Chapter 12, Modern Advanced accounting-review Q & exr

CHAPTER 12TRANSLATION OF FOREIGN CURRENCY FINANCIAL

STATEMENTS

The title of each problem is followed by the estimated time in minutes required for completion and by a difficulty rating. The time estimates are applicable for students using the partially filled-in working papers.

Pr. 12–1 Transcontinent Company (20 minutes, easy)

Remeasurement of foreign branch’s trial balance to U.S. dollars functional currency from local currency.

Pr. 12–2 Sarasota Company (20 minutes, easy)

Remeasurement of trial balance of foreign branch to U.S. dollars. Computation of foreign currency transaction gain or loss resulting from remeasurement.

Pr. 12–3 Pan-Europe Corporation (20 minutes, medium)

Remeasurement of selected items from foreign subsidiary’s balance sheet to U.S. dollars, including computation of exchange rates in terms of one unit of foreign currency.

Pr. 12–4 Westpac Corporation (30 minutes, medium)

Journal entries, in dollars and in foreign currency, for transactions of home office and foreign branch of a U.S. multinational enterprise.

Pr. 12–5 Portero Corporation (50 minutes, medium)

Remeasurement of foreign subsidiary’s trial balance to U.S. dollars from foreign local currency. Computation of foreign currency transaction gain or loss resulting from remeasurement.

Pr. 12–6 Hightower Company (60 minutes, strong)

Preparation of working paper for combined income statement and balance sheet of U.S. multinational enterprise home office and foreign branch with U.S. dollar functional currency. Adjustments of ledger account balances of both home office and branch prior to combination.

Pr. 12–7 Eagle Corporation (60 minutes, strong)

Translation of foreign currency financial statements from functional currency to U.S. dollar; equity-method journal entry for parent company; working paper for consolidated financial statements and related working paper elimination (in journal entry format).

Pr. 12–8 Panamer Corporation (90 minutes, strong)

Translation of financial statements of foreign subsidiary of U.S. multinational enterprise. Adjustment of ledger account balances of parent company and domestic subsidiary. Preparation of working paper for consolidated financial statements and working paper eliminations for U.S. multinational enterprise and its domestic and foreign subsidiaries.

ANSWERS TO REVIEW QUESTIONS

1. The functional currency of a foreign entity is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment in which the entity primarily generates and expends cash.

2. The current/noncurrent method of translating foreign currencies involves the following exchange rates for translation:(1) Current rate for current assets and current liabilities

The McGraw-Hill Companies, Inc., 2006Solutions Manual, Chapter 12 365

(2) Historical rate for all other assets and liabilities, elements of owners’ equity, depreciation expense, and amortization expense

(3) Average rate for revenue and expenses other than depreciation expense and amortization expense

The current rate method of translating foreign currencies requires translation of all balance sheet items other than owners’ equity at the current exchange rate. Owners’ equity amounts are translated at historical rates. All revenue and expenses are translated at an average rate.

3. No exchange rate is used to remeasure the balance of the Intercompany Accounts Payable ledger account of a foreign subsidiary. Instead, the account is remeasured at the balance in U.S. dollars of the reciprocal Intercompany Accounts Receivable account in the U.S. parent company’s accounting records.

4. Remeasurement to functional currency is required for the accounts of a foreign branch, subsidiary, or investee whose accounting records are not maintained in the functional currency. Remeasurement is accomplished by the monetary/nonmonetary method. Foreign currency translation is the restatement of the financial statements of a foreign branch, subsidiary, or investee from its functional currency to the reporting currency (the U.S. dollar for a U.S. enterprise). Translation is accomplished by the current rate method. If the functional currency of a foreign entity is the U.S. dollar, remeasurement makes translation unnecessary.

5. Foreign currency transaction gains and losses result from the following:(1) Changes in the exchange rate for a foreign currency between the date of initiation and the

date of settlement of a business transaction denominated in the foreign currency(2) Remeasurement of the trial balance of a foreign branch, subsidiary, or investee to the

functional currency from a local currencyForeign currency translation adjustments result from the translation of financial statements of a foreign subsidiary, branch, or investee to the reporting currency (the U.S. dollar for a U.S. enterprise) from the functional currency of the foreign entity.

6. Foreign currency transaction gains and losses from the following are excluded from the measurement of net income and are accounted for in the same manner as translation adjustments:(1) Foreign currency transactions designated as, and effective as, economic hedges of a net

investment in a foreign entity(2) Intercompany foreign currency transactions that are of a long-term investment nature

7. The functional currency of a foreign investee in a highly inflationary economy is identified as the reporting currency of the parent company, home office, or investor enterprise.

8. Required disclosures relating to foreign currency matters in the financial statements or in a note to the financial statements of U.S. multinational enterprises include the following:(1) Aggregate foreign currency transaction gain or loss, including gains and losses not deferred

on forward contracts, included in the measurement of net income for the accounting period(2) Changes in foreign currency translation adjustments during the accounting period, in a

separate financial statement, in a note to the financial statements, or in the statement of comprehensive income.

9. Two criticisms of FASB Statement No. 52, “Foreign Currency Translation,” are the following:(1) It established an indefensible distinction between foreign currency transaction gains and

losses and translation adjustments.(2) It abandons historical-cost concepts by sanctioning use of the current rate method for

translation of foreign currency financial statements.

The McGraw-Hill Companies, Inc., 2006366 Modern Advanced Accounting, 10/e

SOLUTIONS TO EXERCISES

Ex. 12–1 1. c 7. a2. c 8. b3. d 9. b4. a 10. a5. a 11. c6. b

Ex. 12–2 Journal entries for home office of Logan Company:

2006Apr. 1 Investment in Foreign Branch (LCU10,000 x $0.24) 2,400

Cash 2,400To record dispatch of draft to branch.

16 Equipment: Foreign Branch (LCU50,000 x $0.22) 11,000Investment in Foreign Branch 11,000

To record acquisition of equipment by branch.

30 Cash (LCU4,000 x $0.22) 880Investment in Foreign Branch 880

To record receipt of draft from branch.

Ex. 12–3 Computation of amounts to be included in remeasured income statement of Multiverse Company’s subsidiary for year ended Nov. 30, 2006:

Amount (LCUs)

Exchange rates

Amount (U.S.

dollars)Doubtful accounts expense LCU 60,000 $0.20 $12,000Patent amortization expense 40,000 0.25 10,000Rent expense 100,000 0.22 22,000

Totals LCU200,000 $44,000

Ex. 12–4 Computation of 2006 depreciation expense for foreign subsidiary of Paloma Company:

Remeasurement of:2004 plant asset acquisitions: LCU2,400,000 x $0.625 $1,500,0002005 plant asset acquisitions:

LCU1,200,000 x $0.556 667,20

0Totals LCU3,600,000 $2,167,200

Depreciation rate (straight-line method) 0.10Depreciation expense for 2006 ($2,167,200 x 0.10) $ 216,720


Ex. 12–5 USA CORPORATIONRemeasurement of French Branch Trial Balance to U.S. Dollars

June 30, 2005

Balance (euros) dr (cr)

Exchangerates

Balance(U.S. dollars)

dr (cr)Cash C 15,000 $1.04 $ 15,600Trade accounts receivable 250,000 1.04 260,000Inventories 115,000 1.05 120,750Home office (360,000) (365,000)Sales (450,000) 1.045 (470,250)Cost of goods sold 340,000 1.05 357,000Operating expenses 90,000 1.045 94,050

Subtotals C -0- $ 12,150Foreign currency transaction gain -0 - (12,150 )

Totals C -0 - $ -0 -

Ex. 12–6 GLOBAL COMPANYRemeasurement of German Branch Trial Balance to U.S. Dollars

April 30, 2005

Balance (euros) dr (cr)

Exchange rates

Balance (U.S. dollars)

dr (cr)Cash C 15,000 $1.06 $ 15,900Trade accounts receivable 260,000 1.06 275,600Inventories 120,000 1.04 124,800Home office (280,000) (298,000)Sales (550,000) 1.05 (577,500)Cost of goods sold 340,000 1.04 353,600Operating expenses 95,000 1.05 99,750

Subtotals C -0- $ (5,850)Foreign currency transaction loss -0 - 5,850

Totals C -0 - $ -0 -

Ex. 12–7 SPANISH COMPANYBalance Sheet

November 30, 2006Assets

Current assets $180,000Plant assets (net) 260,000Other assets 60,000

Total assets $500,000

Liabilities & Stockholder’s Equity

Current liabilities $ 80,000Long-term debt 120,000

Total liabilities $200,000Common stock $ 50,000Additional paid-in capital 100,000Retained earnings 120,000Foreign currency translation adjustments 30,000

Total stockholder’s equity $300,000Total liabilities & stockholder’s equity $500,000


Ex. 12–8 Computation of foreign currency translation adjustments of Overseas Company, Dec. 31, 2005:

Total assets (LCU900,000 x $0.48) $432,000Less: Total liabilities (LCU500,000 x $0.48) $240,000

Common stock (LCU200,000 x $0.44) 88,000Retained earnings (same as net income) (LCU200,000 x

$0.46) 92,000 420,000Foreign currency translation adjustments (credit balance) $ 12,000

Ex. 12–9 Journal entry for Investor Corporation, Dec. 31, 2007:

Foreign Currency Transaction Loss 9,300Loan Payable to Bank 9,300

To recognize transaction loss on loan obtained to hedge investment in Foreign Investee Company as follows:

Liability recorded on Jan. 2, 2007 (LCU300,000 x $0.20) $ 60,000

Less: Liability translated at Dec. 31, 2007 spot rate LCU1 = $0.24 (LCU300,000 x $0.24) 72,000

Difference $(12,000)Less: Increase in cumulative translation

adjustments of investee ($50,300– $47,600) 2,700

Foreign currency transaction loss recognized $ 9,300

CASES

Case 12–1 Although the accounting treatment accorded to the translation adjustment of Ostmark’s Austrian subsidiary was incorrect, the net translation adjustments in Ostmark’s consolidated balance sheet would be correct. The controller of Ostmark incorrectly used a working paper elimination to record a foreign currency translation adjustment. The controller should have included the $25,000 difference between the translated amount of the Austrian subsidiary’s intercompany payable amount and Ostmark’s intercompany receivable amount in the foreign currency translation adjustments amount in the Austrian subsidiary’s translated balance sheet. This treatment is required by FASB Statement No. 52, “Foreign Currency Translation,” for intercompany foreign currency transactions that are of a long-term investment nature.

Case 12–2 Arguments supporting the affirmative position include:

(1) A single translation technique should be used for restating foreign currency financial statements of all foreign entities.

(2) Allowing management of a parent or investor enterprise to determine the functional currency of a foreign entity might encourage improper designation of the entity’s local currency as the functional currency, in order to avoid recognition of foreign currency transaction gains and losses resulting from remeasurement.

(3) The foreign currency translation adjustments resulting from translation of a foreign entity’s financial statements from the functional currency to the reporting currency defy a logical explanation in accounting theory. As a “plug” amount, carried perhaps indefinitely in the foreign entity’s translated financial statements, they are nebulous at best and possibly misleading, given their impact on measures such as debt-to-equity ratio, at worst.


Arguments supporting the negative position include:

(1) It is factual that the local currency of some countries is undesirable as a medium of exchange and that many significant business transactions in those countries use another (functional) currency. The functional currency concept recognizes this fact and avoids misstatements of a foreign entity’s operating results that arise from use of a currency in which transactions were not completed.

(2) Use of the foreign currency translation adjustments “plug” in the stockholders’ equity section of the foreign entity’s translated financial statements avoids recognizing an uncontrollable gain or loss resulting from changes in exchange rates rather than from business transactions or events.

Case 12–3 There appears to be an incentive for management of a U.S. multinational enterprise to avoid remeasurement of a foreign entity’s accounts to a functional currency different from its local currency. Any time generally accepted accounting principles permit enterprise management to make a decision that impacts the “bottom line” of the enterprise’s income statement, the decision likely will be one that enhances net income or reduces net loss. Further, the reliability qualitative characteristic of accounting information is difficult to comply with when objective evidence to support the selection of a foreign entity’s functional currency is difficult to obtain, as it is in most situations other than a highly inflationary economy.


20 Minutes, EasyTranscontinent Company Pr. 12–1

Transcontinent Company

Remeasurement of Mideastia Branch Trial Balance

March 31, 2005

BalanceBalance (LCUs) Exchange (U.S. dollars)

dr (cr) rates dr (cr)

Cash LCU 2 0 0 0 $ 0 . 6 4 (1) $ 1 2 8 0

Trade accounts receivable 5 8 0 0 0 0 . 6 4 (1) 3 7 1 2 0

Allowance for doubtful accounts ( 1 0 0 0 ) 0 6 4 (1) ( 6 4 0 )

Inventories 1 2 6 0 0 0 0 . 6 0 (2) 7 5 6 0 0

Home office ( 2 2 0 0 0 0 ) (3) ( 1 3 2 0 0 0 )

Sales ( 1 8 4 0 0 0 ) 0 . 6 2 (4) ( 1 1 4 0 8 0 )

Cost of goods sold 1 6 0 0 0 0 0 . 6 0 (2) 9 6 0 0 0

Operating expenses 5 9 0 0 0 0 . 6 2 (4) 3 6 5 8 0

Subtotals LCU - 0 - $ ( 1 4 0 )

Foreign currency transaction loss - 0 - 1 4 0

Totals LCU - 0 - $ - 0 -

(1) Current rate (Mar. 31, 2005).

(2) Historical rate (when goods were shipped to branch by home office).

(3) Balance of Investment in Mideastia Branch ledger account in home office accounting records.

(4) Average of exchange rates for the month of March, 2005.

20 Minutes, EasySarasota Company Pr. 12–2


Sarasota Company

Remeasurement of Foreign Branch Trial Balance

April 30, 2005

Balance Balance(LCUs) Exchange (U.S. dollars)dr (cr) rates dr (cr)

Cash LCU 1 0 0 0 0 $ 1 . 0 5 $ 1 0 5 0 0

Trade accounts receivable 5 0 0 0 0 $ 1 . 0 5 5 2 5 0 0

Inventories 1 2 4 3 7 5 ( 1 ) 1 3 1 1 0 0

Reciprocal

Home office ( 1 0 4 5 6 5 ) account ( 1 1 9 7 0 0 )

balance

Sales ( 2 7 9 3 0 0 ) $ 1 . 0 9 (2) ( 3 0 4 4 3 7 )

Cost of goods sold 1 5 2 2 8 9 ( 3 ) 1 6 9 1 0 9

Operating expenses 4 7 2 0 1 $ 1 . 0 9 (2) 5 1 4 4 9

Subtotals - 0 - $ ( 9 4 7 9 )

Foreign currency transaction loss - 0 - 9 4 7 9

Totals LCU - 0 - $ - 0 -

(1) LCU117,150 x $1.05 = $123,008

7,225 x 1.12 = 8,092

LCU124,375 $131,100

(2) ($1.10 x 6/30) + ($1.12 x 12/30) + ($1.05 x 12/30) = $1.09

(3) LCU 72,730 x $1.10 = $ 80,003

79,559x 1.12 = 89,106

LCU152,289 $169,109


20 Minutes, MediumPan-Europe Corporation Pr. 12–3

Pan-Europe Corporation

Remeasurement of Amounts in Foreign Subsidiary’s Trial Balances

November 30, 2007 and 2006


Nov. 30, 2007 Nov. 30, 2006

Exchange Exchange

LCUs rates U.S. dollars LCUs rates U.S. dollars

Trade accounts receivable (net) LCU 4 0 0 0 0 $ 0 . 6 7 $ 2 6 8 0 0 LCU 3 5 0 0 0 $ 0 . 5 9 $ 2 0 6 5 0

Allowance for doubtful accounts 2 2 0 0 0 . 6 7 1 4 7 4 2 0 0 0 0 . 5 9 1 1 8 0

Inventories 8 0 0 0 0 0 . 5 9 4 7 2 0 0 7 5 0 0 0 0 . 5 0 3 7 5 0 0

Plant assets (net):

Dec. 1, 2005 acquisition 1 3 6 0 0 0 0 . 5 0 $ 6 8 0 0 0 1 5 0 0 0 0 0 . 5 0 $ 7 5 0 0 0

June 4, 2007 acquisition 2 7 0 0 0 0 . 6 7 1 8 0 9 0

Total plant assets (net) LCU 1 6 3 0 0 0 $ 8 6 0 9 0 LCU 1 5 0 0 0 0 $ 7 5 0 0 0

Accumulated depreciation:

Dec. 1, 2005 acquisition (164,000) LCU 2 8 0 0 0 0 . 5 0 $ 1 4 0 0 0 LCU 1 4 0 0 0 0 . 5 0 $ 7 0 0 0

June 4, 2007 acquisition (30,000) 3 0 0 0 0 . 6 7 2 0 1 0

Total accumulated depreciation LCU 3 1 0 0 0 $ 1 6 0 1 0 LCU 1 4 0 0 0 $ 7 0 0 0

Long-term debt LCU 1 0 0 0 0 0 0 . 6 7 $ 6 7 0 0 0 LCU 1 2 0 0 0 0 0 . 5 9 $ 7 0 8 0 0

Common stock LCU 5 0 0 0 0 0 . 5 0 2 5 0 0 0 LCU 5 0 0 0 0 0 . 5 0 2 5 0 0 0


30 Minutes, MediumWestpac Corporation Pr. 12–4

Westpac Corporation

Journal Entries

August, 2005

Home Office Accounting Records ($) Branch Accounting Records (S$)

(1) Investment in Singapore Cash 1 1 1 1 1 1

Branch 5 0 0 0 0 Home office 1 1 1 1 1 1

Cash 5 0 0 0 0

(2) Investment in Singapore Inventories 2 2 2 2 2 2

Branch 1 0 0 0 0 0 Home office 2 2 2 2 2 2

Inventories 7 5 0 0 0

Allowance for

Overvaluation of

Inventories:

Singapore Branch 2 5 0 0 0

(3) Rent Expense 1 0 0 0

Cash 1 0 0 0

(4) Equipment: Singapore Home Office 5 0 0 0

Branch 2 2 5 0 Cash 5 0 0 0

Investment in Singapore

Branch 2 2 5 0

(5) Trade Accounts

Receivable 2 5 0 0 0

Sales 2 5 0 0 0

Cost of Goods Sold 1 5 0 0 0

Inventories 1 5 0 0 0

(6) Cash 2 0 0 0 0

Trade Accounts

Receivable 2 0 0 0 0

(7) Operating Expenses 5 0 0 0

Cash 5 0 0 0

(8) Cash 4 4 0 0 Home Office 1 0 0 0 0

Investment in Singapore Cash 1 0 0 0 0

Branch 4 4 0 0

(9) Investment in Singapore 2 0 0 0 Operating Expenses 4 4 9 4

Branch Operating Expenses 2 0 0 0 Home Office 4 4 9 4

(10) Operating Expenses 1 0 0 0

Trade Accounts

Receivable 1 0 0 0


50 Minutes, MediumPortero Corporation Pr. 12–5

Sudamerica Corporation

Remeasurement of Trial Balance

December 31, 2006

Nicaduranpesos Exchange U.S. dollarsdr (cr) rates dr (cr)

Cash $N 2 5 0 0 0 $ 2 . 4 0 $ 6 0 0 0 0

Trade accounts receivable 2 0 0 0 0 2 . 4 0 4 8 0 0 0

Allowance for doubtful accounts ( 5 0 0 ) 2 . 4 0 ( 1 2 0 0 )

Receivable from Portero Corporation 3 3 0 0 0 (Balance of reciprocal account) 7 0 5 0 0

Inventories 1 1 0 0 0 0 2 . 3 0 (1) 2 5 3 0 0 0

Plant assets 2 1 0 0 0 0 2 . 0 0 4 2 0 0 0 0

Accumulated depreciation of plant assets ( 7 9 9 0 0 ) 2 . 0 0 ( 1 5 9 8 0 0 )

Notes payable ( 6 0 0 0 0 ) 2 . 4 0 ( 1 4 4 0 0 0 )

Trade accounts payable ( 2 2 0 0 0 ) 2 . 4 0 ( 5 2 8 0 0 )

Income taxes payable ( 4 0 0 0 0 ) 2 . 4 0 ( 9 6 0 0 0 )

Common stock ( 5 0 0 0 0 ) 2 . 0 0 ( 1 0 0 0 0 0 )

Retained earnings ( 1 0 0 6 0 0 ) 2 . 0 0 ( 2 0 1 2 0 0 )

Sales—local ( 1 7 0 0 0 0 ) 2 . 3 0 ( 3 9 1 0 0 0 )

Sales—foreign ( 2 0 0 0 0 0 ) 2 . 3 0 ( 4 6 0 0 0 0 )

Cost of goods sold 2 0 7 6 0 0 2 . 3 0 (1) 4 7 7 4 8 0

Depreciation expense 2 2 4 0 0 2 . 0 0 4 4 8 0 0

Other operating expenses 6 0 0 0 0 2 . 3 0 1 3 8 0 0 0

Income taxes expense 4 0 0 0 0 2 . 3 0 9 2 0 0 0

Gain on disposal of plant assets ( 5 0 0 0 ) 2 . 3 0 ( 1 1 5 0 0 )

Subtotals $N - 0 - $ ( 1 3 7 2 0 )

Foreign currency transaction loss 1 3 7 2 0

Totals $N - 0 - $ - 0 -

(1) Absent detailed historical cost data, use Year

2006 average.


60 Minutes, StrongHightower Company Pr. 12–6

a. (1) Hightower Company Home Office

Journal Entry (U.S. dollars)

December 31, 2005

Investment in Brazentina Branch 3 0 0 0

Branch Market Research 3 0 0 0

To record amortization of market research fee for

2005, which is chargeable to branch.

(2) Hightower Company Branch

Journal Entries (Brazentina pesos)

December 31, 2005

Purchases 2 0 0 0 0

Home Office 2 0 0 0 0

To record shipment in transit from home office

($4,000 ÷ $0.20 = BP20,000).

Other Operating Expenses 1 5 0 0 0

Home Office 1 5 0 0 0

To record charge from home office for 2005

amortization of market research fee ($3,000 ÷ $0.20 =

BP15,000).

Franchise Fee Expense 1 9 5 0 0

Current Liabilities 1 9 5 0 0

To record Brazentina franchise fee for 2005 as follows:

Sales BP1,680,000

Less: Cost of goods sold (BP80,000 +

BP1,200,000 – BP100,000) BP1,180,000

Depreciation expense 100,000

Other operating

expenses 205,000 1,485,000

Income before franchise fee BP 195,000

Franchise fee (BP195,000 x 0.10) BP 19,500


Hightower Company (continued) Pr. 12–6

b. Hightower Company

Working Paper for Combined Financial Statements of Home Office and Branch

For Year Ended December 31, 2005

Home office

adjusted Branch adjusted trial balance Home office

trial balance In Brazentina Eliminations and branch

(U.S. dollars) pesos Exchange rates In U.S. dollars (U.S. dollars) combined

dr (cr) dr (cr) (remeasurement) dr (cr) dr (cr) dr (cr)

Income Statement:

Sales (4 0 3 5 0 0 0 ) (1 6 8 0 0 0 0 ) $ 0 . 2 2 5 ( 3 7 8 0 0 0 ) (c) 1 4 0 0 0 0 (4 2 7 3 0 0 0 )

Intracompany sales ( 1 6 0 0 0 0 ) (a) 1 6 0 0 0 0Inventories, beginning of year 5 1 0 0 0 0 8 0 0 0 0 0 . 2 5 2 0 0 0 0 (a) ( 2 5 0 0 ) 5 2 7 5 0 0

Purchases 3,140,000 3 0 1 0 0 0 0 1 2 0 0 0 0 0 0 . 2 2 5 (1) 2 7 0 0 0 0 (a)( 1 6 0 0 0 0 ) 3 1 2 0 0 0 0

Intracompany purchases 1 4 0 0 0 0 (c)( 1 4 0 0 0 0 )

Inventories, end of year ( 5 2 0 0 0 0 ) ( 1 0 0 0 0 0 ) 0 . 2 0 (2) ( 2 0 0 0 0 ) (b) 3 0 0 0 ( 5 3 7 0 0 0 )

Depreciation expense 5 0 0 0 0 1 0 0 0 0 0 0 . 2 5 2 5 0 0 0 7 5 0 0 0

Franchise fee expense 1 9 5 0 0 0 . 2 2 5 4 3 8 8 4 3 8 8

Other operating expenses and income

taxes expense 6 8 0 0 0 0 2 0 5 0 0 0 0 . 2 2 5 4 6 1 2 5 7 2 6 1 2 5

Foreign currency transaction gain ( 2 0 1 1 3 )(3) ( 2 0 1 1 3 )

Net income ( 3 2 5 0 0 0 ) ( 1 7 5 5 0 0 ) ( 5 2 6 0 0 )(3) 5 0 0 ( 3 7 7 1 0 0 )

Statement of Retained Earnings:

Retained earnings, beginning of year ( 1 4 5 0 0 0 ) (a) 2 5 0 0 ( 1 4 2 5 0 0 )

Net income ( 3 2 5 0 0 0 ) ( 1 7 5 5 0 0 ) ( 5 2 6 0 0 )(3) 5 0 0 ( 3 7 7 1 0 0 )

Retained earnings, end of year ( 5 1 9 6 0 0 )

(Continued on page 378.)


Hightower Company (continued) Pr. 12–6

b. Hightower Company

Working Paper for Combined Financial Statements of Home Office and Branch (concluded)


Home office

adjusted Branch adjusted trial balance Home office

trial balance In Brazentina Eliminations and branch

(U.S. dollars) pesos Exchange rates In U.S. dollars (U.S. dollars) combined

dr (cr) dr (cr) (remeasurement) dr (cr) dr (cr) dr (cr)

Balance Sheet:

Cash 9 0 0 0 0 1 1 0 0 0 0 0 . 2 0 2 2 0 0 0 1 1 2 0 0 0

Trade accounts receivable (net) 1 6 0 0 0 0 1 5 0 0 0 0 0 . 2 0 3 0 0 0 0 1 9 0 0 0 0

Inventories, end of year 5 2 0 0 0 0 1 0 0 0 0 0 0 . 2 0 (2) 2 0 0 0 0 (b) ( 3 0 0 0 ) 5 3 7 0 0 0

Short-term prepayments 1 8 0 0 0 1 8 0 0 0

Investment in Brazentina Branch 1 3 0 0 0 (d) ( 1 3 0 0 0 )

Branch market research 9 0 0 0 9 0 0 0

Plant assets 7 5 0 0 0 0 1 0 0 0 0 0 0 0 . 2 5 2 5 0 0 0 0 1 0 0 0 0 0 0

Accumulated depreciation of plant assets ( 3 5 0 0 0 0 ) ( 6 5 0 0 0 0 ) 0 . 2 5 ( 1 6 2 5 0 0 ) ( 5 1 2 5 0 0 )

Current liabilities ( 2 4 0 0 0 0 ) ( 2 3 9 5 0 0 ) 0 . 2 0 ( 4 7 9 0 0 ) ( 2 8 7 9 0 0 )

Long-term debt ( 2 0 0 0 0 0 ) ( 2 3 0 0 0 0 ) 0 . 2 0 ( 4 6 0 0 0 ) ( 2 4 6 0 0 0 )

Home office ( 6 5 0 0 0 ) reciprocal account balance ( 1 3 0 0 0 ) (d) 1 3 0 0 0

Common stock ( 3 0 0 0 0 0 ) ( 3 0 0 0 0 0 )

Retained earnings, end of year ( 5 1 9 6 0 0 )

Totals - 0 - - 0 - - 0 - - 0 - - 0 -

(1) Average rate used for purchases occurring uniformly throughout year. Eliminations:

(2) Inventory turnover is more than 13 times [BP1,180,000 ÷ (BP180,000 ÷ 2) = 13.1 times]. (a) Intracompany sales and intracompany profits in beginning

Therefore Dec. 31, 2005, exchange rate is applicable for first-in, first-out cost. inventories—home office shipments to branch (page 379)

(3) $20,113 foreign currency transaction gain was derived from $52,600 remeasured net income (b) Intracompany profits in branch’s ending inventories

required in statement of retained earnings. (c) Intracompany sales—branch to home office

(d) Reciprocal accounts


Hightower Company (concluded) Pr. 12–6

Hightower Company

Analysis of Intracompany Sales, Cost of Goods Sold, and Unrealized Profit in Inventories

Home Office to Branch


Selling Price Cost Markup

Brazentina pesos U.S. dollars U.S. dollars U.S. dollars

Beginning inventories B P 4 0 0 0 0 * $ 1 0 0 0 0 $ 7 5 0 0 $ 2 5 0 0

Add: Shipments 1 6 0 0 0 0 1 2 0 0 0 0 4 0 0 0 0

Subtotals $ 1 7 0 0 0 0 $ 1 2 7 5 0 0 $ 4 2 5 0 0

Less: Ending inventories B P 6 0 0 0 0 † 1 2 0 0 0 9 0 0 0 3 0 0 0

Cost of goods sold $ 1 5 8 0 0 0 $ 1 1 8 5 0 0 $ 3 9 5 0 0

* BP80,000 x ½; translated at BP1 = $0.25

† (BP80,000 x ½) + BP20,000; translated at BP1 = $0.20


60 Minutes, StrongEagle Corporation Pr. 12–7

a. Mapleleaf Company

Translation of Financial Statements


Canadian Exchange

dollars rates U.S. dollars

Income Statement

Total revenue $C 8 0 0 0 0 0 $ 0 . 7 9 $ 6 3 2 0 0 0

Total costs and expenses 7 0 0 0 0 0 0 . 7 9 5 5 3 0 0 0

Net income $C 1 0 0 0 0 0 $ 7 9 0 0 0

Statement of Retained Earnings

Retained earnings, beginning of year

Net income $C 1 0 0 0 0 0 $ 7 9 0 0 0

Subtotal $C 1 0 0 0 0 0 $ 7 9 0 0 0

Dividends declared

Retained earnings, end of year $C 1 0 0 0 0 0 $ 7 9 0 0 0

Balance Sheet

Assets

Current assets $C 4 0 0 0 0 0 0 . 7 8 $ 3 1 2 0 0 0

Plant assets (net) 5 0 0 0 0 0 0 . 7 8 3 9 0 0 0 0

Total assets $C 9 0 0 0 0 0 $ 7 0 2 0 0 0


Current liabilities $C 2 0 0 0 0 0 0 . 7 8 $ 1 5 6 0 0 0

Long-term debt 4 0 0 0 0 0 0 . 7 8 3 1 2 0 0 0

Common stock 2 0 0 0 0 0 0 . 8 0 1 6 0 0 0 0

Retained earnings 1 0 0 0 0 0 7 9 0 0 0

Foreign currency translation adjustments ( 5 0 0 0 )

Total liabilities & stockholder’s equity $C 9 0 0 0 0 0 $ 7 0 2 0 0 0

b. Eagle Corporation

Journal Entries

December 31, 2005

Investment in Mapleleaf Company Common

Stock 7 9 0 0 0

Intercompany Investment Income 7 9 0 0 0

To record 100% of net income of Mapleleaf

Company. (Income tax effects are disregarded.)

Foreign Currency Translation Adjustments 5 0 0 0


Stock 5 0 0 0

To record 100% of other comprehensive income

component of Mapleleaf Company’s stockholder’s

equity. (Income tax effects are disregarded.)

Eagle Corporation (concluded) Pr. 12–7


c. Eagle Corporation and Subsidiary

Working Paper for Consolidated Financial Statements


Eliminations

Eagle Mapleleaf increase

Corporation Company (decrease) Consolidated

Income Statements

Total revenue 1 2 0 0 0 0 0 6 3 2 0 0 0 1 8 3 2 0 0 0

Intercompany investment

income 7 9 0 0 0 (a) ( 7 9 0 0 0 )

Total revenue and income 1 2 7 9 0 0 0 6 3 2 0 0 0 ( 7 9 0 0 0 ) 1 8 3 2 0 0 0

Total costs and expenses 9 0 0 0 0 0 5 5 3 0 0 0 1 4 5 3 0 0 0

Net income 3 7 9 0 0 0 7 9 0 0 0 ( 7 9 0 0 0 ) 3 7 9 0 0 0

Statements of Retained Earnings

Retained earnings, beginning

of year 5 0 0 0 0 0 5 0 0 0 0 0

Net income 3 7 9 0 0 0 7 9 0 0 0 ( 7 9 0 0 0 ) 3 7 9 0 0 0

Subtotal 8 7 9 0 0 0 7 9 0 0 0 ( 7 9 0 0 0 ) 8 7 9 0 0 0

Dividends declared 2 0 0 0 0 0 2 0 0 0 0 0

Retained earnings, end of year 6 7 9 0 0 0 7 9 0 0 0 ( 7 9 0 0 0 ) 6 7 9 0 0 0

Balance Sheet

Assets

Current assets 7 0 0 0 0 0 3 1 2 0 0 0 1 0 1 2 0 0 0

Investment in Mapleleaf

Company common stock 2 3 4 0 0 0 (a)( 2 3 4 0 0 0 )

Plant assets (net) 1 6 0 0 0 0 0 3 9 0 0 0 0 1 9 9 0 0 0 0

Intangible assets (net) 2 4 0 0 0 0 2 4 0 0 0 0

Total assets 2 7 7 4 0 0 0 7 0 2 0 0 0 ( 2 3 4 0 0 0 ) 3 2 4 2 0 0 0

Liabilities & Stockholders’ Equity

Current liabilities 4 0 0 0 0 0 1 5 6 0 0 0 5 5 6 0 0 0

Long-term debt 5 0 0 0 0 0 3 1 2 0 0 0 8 1 2 0 0 0

Common stock 1 2 0 0 0 0 0 1 6 0 0 0 0 (a)( 1 6 0 0 0 0 ) 1 2 0 0 0 0 0

Retained earnings 6 7 9 0 0 0 7 9 0 0 0 ( 7 9 0 0 0 ) 6 7 9 0 0 0

Foreign currency translation

adjustments ( 5 0 0 0 ) ( 5 0 0 0 ) (a) ( 5 0 0 0 )* ( 5 0 0 0 )

Total liabilities & stockholders’

equity 2 7 7 4 0 0 0 7 0 2 0 0 0 ( 2 3 4 0 0 0 ) 3 2 4 2 0 0 0

* A decrease in foreign currency translation adjustments and an increase in equity.

Eagle Corporation and SubsidiaryWorking Paper Elimination

December 31, 2005(a) Common Stock—Mapleleaf 1 6 0 0 0 0

Intercompany Investment Income—Eagle 7 9 0 0 0


Stock—Eagle 2 3 4 0 0 0

Foreign Currency Translation Adjustments—

Eagle 5 0 0 0

To eliminate intercompany investment and equity

accounts of subsidiary. (Income tax effects are

disregarded.)

90 Minutes, Strong


Panamer Corporation Pr. 12–8

a. Itican Subsidiary

Translation of Financial Statements


Itican Exchange

pesos rates U.S. dollars

Income Statement

Sales IN 3 8 1 0 0 0 $ 0 . 0 9 * $ 3 4 2 9 0

Costs and expenses:

Cost of goods sold IN 3 0 0 0 0 0 0 . 0 9 $ 2 7 0 0 0

Depreciation expense 1 7 5 0 0 0 . 0 9 1 5 7 5

Selling expenses 1 6 5 0 0 0 . 0 9 1 4 8 5

Other operating expenses 2 3 6 6 7 0 . 0 9 2 1 3 0

Income taxes expense 9 3 3 3 0 . 0 9 8 4 0

Total costs and expenses IN 3 6 7 0 0 0 $ 3 3 0 3 0

Net income IN 1 4 0 0 0 $ 1 2 6 0

Statement of Retained Earnings

Retained earnings, beginning of year IN 7 0 0 0 0 . 1 2 $ 8 4 0

Net income 1 4 0 0 0 1 2 6 0

Retained earnings, end of year IN 2 1 0 0 0 $ 2 1 0 0

Balance Sheet

Assets

Cash IN 1 0 0 0 0 0 . 0 8 $ 8 0 0

Trade accounts receivable (net) 3 5 0 0 0 0 . 0 8 2 8 0 0

Inventories 8 3 0 0 0 0 . 0 8 6 6 4 0

Plant assets 1 7 5 0 0 0 0 . 0 8 1 4 0 0 0

Accumulated depreciation of plant assets ( 7 5 0 0 0 ) 0 . 0 8 ( 6 0 0 0 )

Total assets IN 2 2 8 0 0 0 $ 1 8 2 4 0


Trade accounts payable IN 7 0 0 0 0 . 0 8 $ 5 6 0

Long-term debt 1 0 0 0 0 0 0 . 0 8 8 0 0 0

Common stock, 1,000 shares 1 0 0 0 0 0 0 . 1 2 1 2 0 0 0

Retained earnings 2 1 0 0 0 2 1 0 0

Foreign currency translation adjustments ( 4 4 2 0 )†

Total liabilities & stockholder’s equity IN 2 2 8 0 0 0 $ 1 8 2 4 0

* Weighted average, computed as follows: [($0.12 x 3) + ($0.08 x 9)] ÷ 12 = $0.09

† Derived amount, computed by determining amount necessary to balance the balance sheet.


Panamer Corporation (continued) Pr. 12–8

b. Panamer Corporation

Adjusting Entries

December 31, 2006

(1) Investment in U.S. Subsidiary Common Stock 9 0 0

Intercompany Investment Income 9 0 0

To record share of net income of U.S. Subsidiary

under equity method of accounting ($1,000 x 0.90 =

$900). (Income tax effects are disregarded.)

(2) Intercompany Receivables 9 0 0

Investment in U.S. Subsidiary Common Stock 9 0 0

To accrue receivable for dividend declared Dec. 18,

2006, by U.S. Subsidiary (900 x $1 = $900).

(3) Investment in U.S. Subsidiary Common Stock 1 8 0

Intercompany Investment Income 1 8 0

To record share of amortization of bargain-purchase

excess arising from acquisition of U.S. Subsidiary,

computed as follows:

Share of current fair value of business combination

assets on date of business combination

($12,000 x 0.90) $10,800

Less: Cost of investment 9,000

Excess allocable to subsidiary’s plant assets $ 1,800

Amortization for 2006 ($1,800 x 0.10) $ 180

(4) Investment in Itican Subsidiary Common Stock 1 2 6 0

Intercompany Investment Income 1 2 6 0

To record 100% share of translated net income of

Itican Subsidiary under equity method of accounting.

(Income tax effects are disregarded.)

(5) Investment in Itican Subsidiary Common Stock 8 4

Intercompany Investment Income 8 4

To record amortization of bargain-purchase excess

arising from acquisition of Itican Subsidiary, computed

as follows:

Current fair value of subsidiary’s net assets

on date of business combination

(IN107,000 x $0.12) $12,840

Less: Cost of net assets 12,000

Excess allocable to subsidiary’s plant assets $ 840

Amortization for 2006 ($840 x 0.10) $ 84

(6) Foreign Currency Translation Adjustments 4 4 2 0

Investment in Itican Subsidiary Common

Stock 4 4 2 0

To record 100% share of other comprehensive income

component of Itican Subsidiary stockholder’s equity.

(Income tax effects are disregarded.)



U.S. Subsidiary

Adjusting Entry

December 31, 2006

Inventories 4 0 0 0

Intercompany Payables 4 0 0 0

To record merchandise in transit from parent company.



c. Panamer Corporation and Subsidiaries

Working Paper for Consolidated Financial Statements



Eliminations

Panamer U.S. Itican increase

Corporation Subsidiary Subsidiary (decrease) Consolidated

Income Statements

Revenue:

Sales 4 0 0 0 0 0 2 1 0 0 0 3 4 2 9 0 4 5 5 2 9 0

Intercompany sales 1 0 0 0 0 (c) ( 1 0 0 0 0 )Intercompany investment income 2 4 2 4 (1) (a) ( 1 0 8 0 )

(b) ( 1 3 4 4 )

Total revenue 4 1 2 4 2 4 2 1 0 0 0 3 4 2 9 0 ( 1 2 4 2 4 ) 4 5 5 2 9 0

Costs and expenses and minority interest

Cost of goods sold 3 0 0 0 0 0 1 5 0 0 0 2 7 0 0 0 (c) ( 1 5 0 0 ) 3 4 0 5 0 0

Intercompany cost of goods sold 7 5 0 0 (c) ( 7 5 0 0 )

Depreciation expense 3 0 0 0 5 5 0 1 5 7 5 (a) ( 1 8 0 ) 4 8 6 1

(b) ( 8 4 )

Selling expenses 3 4 5 0 0 2 4 0 0 1 4 8 5 3 8 3 8 5

Other operating expenses 4 0 0 0 0 1 3 8 3 2 1 3 0 4 3 5 1 3

Income taxes expenses 1 0 0 0 0 6 6 7 8 4 0 1 1 5 0 7

Minority interest in net income of subsidiary (d) 1 1 8 1 1 8

Total cost and expenses and minority interest 3 9 5 0 0 0 2 0 0 0 0 3 3 0 3 0 ( 9 1 4 6 )* 4 3 8 8 8 4

Net income 1 7 4 2 4 1 0 0 0 1 2 6 0 ( 3 2 7 8 ) 1 6 4 0 6

Statements of Retained Earnings

Retained earnings, beginning of year 2 5 0 0 0 2 0 0 0 8 4 0 (a) ( 2 0 0 0 ) 2 5 0 0 0

(b) ( 8 4 0 )

Net income 1 7 4 2 4 1 0 0 0 1 2 6 0 ( 3 2 7 8 ) 1 6 4 0 6

Subtotal 4 2 4 2 4 3 0 0 0 2 1 0 0 ( 6 1 1 8 ) 4 1 4 0 6

Dividends declared 1 0 0 0 (a) ( 1 0 0 0 )†

Retained earnings, end of year 4 2 4 2 4 2 0 0 0 2 1 0 0 ( 5 1 1 8 ) 4 1 4 0 6

(1) $900 + $180 + $1,260 + $84 = $2,424 (see b)

* A decrease in costs and expenses and an increase in net income.

† A decrease in dividends and an increase in retained earnings. (Continued on page 386.)



Panamer Corporation and Subsidiaries

Working Paper for Consolidated Financial Statements (concluded)



Eliminations

Panamer U.S. Itican increase

Corporation Subsidiary Subsidiary (decrease) Consolidated

Balance Sheet

Assets

Cash 1 0 0 0 0 1 5 0 0 8 0 0 1 2 3 0 0

Trade accounts receivable (net) 3 0 0 0 0 8 0 0 0 2 8 0 0 4 0 8 0 0

Intercompany receivables (payables) 4 9 0 0 ( 4 9 0 0 )

Inventories 2 0 0 0 0 4 0 0 0 6 6 4 0 (c) ( 1 0 0 0 ) 2 9 6 4 0

Investment in U.S. Subsidiary common stock 9 1 8 0 (a) ( 9 1 8 0 )

Investment in Itican Subsidiary common stock 8 9 2 4 (b) ( 8 9 2 4 )Plant assets 4 5 0 0 0 5 5 0 0 1 4 0 0 0 (a) ( 1 8 0 0 ) 6 1 8 6 0

(b) ( 8 4 0 )Accumulated depreciation ( 1 5 0 0 0 ) ( 2 0 0 0 ) ( 6 0 0 0 ) (a) ( 1 8 0 )* ( 2 2 7 3 6 )

(b) ( 8 4 )

Total assets 1 1 3 0 0 4 1 2 1 0 0 1 8 2 4 0 ( 2 1 4 8 0 ) 1 2 1 8 6 4

Liabilities & Stockholders’ Equity

Trade accounts payable 2 5 0 0 0 5 6 0 2 5 5 6 0

Dividends payable 1 0 0 1 0 0

Long-term debt 8 0 0 0 8 0 0 0

Common stock 5 0 0 0 0 1 0 0 0 0 1 2 0 0 0 (a) ( 1 0 0 0 0 ) 5 0 0 0 0

(b) ( 1 2 0 0 0 )

Minority interest in net assets of subsidiary (a) 1 1 0 0 1 2 1 8

(d) 1 1 8

Retained earnings 4 2 4 2 4 2 0 0 0 2 1 0 0 ( 5 1 1 8 ) 4 1 4 0 6

Foreign currency translation adjustments ( 4 4 2 0 ) ( 4 4 2 0 ) (b) ( 4 4 2 0 )† ( 4 4 2 0 )

Total liabilities & stockholders’ equity 1 1 3 0 0 4 1 2 1 0 0 1 8 2 4 0 ( 2 1 4 8 0 ) 1 2 1 8 6 4

* Decreases in accumulated depreciation and increases in total assets.

† A decrease in foreign currency translation adjustments and an increase in equity.




Working Paper Eliminations

December 31,2006

(a) Common Stock—U.S. Subsidiary 1 0 0 0 0

Retained Earnings—U.S. Subsidiary 2 0 0 0

Accumulated Depreciation—U.S. Subsidiary 1 8 0

Intercompany Investment Income—Panamer 1 0 8 0

Investment in U.S. Subsidiary Common

Stock—Panamer 9 1 8 0

Plant Assets—U.S. Subsidiary 1 8 0 0

Depreciation Expense—U.S. Subsidiary 1 8 0

Dividends Declared—U.S. Subsidiary 1 0 0 0

Minority Interest in Net Assets of Subsidiary

($1,200 – $100) 1 1 0 0

To eliminate intercompany investment and related

equity accounts of U.S. Subsidiary at beginning of

year; to eliminate intercompany investment income

and subsidiary’s dividends; to offset bargain-purchase

excess against subsidiary’s plant assets; to reduce

subsidiary’s depreciation for pro rata portion of bargain-

purchase excess; and to provide for minority interest in

net assets of U.S. Subsidiary at beginning of year

($12,000 x 0.10 = $1,200), less minority’s share of

subsidiary’s dividends ($1,000 x 0.10 = $100.) (Income

tax effects are disregarded.)

(b) Common Stock—Itican Subsidiary 1 2 0 0 0

Retained Earnings—Itican Subsidiary 8 4 0

Accumulated Depreciation –Itican Subsidiary 8 4

Intercompany Investment Income—Panamer 1 3 4 4

Investment in Itican Subsidiary Common

Stock—Panamer 8 9 2 4

Foreign Currency, Translation Adjustment—

Panamer 4 4 2 0

Plant Assets—Itican Subsidiary 8 4 0

Depreciation Expense—Itican Subsidiary 8 4

To eliminate intercompany investment and related

equity accounts of Itican Subsidiary (retained

earnings at beginning of year); to eliminate

intercompany investment income; to offset bargain-

purchase excess against subsidiary’s plant assets;

and to reduce subsidiary’s depreciation for pro rata

portion of bargain-purchase excess. (Income tax

effects are disregarded.)

(Continued on page 388.)


Panamer Corporation (concluded) Pr. 12–8


Working Paper Eliminations (concluded)

December 31, 2006

(c) Intercompany Sales—Panamer 1 0 0 0 0

Intercompany Cost of Goods Sold—Panamer 7 5 0 0

Cost of Goods Sold—U.S. Subsidiary

($6,000 x 0.25) 1 5 0 0

Inventories—U.S. Subsidiary ($4,000 x 0.25) 1 0 0 0

To eliminate intercompany sales, cost of goods sold,

and unrealized profit in inventories. (Income tax effects

are disregarded.)

(d) Minority Interest in Net Income of Subsidiary 1 1 8

Minority Interest in Net Assets of Subsidiary 1 1 8

To provide for minority interest in adjusted net income:

Net income of U.S. Subsidiary $1,000

Add: Adjustment per elimination (a) 180

Adjusted net income of U.S.

Subsidiary $1,180

Minority interest share ($1,180 x 0.10) $ 118


Chapter 12, Modern Advanced accounting-review Q & exr

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Transcript of Chapter 12, Modern Advanced accounting-review Q & exr