Related questions
Concept explainers
Shott, a public limited company, set up a wholly owned foreign subsidiary company, Hammer, on 1 June 1999 with a share capital of 400 000 ordinary shares of 1 dinar. Shott transacts on a limited basis with Hammer. It maintains a current account with the company but very few transactions are processed through this account. Shott is a multinational company with net assets of £1500 million and ‘normal’ profits are approximately £160 mil- lion. The management of Hammer are all based locally although Shott does have a representative on the management board. The prices of the products of Hammer are deter- mined locally and 90% of sales are to local companies. Most of the finance required by Hammer is raised locally, although occasionally short term finance is raised through bor- rowing monies from Shott. Hammer has made profits of 80 000 dinars and 120 000 dinars after dividend payments respectively for the two years to 31 May 2001. During the financial year to 31 May 2001, the following transactions took place:
(i) On 30 September 2000, a dividend from Hammer of 0.15 dinars per share was declared. The dividend was received on 1 January 2001 by Shott.
(ii) Hammer sold goods of 24 000 dinars to Shott during the year. Hammer made 25% profit on the cost of the goods. The goods were ordered by Shott on 30 September 2000, were shipped free on board (fob) on 1 January 2001, and were received by Shott on 31 January 2001. Shott paid the dinar amount on 31 May 2001 and had not hedged the transaction. All the goods remain unsold as at 31 May 2001.
(iii) Hammer has borrowed 150 000 dinars on 31 January 2001 from Shott in order to alle- viate its
The directors of Shott wish to use the closing rate to translate the
Dinars to £1
Exchange rates: 1 June 1999 1.0
31 May 2000 1.3
30 September 2000 1.1
1 January 2001 1.2
31 January 2001 1.5
31 May 2001 1.6
1 June 2001 1.65
Average rate for year to 31 May 2001 1.44
Required
(a) (i) Advise Shott as to whether the temporal or closing rate/net investment method should be used to translate the financial statements of Hammer;
(ii) Discuss the claim by SSAP 20 Foreign Currency Translation, that the usage of the temporal or net investment/closing rate method is based upon the economic relationship between the holding company and its foreign subsidiary. (
(b) Discuss how the above transactions should be dealt with in the consolidated financial statements of Shott, calculating the gain or loss on the disposal of Hammer on 1 June 2001 and stating how the cumulative exchange differences would be dealt with on the disposal.
Step by stepSolved in 5 steps with 5 images
- Board Company has a foreign subsidiary that began operations at the start of 2017 with assets of 144,000 kites (the local currency unit) and liabilities of 78,000. During this initial year of operation, the subsidiary reported a profit of 38,000 kites. It distributed two dividends, each for 6,200 kites with one dividend declared on March 1 and the other on October 1. Applicable exchange rates for 1 kite follow: January 1, 2017 (start of business) $0.81 March 1, 2017 0.79 Weighted average rate for 2017 0.78 October 1, 2017 0.77 December 31, 2017 0.76 Assume that the kite is this subsidiary’s functional currency. What translation adjustment would Board report for the year 2017? Assume that on October 1, 2017, Board entered into a forward exchange contract to hedge the net investment in this subsidiary. On that date, Board agreed to sell 170,000 kites in three months at a forward exchange rate of $0.77/1 kite. Prepare the journal entries required by this…arrow_forwardPar Corporation, a Canadian company, purchased 80% of the outstanding shares of Sub Company of Germany on December 31, Year 5 for €3,000,000 Euros. At that date, the carrying values of Sub’s assets and liabilities were equal to fair values. There was a goodwill impairment loss in Year 6 of €10,000. The fiscal Year 5 financial statements of Sub were as follows: Sub Company Balance Sheet December 31, Year 5 Cash € 500,000 Accounts receivable 900,000 Inventory 1,200,000 Capital assets (net) 3,250,000 € 5,850,000 Accounts payable € 650,000 Bonds payable 1,700,000 Common shares 2,000,000 Retained earnings 1,500,000 € 5,850,000 Par anticipated that there would be a high volume of intercompany transactions with Sub, because Par provides the raw materials to Sub and sales are global. Also Sub obtained most of its financing thru banks in Canada. Par uses the cost method to account for its investment in Sub. The fiscal Year 6 financial statements of Par and Sub were as follows: Balance Sheets…arrow_forwardcould you answer part B please? Pagle Corporation established a subsidiary to enter into a new line of business considered to be substantially more risky than Pagle's current business. Pagle transferred the following assets and accounts payable to Sand Corporation in exchange for 5,000 shares of $10 par value stock of Sand: Cash Accounts Receivable Inventory Land Buildings and Equipment Accounts Payable Cost $ 30,000 45,000 60,000 20,000 300,000 10,000 Required B Book Value $ 30,000 40,000 60,000 20,000 260,000 10,000 Required: a. Prepare the journal entry that Pagle recorded for the transfer of assets and accounts payable to Sand. b. Prepare the journal entry that Sand recorded for receipt of the assets and accounts payable from Pagle. Complete this question by entering your answers in the tabs below. Required A Prepare the journal entry that Sand recorded for receipt of the assets and accounts payable from Pagle. Note: If no entry is required for a transaction/event, select "No…arrow_forward
- Solo Company Limited, located in Mexico City, is a wholly owned subsidiary of Partner Incorporated, a U.S. company. At the beginning of the year, Solo's condensed balance sheet was reported in Mexican pesos (MXP) as follows: Assets 3,425,000 January 1 (beginning of year) Average for year During the year, the company earned income of MXP260,000 and on November 1 declared dividends of MXP165,000. The Mexican peso is the functional currency. Relevant exchange rates between the peso and the U.S. dollar follow November 1 December 31 (end of year) Liabilities Stockholders' Equity $ 0.0870 0.0900 0.0915 0.0930 Required: a. Prepare a proof of the translation adjustment, assuming that the beginning credit balance of the Accumulated Other Comprehensive Income-Translation Adjustment account was $3,240 b. Did the US dollar strengthen or weaken against the Mexican peso during the year? Complete this question by entering your answers in the tabs below. Dividends Not assets translated at 2,830,000…arrow_forwardProduce a consolidated balance sheet for Johnston Group as at 30 September 20X6 consistent with international accounting standards.arrow_forwardSubject: accountingarrow_forward
- Board Company has a foreign subsidiary that began operations at the start of 2017 with assets of 138,000 kites (the local currency unit) and liabilities of 66,000. During this initial year of operation, the subsidiary reported a profit of 32,000 kites. It distributed two dividends, each for 5,600 kites with one dividend declared on March 1 and the other on October 1. Applicable exchange rates for 1 kite follow: January 1, 2017 (start of business) $0.75 March 1, 2017 0.73 Weighted average rate for 2017 0.72 October 1, 2017 0.71 December 31, 2017 0.70 Assume that the kite is this subsidiary’s functional currency. What translation adjustment would Board report for the year 2017? Assume that on October 1, 2017, Board entered into a forward exchange contract to hedge the net investment in this subsidiary. On that date, Board agreed to sell 260,000 kites in three months at a forward exchange rate of $0.71/1 kite. Prepare the journal entries required by this…arrow_forwardIn a split - off transaction, if the subsidiary's book value is $150 million, and the parent company decides to distribute 80% of the subsidiary's book value to the shareholders of the new entity, how much will a shareholder holding 100 shares in the new entity receive in cash? Assume that the company has 1.25 million shares outstanding.arrow_forwardChang Ltd owns 40% of Tweet Ltd. The CFO of Chang Ltd is a member of the pard of directors of Tweet Ltd. The remaining 60% ownership is spread across a large number of shareholders. These shareholders live in various geographical locations such as India, USA and Japan. They rarely attend AGMS. Tweet Ltd has entered into a fixed 10-year binding contract with Chang Ltd, which requires Tweet Ltd to purchase 90% of its inventories from Chang Ltd. This isa beneficial arrangement for Tweet Ltd, as the selling price is always highly discounted. Required: Using the facts provided and references to AASB10, discuss whether Chang Ltd is required to prepare consolidated financial statements.arrow_forward
AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,
Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis...AccountingISBN:9780134475585Author:Srikant M. Datar, Madhav V. RajanPublisher:PEARSON
Intermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill Education
Financial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education