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 84,000 pounds. The subsidiary immediately borrowed 200,000 pounds on a five-year note with 10 percent interest payable annually beginning on January 1, 2018. The subsidiary then purchased for 284,000 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 7,200 pounds per month. By year-end, rent payments totaling 72,000 pounds had been received, and 14,400 pounds was in accounts receivable. On October 1, 3,600 pounds was paid for a repair made to the building. The subsidiary transferred a cash dividend of 5,100 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 $ 2.10 = 1 Pound

October 1, 2017 2.15 = 1

December 31, 2017 2.18 = 1

Average for 2017 2.14 = 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

Sullivan's Island Company Income Statement For the Year Ended December 31, 2017 LCU rate U.S. Dollars Rent revenue 86400 x 2.14 184896 Interest expense -20000 x 2.14 -42800 Depreciation expense -28400 x 2.14 -60776 Repair expense -3600 x 2.15 -7740 Net income 34400 73580 rent revenue = 7200*12 interest expense = 200000*10% depeciation expense = 284000/10 Sullivan's Island Company Statement of Retained Earnings For the Year Ended December 31, 2017 LCU rate U.S. Dollars Retained earnings, 1/1/17 0 0 Net income 34400 73580 Dividends paid -5100 x 2.18 -11118 Retained earnings, 12/31/17 29300 62462 Sullivan's Island Company Balance Sheet December 31, 2017 LCU rate U.S. Dollars cash 63300 2.18 137994 Accounts receivable 14400 2.18 31392 Building 284000 2.18 619120 Accumulated depreciation -28400 2.18 -61912 Total assets 333300 726594 Interest payable 20000 2.18 43600 Note payable 200000 2.18 436000 Common stock 84000 2.10 176400 Retained earnings 29300 62462 Translation adjustment -8132 Total liabilities and equities 333300 710330 cash = 84000+200000-284000+72000-3600-5100 accounts receivable = 7200*2 interest payable = 200000*10% Calculation of Translation Net assets, 1/1/08 0 0 Change in net assets, 2008: Common stock issuance 84000 2.10 176400 Net income 34400 73580 Dividends paid -5100 x 2.18 -11118 Net assets, 12/31/08 113300 238862 Net assets, 12/31/08 at currentexchange rate 113300 2.18 246994 Translation adjustment, 2008 -8132

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