Question

Sullivan's Island Company began operating a subsidiary in a foreign country on January 1, 2017, by investing capital in the amount of 84,000 pounds. The subsidiary immediately borrowed 200,000 pounds on a five-year note with 10 percent interest payable annually beginning on January 1, 2018. The subsidiary then purchased for 284,000 pounds a building that had a 10-year expected life and no salvage value and is to be depreciated using the straight-line method. Also on January 1, 2017, the subsidiary rented the building for three years to a group of local attorneys for 7,200 pounds per month. By year-end, rent payments totaling 72,000 pounds had been received, and 14,400 pounds was in accounts receivable. On October 1, 3,600 pounds was paid for a repair made to the building. The subsidiary transferred a cash dividend of 5,100 pounds back to Sullivan's Island Company on December 31, 2017. The functional currency for the subsidiary is the pound.
Currency exchange rates for 1 pound follow: January 1, 2017 $ 2.10 = 1 Pound
October 1, 2017 2.15 = 1
December 31, 2017 2.18 = 1
Average for 2017 2.14 = 1
Prepare an income statement, statement of retained earnings, and balance sheet for this subsidiary in pounds and then translate these amounts into U.S. dollars.

Answer 1

Answer:

Sullivan's Island Company

a. Sullivan's Island Company Income Statement for the year ended December 31, 2017:

                                             Pounds            US $

Rent Revenue                      86,400           184,896

Repairs to building                3,600               7,704

Depreciation - Building       28,400             60,776

Interest on Notes                20,000            42,800

Net Income                          34,400              73,616

   

b. Sullivan's Island Company Statement of Retained Earnings for the year ended December 31, 2017:

                                             Pounds            US $

Net Income                          34,400              73,616

Dividends                               5,100               10,914

Retained Earnings             29,300             62,702

c.  Sullivan's Island Company Balance Sheet as of December 31, 2017:

                                             Pounds            US $

Assets:

Cash                                     63,300           138,102

Rent Receivable                   14,400             31,392

Building                             284,000         596,400

Less Depreciation             -28,400           -60,776

Total Assets                     333,300            705,118

Liabilities:

Notes Interest Payable     20,000             42,800

Notes Payable                200,000           420,000

Common Stock                 84,000            176,400

Retained Earnings            29,300             62,702

Foreign Exchange Translation Gain            3,216

Total Liabilities + Equity 333,300             705,118

Explanation:

a) Data and Calculations:

Currency exchange rates for 1 pound follow:

January 1, 2017 $    2.10 = 1 Pound

October 1, 2017       2.15 = 1

December 31, 2017 2.18 = 1

Average for 2017    2.14 = 1

Cash Account:

                                             Pounds            US $

Jan. 1 Common Stock          84,000           176,400

Jan. 1 Notes Payable         200,000         420,000

Jan. 1 Building                   -284,000       -596,400

Oct. 1 Building Repairs          -3600             -7,740

Dec. 31 Rent received         72,000          156,960

Dec. 31 Dividends                 -5,100              -11,118

Dec. 31 Balance                 63,300           138,102

b) Sullivan recorded some unrealized foreign exchange translation gain of $3,216.  This is due to translation differences.