Question: Stebbins Corporation established a wholly owned
Stebbins Corporation established a wholly owned Canadian subsidiary on January 1, Year 1, by contributing US$500,000 for all of the subsidiary’s common stock. The exchange rate on that date was C$1: US$0.90 (that is, one Canadian dollar equaled 90 U.S. cents). The Canadian subsidiary invested C$500,000 in a building with an expected life of 20 years and rented it to various tenants for the year. The average exchange rate during Year 1 was C$1: US$0.85, and the exchange rate on December 31, Year 1, was C$1: US$0.80. Exhibit 8.33 shows the amounts taken from the books of the Canadian subsidiary at the end of Year 1, measured in Canadian dollars.
REQUIRED
a. Prepare a balance sheet, an income statement, and a retained earnings statement for the Canadian subsidiary for Year 1 in U.S. dollars assuming that the Canadian dollar is the functional currency. Include a separate schedule showing the computation of the translation adjustment account.
b. Repeat Requirement a assuming that the U.S. dollar is the functional currency. Include a separate schedule showing the computation of the translation gain or loss.
c. Why is the sign of the translation adjustment for Year 1 under the all-current translation method and the translation gain or loss for Year 1 under the monetary/nonmonetary translation method the same? Why do their amounts differ?
d. Assuming that the firm could justify either translation method, which method would the management of Stebbins Corporation likely prefer for Year 1? Why?
Transcribed Image Text:
Exhibit 8.33 Canadian Subsidiary Financial Statements Year 1 (Problem 8.25) Balance Sheet as of De cember 31, Year 1 ASSETS Cash C$ 77,555 Rent receivable 25,000 475,000 C$577,555 Building (net) LIABILITIES AND EQUITY Accounts payable Salaries payable C$ 6,000 4,000 Common stock 555,555 Retained earnings 12,000 C$577,555 Income Statement for Year 1 Rent revenue C$125,000 Operating expenses Depreciation expense Translation exchange loss (28,000) (25,000) Net Income C$ 72,000 Retained Eamings Statement for Year 1 Balance, January 1, Year 1 Net income 72,000 (60,000) C$ 12,000 Dividends Balance, December 31, Year 1
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