Reference no: EM13589004

On 1/1/1990 the Auf Wiederschen Company was founded in Munich, Germany. This company makes those "We're #1" sponge hands that fans bring to football games. On 1/1/2005 Harry Potter was hired as the CEO of the company at the same time that it adopted IFRS. On 1/1/2010 The American Company Hogswart purchased all of the shares of Auf Weiderschen. On 1/1/2009, 1 Euro = $1.55. On 7/1/2010, when Auf Wiederschen purchased land, 1 Euro = $1.65. On 1/1/2010, when Auf Wiederschen purchased equipment with a 10 year life and no salvage; 1 Euro = $1.35. On 12/31/10, Auf Wiederschen's retained earnings was $55,000. The average exchange rate for 2011 was 1 Euro = $1.40. The exchange rate on 12/31/2011 was 1 Euro = $1.30. On 10/1/2011, when Auf Wiederschen paid a dividend; 1 Euro = $1.42.

The 2011 financial statements for Auf Wiederschen are given below (in Euros but under GAAP)

2011 income statement

		Dollar	Euro
Sales		420000	420000
Cost of Goods Sold	180000	252000	252000
Gross Profit	120000	168000	168000
Operating Expenses	70000	98000	98000
Depreciation Expense	10000	13500	14000
Income Before Currency Adjustment	56500
Currency Adjustment	93460
Income	40000	149960	56000

2011 Statement of Retained Earnings

		Dollar	Euro
Beginning Retained Earnings	100000	55000	55000
Plus 2011 Net Income	40000	149960	56000
Less Dividends	8000	11360	(11360)
Ending Retained Earnings	132000	193600	99640

Balance Sheet 12/31/2011

		Dollar	Euro
Assets
Cash	50000	65000	65000
Accounts Receivable	80000	104000	104000
Inventory	100000	140000	140000
Land	200000	330000	260000
Equipment	100000	108000	104000
Less Accumulated Depreciation	20000
Net Equipment	80000
Total Assets	510000	747000	673000
Liabilities
Accounts Payable	40000	52000	52000
Note Payable	90000	117000	117000
Common Stock	248000	384400	384400
Retained Earnings	132000	193600	99640
Functional Currency Adjustment			19960

REQUIRED

A.) IF THE DOLLAR IS FUNCTIONAL, PREPARE THE STATEMENTS IN DOLLARS.

B.) IF THE EURO IF FUNCTIONAL, PREPARE THE STATEMENTS IN DOLLARS.

Hogswart has decided in 2011 to begin rewarding executives with bonuses.

Below are the incomes of Auf Weiderschen for the past 3 years using different accounting methods.

	GAAP Dollars	GAAP Euros	IFRS Dollars	IFRS Euros
2009	$28000	$22000	$37000	$35000
2010	$33000	$16000	$41000	$32000
2011	?	?	$44000	$25000

C.) If you are Harry Potter, what method of accounting do you believe should be used in determining your bonus? DEFEND YOUR ANSWER

D.) If you are Dumbledoor, head of Hogswart, what accounting method do you think should be used to evaluate Potter? DEFEND YOUR ANSWER