Refer to Problem 7.25 for Stebbins Corporation for Year 1, its first year of operations. Exhibit 7.39 shows the amounts for the Canadian subsidiary for Year 2. The average exchange rate during Year 2 was C$1:US$.82, and the exchange rate on December 31, Year 2, was C$1:US$.84. The Canadian subsidiary declared and paid dividends on December 31, Year 2.
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 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 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?