Translation of Foreign Currency Financial Statements
The balance sheet and income statement of Buchanen, Inc., a subsidiary of a U.S.company, is shown below.Buchanen,Inc.operates in New Zealand and prepares its financial statements in New Zealand dollars (NZ$).
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Buchanen, Inc. |
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Balance Sheet and Income Statement |
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December 31, 2000 |
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(NZ$ in millions) |
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Revenues |
NZ$ 1,200 |
Assets |
NZ$ 1,500 |
Liabilities |
NZ$ 600 |
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Expenses |
(900) |
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Paid-in capita |
150 |
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Net income |
NZ$300 |
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Retained earnings |
750 |
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NZ$1,500 |
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NZ$ 1,500 |
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Supplementary information: |
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Exchange rates (US$/NZ$): |
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Average during 2000 |
55 |
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Spot rate, December 31, 2000 |
60 |
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Historical rate when capital stock was issued |
75 |
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Beginning balance in retained earnings, in US$ |
$500.00 |
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No dividends to shareholders were declared during 2000.
Required
a. Translate Buchanen’s financial statements into U.S. dollars so that they can be consolidated with those of the U.S. parent firm.
b. Has the U.S. dollar strengthened or weakened relative to the New Zealand dollar during 2000? Explain how this change has affected Buchanen’s translated balance sheet.
c. Explain why a translation adjustment is required in order to bring the translated balance sheet into balance.