Freedom Technology Company produced various types of household electronic equipment, which it sold primarily through two large retail store chains in the United States. On October 1, 2001, Freedom established a wholly owned subsidiary in South Korea, called Freedom-Korea, for the purpose of assembling a small home version of a video arcade game that Freedom had been licensed to produce. The Korean subsidiary sold its output directly to the U.S. retailers that carried the game (as opposed to selling its output to its U.S. parent for resale to U.S. retailers).

Exhibit 1 shows the subsidiary’s condensed balance sheet as of September 30, 2002 (fiscal year-end) and an income statement for its first year of operations. Freedom’s controller, Marion Rosenblum, asked a member of the accounting staff to translate these statements into dollars, following the standards of FASB Statement No. 52. The controller also was interested in how the statements translated in accord with FASB 52 might differ from those prepared using the method formerly required by FASB 8.

The accounting staff person assembled the following information to assist in preparing the two sets of translated statements:

1. The South Korean unit of currency is the won (abbreviated W). As of October 1, 2001, the exchange rate was one won = $0.00140; as of September 30, 2002, the rate was one won = $0.00124.
2. As of October 1, 2001, Freedom-Korea’s assets were W400 million cash and W600 million fixed assets. No additional fixed assets were acquired during the first year of operations. On average, the year-end inventories had been on hand one and a half months; the exchange rate on August 15, 2002, was one won = $0.00 126.
3. The capital stock of Freedom-Korea had been issued to Freedom-Technology on October 1, 2001; no additional capital stock transactions had taken place during the fiscal year. . . .

Assignment

1. Prepare translated year-end statements for Freedom-Korea using the current rate method, as required by FASB 52.
2. Prior to issuance of FASB 52, FASB 8 required use of the monetary/nonmonetary method. With this method, monetary assets and liabilities are translated at the rate prevailing as of the balance sheet date; and nonmonetary items are translated at the rates existing when the transactions occurred, called historical rates. Income statement items are translated at the average rate prevailing during the period, except for those expenses related to asset costs that are translated at historical rates (e.g., depreciation expense).
3. Prepare translated statements using FASB 8’s monetary/nonmonetary method. (Note: Under FASB 8, any translation gain or loss was included as an item in the translated income statement. You may treat any such gain or loss as a ‘plug’ figure; i.e., you are not expected to calculate it in detail.)
4. Compare your two sets of translated statements and comment on any differences between them. If the company were permitted a choice as to which method to use, which method do you think they would prefer?