Question #79

The functional currency should be the parent's currency. Under IFRS, the firm would restate the financials for inflation, and then translate under the current rate method. (Module 10.7, LOS 10.g) A U.S. company has a subsidiary based in Malaysia, which has the following income statement for 20X6 and balance sheets for 20X5 and 20X6 (in million Ringgit). Sales 1,000 Cost of goods sold 600 Depreciation 80 Operating expenses 120 Earnings before taxes 200 Taxes 60 Net income 140 Dividends 20 20X5 20X6 Cash 50 60 Accounts receivables 100 110 Inventories 100 110 Other current assets 100 110 Gross PP&E 700 800 Less accumulated depreciation 70 150 Net PP&E 630 650 Other fixed assets 20 40 Total assets 1,000 1,080 Account payable 70 80 Current portion of LTD 100 100 Notes payable 100 150 Other current liabilities 30 30 Long-term debt 300 200 Common stock 100 100 Paid in capital 50 50 Retained earnings 250 370 The value of the Ringgit at various times over the past two years is as follows: January 1, 20X5 $0.37 April 1, 20X5 $0.38 December 31, 20X5 $0.40 June 30, 20X6 $0.47 December 31, 20X6 $0.50 Average for 20X5 $0.39 Average for 20X6 $0.45 The common stock and long-term debt were originally issued in January of 20X5. The fixed assets and first inventory purchases were made in April of 20X5. Additional fixed asset purchases were made in June 20X6. Inventory is measured using the FIFO method. It can be assumed that all of the ending inventory was acquired in June when the last major purchase was made. The operations of the subsidiary are independent from the operations of the U.S. parent. Inflation over the past three years has averaged 15% per year.