P Company

On January 2, 2008, 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, 2008, 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, 2009, are presented here: P Company SFr Company Debits (Dollars) (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 P Company SFr Company Credits (Dollars) (Francs) Accounts Payable 540,000 880,000 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 Dividends Income 54,000 —- Totals 7,438,400 7,848,750 Other information related to the subsidiary follows: 1. Beginning inventory of 830,000 francs were acquired when the exchange rate was $.165 2. Purchases made uniformly throughout 2009 were 2,520,000 francs. 3. The francs is identified as the subsidiary’s functional currency 4. The subsidiary’s beginning (1/1/09) 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 $.15 Average for 2008 .156 January 1, 2009 .17 September 2, 2009 .18 December 31, 2009 .19 Average for the 4th quarter, 2009 .185 Average for 2009 .176 a. Prepare a translated balance sheet and combined statement of income and retained earnings for the subsidiary. b. Prepare a schedule to verify the translation adjustment. c. Compute the following ratios based on the franc and the U. S dollar financial statements. 1. Current ratio 2. Debit to equity 3. Gross profit percentage 4. Net income to sales