Solution manual advanced accounting 10e by fischer taylor CH11

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER 11 UNDERSTANDING THE ISSUES to weaken against the dollar (a strengthening dollar) The remeasurement loss would be included in current-period earnings, and the U.S parent would want to hedge against this loss in reporting earnings The U.S company could borrow foreign currency and designate the loan as a hedge of its net investment in the foreign subsidiary As the foreign currency weakened, it would take fewer dollar equivalents to settle the FC-denominated loan This would result in an exchange gain that could offset the remeasurement loss Given a weakening FC, an FC-denominated loan receivable would not be an effective hedge of the net investment in the subsidiary If major cash inflows and/or outflows are not denominated in the entity’s domestic currency, this is a strong indicator that another currency is the functional currency The company’s financing, sales, and expenditure activities should be evaluated in order to identify the primary currency in which the entity operates For example, if a French company secures most of its financing from a U.S bank with the debt to be serviced with dollars, this suggests that the functional currency is the U.S dollar Because the French company’s functional currency is the euro, it is not exposed to risk associated with exchange rate changes between the euro and the U.S dollar (the parent’s currency) Changes in the exchange rates will not have a current or known economic effect on either the parent’s or the French company’s cash flows or equity Therefore, the translation adjustment should not be included as a component of net income Including the adjustment in net income would suggest that exchange rate changes have an economic effect on the constituent companies when, in fact, they not If a foreign entity’s functional currency is highly inflationary, there is an assumption that the currency has lost its utility as a measure of a store of value and lacks stability Therefore, the currency would not serve as a useful functional currency If the functional currency were translated, rather than remeasured, the results might be quite unusual and not very useful The results will not represent reasonable dollarequivalent measures of the accounts In order to overcome these unusual results, two possible approaches have been proposed The first approach would adjust the foreign entity’s trial balance for inflationary changes over time and then translate the resulting balances A second approach is to assume that the parent/investor (dollar) currency should serve as the foreign entity’s functional currency This latter approach has been adopted by the FASB and therefore requires that the foreign entity’s statements be remeasured into the functional currency (dollars) Because the euro is the subsidiary’s functional currency, its financial statements will be translated rather than remeasured The translated balance of retained earnings consists of the following: a beginning balance represented by the translated balance at the end of the prior year plus net income translated at weighted-average exchange rates less dividends declared translated at the historical exchange rates existing at the date of declaration In order for there to be a remeasurement loss, the foreign currency (FC) would have 519 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 11—Exercises EXERCISES EXERCISE 11-1 (1) Translated trial balance: Debit (Credit) Current Assets Equipment Accumulated Depreciation—Equipment Land and Building Accumulated Depreciation—Building Current Liabilities Noncurrent Notes Payable Common Stock Retained Earnings Sales Revenue Cost of Sales Operating Expenses Subtotal Translation Adjustment (to balance) Total Note A Analysis of retained earnings: Beginning balance—January 1, 20X5 20X5 net income 20X5 dividend Ending balance—December 31, 20X5 20X5 dividend Ending balance—December 31, 20X6 Balance in Exchange FC Rate 140,000 FC $1.28 400,000 1.28 (80,000) 1.28 665,000 1.28 (20,000) 1.28 (180,000) 1.28 (300,000) 1.28 (500,000) 1.25 (60,000) Note A (185,000) 1.32 90,000 1.32 30,000 1.32 FC (100,000) 20,000 (80,000) 20,000 (60,000) 1.25 1.30 1.33 FC 1.29 FC Translated into U.S.$ $179,200 512,000 (102,400) 851,200 (25,600) (230,400) (384,000) (625,000) (77,600) (244,200) 118,800 39,600 11,600 (11,600) $ (130,000) 26,600 $(103,4 25,800 $ (2) Because the functional currency is the FC, the company is not exposed to immediate exchange rate risk between the FC and the dollar Therefore, the translation adjustment should not be included as a component of net income but rather as a component of other comprehensive income Because there is no noncontrolling interest, no allocation of the translation adjustment between controlling and noncontrolling interests is necessary 520 (77,600 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 11—Exercises Exercise 11-1, Concluded (3) Translation adjustment traceable to the current year: Net assets at beginning of year multiplied by the change in exchange rates during the period: 580,000 FC × ($1.28 – $1.34) 500,000 FC × ($1.34 – $1.25) 20X6 $ 2,600 (4,000) Increase in net assets due to capital transactions multiplied by the difference between the current rate and the rate a the time of the capital transaction: 20,000 FC × ($1.28 – $1.29) 20,000 FC × ($1.34 – $1.33) Cumulative translation adjustment as of December 31, 20X6 521 34,800 $(45,000) Increase in net assets (excluding capital transactions) multiplied by the difference between the current rate and the average rates used to translate income: 65,000 FC × ($1.28 – $1.32) 100,000 FC × ($1.34 – $1.30) Current-year translation adjustment 20X5 (200) 200 $ 37,200 $(11,600) $(48,800) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 11—Exercises EXERCISE 11-2 Translated Value Assuming $ Is Functional Currency Rate $ Amount In FC Income Statement Components: Sales revenue Cost of sales Gross profit Selling, general, and administrative Depreciation: 2,000,000 FC/10 years 1,000,000 FC/10 years × 1/2 Subtotal Remeasurement gain (loss to balance) Net income Year-End Balance Sheet Components: Current assets (assume all cash) Net depreciable assets Initial contributed capital Dividend ($1,110,000/$1.11) Net income excluding remeasurement Subtotal Translation adjustment Remeasurement gain (loss to balance) 10,000,000 FC$1.06 3,700,0001.06 6,300,000 FC 1,200,0001.06 $ 200,000 1.00 50,000 1.05 4,850,000 FC $ 4,850,000 FC $ 4,100,000 FC1.11 2,750,000(see Note A) 6,850,000 FC 3,000,000 FC1.00 (1,000,000)1.11 4,850,000 6,850,000 FC 6,850,000 FC 522 $ $ $ $ $ Translated Value Assuming FC Is Functional Currency Rate $ Amount $10,600,000$1.06 3,922,0001.06 6,678,000 1,272,0001.06 200,000 1.06 52,500 1.06 5,153,500 305,000 5,458,500 4,551,0001.11 2,797,5001.11 7,348,500 3,000,0001.00 (1,110,000)1.11 5,153,500 7,043,500 305,000 7,348,500 $ $10,600,000 3,922,000 6,678,000 1,272,000 $ 212,000 53,000 5,141,000 $ 5,141,000 $ 4,551,000 3,052,500 7,603,500 3,000,000 (1,110,000) 5,141,000 7,031,000 572,500 $ $ $ $ 7,603,500 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 11—Exercises Exercise 11-2, Concluded Translated Value Assuming $ Is Functional Currency Rate $ Amount In FC Cash Flow Components: Initial investment 3,000,000 Purchase of equipment at beginning Purchase of equipment at midyear Net income Add back depreciation Deduct remeasurement gain Dividend payment (1,110,000) Subtotal 4,246,000 FC exchange gain (see Note B)) Net cash flow 4,551,000 3,000,000 FC $1.00 (2,000,000)1.00 (1,000,000)1.05 4,850,000see above 250,000 see above see above (1,000,000) FC 1.11 4,100,000 FC 5,100,000 FC from operations (6,300,000 gross profit – 1,200,000 SGA*) held since average point: Value at midyear (5,100,000 FC × $1.06) Value at end of year (5,100,000 FC × $1.11) 523 3,000,000 $1.00 $ $ $ $ $ (2,000,000)1.00 (2,000,000) (1,050,000)1.05 (1,050,000) 5,458,500see above 5,141,000 252,500 see above 265,000 (305,000) (1,110,000) 1.11 4,246,000 305,000 $ 4,551,000 $ Note B: Effect of exchange rate changes on cash: 1,000,000 FC held and not spent on equipment during the first six months: Value at beginning of year (1,000,000 FC × $1.00) Value at end of first six months (1,000,000 FC × $1.05) Exchange gain on cash $ $ 4,100,000 FC Note A: Net depreciable assets: Purchased at beginning of year (1,800,000 FC × $1.00) Purchased at midyear (950,000 FC × $1.05) Translated Value Assuming FC Is Functional Currency Rate $ Amount 1,800,000 997,500 2,797,500 1,000,000 1,050,000 50,000 5,406,000 5,661,000 $ 305,000 $ To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 11—Exercises Exchange gain on cash $ 255,000 Total exchange gain on cash $ 305,000 *SGA for selling, general, and administrative 524 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 11—Exercises EXERCISE 11-3 June 30 Dec 31 Investment in Fabinet Cash To record purchase of 40% interest in Fabinet 3,120,000 Cash Investment to Fabinet To record receipt of dividend (126,000 FC × $0.66 × 40%) 33,264 Investment in Fabinet Subsidiary Income Translation Adjustment To record share of net income adjusted for the amortization of excess and share of translation (see Schedules A and B) 565,712 3,120,000 33,264 210,560 355,152 Schedule A—Calculation of Investor’s Share of Adjusted Equity Income Price paid ($3,120,000/$0.60) 5,200,000 FC Equity purchased 10,500,000 FC 40% Interest acquired × 40% 4,200,000 Excess cost 1,000,000 FC Allocation of excess cost: Equipment ($240,000/$0.60) 400,000 FC Goodwill 600,000 1,000,000 FC Subsidiary net income (1,260,000 FC × $0.64) Investor’s interest Investor’s interest in net income Depreciation of excess related to equipment: $240,000/10 years × 1/2 year Impairment loss on goodwill Investor’s adjusted income $ 806,400 × 40% $ 322,560 $ (12,000) (100,000) 210,560 Schedule B—Recomputation of Annual Translation Adjustment Net assets owned by the investee at the beginning of period multiplied by the change in the exchange rates during the period [10,500,000 FC × ($0.68 – $0.60)] $840,000 Increase in net assets (excluding capital transactions) multiplied by the difference between the current rate and the average rate used to translate income [1,260,000 FC × ($0.68 – $0.64)] 50,400 Increase/decrease in net assets due to capital transactions (including investments by the domestic investor) multiplied by the difference between the current rate and the rate at the time of the capital transaction [126,000 FC × ($0.68 – $0.66)] Translation adjustment Investor’s interest Investor’s interest in translation adjustment (2,520) $887,880 × 40% $355,152 525 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 11—Exercises EXERCISE 11-4 Translated net income: Debit (Credit) Sales Revenue Cost of Inventory Sold Depreciation Expense Other Operating Expenses Net Income Note A Cost of inventory sold per FIFO: Second quarter 20X6 Third quarter 20X6 Fourth quarter 20X6 Remeasurement gain (loss): Net assets at December 31, 20X6: Monetary net assets Inventory Depreciable assets (net) Land Total Shareholders' equity at December 31, 20X6: Equity at July 1, 20X6 Net income Remeasurement gain (loss) Total Exchange In FC Rate (1,022,000) FC 480,000 Note A 80,000 1.15 60,000 1.19 (402,000) FC Rate In FC 150,000 FC$1.15 220,000 1.18 110,000 1.20 480,000 FC In U.S.$ $172,500 259,600 132,000 $564,100 In FC In U.S.$ Rate 732,000 FC$1.23 100,000 1.20 870,000 1.15 500,000 1.15 2,202,000 FC 1,800,000 FC1.15 402,000 2,202,000 FC Net investment under the sophisticated equity method: Initial investment Share of subsidiary net income (30% × $488,680) Share of remeasurement gain (30% × $37,180) Amortization of excess of cost over book value (Note B) Net investment as of December 31, 20X6 Note B Cost Book value: (1,800,000 × $1.15) $2,070,000 Percentage interest acquired × 30% Excess of cost over book value Excess traceable to depreciable assets Depreciation of excess (over years) Excess attributed to goodwill 526 In U.S.$ $1.19 564,100 92,000 71,400 $ (488,680) $700,000 621,000 $ 79,000 $ 54,000 $ 6,000 $ 25,000 $ $(1,216 900,360 120,000 1,000,500 575,000 $2,595,860 $2,070,000 488,680 37,180 $2,595,860 $700,000 146,604 11,154 (6,000) $851,758 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 11—Exercises EXERCISE 11-5 Translation of Forecasted December 31, 20X4, Trial Balance Debit (Credit) Balance in FC Account Cash Accounts Receivable Inventory Equipment (net of depreciation) Accounts Payable 6% Note Payable Accrued Interest Payable Common Stock Contributed Capital in Excess of Par Value Beginning Retained Earnings Sales Cost of Sales Selling Expenses Administrative Expenses Interest Expense Subtotal Cumulative Translation Adjustment (to balance) Total Rate 40,000 FC$1.20 220,000 1.20 320,000 1.20 825,000 1.20 (360,000)1.20 (400,000)1.20 (4,000)1.20 (200,000)1.45 (200,000)1.45 (140,000) (600,000)1.28 366,000 1.28 55,000 1.28 48,000 1.28 30,000 1.28 FC Debit (Credit) Balance In $ $ 48,000 264,000 384,000 990,000 (432,000) (480,000) (4,800) (290,000) (290,000) (200,000) (768,000) 468,480 70,400 61,440 38,400 $(140,080) 140,080 $ 20X4 Change in the Translation Adjustment Cumulative translation adjustment as of December 31, 20X4 Cumulative translation adjustment as of December 31, 20X3 20X4 Increase in cumulative translation adjustment $140,080 120,000 $ 20,080 Calculation of necessary hedge: 20X4 Increase in cumulative translation adjustment Change in exchange rates: September 30, 20X4, exchange rate $1.24 December 31, 20X4, exchange rate 1.20 Amount of loan necessary to generate a $20,080 exchange gain given the anticipated change in exchange rates: $20,080/$0.04 Proof: If you borrowed (versus loaned) 502,000 FC, the value at various times would be as follows: At September 30, 20X4 (502,000 FC × $1.24) At December 31, 20X4 (502,000 FC × $1.20) Exchange gain on loan payable 527 $20,080 ÷ $0.04 502,000 FC $622,480 602,400 $ 20,080 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 11—Exercises EXERCISE 11-6 Case A: Remeasurement of Ending Inventory October 1, 20X7 December 15, 20X7 Historical cost Exchange Recording Rate Currency ($/FC) 150,000 FC1.76 30,000 1.72 180,000 FC Market value 176,000 FC1.82 Balance in Dollars $264,000 51,600 $315,600 $320,320 Because the remeasurement into the functional currency results in the historical cost having the least value, this amount is presented in the financial statements Case B: Inventory—December 31, 20X7 (60% × 380,000 FC) Current exchange rate Translated value Intercompany profit, 60% × [(380,000 FC × $2.00) – $500,000] Ending inventory after eliminating intercompany profit 228,000 FC $2.10 478,800 (156,000) $ 322,800 × $ Case C: Depreciation expense: January 1, 20X6, acquisition March 1, 20X6, acquisition July 1, 20X6, acquisition December 1, 20X6, acquisition Balance Exchange Rate in FCA* 38,000 FC2.10 59,167 1.98 10,800 1.92 2.01 250 108,217 FC Balance Exchange in FCB Rate 79,800 FC$1.05 117,151 1.05 20,736 1.05 503 1.05 218,190 FC *The 20X6 depreciation expenses in FC are calculated as follows: 380,000 ữ 10 ì 12/12 = 38,000 710,000 ữ 10 ì 10/12 = 59,167 216,000 ữ 10 ì 1/2 = 10,800 30,000 ữ 10 ì 1/12 = 250 528 Balance in Dollars $ 83,790 123,008 21,773 528 $229,099 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 11—Problems Problem 11-7, Concluded (2) Translated value of cost of sales: Exchange In FC Rate 420,000 FC1.19 17,166,0001.24 20X4 Cost of sales (see Note 3) 20X5 Cost of sales (see Note 4) $ In U.S.$ 499,800 21,285,840 PROBLEM 11-8 Tobac, Inc Trial Balance Translation December 31, 20X7 Relevant Exchange Rate Balance in FC Account Cash Net Accounts Receivable Inventory Depreciable Assets Accumulated Depreciation Due to Balfour Other Liabilities Common Stock Paid-In Capital in Excess of Par Retained Earnings, January 1, 20X7 Sales Cost of Sales Depreciation Expense Interest Expense on Balfour Loan (accrued at December 31) Exchange Gain on Balfour Loan Other Expenses Cumulative Translation Adjustment Totals 3,087,385 FC 12,000,0000.65 8,000,0000.65 34,000,0000.65 (12,300,000)0.65 (2,087,385)0.65 (3,700,000)0.65 (19,000,000)0.55 (8,480,000)0.55 (7,520,000)Note A (40,000,000)0.67 27,600,0000.67 3,300,0000.67 Balance in Dollars $0.65 118,154 0.65 (30,769) 0.67 5,012,6150.67 FC $ $ 2,006,8 7,800,000 5,200,000 22,100,000 (7,995,000) (1,356,800) (2,405,000) (10,450,000) (4,664,000) (4,266,000) (26,800,000) 18,492,000 2,211,000 76,800 (20,615) 3,358,452 (3,287,637) Note A—The translated balance in retained earnings is as follows: Balance on July 1, 20X5 (2,520,000 FC × $0.55) Last months, 20X5 income (2,000,000 FC × $0.57) 20X6 Income (3,000,000 FC × $0.58) Retained earnings, December 31, 20X6 548 $1,386,000 1,140,000 1,740,000 $4,266,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 11—Problems Problem 11-8, Continued Consolidating the Foreign Subsidiary Balfour Corporation and Tobac, Inc Worksheet for Consolidated Financial Statements (in dollars) For Year Ended December 31, 20X7 Cash Net Accounts Receivable Inventory Due from Tobac Investment in Tobac Depreciable Assets Equipment Accumulated Depreciation Due to Balfour Other Liabilities Common Stock—Parent Common Stock—Subsidiary Paid-In Capital in Excess of Par—Parent Paid-In Capital in Excess of Par—Subsidiary Retained Earnings, January 1, 20X7—Parent Retained Earnings, January 1, 20X7—Subsidiary Sales (124,800,000) Cost of Sales Depreciation Expense Interest Expense on Balfour Loan Exchange Gain on Balfour Loan Other Expenses Interest Income Subsidiary Income Cumulative Translation Adjustment Eliminations Consolidated Consolidated Trial Balance and Adjustments Income Balance Balfour Tobac Dr Cr Statement Sheet 4,463,200 2,006,800 15,350,000 7,800,000 16,300,000 5,200,000 1,356,800 (LN1) 1,356,800 23,712,363 (CY1) 2,682,363 (EL) 19,380,000 (D/A) 1,650,000 68,000,000 22,100,000 (D/A) 1,950,000 1,950,000 (42,000,000) (7,995,000) (D/A) 487,500 (1,356,800) (LN1) 1,356,800 (27,000,000) (2,405,000) (35,000,000) (35,000,000) (10,450,000) (EL) 10,450,000 (2,000,000) (2,000,00 (4,664,000) (EL) 4,664,000 (4,500,000) (D/A) 259,500 (4,266,000) (EL) 4,266,000 (98,000,000) (26,800,000) 64,000,000 18,492,000 82,492,000 8,076,800 2,211,000 10,287,800 76,800 (LN2) 76,800 (20,615) (20,615) 10,000,000 3,358,452 (D/A) 201,000 13,559,452 (76,800) (LN2) 76,800 (2,682,363) (CY1) 2,682,363 (3,287,637) (D/A) 273,000 (3,560,63 0 25,906,463 25,906,463 Combined Net Income (18,481,363) (18,481,363) 549 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 11—Problems Problem 11-8, Concluded Eliminations and Adjustments: (CY1) Eliminate the subsidiary income account against the investment account (EL) Eliminate the subsidiary’s January 1, 20X7, equity balances against the investment account (D/A) Distribute the excess of cost over book value and record appropriate amortization Cost to acquire subsidiary Book value of subsidiary Excess of cost over book value Annual depreciation of excess (3,000,000 FC ÷ 10) Accumulated depreciation of excess at December 31, 20X6 (300,000 FC × 1.5 years) Excess of cost over book value in dollars at: July 1, 20X5 (3,000,000 FC × $0.55) December 31, 20X7 (3,000,000 FC × $0.65) Accumulated depreciation of excess at December 31, 20X7, in dollars (750,000 FC × $0.65) Depreciation expense in dollars: 20X5 (150,000 FC × $0.57) 20X6 (300,000 FC × $0.58) 20X7 (300,000 FC × $0.67) (LN1) Eliminate the intercompany loan balances (LN2) Eliminate interest on intercompany loans 550 33,000,000 FC 30,000,000 3,000,000 FC 300,000 FC 450,000 FC $1,650,000 $1,950,000 $487,500 $85,500 $174,000 $201,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 11—Problems PROBLEM 11-9 Account Tobac, Inc Trial Balance Translation December 31, 20X7 Balance in Foreign Currency Cash Net Accounts Receivable Inventory Depreciable Assets Accumulated Depreciation Due to Balfour Other Liabilities Common Stock Paid-In Capital in Excess of Par Retained Earnings, January 1, 20X7 Sales Cost of Sales Depreciation Expense Interest Expense on Balfour Loan (accrued at December 31, 20X7) Exchange Gain on Balfour Loan Other Expenses Remeasurement Loss (Gain) Totals Relevant Exchange Rate Balance in Dollars 3,087,385 FC $0.65 12,000,0000.65 8,000,000Note A 34,000,000Note B (12,300,000)Note B (2,087,385)0.65 (3,700,000)0.65 (19,000,000)0.55 (8,480,000)0.55 (7,520,000)Note C (40,000,000)0.67 27,600,000Note D 3,300,000Note B $ 2,006,8 7,800,000 4,855,000 19,060,000 (6,792,000) (1,356,800) (2,405,000) (10,450,000) (4,664,000) (4,856,000) (26,800,000) 18,048,000 1,842,000 118,154 0.65 (30,769) 0.67 5,012,6150.67 76,800 (20,615) 3,358,452 297,363 0 FC $ Note A—Ending inventory consists of: Inventory acquired before July 1, 20X5 (1,500,000 FC × $0.55) Inventory acquired in the first quarter of 20X7 (6,500,000 FC × $0.62) $ 825,000 4,030,000 $4,855,000 Note B—Depreciable assets consists of the following: Assets acquired prior to July 1, 20X5 (30,000,000 FC × $0.55) Assets acquired on April 1, 20X7 (4,000,000 FC × $0.64) $16,500,000 2,560,000 $19,060,000 Accumulated depreciation consists of: Assets acquired prior to July 1, 20X5 (30,000,000 FC × 4*/10 × $0.55) Assets acquired on April 1, 20X7 (4,000,000 FC × 1/10 × 9/12 year × $0.64) $6,600,000 192,000 $6,792,000 *12,300,000 FC – (4,000,000 FC/10 × 9/12 for assets acquired on April 1, 20X7) = 12,000,000 FC balance in accumulated depreciation related to assets acquired before July 1, 20X5 12,000,000 FC/(30,000,000 FC/10 years) = 4, the number of years those assets have been depreciated as of the end of 20X7 551 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 11—Problems Problem 11-9, Continued Depreciation expense consists of: Assets acquired prior to July 1, 20X5 (30,000,000 FC × 1/10 × $0.55) Assets acquired on April 1, 20X7 (4,000,000 FC × 1/10 × 9/12 year × $0.64) $1,650,000 192,000 $1,842,000 Note C—The translated balance of retained earnings is as follows: Balance on July 1, 20X5 (2,520,000 FC × $0.55) Last months, 20X5 income 20X6 Income Retained earnings, December 31, 20X6 $1,386,000 1,610,000 1,860,000 $4,856,000 Note D—Cost of sales consists of: Inventory purchases over past months of 20X7 (23,400,000 FC × $0.66) Inventory purchased in the first quarter of 20X7 (4,200,000 FC × $0.62) 552 $15,444,000 2,604,000 $18,048,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 11—Problems Problem 11-9, Continued Consolidating the Foreign Subsidiary Balfour Corporation and Tobac Inc Worksheet for Consolidated Financial Statements (in dollars) For Year Ended December 31, 20X7 Cash Net Accounts Receivable Inventory Due from Tobac Investment in Tobac Depreciable Assets Equipment Accumulated Depreciation Due to Balfour Other Liabilities Common Stock—Parent Common Stock—Subsidiary Paid-In Capital in Excess of Par—Parent Paid-In Capital in Excess of Par—Subsidiary Retained Earnings, January 1, 20X7—Parent Retained Earnings, January 1, 20X7—Subsidiary Sales (124,800,000) Cost of Sales Depreciation Expense Interest Expense on Balfour Loan Exchange Gain on Balfour Loan Other Expenses Interest Income Subsidiary Income Remeasurement Loss Eliminations Consolidated Consolidated Trial Balance and Adjustments Income Balance Balfour Tobac Dr Cr Statement Sheet 4,463,200 2,006,800 15,350,000 7,800,000 16,300,000 4,855,000 1,356,800 (LN1) 1,356,800 25,115,363 (CY1) 3,495,363 (EL) 19,970,000 (D/A) 1,650,000 68,000,000 19,060,000 (D/A) 1,650,000 1,650,000 (42,000,000) (6,792,000) (D/A) 412,500 (1,356,800) (LN1) 1,356,800 (27,000,000) (2,405,000) (35,000,000) (35,000,000) (10,450,000) (EL) 10,450,000 (2,000,000) (2,000,00 (4,664,000) (EL) 4,664,000 (5,090,000) (D/A) 247,500 (4,856,000) (EL) 4,856,000 (98,000,000) (26,800,000) 64,000,000 18,048,000 82,048,000 8,076,800 1,842,000 9,918,800 76,800 (LN2) 76,800 (20,615) (20,615) 10,000,000 3,358,452 (D/A) 165,000 13,523,452 (76,800) (LN2) 76,800 (3,495,363) (CY1) 3,495,363 297,363 297,363 26,961,463 26,961,463 Combined Net Income (19,033,000) (19,033,000) 553 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 11—Problems Problem 11-9, Concluded Eliminations and Adjustments: (CY1) Eliminate the subsidiary income account against the investment account (EL) Eliminate the subsidiary’s January 1, 20X7, equity balances against the investment account (D/A) Distribute the excess of cost over book value and record appropriate amortization Cost to acquire subsidiary Book value of subsidiary Excess of cost over book value Annual depreciation of excess (3,000,000 FC ÷ 10) Accumulated depreciation of excess at December 31, 20X6 (300,000 FC × 1.5 years) Excess of cost over book value in dollars at: July 1, 20X5 (3,000,000 FC × $0.55) Accumulated depreciation of excess at December 31, 20X7, in dollars (750,000 FC × $0.55) Depreciation expense in dollars: 20X5 (150,000 FC × $0.55) 20X6 (300,000 FC × $0.55) 20X7 (300,000 FC × $0.55) (LN1) Eliminate the intercompany loan balances (LN2) Eliminate the interest on intercompany loan 554 33,000,000 FC 30,000,000 3,000,000 FC 300,000 FC 450,000 FC $1,650,000 $412,500 $82,500 $165,000 $165,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 11—Problems PROBLEM 11-10 Korbel Manufacturing Trial Balance Translation December 31, 20X6 Dr (Cr.) Balance Account in FC Working Capital Depreciable Assets Accumulated Depreciation Other Assets Due to Troutman Notes Payable Common Stock at Par Value Paid-In Capital in Excess of Par Retained Earnings 20X6 Net Income Cumulative Translation Adjustment Totals Relevant Exchange Rate 5,200,000 FC 22,500,0001.15 (6,740,000)1.15 3,080,0001.15 (80,000) 1.15 (1,600,000)1.15 (5,000,000)1.10 (10,000,000)1.10 (6,260,000)Note A (1,100,000)1.17 FC Dr (Cr.) Balance in Dollars $1.15 $ $ 5,980,0 25,875,000 (7,751,000) 3,542,000 (92,000) (1,840,000) (5,500,000) (11,000,000) (6,956,800) (1,287,000) (970,200) Note A—The translated balance in retained earnings is as follows: Relevant Exchange Rate 5,000,000 FC 900,000 1.12 (240,000) 1.13 800,000 1.20 (200,000) 1.20 Balance in FC Balance on July 1, 20X4 Last months of 20X4 net income 20X4 Dividend declared 20X5 Net income 20X6 Dividend declared Retained earnings (20X6 year end, excluding net income) 555 6,260,000 FC Dr (Cr.) Balance in Dollars $1.10 $5,500, 1,008,000 (271,200) 960,000 (240,000) $6,956, To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 11—Problems Problem 11-10, Continued Consolidating the Foreign Subsidiary Troutman International and Korbel Manufacturing Worksheet for Consolidated Financial Statements (in dollars) For Year Ended December 31, 20X6 Working Capital 13,728,580 Depreciable Assets 61,025,000 Accumulated Depreciation/Amortization (19,886,000) Goodwill 1,817,000 Due from Korbel Investment in Korbel Other Assets 5,612,000 Due to Troutman Notes Payable (5,840,000) Common Stock at Par Value (16,000,000) Paid-In Capital in Excess of Par (26,000,000) Retained Earnings—Parent Retained Earnings—Subsidiary 20X6 Net Income—Parent 20X6 Net Income—Subsidiary Cumulative Translation Adjustment—Subsidiary Cumulative Translation Adjustment—Parent 34,000,000 (11,560,000) Consolidated Income Statement Noncontrolling Interest Controlling Retained Earnings 575,000 483,000 92,000 (CY1) 1,158,300 21,111,120 2,970,000 Eliminations and Adjustments Dr Cr 5,980,000 Trial Balance Korbel Troutman 7,748,580 25,875,000 (D) (7,751,000) (D) 1,150,000 (A) 2,300,000 92,000 25,239,420 2,070,000 3,542,000 (4,000,000) (92,000) (1,840,000) (IA) (16,000,000) (5,500,000) (EL) 4,950,000 (550,000) (26,000,000) (11,000,000) (EL) 9,900,000 (1,100,000) 316,800 464,940 (EL) 6,261,120 (NCI) 35,200 51,660 (A) 210,600 330,000 (8,000,000) (A) (6,956,800) (A) (A) (3,590,000) (A) (CY1) (1,287,000) (970,200) (CT) (IA) (A) (EL) (D) 92,000 1,158,300 (A) 23,400 1,048,320 (D/A) 150,000 (A) 44,600 556 Consolidated Balance Sheet (7,218,260) (2,221,100) (938,820) (1,263,600) (116,480) (1,048,320) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 11—Problems (CT) 27,962,340 1,048,320 27,962,340 Consolidated Net Income (3,484,700) To Noncontrolling Interest (NCI) 126,360 (126,360) (3,358,340) Balance to Controlling Interest 3,358,340 Total Noncontrolling Interest (2,831,660) (2,831,660) Retained Earnings—Controlling Interest, December 31, 20X6 (10,576,600) (10,576,600) 557 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 11—Problems Problem 11-10, Continued Eliminations and Adjustments: (CY1) Eliminate the entries in the subsidiary income account against the investment in subsidiary account to record the parent’s controlling interest subsidiary (EL) Eliminate the parent’s percentage of the subsidiary’s beginning-of-period equity balances against the balance of the investment account (D)/(NCI) Distribute the excess of cost over book value at the time of acquisition Cost to acquire subsidiary Book value of subsidiary Excess of cost over book value 20,700,000 FC 18,000,000 2,700,000 FC Allocation of excess of cost over book value: Allocated to a licensing agreement to be amortized over years Allocated to goodwill Parent’s allocated excess: Excess of cost over book value in dollars at: July 1, 20X4 (2,700,000 FC × $1.10) $1,980,000 December 31, 20X6 (2,700,000 FC × $1.15) Controlling Noncontrolling Interest Interest 900,000 FC 100,000 FC 1,800,000 200,000 2,700,000 FC 300,000 FC Allocated to Licensing Total Agreement Goodwill $2,970,000 $ 990,000 3,105,000 1,035,000 2,070,000 Noncontrolling interest’s (10%) allocated excess: Excess of cost over book value in dollars at: July 1, 20X4 (300,000 FC × $1.10) December 31, 20X6 (300,000 FC × $1.15) 558 Total $330,000 345,000 Allocated to Licensing Agreement Goodwill $110,000 $220,000 115,000 230,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 11—Problems Problem 11-10, Concluded (A) Record appropriate depreciation/amortization on relevant items of cost in excess of book value Total licensing agreement of 1,000,000 FC allocated over years at 200,000 FC per year Balance in goodwill before impairment is $2,300,000 and $1,817,000 after impairment Therefore, goodwill must be reduced by $483,000 Accumulated amortization on licensing agreement: (200,000 FC × 2.5 years × $1.15)……………………… $575,000 Amortization expense on licensing agreement in dollars: 20X4 (100,000 FC × $1.12) 20X5 (200,000 FC × $1.20) Total To Parent’s To Subsidiary’s RE RE $112,000 $100,800 $11,200 240,000 216,000 24,000 $316,800 $35,200 20X6 (200,000 FC × $1.17) 234,000 Parent’s share $210,600; Subsidiary’s share $23,400 Impairment loss on goodwill: 20X5 (420,000 FC × $1.23) $516,600 To Parent’s RE $464,940; to Subsidiary’s RE $51,660 Year-end 20X6 translated value of goodwill: Original amount of goodwill Less: Impairment loss Net balance Year-end 20X6 exchange rate Translated value × 2,000,000 FC (420,000) 1,580,000 FC $1.15 $1,817,000 (IA) Eliminate intercompany trade balances (CT) Distribute the cumulative translation adjustment between controlling interest and NCI ($970,200 + $150,000 + $44,600) × 90% = $1,048,320 559 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 11—Problems PROBLEM 11-11 Keltner Enterprises and Subsidiary Jacklandia Worksheet for Consolidated Financial Statements For Year Ended December 31, 20X8 Percentage interest acquired in subsidiary: 80% Keltner Trial Balance (in dollars) Jacklandia Trial Balance (in FC) ExJacklandia change Trial Balance Rate (in dollars) Eliminations and Adjustments Dr Cr Consolidated Income Noncontrolling Statement Interest Working Capital $ 32,120,800 9,550,000 $1.29 $12,319,500 Due from Jacklandia 800,000 (IA) $ 800,000 Investment in Jacklandia 14,221,200 (CY1) 1,320,800 (EL) 10,660,400 (D) 2,240,000 Land 5,120,000 1,000,0001.29 1,290,000 Depreciable Assets 54,000,000 6,000,0001.29 7,740,000 Accumulated Depreciation (27,000,000) (2,000,000)1.29 (2,580,000) Patents (D) $ 2,580,000 Accumulated Amortization (A) 774,000 Other Assets 5,978,800 1,500,0001.29 1,935,000 Due to Keltner (620,155)1.29 (800,000) (IA) 800,000 Other Long-Term Debt (31,320,800) (4,679,845)1.29 (6,037,000) Common Stock—Parent (30,000,000) Common Stock—Subsidiary (5,000,000) 1.40 (7,000,000) (EL) 5,600,000 Paid-In Capital in Excess of Par—Parent (6,000,000) Paid-in Capital in Excess of Par—Subsidiary (1,000,000) 1.40 (1,400,000) (EL) 1,120,000 Retained Earnings—Parent (15,000,000) (A) 443,200 Retained Earnings— Subsidiary (3,450,000)Note A (4,925,500) (EL) 3,940,400(NCI) 560,000 (1,434,300) (A) 110,800 20X8 Net Income (2,920,000) (1,300,000)1.27 (1,651,000) (CY1) 1,320,800 $(2,996,200) (A) 254,000 Cumulative Translation Adjustment—Jacklandia 1,109,000 (D) 220,000 (A) 34,000 259,000 Cumulative Translation (CT) 1,036,000 Adjustment—Keltner (CT) 1,036,000 $ $17,425,200 $17,425,200 $ Combined Net Income $(2,996,200) To Noncontrolling Interest 0.2 x (1,651,000 – 254,000) 279,400 560 Controlling Retained Earnings Consolidated Balance Sheet $(1,400,000) (280,000) $(14,556,800) (279,400) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 11—Problems Balance to Controlling Interest $ 2,716,800 (2,716,800) Total Noncontrolling Interest $(3,134,700) Retained Earnings—Controlling Interest, December 31, 20X8 $(17,273,600) (17,273,600) $ 561 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 11—Problems Problem 11-11, Concluded Note A: Translation of Retained Earnings January 1, 20X6, beginning balance: 1,000,000 FC × $1.40 20X6 income: 1,400,000 FC × $1.42 20X7 income: 2,250,000 FC × $1.35 20X8 dividends: (1,200,000) FC × $1.25 Translated value of retained earnings (20X8 year end, excluding net income) $ 1,400,000 1,988,000 3,037,500 (1,500,000) $ 4,925,500 Eliminations and Adjustments: (CY1) Eliminate the entry in the subsidiary income account against the investment in the Jacklandia account ($1,651,000 × 80%) (EL) Eliminate 80% of the subsidiary’s beginning-of-year equity balances against the balance in the investment account (D)/(NCI) Distribute the excess of cost over book value Excess at rate on purchase date: (7,200,000/.8 – 7,000,000 = 2,000,000) × 1.40 = Excess at rate on balance sheet date 2,000,000 × 1.29 = patent Debit to Jacklandia exchange adjustment $ $2,800,000 2,580,000 to 220,000 $2,800,000 excess allocated 80% to Parent ($2,240,000) and 20% to NCI ($560,000) (A) Amortization of excess cost Total amortization at balance sheet date years × 200,000 × 1.29 = 2006 amortization to retained earnings, 200,000 × 1.42 = 2007 amortization to retained earnings, 200,000 × 1.35 = Prior year total 2008 amortization to expense, 200,000 × 1.27 = 808,000 Credit to Jacklandia exchange adjustment $774,000 $284,000 270,000 554,000 254,000 $ 34,000 $554,000 prior year amortization allocated 80% to Parent ($443,200) and 20% to NCI ($110,800) (IA) Eliminate intercompany trade balances (CT) Distribute the adjusted cumulative Jacklandia translation adjustment between controlling and noncontrolling interests ($1,109,000 + $220,000 – $34,000) × 80% = $1,036,000 562 ... Schedule B—Recomputation of Annual Translation Adjustment Net assets owned by the investee at the beginning of period multiplied by the change in the exchange rates during the period [10,500,000 FC... Increase/decrease in net assets due to capital transactions (including investments by the domestic investor) multiplied by the difference between the current rate and the rate at the time of the capital... of equity to the translated value of net assets (2) Net assets owned by the investor at the beginning of period multiplied by the change in the exchange rates during the period [5,620,000 FC ×