Assume that Scud Co. is a Swiss subsidiary of the U.S. firm Patriot, Inc. On December 31, 2007 the /SF exchange rate was 0.77. (Each Swiss Franc buys 77 cents.) Assume that this is the historical rate, except as noted below. One year later the Swiss Franc had appreciated to 0.85 /SF. Scud Co. pays no dividends. The average exchange rate for the year was 0.80 $/SF. Scud pays no taxes. Assume that inventory is accounted for using the LIFO inventory assumption, was bought and sold evenly throughout the year, and that COGS is translated at the average rate for the year.
Scud Co. Int’l
Balance Sheet (in SF thousands)
Dec. 31, 2007 Dec. 31, 2008
Cash & A/R 400 600
Inventory 500 500
Net Fixed Assets 700 600
Total Assets 1,600 1,700
A/P 100 200
Long-term debt 200 100
Common Stock 1,300 1,300
Retained Earnings 0 100
Total Liabilities 1,600 1,700
Income Statement (in SF thousands)
December 31, 2008
In SF
Sales 7,000
COGS (6,800)
Depreciation (100)
Remeasurement Gain/Loss –
Net Income 100
Assume that the functional currency is the U.S. dollar when answering the following questions.
The translation gain or loss on the income statement would be:
A)
$25.
B)
$0.
C)
$18.
Explanation
We need to complete our remeasurement of the income statement. Since beginning retained earnings for the year were zero, we know that net income on the remeasured income must be equal to ending retained earnings. The remeasurement gain or loss is the plug figure that causes this to be the case.
Income Statement (in SF thousands)
December 31, 2008
Sales 7,000 × 0.80 = $5,600
COGS (6,800) × 0.80 = $5,440 .8 is the average rate above
Depreciation 100 × 0.77 = = $77 .77 is this historical rate above
Income before remeasurement gain/loss = $83
Remeasurement gain = Plug = $18
Net Income $101
In the book I noted that under the current method COGS and Dep/amort are translated using the average rate, however, this problem seems to use the average rate for COGS but the historical for dep/amort. Are my notes wrong or is this problem wrong?