends	(32,700)	Answer	Answer
Net cash flows from financing activities	121,400		Answer
Net change in cash	417,700		Answer
Effect of exchange rate on cash			Answer
Beginning cash	248,300	Answer	Answer
Ending cash	€ 666,000	Answer	Answer

b. Compute the ending Cumulative Translation Adjustment directly for the current year.

Note:Use negative signs with answers, when appropriate.

Direct computation of translation adjustment:
BOY Net assets x EOY -BOY Exchange rates	Answer
Net income x EOY -Avg. Exchange rates	Answer
Dividends x EOY -Dividend Exchange rates	Answer
	Answer
BOY Cumulative Translation Adjustment	Answer
EOY Cumulative Translation Adjustment	Answer

Answer 1

Prior Year
Income Statement:	(In €)	Translation	(In $)
Rate
Sales	€ 19,50,000	1.25	2437500
Cost of goods sold	-11,70,000	1.25	-1462500
Gross Profit	7,80,000		975000
Operating expenses	-5,07,000	1.25	-633750
Net income	€ 2,73,000		341250
Statement of retained earnings:
BOY retained earnings	€ 9,82,800		4,68,000
Net income	2,73,000		341250
Dividends	-27,300	1.22	-33306
Ending retained earnings	€ 12,28,500		775944
Balance sheet:
Assets
Cash	€ 2,48,300	1.21	300443
Accounts receivable	4,52,400	1.21	547404
Inventory	5,81,100	1.21	703131
PPE, net	13,99,000	1.21	1692790
Total assets	€ 26,80,800		3243768
Liabilities and stockholders' equity
Current liabilities	€ 3,30,700	1.21	400147
Long-Term liabilities	7,70,600	1.21	932426
Common Stock	1,56,000	1.41	219960
APIC	1,95,000	1.41	274950
Retained earnings	12,28,500		775944
Cumulative translation adjustment			640341
Total liabilities & equity	€ 26,80,800		3243768
Current Year
Income Statement:	(In €)	Translation	(In $)
Rate
Sales	€ 23,40,000	1.18	2761200
Cost of goods sold	-14,04,000	1.18	-1656720
Gross profit	9,36,000		1104480
Operating expenses	-6,08,400	1.18	-717912
Net income	€ 3,27,600		386568
Statement of retained earnings:
BOY retained earnings	€ 12,28,500		775944
Net income	3,27,600		386568
Dividends	-32,700	1.16	-37932
Ending retained earnings	€ 15,23,400		1124580
Balance sheet
Assets
Cash	€ 6,66,000	1.15	765900
Accounts receivable	5,42,800	1.15	624220
Inventory	6,97,300	1.15	801895
PPE, net	12,89,800	1.15	1483270
Total assets	€ 31,95,900		3675285
Liabilities and stockholders' equity
Current liabilities	€ 3,96,800	1.15	456320
Long-term liabilities	9,24,700	1.15	1063405
Common stock	1,56,000	1.41	219960
APIC	1,95,000	1.41	274950
Retained earnings	15,23,400		1124580
Cumulative translation adjustment			536070
Total liabilities & equity	€ 31,95,900		3675285
Statement of cash flows:
Net income	€ 3,27,600		386568
Change in accounts receivable	-90,400	1.15	-103960
Change in inventories	-1,16,200	1.15	-133630
Change in current liabilities	66,100	1.15	76015
Net cash flows from operating activities	1,87,100		224993
Change in PPE, net	1,09,200	1.17	127764
Net cash flows from investing activities	1,09,200		127764
Change in long-term debt	1,54,100	1.17	180297
Dividends	-32,700	1.16	-37932
Net cash flows from financing activities	1,21,400		142365
Net change in cash	4,17,700		495122
Effect of exchange rate on cash			-29665
Beginning cash	2,48,300	1.21	300443
Ending cash	€ 6,66,000	1.15	765900

BOY Net assets x EOY -BOY Exchange rates	-1482940
( 1399000x1.15-2.21 )
Net income x EOY -Avg. Exchange rates	-9828
( 327600x1.15-1.18 )
Dividends x EOY -Dividend Exchange rates	-327
( 32700x1.15-1.16 )
BOY Cumulative Translation Adjustment	640341
EOY Cumulative Translation Adjustment	536070