Diekmann Company, a U.S.-based company, acquired a 100 percent interest in Rakona A.S. in the Czech Republic on January 1, 2012, when the exchange rate for the Czech koruna (Kc s) was $0.05. Rakona's financial statements as of December 31, 2013, two years later, follow:

Balance Sheet

41639

Assets

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. Kc s 2,000,000

Accounts receivable (net) . . . . . . . . . . . . . . .. . . . . 3,300,000

Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,500,000

Assets

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, 2013

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, 1/1/13 . . . . . . . . . . . . . . . . 500,000

Less: Dividends, 2013 . . . . . . . . . . . . . . . . . . . . (1,500,000)

Retained earnings, 12/31/13 . . . . . . . . . . . . .Kc s 5,500,000

• The January 1, 2013, beginning inventory of Kc s 6,000,000 was acquired on December 18, 2012, when the exchange rate was $0.043. Purchases of inventory were acquired uniformly during 2013. The December 31, 2013, ending inventory of Kc s 8,500,000 was acquired in the latter part of 2013 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, 2013, when the exchange rate was $0.036, and Kc s 12,000,000 in buildings acquired on March 5, 2013, 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, 2013, when the exchange rate was $0.031.

• Other exchange rates for 1 Kc s follow:

January 1, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.040

Average 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.035

December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . 0.030

Part I. Translate the Czech koruna financial statements at December 31, 2013, in the following three situations:

a. The Czech koruna is the functional currency. The December 31, 2012, U.S. dollar- translated balance sheet reported retained earnings of $22,500. The December 31, 2012, cumulative translation adjustment was negative $202,500 (debit balance).

b. The U.S. dollar is the functional currency. The December 31, 2012, Retained Earnings account in U.S. dollars (including a 2012 re-measurement gain) that appeared in Rakona's re-measured 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, 2012, U.S. dollar-translated balance sheet reported a negative balance in retained earnings of $147,000 (including a 2012 re-measurement loss).

Part II. Explain the positive or negative sign of the translation adjustment in Part I(a) and explain why a re-measurement gain or loss exists in Parts I(b) and I(c).