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	813,000
Inventory		1,313,000
Property, plant & equipment		4,013,000
Notes payable		(2,126,000	)

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
a) Calculation of translation adjustment assuming the subsidiaries functional currency is CHF
	CHF	Exchange rate	US $
Cash	8,13,000	$1.10	$       8,94,300
Inventory	13,13,000	$1.10	$     14,44,300
Property , plant and equipment	40,13,000	$1.10	$     44,14,300
Total	61,39,000		$     67,52,900
Notes payable	21,26,000	$1.10	$     23,38,600
Owner equity	40,00,000	$1.00	$     40,00,000
Translation adjustment			$       4,14,300
Total			$     67,52,900
b)Calculation of remeasurement loss assuming the subsidiaries functional currency is dollars
	CHF	Exchange rate	US $
Cash	8,13,000	$1.10	$       8,94,300
Inventory	13,13,000	$1.00	$     13,13,000
Property , plant and equipment	40,13,000	$1.00	$     40,13,000
Total	61,39,000		$     62,20,300
Notes payable	21,26,000	$1.10	$     23,38,600
Owner equity	40,00,000	$1.00	$     40,00,000
Remeasurement loss			$      -1,18,300
Total			$     62,20,300
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