Papa International is a U.S. company with a subsidiary, Kid, Inc., located in th
ID: 2555203 • Letter: P
Question
Papa International is a U.S. company with a subsidiary, Kid, Inc., located in the country of Sartonia. Kid was acquired by Papa on 12/3 1/2015. Papa reports its financial results in U.S. dollars (USD). The currency of Sartonia is the loca (LC). Suppose it is now the end of 2017 and Kid reports the operating results for FY 2016 and 2017 shown in the following table.
The Following exchange rates between the U.S. dollar and the local currency were observed:
*December 31, 2016--> USD/LC= 0.4545
*December 31, 2017--> USD/LC= 0.4000
*Average for FY2017 --> USD/LC= 0.4292
*Historical rate for fixed assets, inventory, and equity--> LC:USD 0.5000
Notes:
*At the beginning of FY 2017, retained earnings were LC800 which were translated into USD 383.3
* Kid did not pay any dividends.
* The Cumulative Translation Ajdustment (CTA) at the end of FY2016 was equal to -$37.9 under the current rate method.
1) Kid, Inc. operates relatively independently from Papa Internationa. For 2017, how much cumulative translation adjustment (CTA) will appear Papa's consolidated balance sheet for FY2017? You have to show all of your calculation work to get credit points. (Hint: You have to translate all financial data or relevant accounts for FY2017 into USD).
2) Calculate the gross profit margin ratio (gross margin/revenue) and the return on assets (net incone/total assets) ratio from Kid's 2017 U.S. dollar financial statements translated using the current rate method. (Hint: you have to translate all component accounts (for FY2017) of the ratios into USD).
3) As compared to the current rate method, determine the impact of the temporal method on accounts receivable turnover ratio and gross profit margin ratio from Kid, Inc.'s 2017 U.S. dollar financial statements (circle an appropriate choice in the parentheses below). Make sure to justify your answers.
Account receivable turnover ratio under the temporal method will be (greater than, the same as, lower than) that under the current rate method.
Justify why:
Gross profit margin ratio under the temporal method will be (greater than, the same as, lower than) that under the current rate method.
Justify why:
Currency Unit: LC FY2017 FY2016 Cash 150 100 Accounts recievanble 800 650 Inventory 1,400 1,200 Current assets 2,350 1,950 Net fixed assets 1,000 900 Total assets 3,350 2,850 Accounts payable 500 500 Current debt 100 200 Long-term debt 1,150 950 Total liabilities 1,750 1,650 Common stock 400 400 Retained earnings 1,200 800 Total equity 1,600 1,200 Total Lliabilities and equity 3,350 2,850 Currency Unit: LC FY2017 Revenue 5,500 Cost of goods sold (3,800) Gross margin 1,700 Other expenses (500) Depreciation expense (800) Net income 400Explanation / Answer
a)Translation of balance sheet into USD
Cash -150*0.4=60
Accounts Receivable-800*0.4=320
Inventory-1400*0.5=700
Current Assets-2350*0.4292=1,009
Net Fixed Assets-1000*0.5=500
Total Assets= 2,589
Accounts Payable-500*0.4=200
Current Debt-100*0.4292=43
Long Term Debt-1150*0.4292=494
Common Stock-400*0.5=200
Retained Earning-1200*0.5=600
Total Libalities and Equity=1537
Difference between Assets and Equities and Liablilites=2589-1537=$1052 to be transferred to cumulative translation adjustment account.
b)Gross Profit Margin Ratio=Gross Profit/Revenue
=1700*0.4292/5500*0.4292
=0.31
Return on Assets=Net income/Total Assets
=(400*0.4292/3350*0.4292)*100
=11.9%
c)There will be no change in ratios and the ratios will remain same.
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