[SOLVED] Refer to Problem 8.25 for Stebbins

Refer to Problem 8.25 for Stebbins Corporation for Year 1, its first year of operations. Exhibit 8.31 shows the amounts for the Canadian subsidiary for Year 2. The average exchange rate during Year 2 was C$1:US$0.82, and the exchange rate on December 31, Year 2, was C$1:US$0.84. The Canadian subsidiary declared and paid dividends on December 31, Year 2. Data given in Problem 8.25: Stebbins Corporation established a wholly owned Canadian subsidiary on January 1, Year 1, by contributing US$500,000 for all of the subsidiaryâ€™s common stock. The exchange rate on that date was C$1:US$0.90 (that is, one Canadian dollar equaled 90 U.S. cents). The Canadian subsidiary invested C$500,000 in a building with an expected life of 20 years and rented it to various tenants for the year. The average exchange rate during Year 1 was C$1:US$0.85, and the exchange rate on December 31, Year 1, was C$1:US$0.80. Exhibit 8.30 shows the amounts taken from the books of the Canadian subsidiary at the end of Year 1, measured in Canadian dollars. REQUIRED: a. Prepare a balance sheet, an income statement, and a retained earnings statement for the Canadian subsidiary for Year 2 in U.S. dollars, assuming that the Canadian dollar is the functional currency. Include a separate schedule showing the computation of the translation adjustment for Year 2 and the change in the translation adjustment account. b. Repeat Requirement a assuming that the U.S. dollar is the functional currency. Include a separate schedule showing the computation of the translation gain or loss. c. Why is the sign of the translation adjustment for Year 2 under the all-current translation method and the translation gain or loss under the monetary/nonmonetary translation method the same? Why do their amounts differ? d. Assuming that the firm could justify either translation method, which method would management of Stebbins Corporation likely prefer for Year 2? Why? Exhibit 8.31:

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Exhibit 8.31 Canadian Subsidiary Financial Statements Year 2 (Problem 8.26) Balance Sheet ASSETS Cash C$116,555 Rent receivable 30,000 450,000 CS596,555 Building (net) LIABILITIES AND EQUITY Accounts payable Salaries payable C$ 7,500 5,500 Common stock 555,555 Retained earnings 28,000 C$596,555 Income Statement Rent revenue C$150,000 Operating expenses Depreciation expense Translation exchange gain (34,000) (25,000) Net Income C$ 91,000 Retained earnings Statement Balance, January 1, Year 2 C$ 12,000 Net income 91,000 Dividends (75,000) Balance, December 31, Year 2 C$ 28,000

Question: Refer to Problem 8.25 for Stebbins

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