Question

Assume that our company owns a subsidiary operating in Germany. The subsidiary has adopted the Euro (€) as its functional currency. Following are the subsidiary’s financial statements (in €) for the most recent year:

	Subsidiary (in €)
Income statement:
Sales	8,000,000
Cost of goods sold	(5,100,000)
Gross Profit	2,900,000
Operating expenses	(1,490,000)
Depreciation	(405,000)
Remeasurement gain or loss
Net income	1,005,000
Statement of retained earnings:
BOY retained earnings	4,615,000
Net income	1,005,000
Dividends	(118,000)
Ending retained earnings	5,502,000
Balance sheet:
Assets
Cash	2,050,100
Accounts receivable	2,076,000
Inventory	1,866,000
PPE, net	4,790,900
Total Assets	10,783,000
Liabilities and Stockholders’ Equity
Current Liabilities	1,365,100
Long-term Liabilities	2,645,900
Common Stock	350,000
APIC	920,000
Retained Earnings	5,502,000
Total Liabilities & Equity	10,783,000

Our subsidiary also reports the following additional financial statement information:

	In Euros (€)
Beginning inventory	1,927,000
Purchases	5,039,000
Ending inventory	(1,866,000)
Cost of Goods Sold	5,100,000
Land	1,890,900
Building	3,500,000
Accumulated Depreciation—Building	(1,750,000)
Equipment	2,300,000
Accumulated Depreciation—Equipment	(1,150,000)
PPE, net	4,790,900
Depreciation expense—Building	175,000
Depreciation expense—Equipment	230,000
Depreciation expense	405,000

The relevant exchange rates for the $US value of the Euro (€) are as follows:

BOY Rate	$1.30
EOY rate	$1.40
Avg. rate	$1.35
Dividend rate	$1.38
Historical rates:
Beginning inventory	$1.30
Land	$0.60
Building	$0.60
Equipment	$0.62
Historical rate (Common Stock and APIC)	$0.50

Required:  Remeasure the subsidiary’s income statement, statement of retained earnings, and balance sheet into $US for the current year (assume that the BOY Retained Earnings is $3,462,510).

Answer 1

	Subsidiary (in €)	Logic	Rate used	Subsidiary in $
Income statement:
Sales	8,000,000	avg rate	1.35	5,925,926
Cost of goods sold	-5,100,000	avg rate	1.35	-     3,777,778
Gross Profit	2,900,000			2,148,148
Operating expenses	-1,490,000	Avg rate	1.35	-     1,103,704
Depreciation	-405,000	Rate on the date of purchase of asset		-       662,634
Remeasurement gain or loss				358,473
Net income	1,005,000			740,283
Statement of retained earnings:
BOY retained earnings	4,615,000	Provided in the problem	3,462,510	3,462,510
Net income	1,005,000			740,283
Dividends	-118,000	Date of declaration	1.38	-         85,507
Ending retained earnings	5,502,000			4,117,286
Balance sheet:
Assets
Cash	2,050,100	Closing rate	1.4	1,464,357
Accounts receivable	2,076,000	Avg rate	1.35	1,537,778
Inventory	1,866,000	From below	0	-     1,332,857
PPE, net	4,790,900	From below	7923005	7,923,005
Total Assets	10,783,000			9,592,283
Liabilities and Stockholders’ Equity
Current Liabilities	1,365,100	Closing rate	1.4	975,071
Long-term Liabilities	2,645,900	Closing rate	1.35	1,959,926
Common Stock	350,000	Historical date of issue	0.5	700,000
APIC	920,000	Historical date of issue	0.5	1,840,000
Retained Earnings	5,502,000		0	4,117,286
Total Liabilities & Equity	10,783,000			9,592,283
Our subsidiary also reports the following additional financial statement information:
	In Euros (€)
Beginning inventory	1,927,000	opening rate	1.3	1,482,308
Purchases	5,039,000	avg rate	1.35	3,732,593
Ending inventory	-1,866,000	closing rate	1.4	-     1,332,857
Cost of Goods Sold	5,100,000			3,882,043
Land	1,890,900	historical rate	0.6	3,151,500
Building	3,500,000	historical rate	0.6	5,833,333
Accumulated Depreciation—Building	-1,750,000	historical rate	0.6	-     2,916,667
Equipment	2,300,000	historical rate	0.62	3,709,677
Accumulated Depreciation—Equipment	-1,150,000	historical rate	0.62	-     1,854,839
PPE, net	4,790,900	historical rate		7,923,005
Depreciation expense—Building	175,000	historical rate	0.6	291,667
Depreciation expense—Equipment	230,000	historical rate	0.62	370,968
Depreciation expense	405,000	historical rate		662,634