Problem:
The balance sheet below represents the end-of-year balance sheet for a new wholly owned subsidiary of a U.S. multinational corporation operating in Poland. All amounts are shown in millions of zloty, the local currency. The subsidiary was incorporated on January 1, 1994, when the exchange rate was 40.50/zloty. Since the subsidiary has been in operation for only one year, the Retained Earnings represent only the current year's profits.
CLICK ENTERPRISES OF POLAND
Balance Sheet
December 31, 1994
Millions of zloty
Assets Liabilities
Cash 100 Accounts Payable 100
Accounts Receivable 100 Long-Term Debt 600
Inventory 100 Common Stock 300
Plant and Equipment (net) 800 Retained Earnings 100
Total 1100 Total 1100
You are faced with the task of converting this balance sheet into U.S. dollars for consolidation into the parent company's balance sheet. The exchange rate on December 31,1994, is $0.45/zloty. Inventory is carried at historical cost, and the associated historical exchange rate is $0.50/zloty. The historical rate for plant and equipment and for the initial equity (common stock) in the subsidiary is also $0.50/zloty. The average exchange rate for 1994 was $0.48/zloty.
Q1. Assuming that the subsidiary in Poland is self-contained and that Poland is not a highly inflationary country, show the conversion to U.S. dollars.
Q2. Over the past decade, Poland has occasionally experienced high inflation, and there is some concern that inflation will again be a big problem in the near future.
If, on December 31,1994, Poland had experienced more than 100 percent inflation over the previous three years, translation of the balance sheet would have to follow slightly different rules. Show the conversation to U.S. dollars if Poland must be considered a highly inflationary country.