Diekmann Company, a U.S.-based company, acquired a 100 percent interest in Rakona A.S. in the Czech Republic
Question:
Diekmann Company, a U.S.-based company, acquired a 100 percent interest in Rakona A.S. in the Czech Republic on January 1, 2019, when the exchange rate for the Czech koruna (Kčs) was $0.05.
Rakona’s financial statements as of December 31, 2020, two years later, follow:
Additional Information
- The January 1, 2020, beginning inventory of Kčs 6,000,000 was acquired on December 18, 2019, when the exchange rate was $0.043. Purchases of inventory were acquired uniformly during 2020. The December 31, 2020, ending inventory of Kčs 8,500,000 was acquired in the latter part of 2020 when the exchange rate was $0.032. All depreciable assets (equipment and buildings) were on the books when the subsidiary was acquired—except for Kčs 5,000,000 of equipment acquired on January 3, 2020, when the exchange rate was $0.036, and Kčs 12,000,000 in buildings acquired on March 5, 2020, 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, 2020, when the exchange rate was $0.031.
- Other exchange rates for 1 Kčs follow:
January 1, 2020 . . . . . . . . . . . . . . . . . . . . . . . $ 0.040
Average 2020 . . . . . . . . . . . . . . . . . . . . . . . . . 0.035
December 31, 2020 . . . . . . . . . . . . . . . . . . . . 0.030
Part I. Translate the Czech koruna financial statements at December 31, 2020, in the following three situations:
a. The Czech koruna is the functional currency. The December 31, 2019, U.S. dollar–translated balance sheet reported retained earnings of $22,500. The December 31, 2019, cumulative translation adjustment was negative $202,500 (debit balance).
b. The U.S. dollar is the functional currency. The December 31, 2019, U.S. dollar–remeasured balance
sheet reported retained earnings (including a 2019 remeasurement gain) of $353,000.
c. The U.S. dollar is the functional currency. Rakona has no long-term debt. Instead, it has common stock of Kčs 20,000,000 and additional paid-in capital of Kčs 50,000,000. The December 31, 2019, U.S. dollar–remeasured balance sheet reported a negative balance in retained earnings of $147,000 (including a 2019 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).
Step by Step Answer:
Advanced Accounting
ISBN: 9781260247824
14th Edition
Authors: Joe Ben Hoyle, Thomas Schaefer, Timothy Doupnik