Brooks Company organized and began operating a subsidiary in a foreign country o

Question

Brooks Company organized and began operating a subsidiary in a foreign country on January 1, 2015, by investing LCU 74,000. This subsidiary immediately borrowed LCU 185,000 on a five-year note with 9 percent interest payable annually beginning on January 1, 2016. The subsidiary then purchased for LCU 259,000 a building that had a 10-year anticipated life and no salvage value and is to be depreciated using the straight-line method. Also on January 1, the subsidiary rents the building for three years to a group of local doctors for LCU 6,000 per month. By year-end, payments totaling LCU 60,000 had been received. On October 1, LCU 4,100 was paid for a repair made on that date. The subsidiary transferred a cash dividend of LCU 5,600 back to Fenwicke on December 31, 2015. The functional currency for the subsidiary is the LCU. Currency exchange rates for 1 LCU follow:

January 1, 2015 $ 2.60 = 1 LCU

October 1, 2015 2.45 = 1

Average for 2015 2.50 = 1

December 31, 2015 2.40 = 1

Prepare a statement of cash flows in LCU for Brook's foreign subsidiary and then translate these amounts into U.S. dollars. (Amounts to be deducted and cash outflows should be indicated with minus sign.)

Explanation / Answer

LCU U.S. Dollars Rent revenue 72,000 2.5 $1,80,000 Interest expense 16650 2.5 $41,625 Depreciation expense 25900 2.5 $64,750 Repair expense 4100 2.45 10045 Net income $63,580 Brook's foreign subsidiary Statement of Cash Flows Net income 63580 plus: depreciation 64750 less: increase in accounts receivable (72000-60000)*2.50 -30000 plus: increase in interest payable 41625 41625 Cash flow from operations 139955 Investing Activities Purchase of building 259000*2.60 -673400 Cash flow from Investing Activities -673400 Financing Activities Sale of common stock 74000*2.60 192400 Borrowing on note 185000*2.60 481000 Dividends paid 5600*2.4 -13440 Cash flow from Financing Activities 659960 Increase in cash 126515 Effect of exchange rate change on cash 5795 Cash In Hand (74000+185000-259000+60000-4100-5600) 50300*2.40 120720

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