Sean Regan Company formed a subsidiary in a foreign country on January 1, Year 1, through a combination of debt and equity financing. The foreign subsidiary acquired land on January 1, Year 1, which it rents to a local farmer. The foreign subsidiary’s financial statements for its first year of operations, in foreign currency units (FC), are presented in Exhibit 9.3 . All revenues and expenses were realized in cash during the year. Thus, the balance in the Cash account at December 31 (FC 1,750) is equal to the beginning balance in cash (FC 1,000) plus net income for the year (FC 750). The foreign country experienced significant inflation in Year 1, especially in the second half of the year. The general price index (GPI) during Year 1 was :January 1, Year 1 100 Average, Year 1 125 December 31, Year 1 200 The rate of inflation in Year 1 is 100 percent [(200 − 100)/100], and the foreign country clearly meets the definition of a hyperinflationary economy. (in FC) January 1 December 31 Cash 1,000 1,750 Land 9,000 9,000 Total 10,000 10,750 Note payable (5%) 5,000 5,000 Capital stock 5,000 5,000 Retained earnings 0 750 Total 10,000 10,750 SEAN REGAN COMPANY YEAR 1 FINANCIAL STATEMENTS Foreign Subsidiary(in FC) Income Statement Year 1 Rent revenue 1,000 Interest expense (250) Net income 750 As a result of the high rate of inflation in the foreign country, the FC weakened substantially during the year relative to other currencies. Relevant exchange rates between Sean Regan’s parent company currency (PC) and the FC during Year 1 were PC per FC January 1, Year 1 1.00 Average, Year 1 0.80 December 31, Year 1 0.50 Assuming that Sean Regan Company prepares its consolidated financial statements in accordance with IFRS, the foreign subsidiary’s FC financial statements would be (1) restated for local inflation and then (2) translated into PC ?
Sean Regan Company formed a subsidiary in a foreign country on January 1, Year 1, through a combination of debt and equity financing. The foreign subsidiary acquired land on January 1, Year 1, which it rents to a local farmer. The foreign subsidiary’s financial statements for its first year of operations, in foreign currency units (FC), are presented in Exhibit 9.3 . All revenues and expenses were realized in cash during the year. Thus, the balance in the Cash account at December 31 (FC 1,750) is equal to the beginning balance in cash (FC 1,000) plus net income for the year (FC 750). The foreign country experienced significant inflation in Year 1, especially in the second half of the year. The general price index (GPI) during Year 1 was
:January 1, Year 1 100
Average, Year 1 125
December 31, Year 1 200
The rate of inflation in Year 1 is 100 percent [(200 − 100)/100], and the foreign country clearly meets the definition of a hyperinflationary economy.
(in FC) January 1 December 31
Cash 1,000 1,750
Land 9,000 9,000
Total 10,000 10,750
Note payable (5%) 5,000 5,000
Capital stock 5,000 5,000
Retained earnings 0 750
Total 10,000 10,750
SEAN REGAN COMPANY
YEAR 1 FINANCIAL STATEMENTS
Foreign Subsidiary(in FC)
Income Statement
Year 1
Rent revenue 1,000
Interest expense (250)
Net income 750
As a result of the high rate of inflation in the foreign country, the FC weakened substantially during the year relative to other currencies. Relevant exchange rates between Sean Regan’s parent company currency (PC) and the FC during Year 1 were
PC per FC
January 1, Year 1 1.00
Average, Year 1 0.80
December 31, Year 1 0.50
Assuming that Sean Regan Company prepares its consolidated financial statements in accordance with IFRS, the foreign subsidiary’s FC financial statements would be (1) restated for local inflation and then (2) translated into PC ?
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