Question

2/11/2020 Part III. (35 points) Doner Company Inc. established a foreign subsidiary on January 1, Year I Revenues and expenses occur evenly throughout the year. The exchange rates for Year 1 are as follows ($ per FC): January 1 $1.00 February 1, FC50,000 Equipment was purchased 0.95 Average 0.90 December 1, FC10,000 Dividend was declared. 0.85 December 31 0.80 Required: a. Assuming that FC is the subsidiary's functional currency, translate the subsidiary's financial statements to U.S. dollars. Year 1 Exchange rate Year 1 Income Statement FC 100,000 Revenues Depreciation (5,000) Other expenses (35,000) Net income 60,000 Exchange rate Year 1 Statement of Retained Earnings Year 1 FC Retained carnings, 1/1/41 Add: Net income 60,000 Deduct: Dividend (10,000) Retained earnings, 12/31/41 50,000 Balance Sheet Exchange rate Year 1 Cash and receivable Property and equipment, net Total Year 1 FC 75,000 45,000 120.000 Accounts payable Common stock Retained earnings 15,000 55,000 50,000 Total 120,000

Answer 1

Requirement (a)

Functional currency of the subsidiary is FC.
Therefore, the following translation principles are used:
- Assets and liabilities: Translate using the current exchange rate at the balance sheet date for assets and liabilities.
- Income statement items: Translate revenues, expenses, gains, and losses using the exchange rate as of the dates when those items were originally recognized.
- Depreciation and other Allocations: Translate using the exchange rates in effect when those allocations are recorded.

As transactions occur uniformly throughout the year, and it is impractical in most cases to determine the rate that existed at the time the transaction occurred, a weighted average rate based on the average monthly rate is used.

Computation of weighted average rate:

Month	Rate	Weight	Weighted rate #
January' 1	1.00	1/12 = 0.08	0.07
February' 1	0.95	1/11 = 0.09	0.07
December' 1	0.85	1/1 = 1	0.73
December' 31	0.80	0	0.00
		Total Weight = 1.17	0.87	Effective Weighted average rate
# Weighted rate = (Rate * Weight ) / Total Weight

Therefore, conversion of financial statements to US Dollars

Income Statement	Year 1 FC	Exchange rate	Year 1 $
Revenue	100000	0.87	87000
Depreciation	-5000	0.87	-4350
Other Expense	-35000	0.87	-30450
Net Income	60000		52200
Statement of Retained Earnings	Year 1 FC	Exchange rate	Year 1 $
Retained Earnings 1/1/Y1	0	0	0
Add: Net Income	60000	0.87	52200
Deduct: Dividend	10000	0.85	8500
Retained Earnings 12/31/Y1	50000		43700
Balance Sheet	Year 1 FC	Exchange rate	Year 1 $
Cash And Receivables	75000	0.80	60000
Property and Equipment, net	45000	0.80	36000
Total	120000		96000
Accounts Payable	15000	0.80	12000
Common Stock	55000	0.80	44000
Retained Earnings	50000	As Above	43700
Cumulative Translation Adjustment		Note	-3700
	120000		96000
Note:
Cumulative Translation Adjustment
Retained Earnings based on Statement	43700
Retained Earnings based on year end rate	40000
(i.e 50000FC * 0.80)
Therefore, adjustment	-3700

Requirement (b)
Functional currency of the subsidiary is US$.

Therefore, the following translation principles are used:
- Assets and liabilities: Translate using the historic exchange rate, i.e at the rate as on the date items were originally recognized.
- Income statement items: Translate revenues, expenses, gains, and losses using the exchange rate as of the dates when those items were originally recognized.
- Depreciation and other Allocations: Translate using the exchange rates in effect when those allocations are recorded.

As transactions occur uniformly throughout the year, and it is impractical in most cases to determine the rate that existed at the time the transaction occurred, a weighted average rate based on the average monthly rate is used.
Weighted average rate is as determined above: 0.87

Therefore, conversion of financial statements to US Dollars

Income Statement	Year 1 FC	Exchange rate	Year 1 $
Revenue	100000	0.87	87000
Depreciation	-5000	0.87	-4350
Other Expense	-35000	0.87	-30450
Net Income	60000		52200
Statement of Retained Earnings	Year 1 FC	Exchange rate	Year 1 $
Retained Earnings 1/1/Y1	0	0	0
Add: Net Income	60000	0.87	52200
Deduct: Dividend	10000	0.85	8500
Retained Earnings 12/31/Y1	50000		43700
Balance Sheet	Year 1 FC	Exchange rate	Year 1 $
Cash And Receivables	75000	0.87	65250
Property and Equipment, net	45000	0.95	42750
Total	120000		108000
Accounts Payable	15000	0.87	13050
Common Stock	55000	0.87	47850
Retained Earnings	50000	As Above	43700
Cumulative Translation Adjustment		Note	3400
	120000		108000
Note:
Cumulative Translation Adjustment
Retained Earnings based on Statement	43700
Retained Earnings based on Weighted average rate	43500
(i.e 50000FC * 0.87)
Therefore, adjustment		-200	(i)
Property and Equipment, net based on Historic rate	42750
Property and Equipment, net based on Weighted average rate	39150
(i.e 45000FC * 0.87)
Therefore, adjustment		3600	(ii)
Total Cumulative Translation Adjustment		3400	(i) + (ii)