Blue Sky Corporation, a U.S.-based company, invested 11 million Polish zloty in Green Mountain Company in Lodz, Poland, on January 1, Year 2, when the exchange rate for the Polish zloty (PLN) was $0.255. $2.5 million of the $11M zloty was recorded in Common Stock and $8.5 million was recorded in Additional Paid in Capital. The financial statements of Green Mountain as of December 31, Year 2, one year later, are presented on the following page:
Additional information:
· The December 31, Year 2, ending inventory of PLN 5,150,000 was acquired evenly throughout the fourth quarter of Year. The January 1, Year 2 beginning inventory was zero.
· All fixed assets were on the books when the subsidiary was acquired as follows:
· PLN 12,500,000 of equipment which was acquired on January 3, Year 2
· PLN 17,000,000 in buildings and PLN 2,000,000 in land was acquired on August 5, Year
· An Additional PLN 500,000 of land was acquired on December 15.
· An Additional PLN 1,500,000 of land was acquired on December 20.
· Dividends were declared and paid on December 15, Year 2
· Exchange rates for Year 2 are:
January 1, Year 2
0.255
January 3, Year 2
0.22
Average Year 2
0.235
August 5, Year 2
0.19
Fourth quarter, Year 2
0.215
December 15, Year 2
December 20, Year 2
0.18
0.175
December 31, Year 2
0.20
·
The Year 2 financial statements for Green Mountain Company are on the next page.
Income Statement and Statement of Retained Earnings
PLN
Sales
19,000,000
Cost of goods sold
-8,000,000
Depreciation expense-equipment
-1,250,000
Depreciation expense-building
-900,000
Research and development expense
-700,000
Other expenses (including taxes)
-400,000
Income before remeasurement gain
7,750,000
Remeasurement gain/loss, Year 2
–
Net income
7,750,000
Plus: Retained earnings, 1/1/Y2
0
Less: Dividends paid
– 850,000
Retained earnings, 12/31/Y2
6,900,000
Balance Sheet
Cash
6,000,000
Accounts receivable (net)
1,650,000
Inventory
5,150,000
Equipment
12,500,000
Less: accumulated depreciation
-1,250,000
Building
17,000,000
Less: accumulated depreciation
-900,000
Land
4,000,000
Total assets
44,150,000
Accounts payable
1,250,000
Long-term debt
25,000,000
Common stock
2,500,000
Additional paid-in capital
8,500,000
Retained earning
AOCI Translation Gain Adjustment
6,900,000
Total
44,150,000
Required
1. Translate Green Mountain’s financial statements into U.S. dollars in accordance with U.S. GAAP at December 31, Year 2 and prove out the Foreign Exchange gain or loss through a reconciliation schedule:
a. Assuming the Polish zloty is the functional currency.
b. Assuming the U.S. dollar is the functional currency.
Please provide schedules for any calculations for any account that is a mix rate (i.e., cost of goods sold).
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