Question

On December 18, 2020, Stephanie Corporation acquired 100 percent of a Swiss company for 4.003 million Swiss francs (CHF), which is indicative of book and fair value. At the acquisition date, the exchange rate was $1.00 = CHF 1. On December 18, 2020, the book and fair values of the subsidiary’s assets and liabilities were as follows: Cash CHF 803,000 Inventory 1,303,000 Property, plant, and equipment 4,003,000 Notes payable (2,106,000 ) Stephanie prepares consolidated financial statements on December 31, 2020. By that date, the Swiss franc has appreciated to $1.10 = CHF 1. Because of the year-end holidays, no transactions took place prior to consolidation. Determine the translation adjustment to be reported on Stephanie’s December 31, 2020, consolidated balance sheet, assuming that the Swiss franc is the Swiss subsidiary’s functional currency. What is the economic relevance of this translation adjustment? Determine the remeasurement gain or loss to be reported in Stephanie’s 2020 consolidated net income, assuming that the U.S. dollar is the functional currency. What is the economic relevance of this remeasurement gain or loss?

Answer 1

a): Translation adjustment:

Particulars CHF Exchange Rate US ($)

Beginning net assets 4,000,000 1 4,000,000

Ending net assets 4,000,000 1.10 4,400,000

Translation Adjustment (400,000)

Hence, the translation adjustment is positive. This would increase the shareholder's equity by $400,000. It is not considered a cash flow until Stephanie sells Swiss for CHF 4,000,000, and the sale proceeds are made at the rate of $1.10 per Swiss franc.

(b): Remeasurement gain or loss:

Particulars CHF Exchange Rate US ($)

Beginning net liabilities (1,300,000) 1 (1,300,000)

Ending net liabilities (1,300,000) 1.10 (1,430,000)

Remeasurement Loss (130,000)

Hence, there is an unrealized loss or remeasurement loss of $130,000. This loss will be realized when the Swiss franc is converted into the US dollar. The amount of gain will be $80,000 ($800,000 x ($1.1-$1)). In case the notes payable are settled by using the US dollar, then there will be a transaction loss of $210,000 ($2,100,000 x ($1.1-$1)).

Step-by-step explanation: