Requirement 1 asks you first to show the impact on the CCC-U.S. balance sheet of investing in the opening of the Mexican subsidiary. Only two balance sheet items are affected by the opening. Column 3 is simple the addition of column 1 and column 2. The assets should balance with the total liabilities and shareholders’ equity for both column 2 and column 3. You are next asked to prepare the balance sheet for CCC-Mexico on the day the subsidiary will open (January 1, 2001). Only two events happened that will be reflected in the opening balance sheet: (1) the investment from CCC-U.S. and the bank loan. Column 4 should balance at about 11,000,000 pesos.
Requirement 2. Column 5 is column 4 translated from Mexican pesos to
U.S. dollars. Since no time has passed since the Mexican subsidiary opened,
every item on the balance sheet of CCC-Mexico is translated at the same
rate: the beginning exchange rate. You need to eliminate, in column 6, any
balance sheet items that arose to a transaction with between CCC-U.S. and
CCC-Mexico. One asset and one equity item must be eliminated. One elimination
is from the balance sheet of CCC-U.S. and one is from the balance sheet
of CCC-Mexico. Column 7 is simply the sum of each item in columns 3, 5,
and 6. Column 7 should balance at about $26,000,000.
Requirement 3. All revenues and expenses, except cost of sales, are in pesos
to begin with, so just enter the total sales and fixed costs into the income
statement. The cost of purchasing the sedans from CCC-U.S. should be converted
to pesos at the average exchange rate in order to get the budgeted income
statement in pesos. The budgeted net income is about $6,350,000.
