International accounting case study
International Accounting and Reporting
Case 3 — Spring 2018
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Thunderbird International Inc.
(A Wholly-Owned Subsidiary of Classic Car’s Inc.)
Statement of Income
For the Year Ended December 31, 2017
| Sales | CHF 30,000,000 | ||||||
| Cost of goods sold | (18,000,000) | ||||||
| Selling and administrative expense | (6,000,000) | ||||||
| Depreciation expense | (2,000,000) | ||||||
| Income taxes | (1,200,000) | ||||||
| Net income | CHF 2,800,000 | ||||||
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Statement of Retained Earnings For the Year Ending December 31, 2017
Add: Net Income 2,800,000 Less: Dividends (500,000)
Balance Sheet December 31, 2017
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| Cash | CHF 4,800,000 | ||||||
| Accounts Receivable | 2,000,000 | ||||||
| Inventory | 8,000,000 | ||||||
| Machinery and Equipment | 20,000,000 | ||||||
| Less: accumulated depreciation | (4,000,000) | ||||||
| Total Assets | CHF 30,800,000 | ||||||
| Current liabilities | CHF 4,000,000 | ||||||
| Long-term debt | 8,000,000 | ||||||
| Contributed capital | 16,000,000 | ||||||
| Retained earnings | 2,800,000 | ||||||
| Total Liabilities and Stockholders’ Equity | CHF 30,800,000 | ||||||
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Background
As the Controller for Classic Cars Inc., your team is preparing the Company’s consolidation of financial statements as of December 31, 2017. You just received the 2017 financial statements for Thunderbird International Inc., a wholly-owned subsidiary based in Zurich, Switzerland. Thunderbird’s financial statements for 2017 are denominated in Swiss Francs (CHF) and are presented above.
Classic Cars Inc. acquired Thunderbird for CHF 16,000,000 on January 1, 2016 (two years ago) when the exchange rate was $0.98. Thunderbird borrowed CHF 8,000,000 on January 5, 2016 when the exchange rate was $0.95 and immediately purchased Machinery and Equipment for CHF 20,000,000. Machinery and Equipment is depreciated on a straight-line basis using a ten-year life.
On January 1 2017, the inventory balance was CHF 6,000,000 and was acquired on December 15, 2016 when the exchange rate was $1.02. Purchases of inventory during 2017 were made uniformly throughout the year. The December 31, 2017 ending inventory of CHF 8,000,000 was acquired evenly throughout the fourth quarter of 2017 when the average exchange rate was $0.83.
Dividends of CHF 500,000 were declared and paid on December 15, 2017 when the exchange rate was $0.85.
Additional exchange rates during 2017 are as follows:
January 1 $1.00
Average 0.90
December 31 0.80
Required:
Using Excel, complete the questions below following the format in the text. Where appropriate, show your calculations to ensure partial credit.
Note: This is not a group case. The work submitted must be your own.
What relationships are apparent in these calculations? In other words, which method (Current or Temporal) provides results that are more consistent with ratios calculated using the foreign currency? (Briefly explain).
