International Accounting - Galactic Operations

Translation of Foreign Currency Financial Statements

Galactic Operations

Tatooine (Outer Rim Territory) is a desert world where water is a scarce commodity.

Moisture farming is the primary occupation for most locals and unemployment is high

(it is a desert.) They have determined the answer to all of their problems is to acquire a

100% interest in Kashyyyk (Mid Rim Territory- AKA the Wookie Planet.) Because of the

lush, wroshyr-tree filled land, moisture is plentiful and therefore a good investment for

Tatooine.

Tatooine’s form of currency is the Peggat; Kashyyyk uses the Galactic Credit Standard

(GCS). On January 1, Year 1 Tatooine acquired a 100% interest in Kashyyk. During this

time the exchange rate for the Galactic Credit Standard was f0.68.

Tatooine is enjoying its new investment and it is time, once again, to translate the

financial statements. The financial statements of Kashyyyk as of December 31, Year 2

are as follows:

Balance Sheet

December 31, Year 2

Assets

Cash f $1,000,000

Accounts Receivable $1,650,000

Inventory $4,250,000

Equipment $12,500,000

Less: Accumulated Depreciation $(4,250,000)

Building $36,000,000

Less: Accumulated Depreciation $(15,150,000)

Land $3,000,000

Total Assets f $39,000,000

Liabilities and Stockholders' Equity

Accounts Payable f $1,250,000

Long-term Debt $25,000,000

Common Stock $2,500,000

Additional Paid-In Capital $7,500,000

Retained Earnings $2,750,000

Total Liabilities and Stockholders' Equity f $39,000,000

Statement of Income and Retained Earnings

For the Year Ending December 31, Year 2

GCS

Sales f $12,500,000

Cost of Goods Sold $(6,000,000)

Depreciation Expense- Equipment $(1,250,000)

Depreciation Expense- Building $(900,000)

Research and Development Expense $(600,000)

Other Expenses (including taxes) $(500,000)

Net Income f $3,250,000

Plus: Retained Earnings, 1/1/Y2 $250,000

Less: Dividends, Year 2 $(750,000)

Retained Earnings, 12/31/Y2 f $2,750,000

Exchange Rates

January 1, Year 1 0.68

November 8, Year 1 0.64

January 1, Year 2 0.62

May 2, Year 2 0.61

Average Year 2 0.605

September 8, Year 2 0.585

Fourth quarter, Year 2 0.56

December 20, Year 2 0.555

December 31, Year 2 0.53

• The January 1, Year 2, beginning inventory of 3,000,000 was acquired on

November 8, Year 1. Purchases of inventory during Year 2 were acquired

uniformly throughout the year. The December 31, Year 2, ending inventory of

GCS 4,250,000 was acquired evenly throughout the fourth quarter of Year 2.

• All fixed assets were on the books when the subsidiary was acquired except

for GCS 2,500,000 of equipment, which was acquired on May 2, Year 2 and

GCS 6,000,000 in buildings which was acquired on September 8, Year 2.

• 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 20, Year 2.

Required

1. Translate Kashyyyk’s financial statements into Peggat in accordance with U.S. GAAP at December 31, Year 2. Each Scenario will require it’s own sets of financial statements translated in the Peggat. Include all

financial statements as well as all supporting documentation required to complete the financial statements.

1st Scenario:

a. Assume the Galactic Credit Standard (GCS) is the functional currency. The December 31, Year 1, retained earnings that appeared in Kashyyyk’s translated financial statements were 167,500. The December 31, Year 1, cumulative translation adjustment that appeared in Kashyyyk’s translated balance sheet was negative 612,500

2nd Scenario:

b. Assume the Peggat is the functional currency. The December 31, Year 1, retained earnings that appeared in Kashyyyk’s re-measured financial statements were 1,160,000.

3rd Scenario:

c. The same as (b) except Kashyyyk has no long-term debt. Instead, Kashyyyk has common stock of GCS 10,000,000 and additional paid-in capital of GCS 25,000,000. The December 31, Year 1, retained earnings

that appeared in Kashyyyk’s re-measured financial statements were negative 340,000.

2. Explain why the sign of the translation adjustments in (1a), (1b), and (1c) is positive or negative.