Foreign subsidiaries may maintain their accoaunting records in currencies other than the $US. Each must define their functional currency, the currency of the primary economic environment in which the subsidiary operates. Normally, that is the currency of the environment in which a subsidiary primarily generates and expends cash. If the the foreign-currency-denomiinated subdidiary financial statements are already in the dufunctional currency, but not in the parent’s currency, then the financial information must be “translated” into the parent’s currncy. If, however, the foreign-currency-denomiated subsidiary’s financial statements are not already in the functional currency, then the finanacial information must first be “remeasured” into the functional currency. Refer to Exhibit 14-1 Summary of Exhange Rates Used fore Remeasurement and Tranlation.
Following is a comphresinve exercise to illustrate these two approaches using the same fact set.
Background: Parent Company formed a subsidiary company operating in Germany and capitalized it with 900,000 Euros (€) when the exchange rate to the $US was €1:$0.75. Since its inception, the foreign subsidiary company has performed well, recording net income of €840,000 on sales of €6,000,000 in the most recent year. cumulative retained earnings now stand at €3,906,000. Please find on the “Table” tab the most recent financial information on the foreign subisidiary.
Required: Complete the “Table” tab to translate and remeasure the subsidiary’s financial statements. Assume a BOY Retained Earnings balance of $2,625,000 for the current rate method and $2,866,992 for the remeasurement