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 five-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 a statement of cash flows in LCU for Fenwicke’s foreign subsidiary and then translate these amounts into U.S. dollars. (Amounts to be deducted and cash outflows should be indicated with minus sign.)

Answer 1

The statement of cash flows in LCU for Fenwicke’s foreign subsidiary and translated into U.S. dollars is prepared as below:

Fenwike Company Subsidiary
Statement of Cash Flows
	LCU		U.S.Dollars
Operating Activities:
Net Income (Refer to Notes Section Below)	32,000		61,000
Add Depreciation (140,000/10)	14,000	$1.90	26,600
Increase in Interest Payable (100,000*10%)	10,000	$1.90	19,000
Less Increase in Accounts Receivable (60,000 - 50,000)	-10,000	$1.90	-19,000
Cash Flow from Operations	46,000		87,600
Investing Activities:
Purchase of Building	-140,000	$2.00	-280,000
Financing Activities:
Sale of Common Stock	40,000	$2.00	80,000
Borrowing on Note	100,000	$2.00	200,000
Dividends Paid	-5,000	$1.80	-9,000
Cash Flow from Financing Activities	135,000		271,000
Increase in Cash	41,000		78,600
Effect of Exchange Rate Change on Cash (73,800 - 78,600)			-4,800
Cash, 1/1	0		0
Cash, 12/31	41,000	$1.80	$73,800

_____

Notes:

The value of LCU and Dollar Net Income is arrived as below:

	LCU		U.S.Dollars
Rent Revenue	60,000	$1.90	114,000
Depreciation	-14,000	$1.90	-26,600
Interest	-10,000	$1.90	-19,000
Repair	-4000	$1.85	-7400
Net Income	32,000		$61,000