On December 18, 2015, Stephanie Corporation acquired 100 percent of a Swiss company for 4.0 million Swiss

Question:

On December 18, 2015, Stephanie Corporation acquired 100 percent of a Swiss company for 4.0 million Swiss francs (CHF), which is indicative of book and fair value. At the acquisition date, the exchange rate was $1.00 = CHF 1. On December 18, 2015, the book and fair values of the subsidiary’s assets and liabilities were:

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . CHF 800,000

Inventory . . . . . . . . . . . . . . . . . . . . . . . . 1,300,000

Fixed assets . . . . . . . . . . . . . . . . . . . . . . 4,000,000

Notes payable . . . . . . . . . . . . . . . . . . . . (2,100,000)

Stephanie prepares consolidated financial statements on December 31, 2015. By that date, the Swiss franc has appreciated to $1.10 = CHF 1. Because of the year-end holidays, no transactions took place prior to consolidation.

a. Determine the translation adjustment to be reported on Stephanie’s December 31, 2015, consolidated balance sheet, assuming that the Swiss franc is the Swiss subsidiary’s functional currency. What is the economic relevance of this translation adjustment?

b. Determine the remeasurement gain or loss to be reported in Stephanie’s 2015 consolidated net income, assuming that the U.S. dollar is the functional currency. What is the economic relevance of this remeasurement gain or loss?

Financial Statements
Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial... Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may... Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...