Task: Read and review the selected case study from the required text, and answer the analysis questions. After reviewing the background section of theColumbia Corporationin your text

FIND ME A TUTOR Chapter: Problem:

Columbia Corporation Columbia Corporation, a U.S.-based company, acquired a 100 percent interest in Swoboda Company in Lodz, Poland, on January 1, Year 1, when the exchange rate for the Polish zloty (PLN) was $0.25. The financial statements of Swoboda as of December 31, Year 2, two years later, are as follows:

C H 8 1C 1

Additional information:

• The January 1, Year 2, beginning inventory of PLN 3,000,000 was acquired on December 15, Year 1, when the exchange rate was $0.215. Purchases of inventory during Year 2 were acquired uniformly throughout the year. The December 31, Year 2, ending inventory of PLN 4,250,000 was acquired evenly throughout the fourth quarter of Year 2 when the exchange rate was $0.16.

• All fixed assets were on the books when the subsidiary was acquired except for PLN 2,500,000 of equipment which was acquired on January 3, Year 2 when the exchange

rate was $0.18 and PLN 6,000,000 in buildings which was acquired on August 5, Year 2, when the exchange rate was $0.17. Equipment is depreciated on a straight-line basis over 10 years. Buildings are depreciated on a straight-line basis over 40 years. A full year’s depreciation is taken in the year of acquisition.

• Dividends were declared and paid on December 15, Year 2, when the exchange rate was $0.155.

• Other exchange rates for Year 2 are:

Required Translate Swoboda’s financial statements into U.S. dollars in accordance with U.S. GAAP at December 31, Year 2:

a. Assuming the Polish zloty is the functional currency. (The December 31, Year 1, retained earnings that appeared in Swoboda’s translated financial statements was $56,250. The December 31, Year 1, cumulative translation adjustment that appeared in Swoboda’s translated balance sheet was negative $506,250.) b. Assuming the U.S. dollar is the functional currency. (The December 31, Year 1, retained earnings that appeared in Swoboda’s remeasured financial statements was $882,500.) c. The same as (b) except Swoboda has no long-term debt. Instead, Swoboda has common stock of PLN 10,000,000 and additional paid-in capital of PLN 25,000,000. The December 31, Year 1, retained earnings that appeared in Swoboda’s remeasured financial statements was negative $367,500.

Sample Solution

 Step 1 of 15  Step 2 of 15  Step 3 of 15  Step 4 of 15  Step 5 of 15

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The translation of S financial statements into US dollars in accordance US GAAP at 31st December, Year 2 assuming PZ is the functional currency is as under: a.

The S’s retained earnings that appeared in S’s translated financial statements as on 31st December, year 1 was $56,250. The cumulative translation adjustment that appeared in S’s translated balance sheet was negative $506,250. The translation of financial statements assuming that the PZ is the functional currency- current rate method is as under:

The average exchange rate for the year is $0.175 and the exchange rate at the time of dividends have been declared and paid was $0.155. Therefore all the income and expenditures of the financial statements will be converted with the average exchange rate and dividend paid will be converted at the rate of given rate of $0.155.

The retained earnings that appeared in S’s translated financial statements was $56,250 which is stated as it is in the translated financial statement.

 Step 7 of 15

The all the items of balance sheet will be translated at the exchange rate at the end of the year 2 which is $0.150 except for the common stock and additional paid in capital because it will be converted at the exchange rate of $0.250 which is the exchange rate at the January 1st, Year1.

The amount of translation adjustment is calculated by the difference between the amount of net assets in US dollar calculated by applicable exchange rates and the net assets calculated at the current exchange rate of $0.150.

The net assets as on 31st December, year 2 is calculated by adding net assets as on 1st January year 2 and net income for the year 2 and reducing the sum by dividends paid as on 15th December, year 2. The difference between the net assets as on 31st December, year 2 calculated by the translated exchange rates.

 Step 8 of 15

b. The currency translation of the items of financial statement when the U.S dollars assumed to be the functional currency. The translation of currency at temporal method is as under:

Under Temporal method the cost of goods sold is calculated by adding opening inventory and purchases and reducing ending inventory to the calculated sum. The opening inventory is translated at the exchange rate of $0.215 because the inventory available as on 1st Jan. Year 2 have been purchased on 15th December year 1 when the prevailing exchange rate was $0.215. Therefore, the beginning inventory has been translated at the rate of $0.215. Purchases are translated at the exchange rate of $0.175 which is the average exchange rate because the purchases are made throughout the year evenly. The ending inventory will be translated at $0.160 because the inventory at the end of the year remained have been purchased in fourth quarter when the exchange rate was $0.160. The schedule of calculation of cost of goods sold with above mentioned exchange rates is as under:

Schedule “A”

Calculation of cost of goods sold

The equipment and building opening balance will be translated at the exchange rate as on 1st January, year 1 of $0.250 and the purchase of new equipment will be translated at the exchange rate at the time of purchase of new equipment which is $0.18. Schedule “B”

Calculation of cost of equipment and depreciation

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Schedule “C”

Calculation of cost of Building

The translation of financial statement is as under:

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The re measurement gain can be calculated by considering the impact of changes in exchange rates on the subsidiary balance sheet exposure. The remeasurement is the difference between net monetary liabilities as on 31stDecember year 2 calculated by the sum of net monetary liabilities and increase in monetary assets reduced by decrease in monetary assets translated at the different exchange rates and the net monetary liabilities as on 31stDecember year 2 at net current exchange rate. The re measurement gain is added to the net income for the year.

 Step 11 of 15

The calculation of re measurement gain, year 2 is as under:

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c.

The translated financial statement on basis of temporal method where U.S. dollar is the functional currency and with no long term debt is as under:

Under temporal method the income and expenses are translated at the average exchange rate for the year $0.175 except for cost of goods sold, depreciation expenses and retained earnings.

The cost of goods sold is calculated by the sum of beginning inventory and purchases made reduced by ending inventory all the items used for calculation are translated with the exchange rates prevailing on the date of transaction taken place.

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The re measurement gain can be calculated by considering the impact of changes in exchange rates on the subsidiary balance sheet exposure. The remeasurement is the difference between net monetary liabilities as on 31st December year 2 calculated by the sum of net monetary liabilities and increase in monetary assets reduced by decrease in monetary assets translated at the different exchange rates and the net monetary liabilities as on 31st December year 2 at net current exchange rate.

The re measurement gain is added to the net income for the year: