Reference no: EM132465919
Biscayne International Inc.
(A Wholly-Owned Subsidiary of Motorworks, Inc.)
Statement of Income
For the Year Ended December 31, 2019
Sales CHF 30,000,000
Cost of goods sold (18,000,000)
Selling and administrative expense (6,000,000)
Depreciation expense (2,000,000)
Income taxes (1,200,000)
Net income CHF 2,800,000
Statement of Retained Earnings
For the Year Ending December 31, 2019
Retained earnings, 1/1/2019 CHF 500,000
Add: Net Income 2,800,000
Less: Dividends (500,000)
Retained earnings, 12/31/2019 CHF 2,800,000
Balance Sheet
December 31, 2019
Cash CHF 4,800,000
Accounts Receivable 2,000,000
Inventory 8,000,000
Machinery and Equipment 20,000,000
Less: accumulated depreciation (4,000,000)
Total Assets CHF 30,800,000
Current liabilities CHF 4,000,000
Long-term debt 8,000,000
Contributed capital 16,000,000
Retained earnings 2,800,000
Total Liabilities and Stockholders' Equity CHF 30,800,000
Background
- As the Controller for Motorworks, Inc., your team is preparing the Company's consolidation of financial statements as of December 31, 2019. You just received the 22019 financial statements for Biscayne International Inc., a wholly-owned subsidiary based in Zurich, Switzerland. Biscayne's financial statements for 2019 are denominated in Swiss Francs (CHF) and are presented above.
- Motorworks, Inc. acquired Biscayne for CHF 16,000,000 on January 1, 2018 (two years ago) when the exchange rate was $0.98. Biscayne borrowed CHF 8,000,000 on January 5, 2018 when the exchange rate was $0.95 and immediately purchased Machinery and Equipment for CHF 20,000,000. Machinery and Equipment is depreciated on a straight-line basis using a ten-year life.
- On January 1 2019, the inventory balance was CHF 6,000,000 and was acquired on December 15, 2018 when the exchange rate was $1.02. Purchases of inventory during 2019 were made uniformly throughout the year. The December 31, 2019 ending inventory of CHF 8,000,000 was acquired evenly throughout the fourth quarter of 2019 when the average exchange rate was $0.83.
- Dividends of CHF 500,000 were declared and paid on December 15, 2019 when the exchange rate was $0.85.
Additional exchange rates during 2019 are as follows:
January 1 $1.00
Average 0.90
December 31 0.80
Required:
Question 1: Using Excel, complete the questions below following the format in the text. Where appropriate, show your calculations to ensure partial credit.
Problem 1. Assume that CHF is the functional currency. Translate (remeasure) Biscayne's financial statements into U.S. dollars at December 31, 2019. (Also, assume that the December 31, 2018 retained earnings that appeared in Biscayne's translated (remeasured) financial statements was $550,000).
Problem 2. Assume that the U.S. Dollar is the functional currency. Translate (remeasure) Biscayne's financial statements into U.S. dollars at December 31, 2019. (Also, assume that the December 31, 2018 retained earnings that appeared in Biscayne's translated (remeasured) financial statements was $950,000).
Problem 3. Explain why the translation adjustments in No.1 and No.2 above are positive or negative. Your response should include the relationship between net asset/liability exposures and movements in FX rates as we illustrated in class.
Problem 4. Calculate and present the following ratios for Biscayne at December 31, 2019 using (a) the original CHF-denominated financial statements, (b) the U.S.-dollar financial statements in No. 1 above, and (c) the U.S.-dollar financial statements in No. 2 above:
- Current Ratio
- Total Liabilities to Total Equity
- Profit Margin (Net Income/Sales)
Question 2: What relationships are apparent in these calculations? In other words, which method (Current or Temporal) provides results that are more consistent with ratios calculated using the foreign currency? (Briefly explain).