Sullivan\'s Island Company began operating a subsidiary in a foreign country on

Question

Sullivan's Island Company began operating a subsidiary in a foreign country on January 1, 2017, by investing capital in the amount of 64,000 pounds. The subsidiary immediately borrowed 150,000 pounds on a five-year note with 6 percent interest payable annually beginning on January 1, 2018. The subsidiary then purchased for 214,000 pounds a building that had a 10-year expected life and no salvage value and is to be depreciated using the straight-line method. Also on January 1, 2017, the subsidiary rented the building for three years to a group of local attorneys for 8,100 pounds per month. By year-end, rent payments totaling 81,000 pounds had been received, and 16,200 pounds was in accounts receivable. On October 1, 2,600 pounds was paid for a repair made to the building. The subsidiary transferred a cash dividend of 11,950 pounds back to Sullivan's Island Company on December 31, 2017. The functional currency for the subsidiary is the pound. Currency exchange rates for 1 pound follow:

January 1, 2017 $ 2.20 = 1 Pound
October 1, 2017 2.25 = 1
December 31, 2017 2.28 = 1
Average for 2017 2.24 = 1

Prepare an income statement, statement of retained earnings, and balance sheet for this subsidiary in pounds and then translate these amounts into U.S. dollars.

Explanation / Answer

Income statement LCU Exchange Rate US dollars Rent revenue 97200 2.24 217728 (8100*12) Less: Expenses Interest expenses 9000 2.24 20160 (150000*6%) Repair expenses 2600 2.25 5850 Depreciation expenses 21400 2.24 47936 (214000/10) Total expenses 33000 73946 Net income 64200 143782 Statement of retained earnings LCU Exchange Rate US dollars Balance as on Jan 1. 0 0 0 Add: Net income 64200 143782 64200 143782 Less: Dividend paid 11950 2.28 27246 Balance as on Dec 31. 52250 116536 Balance sheet LCU Exchange Rate US dollars Cash (Note:1) 66450 2.28 151506 Accounts receivable 16200 2.28 36936 Building 214000 2.28 487920 Accumulated depreciation -21400 2.28 -48792 Total assets 275250 627570 Interest payable 9000 2.28 20520 Note payable 150000 2.28 342000 Common stock 64000 2.2 140800 Retained earnings 52250 116536 Translation adjustment (Balancing figure) 7714 Total liabilities 275250 627570

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