A company began operating a subsidiary in a foreign country on January 1, 2017,

Question

A company began operating a subsidiary in a foreign country on January 1, 2017, by investing capital in the amount of 70,000 pounds. The subsidiary immediately borrowed 139,000 pounds on a five-year note with 10 percent interest payable annually beginning on January 1, 2018. The subsidiary then purchased for 209,000 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 8,800 pounds per month. By year-end, rent payments totaling 88,000 pounds had been received, and 17,600 pounds was in accounts receivable. On October 1, 4,900 pounds was paid for a repair made to the building. The subsidiary transferred a cash dividend of 13,700 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 $ 3.00 = 1 Pound October 1, 2017 3.05 = 1 December 31, 2017 3.08 = 1 Average for 2017 3.04 = 1 Prepare a statement of cash flows in pounds for Sullivan's Island Company's foreign subsidiary and then translate these amounts into U.S. dollars. (Round your exchange rate answers to 2 decimal places. Amounts to be deducted and cash outflows should be indicated with minus sign.)

Explanation / Answer

Sullivan's Island Company Subsidiary Statement of Cash Flows     POUNDS U.S. Dollars Operating Activities: Net income 65,900 $200,287 plus: depreciation 20,900 x $3.04 A = 63,536 less: increase in accounts receivable -17,600 x $3.04 A = -53,504 plus: increase in interest payable 13,900 x $3.04 A = 42,256 Cash flow from operations 83,100 252,575 Investing Activities: Purchase of building -209,000 x $3.00 H = -627,000 Financing Activities: Sale of common stock 70,000 x $3.00 H = 210,000 Borrowing on note 139,000 x $3.00 H = 417,000 Dividends paid -13,700 x $3.08 H = -42,196 195,300 584,804 Increase in cash 69,400 210,379 Effect of exchange rate change on cash 3,373 Cash, 1/1      -0-              -0- Cash, 12/31 69,400 x $3.08 C = $213,752 Sullivan's Island Company Subsidiary Income Statement POUNDS U.S. Dollars Rent revenue 105,600 x $3.04 A = $321,024 Interest expense -13,900 x $3.04 A = -42,256 Depreciation expense -20,900 x $3.04 A = -63,536 Repair expense -4,900 x $3.05*H = -14,945 Net income 65,900 $200,287 * Repair expense is the only expense not incurred evenly throughout the year.

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