Translation of Foreign Currency Financial StatementsGalactic OperationsTatooine (Outer Rim Territory) is a desert world where water is a scarce commodity.Moisture farming is the primary occupation for most locals and unemployment is high(it is a desert.) They have determined the answer to all of their problems is to acquire a100% interest in Kashyyyk (Mid Rim Territory- AKA the Wookie Planet.) Because of thelush, wroshyr-tree filled land, moisture is plentiful and therefore a good investment forTatooine.Tatooines form of currency is the Peggat; Kashyyyk uses the Galactic Credit Standard(GCS). On January 1, Year 1 Tatooine acquired a 100% interest in Kashyyk. During thistime the exchange rate for the Galactic Credit Standard was f0.68.Tatooine is enjoying its new investment and it is time, once again, to translate thefinancial statements. The financial statements of Kashyyyk as of December 31, Year 2are as follows:Balance SheetDecember 31, Year 2AssetsCash f $1,000,000Accounts Receivable $1,650,000Inventory $4,250,000Equipment $12,500,000Less: Accumulated Depreciation $(4,250,000)Building $36,000,000Less: Accumulated Depreciation $(15,150,000)Land $3,000,000Total Assets f $39,000,000Liabilities and Stockholders’ EquityAccounts Payable f $1,250,000Long-term Debt $25,000,000Common Stock $2,500,000Additional Paid-In Capital $7,500,000Retained Earnings $2,750,000Total Liabilities and Stockholders’ Equity f $39,000,000Statement of Income and Retained EarningsFor the Year Ending December 31, Year 2GCSSales f $12,500,000Cost of Goods Sold $(6,000,000)Depreciation Expense- Equipment $(1,250,000)Depreciation Expense- Building $(900,000)Research and Development Expense $(600,000)Other Expenses (including taxes) $(500,000)Net Income f $3,250,000Plus: Retained Earnings, 1/1/Y2 $250,000Less: Dividends, Year 2 $(750,000)Retained Earnings, 12/31/Y2 f $2,750,000Exchange RatesJanuary 1, Year 1 0.68November 8, Year 1 0.64January 1, Year 2 0.62May 2, Year 2 0.61Average Year 2 0.605September 8, Year 2 0.585Fourth quarter, Year 2 0.56December 20, Year 2 0.555December 31, Year 2 0.53 The January 1, Year 2, beginning inventory of 3,000,000 was acquired onNovember 8, Year 1. Purchases of inventory during Year 2 were acquireduniformly throughout the year. The December 31, Year 2, ending inventory ofGCS 4,250,000 was acquired evenly throughout the fourth quarter of Year 2. All fixed assets were on the books when the subsidiary was acquired exceptfor GCS 2,500,000 of equipment, which was acquired on May 2, Year 2 andGCS 6,000,000 in buildings which was acquired on September 8, Year 2. Equipment is depreciated on a straight-line basis over 10 years. Buildings aredepreciated on a straight-line basis over 40 years. A full years depreciation istaken in the year of acquisition. Dividends were declared and paid on December 20, Year 2.Required1. Translate Kashyyyks financial statements into Peggat in accordance with U.S. GAAP at December 31, Year 2. Each Scenario will require itsown sets of financial statements translated in the Peggat. Include allfinancial statements as well as all supporting documentation required to complete the financial statements.1st Scenario:a. Assume the Galactic Credit Standard (GCS) is the functional currency. The December 31, Year 1, retained earnings that appearedin Kashyyyks translated financial statements were 167,500. TheDecember 31, Year 1, cumulative translation adjustment thatappeared in Kashyyyks translated balance sheet was negative612,5002nd Scenario:b. Assume the Peggat is the functional currency. The December 31, Year 1, retained earnings that appeared in Kashyyyks re-measuredfinancial statements were 1,160,000.3rd Scenario:c. The same as (b) except Kashyyyk has no long-term debt. Instead, Kashyyyk has common stock of GCS 10,000,000 and additional paid-incapital of GCS 25,000,000. The December 31, Year 1, retained earningsthat appeared in Kashyyyks re-measured financial statements were negative 340,000.2. Explain why the sign of the translation adjustments in (1a), (1b), and (1c) is positive or negative.Translation of Foreign Currency Financial StatementsGalactic OperationsTatooine (Outer Rim Territory) is a desert world where water is a scarce commodity.Moisture farming is the primary occupation for most locals and unemployment is high(it is a desert.) They have determined the answer to all of their problems is to acquire a100% interest in Kashyyyk (Mid Rim Territory- AKA the Wookie Planet.) Because of thelush, wroshyr-tree filled land, moisture is plentiful and therefore a good investment forTatooine.Tatooines form of currency is the Peggat; Kashyyyk uses the Galactic Credit Standard(GCS). On January 1, Year 1 Tatooine acquired a 100% interest in Kashyyk. During thistime the exchange rate for the Galactic Credit Standard was f0.68.Tatooine is enjoying its new investment and it is time, once again, to translate thefinancial statements. The financial statements of Kashyyyk as of December 31, Year 2are as follows:Balance SheetDecember 31, Year 2AssetsCash f $1,000,000Accounts Receivable $1,650,000Inventory $4,250,000Equipment $12,500,000Less: Accumulated Depreciation $(4,250,000)Building $36,000,000Less: Accumulated Depreciation $(15,150,000)Land $3,000,000Total Assets f $39,000,000Liabilities and Stockholders’ EquityAccounts Payable f $1,250,000Long-term Debt $25,000,000Common Stock $2,500,000Additional Paid-In Capital $7,500,000Retained Earnings $2,750,000Total Liabilities and Stockholders’ Equity f $39,000,000Statement of Income and Retained EarningsFor the Year Ending December 31, Year 2GCSSales f $12,500,000Cost of Goods Sold $(6,000,000)Depreciation Expense- Equipment $(1,250,000)Depreciation Expense- Building $(900,000)Research and Development Expense $(600,000)Other Expenses (including taxes) $(500,000)Net Income f $3,250,000Plus: Retained Earnings, 1/1/Y2 $250,000Less: Dividends, Year 2 $(750,000)Retained Earnings, 12/31/Y2 f $2,750,000Exchange RatesJanuary 1, Year 1 0.68November 8, Year 1 0.64January 1, Year 2 0.62May 2, Year 2 0.61Average Year 2 0.605September 8, Year 2 0.585Fourth quarter, Year 2 0.56December 20, Year 2 0.555December 31, Year 2 0.53 The January 1, Year 2, beginning inventory of 3,000,000 was acquired onNovember 8, Year 1. Purchases of inventory during Year 2 were acquireduniformly throughout the year. The December 31, Year 2, ending inventory ofGCS 4,250,000 was acquired evenly throughout the fourth quarter of Year 2. All fixed assets were on the books when the subsidiary was acquired exceptfor GCS 2,500,000 of equipment, which was acquired on May 2, Year 2 andGCS 6,000,000 in buildings which was acquired on September 8, Year 2. Equipment is depreciated on a straight-line basis over 10 years. Buildings aredepreciated on a straight-line basis over 40 years. A full years depreciation istaken in the year of acquisition. Dividends were declared and paid on December 20, Year 2.Required1. Translate Kashyyyks financial statements into Peggat in accordance with U.S. GAAP at December 31, Year 2. Each Scenario will require itsown sets of financial statements translated in the Peggat. Include allfinancial statements as well as all supporting documentation required to complete the financial statements.1st Scenario:a. Assume the Galactic Credit Standard (GCS) is the functional currency. The December 31, Year 1, retained earnings that appearedin Kashyyyks translated financial statements were 167,500. TheDecember 31, Year 1, cumulative translation adjustment thatappeared in Kashyyyks translated balance sheet was negative612,5002nd Scenario:b. Assume the Peggat is the functional currency. The December 31, Year 1, retained earnings that appeared in Kashyyyks re-measuredfinancial statements were 1,160,000.3rd Scenario:c. The same as (b) except Kashyyyk has no long-term debt. Instead, Kashyyyk has common stock of GCS 10,000,000 and additional paid-incapital of GCS 25,000,000. The December 31, Year 1, retained earningsthat appeared in Kashyyyks re-measured financial statements were negative 340,000.2. Explain why the sign of the translation adjustments in (1a), (1b), and (1c) is positive or negative.