On December 18 2017 Stephanie Corporation acquired 100 perce

On December 18, 2017, Stephanie Corporation acquired 100 percent of a Swiss company for 4.0 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, 2017, the book and fair values of the subsidiary’s assets and liabilities were:

Stephanie prepares consolidated financial statements on December 31, 2017. 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.

A. Determine the translation adjustment to be reported on Stephanie’s December 31, 2017, consolidated balance sheet, assuming that the Swiss franc is the Swiss subsidiary’s functional currency. What is the economic relevance of this translation adjustment?

B. Determine the remeasurement gain or loss to be reported in Stephanie’s 2017 consolidated net income, assuming that the U.S. dollar is the functional currency. What is the economic relevance of this remeasurement gain or loss?

Solution

Part A

Translation adjustment

4020000

(820000+1320000+4020000-2140000)

The translation adjustment increases stockholders’ equity by $402000. The positive translation adjustment arises because the Swiss subsidiary has a net asset position of CHF 4020,000 and the Swiss franc appreciates by $.10 [CHF 4020,000 × $.10 = $4020,000]. The positive translation adjustment is not realized in terms of dollar cash flow. It would be a realized gain only if Stephanie sold this operation on December 31 for exactly CHF4,020,000 and converted the sales proceeds into dollars at the current exchange rate of $1.10 per Swiss franc.

Part B

Remeasurement loss

(1320000)

(820000-2140000)

The remeasurement loss arises because the Swiss subsidiary has a net monetary liability position of CHF1,320,000 (Cash of CHF820,000 less Notes payable of CHF2,140,000) and the Swiss franc has appreciated by $.10 [CHF1,320,000 × $.10 = $132,000]. The loss is unrealized. It would be realized only if the Swiss subsidiary converted its Swiss franc cash into dollars at December 31, thereby realizing a transaction gain of $82,000 [CHF820,000 × ($1.10 ? $1.00)], and the parent paid off the Swiss franc note payable using U.S. dollars, thereby realizing a transaction loss of $214,200 [CHF2,140,000 × ($1.10 ? $1.00)].

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