Brookhurst Company a U S based company established a

subsidiary in South #3440

Brookhurst Company (a U.S.-based company) established a subsidiary in South Africa on
January 1, Year 1, by investing 300,000 South African rand (ZAR) when the exchange rate was
US$0.09/ZAR 1. On that date, the foreign subsidiary borrowed ZAR 500,000 from local banks
on a 10-year note to finance the acquisition of plant and equipment. The subsidiary's opening
balance sheet (in ZAR) was as follows:During Year 1, the foreign subsidiary generated sales of
ZAR 1,000,000 and net income of ZAR 110,000. Dividends in the amount of ZAR 20,000 were
paid to the parent on June 1 and December 1. Inventory was acquired evenly throughout the
year, with ending inventory acquired on November 15, Year 1. The subsidiary's ZAR financial
statements for the year ended December 31, Year 1, are as follows:Income Statement Year 1
ZARSales 1,000,000Cost of goods sold (600,000)Gross profit 400,000Depreciation expense
(50,000)Other operating expenses (150,000)Income before tax 200,000Income taxes (90,000)
Net income …………………. 110,000Statement of Retained Earnings Year 1 ZARRetained earnings,
1/1/Y1 0Net income 110,000Dividends (40,000)Retained earnings, 12/31/Y1 70,000Balance
Sheet December 31, Year 1 ZARCash 80,000Receivables 150,000Inventory 270,000Plant and
equipment (net) 450,000Total assets 950,000Accounts payable 80,000Long-term debt
500,000Common stock 300,000Retained earnings, 12/31/Y1 70,000 Total liabilities and
stockholders' equity….. 950,000Relevant exchange rates for Year 1 are as follows (US$ per
ZAR):January 1, Year 1 $0,090June 1, Year 1 0.095Average for Year 1 0.096November 15,
Year 1 0.100December 1, Year 1 0.105December 31, Year 1 0.110Required:a. Translate the
South African subsidiary's financial statements into U.S. dollars, assuming that the South
African rand is the functional currency. Compute the translation adjustment by considering the
impact of exchange rate changes on the subsidiary's net assets.b. Translate (remeasure) the
South African subsidiary's financial statements into U.S. dollars, assuming that the U.S. dollar is
the functional currency. Compute the translation adjustment (remeasurement gain or loss) by
considering the impact of exchange rate changes on the subsidiary's net monetary asset or
liability position.View Solution:
Brookhurst Company a U S based company established a subsidiary in South

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