Question

Diekmann Company, a U.S.-based company, acquired a 100 percent interest in Rakona A.S. in the Czech Republic on January 1, 2010, when the exchange rate for the Czech koruna (Kc˘ s) was $0.05. Rakona’s financial statements as of December 31, 2011, two years later, follow:
Balance Sheet
December 31, 2011
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kcs 2,000,000
Accounts receivable (net) . . . . . . . . . . . . . . . . . . . . 3,300,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,500,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000,000
Less: Accumulated depreciation . . . . . . . . . . . . . . . (8,500,000)
Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,000,000
Less: Accumulated depreciation . . . . . . . . . . . . . . . (30,300,000)
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000,000
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kc˘ s 78,000,000
Liabilities and Stockholders’ Equity
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . Kc˘ s 2,500,000
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000,000
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000,000
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . 15,000,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . 5,500,000
Total liabilities and stockholders’ equity . . . . . . Kc˘ s 78,000,000
Income Statement
For Year Ending December 31, 2011
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Kc˘ s 25,000,000
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . (12,000,000)
Depreciation expense—equipment . . . . . . . . . . . . . (2,500,000)
Depreciation expense—building . . . . . . . . . . . . . . . (1,800,000)
Research and development expense . . . . . . . . . . . . (1,200,000)
Other expenses (including taxes) . . . . . . . . . . . . . . . (1,000,000)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . Kc˘ s 6,500,000
Plus: Retained earnings, 1/1/11 . . . . . . . . . . . . . . . . 500,000
Less: Dividends, 2011 . . . . . . . . . . . . . . . . . . . . . . . (1,500,000)
Retained earnings, 12/31/11 . . . . . . . . . . . . . . . . Kc˘ s 5,500,000
Additional Information
• The January 1, 2011, beginning inventory of Kc˘s 6,000,000 was acquired on December 18, 2010, when the exchange rate was $0.043. Purchases of inventory were acquired uniformly during 2011. The December 31, 2011, ending inventory of Kc˘s 8,500,000 was acquired in the latter part of 2011 when the exchange rate was $0.032. All fixed assets were on the books when the subsidiary was acquired except for Kc˘s 5,000,000 of equipment acquired on January 3, 2011, when the exchange rate was $0.036, and Kc˘s 12,000,000 in buildings acquired on March 5, 2011, when the exchange rate was $0.034. Straight-line depreciation is 10 years for equipment and 40 years for buildings. A full year’s depreciation is taken in the year of acquisition.
• Dividends were declared and paid on December 15, 2011, when the exchange rate was $0.031.
• Other exchange rates for 1 Kc˘ s follow:
January 1, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.040
Average 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.035
December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . 0.030
Part I. Translate the Czech koruna financial statements at December 31, 2011, in the following three situations:
a. The Czech koruna is the functional currency. The December 31, 2010, U.S. dollar-translated balance sheet reported retained earnings of $22,500. The December 31, 2010, cumulative translation adjustment was negative $202,500 (debit balance).
b. The U.S. dollar is the functional currency. The December 31, 2010, Retained Earnings account in U.S. dollars (including a 2010 remeasurement gain) that appeared in Rakona's remeasured financial statements was $353,000.
c. The U.S. dollar is the functional currency. Rakona has no long-term debt. Instead, it has common stock of Kc˘ s 20,000,000 and additional paid-in capital of Kc˘ s 50,000,000. The December 31, 2010, U.S. dollar-translated balance sheet reported a negative balance in retained earnings of $147,000 (including a 2010 remeasurement loss).
Part II. Explain the positive or negative sign of the translation adjustment in Part I(a) and explain why a remeasurement gain or loss exists in Parts I(b) and I(c).



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