3.

Multico, a US company forms a wholly owned subsidiary in Italy (Italco) on

31/12/20X0. On that date, Multico invests $1,350,000 in exchange for all of the
subsidiary’s capital stock. Italco purchased its inventory on 31/12/20X0 and its
beginning balance sheet on 1 Jan 20X1 is as follows:

Assets € Liabilities and Equity €

Cash 400,000 Capital stock 1,000,000
Inventory 600,000
Relevant exchange rates for 20X1 are as follows:
January 1, 20X1 1.35
Rate when PPE are acquired and long-term debt was incurred, Jan 15, X1 1.33
Rate when patent was acquired and capital was increased Feb 1, X1 1.32
Average for 20X1 1.3
Rate when dividends was declared, Dec 1, X1 1.27
Average for the month of Dec 1.26
Dec 31, 20X1 1.25
Required: Translate the Italy subsidiary’s Financial statements into USD using
temporal method.
Answer:
Balance sheet Dec 31, 20X1

Euro translation rate USD

Cash 750.000 1,25 937.500
A/R 600.000 1,25 750.000
Inventory 800.000 1,26 1.008.000
PPE 2.000.000 1,33 2.660.000
Acc. Depn - 200.000 1,33 -266.000
Patent, net 80.000 1,32 105.600
Total asset 4.030.000 5.195.100
AP 330.000 1,25 412.500
Long-term
liability 2.000.000 1,25 2.500.000
   
Capital stock 1.200.000 1,35 1.620.000
RE 500.000 662.600
Total liability +
equity 4.030.000 5.195.100
 Income Statement, 20X1
Euro translation rate USD
Sales 8.000.000 1,3 10.400.000
COGS 6.000.000 7.862.000
S.A expenses 500.000 1,3 650.000
Depn expense 200.000 1.33 266.000
Amortization expense 20.000 1.32 26.4000
Interest exp 180.000 1.3 234.000
Income tax exp 275.000 1,3 357.500
Remeasurement
gain/loss - 91.250
Net income 825.000 1.095.000

Statement of Retained earnings, 20X1

Step 2 Euro Translation rate USD
RE, 1/1/X1 - -
Net income 825.000 1.095.350
Dividend, 1/12/X1 325.000 1,27 412.750
RE, 31/12/X1 500.000 682.600

Calculation for
COGS Euro translation rate USD
opening inventory 600.000 1,35 810.000
Purchase 6.200.000 1,3 8.060.000
COGS 6.000.000 7.862.000
Closing inventory 800.000 1,26 1.008.000

Calculation for
Capital stock Euro translation rate USD
Beginning 1.000.000 1,35 1.350.000
Added 200.000 1.3 260.000
Ending 1.200.000 1,25 1.500.000