Question #42

- Wilkins and Hirauye are working on constructing the consolidated statements for Neslarone. They know that after they convert from Swiss Francs (CHF) to U.S. dollars (USD), they will be left with a foreign currency adjustment that needs to be included on the financial statements. To convert from CHF to USD, the analysts should use the: A) current rate method and they should record the foreign currency adjustment on the balance sheet. B) current rate method and they should record the foreign currency adjustment on the income statement. C) temporal method and they should record the foreign currency adjustment on the income statement. Scud Co. is a Swiss subsidiary of the U.S. firm Patriot, Inc. On December 31, 2012 the $/SF exchange rate was 0.77. (Each Swiss Franc buys 77 cents) and is the historical rate applicable for fixed assets and common stock. One year later the Swiss Franc had appreciated to 0.85 $/SF. Scud Co. pays no dividends. The average exchange rate for the year was 0.80 $/SF. Scud pays no taxes. Assume that inventory is accounted for using the last in, first out (LIFO) inventory assumption and was bought and sold evenly throughout the year. Scud Co. Int'l Balance Sheet (in SF thousands) Dec. 31, 2012 Dec. 31, 2013 Cash & accounts receivables (A/R) 400 600 Inventory 500 500 Net Fixed Assets 700 600 Total Assets 1,600 1,700 Accounts payable (A/P) 100 200 Long-term debt 200 100 Common Stock 1,300 1,300 Retained Earnings 0 100 Total Liabilities 1,600 1,700 Income Statement (in SF thousands) December 31, 2013 In SF Sales 7,000 Cost of Goods Sold (COGS) (6,800) Depreciation (100) Translation Gain/Loss -- Net Income 100 Assume that the functional currency is the U.S. dollar when answering the following questions.