On January 2, 2008, P Company, aU.S.based company, acquired for$2,000,000 francs an 80% interest in SFr Company, a Swiss company.OnJanuary 2, 2008, SFr Company reported a retained earnings balanceof $480,000 francs. SFr’s books are maintained in francs and are inconformity withU.S.generally accepted accounting principles. Trialbalances of the two companies as of December 31, 2009, arepresented here: P Company SFr Company Debits (Dollars) (Francs)Cash 500,200 962,500 Accounts Receivable 516,400 660,000Inventories (FIFO cost) 627,800 1,037,500 Investment in SFr Company300,000 —- Land 450,000 500,000 Buildings (net) 610,000 550,000Equipment (net) 290,000 405,000 Dividends Declared 200,000 375,000Cost of Goods Sold 2,720,000 2,312,500 Depreciation Expense 210,000125,000 Other Expense 914,000 818,750 Income Tax Expense 100,000102,500 Totals 7,438,400 7,848,750 P Company SFr Company Credits(Dollars) (Francs) Accounts Payable 540,000 880,000 Short-termNotes Payable 300,000 650,750 Bonds Payable 700,000 850,000 CommonStock 800,000 960,000 Additional Paid-in Capital 300,000 300,000Retained Earnings, 1/1 544,400 513,000 Sales 4,200,000 3,775,000Dividends Income 54,000 —- Totals 7,438,400 7,848,750 Otherinformation related to the subsidiary follows: 1. Beginninginventory of 830,000 francs were acquired when the exchange ratewas $.165 2. Purchases made uniformly throughout 2009 were2,520,000 francs. 3. The francs is identified as the subsidiary’sfunctional currency 4. The subsidiary’s beginning (1/1/09) retainedearnings and cumulative translation adjustment (credit) in dollarswere $75,948 and $36,462, respectively 5. All plant assets wereacquired before the parent obtained a controlling interest in thesubsidiary. 6. Sales are made and all expenses are incurreduniformly throughout the year 7. The ending inventory was acquiredduring the last quarter 8. The subsidiary declared and paiddividends of $375,000 francs on September 2,. 9. The followingdirect exchange rate quotations were available: Date of subsidiaryacquisition $.15 Average for 2008 .156January 1, 2009.17September2, 2009.18December 31, 2009.19 Average for the 4th quarter, 2009.185 Average for 2009 .176 a. Prepare a translated balance sheetand combined statement of income and retained earnings for thesubsidiary. b. Prepare a schedule to verify the translationadjustment. c. Compute the following ratios based on the franc andthe U. S dollar financial statements. 1. Current ratio 2. Debit toequity 3. Gross profit percentage 4. Net income to sales
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