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PROBLEM 13-3

TranslationLocal Currency Is the Functional Currency LO 7

(This problem is a continuation of the illustration presented in the chapter.)

On January 2, 2014, P Company, a U.S.-based company, acquired for 2,000,000 francs an 80% interest in SFr Company, a Swiss company. On January 2, 2014, SFr Company reported a retained earnings balance of 480,000 francs. SFr's books are maintained in francs and are in conformity with U.S. generally accepted accounting principles. Trial balances of the two companies as of December 31, 2015, are presented here:

Debits	P Company (Dollars)	SFr Company (Francs)
Cash	500,200	962,500
Accounts Receivable	516,400	660,000
Inventories (FIFO Cost)	627,800	1,037,500
Investment in SFr Company	300,000	-
Land	450,000	500,000
Buildings (net)	610,000	550,000
Equipment (net)	290,000	405,000
Dividends Declared	200,000	375,000
Cost of Goods Sold	2,720,000	2,312,500
Depreciation Expense	210,000	125,000
Other Expense	914,000	818,750
Income Tax Expense	100,000	102,500
Totals	7,438,400	7,848,750
Credits	P Company (Dollars)	SFr Company (Francs)
Accounts Payable	540,000	800,000
Short-term Notes Payable	300,000	650,750
Bonds Payable	700,000	850,000
Common Stock	800,000	960,000
Additional Paid-in Capital	300,000	300,000
Retained Earnings, 1/1	544,400	513,000
Sales	4,200,000	3,775,000
Dividend Income	54,000	-
Totals	7,438,400	7,848,750

Other information related to the subsidiary follows:

1. Beginning inventory of 830,000 francs was acquired when the exchange rate was $.165.

2. Purchases made uniformly throughout 2015 were 2,520,000 francs.

3. The franc is identified as the subsidiary's functional currency.

4. The subsidiary's beginning (1/1/15) retained earnings and cumulative translation adjustment (credit) in

dollars were $75,948 and $36,462, respectively.

5. All plant assets were acquired before the parent obtained a controlling interest in the subsidiary.

6. Sales are made and all expenses are incurred uniformly throughout the year.

7. The ending inventory was acquired during the last quarter.

8. The subsidiary declared and paid dividends of 375,000 francs on September 2.

9. The following direct exchange rate quotations were available:

	$
Date of subsidiary acquisition	0.15
Average for 2014	0.156
1/1/2015	0.17
9/2/2015	0.18
12/31/2015	0.19
AVG QTR 4 2015	0.185
Average for 2015	0.176

Required:

1. Prepare a translated balance sheet and combined statement of income and retained earnings for the subsidiary.
2. Prepare a schedule to verify the translation adjustment.
3. Compute the following ratios based on the franc and the U.S. dollar financial statements.

(1) Current ratio.

(2) Debt to equity.

(3) Gross profit percentage.

(4) Net income to sales.

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