Question

On December 18, 2017, Stephanie Corporation acquired 100 percent of a Swiss company for 4.0 million Swiss francs (CHF), which is indicative of book and fair value. At the acquisition date, the exchange rate was $1.00 = CHF 1. On December 18, 2017, the book and fair values of the subsidiary’s assets and liabilities were:

Cash	CHF	805,000
Inventory		1,305,000
Property, plant & equipment		4,005,000
Notes payable		(2,110,000	)

Stephanie prepares consolidated financial statements on December 31, 2017. By that date, the Swiss franc has appreciated to $1.10 = CHF 1. Because of the year-end holidays, no transactions took place prior to consolidation.

1. Determine the translation adjustment to be reported on Stephanie’s December 31, 2017, consolidated balance sheet, assuming that the Swiss franc is the Swiss subsidiary’s functional currency. What is the economic relevance of this translation adjustment?

2. Determine the remeasurement gain or loss to be reported in Stephanie’s 2017 consolidated net income, assuming that the U.S. dollar is the functional currency. What is the economic relevance of this remeasurement gain or loss?

Answer 1

Answer:

Particulars	CHF	Translation rate	US
ASSETS
Cash	805,000	$ 1.10	885,500
Inventory	1,305,000	$ 1.10	1435500
Fixed Assets	4,005,000	$ 1.10	4405500
Total Assets	6,115,000		$ 6726500
Liabilities:
Notes Payable	2,110,000	$ 1.10	2321000
Owners Equity	4,005,000	$ 1.10	4405500
Translation adjustment	400,500
(4005000 x $ 1.10 =4,405,500 $ 440,5500 - 400500 = 400,500
Total liabilities	6,515,500		6726500

b:

Particulars	CHF	Translation rate	US
ASSETS
Cash	805,000	$ 1.10	885,500
Inventory	1,305,000	$ 1.00	1305000
Fixed Assets	4,005,000	$ 1.00	4005000
Total Assets	6,115,000		$ 6195500
Liabilities:
Notes Payable	2,110,000	$ 1.10	2321000
Owners Equity	4,005,000	$ 1.00	4005000
Translation adjustment (6195500-2321000-4005000)			- 130500
Total liabilities	6,115,000		6,195,500

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