On 1/1/20x1, Pooma Industries, a 100% owned subsidiary of Lepard Corporation, a U. S. company, was established and began business operations. Pooma is domiciled in Switzerland. Their local currency is the Swiss franc (symbol “SF”). When it was formed, Pooma retained the following assets: Cash = SF 50,000, Notes Receivable = SF 75,000, and Equipment= SF350,000. Pooma also starts with a Long-term Liability = SF 175,000.

During 20x1, Pooma had the following operating activities:

1/1/20x1 Issued common stock for SF 300,000

7/30/20x1 Received cash for an unrecorded licensing agreement, generating a gain on sale of SF 40,000

10/1/20x1 Paid dividends = SF 60,000

In 20x1, Pooma generated revenues of SF 800,000 and incurred expenses of SF 650,000. These were incurred throughout the year. Assume, during 20x1, all revenues were paid in cash and all expenses were settled for cash.

At 12/31/20x1, Lepard Company prepares its year-end financial statements. The relevant exchange rates for the period are:

20x1 Exchange Rates

1/1/20x1 - 0.520

7/30/20x1 - 0.505

10/1/20x1 - 0.510

12/31/20x1 - 0.535

Average rate for 20x1 - 0.5175

Required

Briefly, i. e., no more than 4 sentences, explain what is meant by the term “functional currency”.

Assuming the Swiss Franc is Pooma Industries’ functional currency, determine the resulting adjustment necessary when Pooma’s financials are converted into the Lepard’s reporting currency, the U. S. dollar. Additionally, explain how the adjustment is reported in their financial statements.

Assuming the U. S. dollar is Pooma Industries’ functional currency, determine the resulting adjustment necessary when Pooma’s financials are converted into the Lepard’s reporting currency, the U. S. dollar. Additionally, explain how the adjustment is reported in their financial statements.

Briefly, discuss the similarities and differences between the U. S. and the international accounting standards criteria for identifying a foreign subsidiary’s functional currency.

Optional Bonus Question #1 (6 points)

With respect to the U. S. accounting rules for translating the financial statements of a foreign subsidiary located in a highly inflationary economy:

Give the criteria for determining that a foreign subsidiary is located in a highly-inflationary economy, and

Explain the accounting for translating financial statements of a subsidiary located in a highly-inflationary economy.