Stebbins Corporation established a wholly owned Canadian subsidiary on January 1, Year 1, by contributing US$500,000 for all of the subsidiary's common stock. The exchange rate on that date was C$1:US$.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$1:US$.85, and the exchange rate on December 31, Year 1, was C$1:US$.80. Exhibit 7.38 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 1 in U.S. dollars assuming that the Canadian dollar is the functional currency. Include a separate schedule showing the computation of the translation adjustment account.
b. Repeat Part 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 1 under the all-current translation method and the translation gain or loss for Year 1 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 1? Why?