Refer to Problem 8.25 for Stebbins Corporation for Year 1, its first year of operations. Exhibit 8.31 shows the amounts for the Canadian subsidiary for Year 2. The average exchange rate during Year 2 was C$1:US$0.82, and the exchange rate on December 31, Year 2, was C$1:US$0.84. The Canadian subsidiary declared and paid dividends on December 31, Year 2.

REQUIRED

a. Prepare a balance sheet, an income statement, and a retained earnings statement for the Canadian subsidiary for Year 2 in U.S. dollars, assuming that the Canadian dollar is the functional currency. Include a separate schedule showing the computation of the translation adjustment for Year 2 and the change in the translation adjustment account.

b. Repeat Requirement a assuming that the U.S. dollar is the functional currency. Include a separate schedule showing the computation of the translation gain or loss.

c. Why is the sign of the translation adjustment for Year 2 under the all-current translation  method and the translation gain or loss under the monetary/nonmonetary translation method the same? Why do their amounts differ?

d. Assuming that the firm could justify either translation method, which method would management of Stebbins Corporation likely prefer for Year 2? Why?

Exhibit 8.31

Canadian Subsidiary Financial Statements Year 2
Balance Sheet
ASSETS
Cash	C$116,555
Rent receivable	30,000
Building (net)	450,000
	C$596,555
LIABILITIES AND EQUITY
Accounts payable	C$ 7,500
Salaries payable	5,500
Common stock	555,555
Retained earnings	28,000
	C$596,555
Income Statement
Rent revenue	C$150,000
Operating expenses	(34,000)
Depreciation expense	(25,000)
Translation exchange gain	—
Net Income	C$ 91,000
Retained Earnings Statement
Balance, January 1, Year 2	C$ 12,000
Net income	91,000
Dividends	(75,000)
Balance, December 31, Year 2	C$ 28,000

Problem 8.25

Stebbins Corporation established a wholly owned Canadian subsidiary on January 1, Year 1, by contributing US$500,000 for all of the subsidiary's common stock. The exchange rate on that date was C$1:US$0.90 (that is, one Canadian dollar equaled 90 U.S. cents). The Canadian subsidiary invested C$500,000 in a building with an expected life of 20 years and rented it to various tenants for the year. The average exchange rate during Year 1 was C$1:US$0.85, and the exchange rate on December 31, Year 1, was C$1:US$0.80. Exhibit 8.30 shows the amounts taken from the books of the Canadian subsidiary at the end of Year 1, measured in Canadian dollars.

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Exhibit 8.30 Canadian Subsidiary Financial Statements Year 1 (Problem 8.25) Balance Sheet as of December 31, Year 1 ASSETS Cash C$ 77,555 Rent receivable 25,000 Building (net) 475,000 C$577,555 LIABILITIES AND EQUITY Accounts payable C$ 6,000 4,000 Salaries payable Common stock 555,555 Retained earnings 12,000 C$577,555 Income Statement for Year 1 Rent revenue C$125,000 Operating expenses Depreciation expense Translation exchange loss (28,000) (25,000) Net Income C$ 72,000 Retained Earnings Statement for Year 1 Balance, January 1, Year 1 - Net income 72,000 (60,000) C$ 12,000 Dividends Balance, December 31, Year 1