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Please answer all parts of the problem. Palmerstown Company established a subsidiary in a foreign country on January 1, Year 1, by investing 8 million pounds when the exchange rate was $1.00/pound.

Please answer all parts of the problem.

Palmerstown Company established a subsidiary in a foreign country on January 1, Year 1, by investing 8 million pounds when the exchange rate was $1.00/pound. Palmerstown negotiated a bank loan of 4 million pounds on January 5, Year 1, and purchased plant and equipment in the amount of 10 million pounds on January 8, Year 1. Plant and equipment is depreciated on a straight-line basis over a 10 year useful life. The first purchase of inventory in the amount of 1 million pounds was made on January 10, Year 1. Additional inventory of 12 million pounds was acquired at three points in time during the year at an average exchange rate of $0.86/pound. Inventory on hand at year-end was acquired when the exchange rate was $0.83/pound. The first-in, first-out (FIFO) method i sused to determine cost of goods sold. Additional exchange rates for the pound during Year 1 are as follows:

Jan 1-31, Year 1 - $1.00

Average, Year 1 - $.90

Dec 31, Year 1 - $.80

The foreign subsidiary's income statement for Year 1 and balance sheet at December 31, Year 1, are as follows:

Income Statement
For the Year Ended December 31, Year 1
    Pounds
Sales   15,000
Cost of goods sold 9,000
Gross profit   6,000
Selling/admin expense 3,000
Depreciation expense 1,000
Income before tax 2,000
Income tax   600
Net income   1,400
Retained earnings, 1/1/Y1 -  
Retained earnings, 12/31/Y1 1,400
Balance Sheet
December 31, Year 1
    Pounds
Cash   2,400
Inventory   4,000
Fixed assets   10,000
Less: accum depn   (1,000)
Total assets   15,400
Current liabilities   2,000
Long-term debt   4,000
Contributed capital   8,000
Retained earnings   1,400
Translation adjustment    
Total liabilites/   15,400
stockholders' equity    

As the Controller for Palmerstown Company, you have evaluated the characteristics of the foreign subsidiary to determine that the pound is the subsidiary's functional currency.

1.) Use an electronic spreadsheet to translate the foreign subsidiary's financial statements into US dollars at December 31, Year 1, in accordance with US GAAP. Insert a row in the spreadsheet after retained earnings and before total liabilities and stockholders' eequity for the cumulative translation adjustment. Calculate the translation adjustment separately to erify the amount obtained as a balancing figure in the translation worksheet.

2.) Use an electronic spreadsheet to translate the foreign subsidiary's financial statements into US dollars at December 31, Year 1, assuming that the US dollar is the subsidiary's functional currency. Inserta row in the spreadsheet after depreciation expense and before income before taxes for the remeasurement gain/(loss)

3.) Prepare a report for the chief executive offer of Palmerstown Company summarizing the differences that will be reported in the Year 1 consolidated financial statements because the pound, rather than the US dollar, is the foreign subsidiary's functional currency. In your repoert, discuss the relationship between the current ratio, the debt-to-equity ration, and the profit margin calculated form the foeign currency financial statments and from the translated US dollar financial statements. Also, include a discussion of the meaning of the translated US dollar amounts for inventory and for fixed assets.

Please answer all parts of the problem.

Jul 28 2021 View more View Less

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