Problem - Rushville Corporation, a U.S.-based company, acquired a 100% interest in Guilin Company in China, on January 1, 2016, when the exchange rate for Chinese RMB was $0.200. The financial statements of Guilin Company as of December 31, 2017, are as follows:
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Balance Sheet December 31, 2017
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Assets
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Cash
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RMB
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1,000,000
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Accounts receivable (net)
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1,500,000
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Inventory (at cost)
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4,500,000
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Equipment
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13,000,000
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Less: Accumulated depreciation
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(4,500,000)
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Building
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40,000,000
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Less: Accumulated depreciation
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(8,500,000)
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Land
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15,000,000
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Total assets
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RMB
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62,000,000
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Liabilities and shareholders' equity
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Accounts payable
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RMB
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2,500,000
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Long-term debt
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25,000,000
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Common stock
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3,000,000
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Additional paid-in-capital
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26,000,000
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Retained earnings
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5,500,000
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Total liabilities and shareholders' equity
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RMB
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62,000,000
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Statement of Income and Retained Earnings For the Year Ending December 31, 2017
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Sales
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RMB
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17,500,000
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Cost of goods sold
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(7,500,000)
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Depreciation expense - equipment
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(2,200,000)
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Depreciation expense - buildings
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(1,300,000)
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Other operating expenses (including taxes)
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(4,300,000)
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Net income
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RMB
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2,200,000
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Plus: Retained earnings, 1/1/2017
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2,250,000
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Less: Dividends, 2017
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(750,000)
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Retained earnings, 12/31/2017
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RMB
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3,700,000
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Additional information:
1. The 1/1/2017 beginning inventory of RMB3,000,000 was acquired when the exchange rate was $0.195. Purchases of inventory during 2017 were acquired evenly throughout the year. 12/31/2017 ending inventory of RMB4,500,000 was acquired when the exchange rate was $0.157.
2. All fixed assets were on the books when the subsidiary was acquired except for RMB3,000,000 of equipment which was acquired on 1/1/2017 when the exchange rate was $0.165 and RMB6,000,000 in buildings which was acquired on 5/1/2017 when the exchange rate was $0.160. Equipment is depreciated on a straight-line basis over 10 years; buildings are depreciated on a straight-line basis over 40 years. A full year's depreciation is taken in the year of acquisition.
3. Dividends were declared and paid on 12/1/2017 when the exchange rate was 0.158.
4. Other exchange rate for 2017 are:
1/1/2017 $0.165
Average for the year $0.160
12/31/2017 $0.155
Required -
1. Translate Guilin Company's financial statements into U.S. dollars at 12/31/2017, assuming that RMB is the functional currency. Retained earnings and cumulative translation adjustment appeared in Guilin Company's 12/31/2016 translated balance sheet were $405,000 and $(751,750), respectively.
2. Translate Guilin Company's financial statements into U.S. dollars at 12/31/2017, assuming that U.S. dollar is the functional currency. Retained earnings appeared in Guilin Company's 12/31/2016 translated balance sheet was $1,205,750.