Reference no: EM132430868

Question - Gramado Company was created as a wholly owned subsidiary of Porto Alegre Corporation on January 1, Year 1. On that date, Porto Alegre invested $42,000 in Gramado's capital stock. Given the exchange on that date of $0.84 per cruzeiro, the initial investment of $42,000 was converted into 50,000 cruzeiros (Cz). Other than the capital investment on January 1, there were no transactions involving stockholders' equity in Year 1. Gramado's cruzeiro-denominated financial statements for Year 2 are as follows:

Income Statement

Year 2 Cz

Sales 540,000

Cost of goods sold (310,000)

Gross profit 230,000

Operating expenses (108,000)

Income before tax 122,000

Income taxes (40,000)

Net income 82,000

Statement of Retained Earnings

Year 2 Cz

Retained earnings, 1/1/Y2 154,000

Net income 82,000

Dividends (paid on 12/1/Y2) (20,000)

Balance Sheet December 31, Year 2

Cz

Cash 50,000

Receivables 100,000

Inventory 72,000

Plant and equipment (net) 300,000

Less: accumulated depreciation (70,000)

Total assets 452,000

Liabilities 186,000

Capital stock 50,000

Retained earnings, 12/31/Y2 216,000

Total liabilities and stockholders' equity 452,000

Retained earnings, 12/31/Y2 216,000

The cruzeiro is the primary currency that Gramado uses in its day-to-day operations. The cruzeiro has steadily fallen in value against the dollar since Porto Alegre made the investment in Gramado on January 1, Year 1. Relevant exchange rates for the cruzeiro for Years 1 and 2 are as follows:

January 1, Year 1 $0.84

Average for Year 1 0.80

December 31, Year 1 0.75

Average for Year 2 0.72

December 1, Year 2 0.71

December 31, Year 2 0.70

Required:

a. Translate Gramado Company's Year 2 financial statements into dollars.

b. Compute the translation adjustment for Year 1 and for Year 2 and reconcile these amounts to the cumulative translation adjustment reported on the translated balance sheet at December 31, Year 2.