ADVANCED ACCOUNTING
ADVANCED ACCOUNTING
4th Edition
ISBN: 9781618533128
Author: Halsey
Publisher: Cambridge Business Publishers
Question
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Chapter 8, Problem 33P

a.

To determine

Translate the subsidiary's income statement, retained earnings statement, balance sheet,

statement of cash flows into $US.

a.

Expert Solution
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Explanation of Solution

Translation is a process used to express the financial results of a separate entity in such a way that it can be included in the consolidated financial statements of the parent entity when the functional currency of the separate entity is different from that of the parent. The translation adjustments resulting from the transfer of the entity's financial statements to the reporting currency shall be reported in other comprehensive income rather than in determining net income.

Subsidiary(in BRL)Translation RateSubsidiary(in $)
Income statement:
Sales7,350,000$0.22$1,617,000
Cost of goods sold(4,410,000)$0.22(970,200)
Gross Profit2,940,000646,800
Operating expenses(1,911,000)$0.22(420,420)
Net income1,029,000$226,380
Statement of retained earnings:
BOY retained earnings3,858,750given$617,400
Net income1,029,000above226,380
Dividends(102,900)$0.24(24,696)
Ending retained earnings4,784,850computed$819,084
Balance sheet:
Assets
Cash2,091,810$0.26$543,871
Accounts receivable1,705,200$0.26443,352
Inventory2,190,300$0.26569,478
PPE, net4,051,320$0.261,053,343
Total Assets10,038,630$2,610,044
Liabilities and Stockholders’ Equity
Current Liabilities1,246,560$0.26$324,106
Long-term Liabilities2,904,720$0.26755,227
Common Stock490,000$0.0734,300
APIC612,500$0.0742,875
Retained Earnings4,784,850above819,084
Cumulative translation adjustment plug634,452
Total Liabilities & Equity10,038,630$2,610,044
Subsidiary(in BRL)Translation RateSubsidiary(in $)
Statement of cash flows:
Net income1,029,000$0.22$226,380
Change in Accounts Receivable(284,200)$0.22(62,524)
Change in Inventories(365,050)$0.22(80,311)
Change in Current Liabilities207,760$0.2245,707
Net cash flows from operating activities587,510$129,252
Change in PPE, net(376,320)$0.23($86,554)
Net cash flows from investing activities(376,320)($86,554)
Change in long-term debt484,120$0.23$111,348
Dividends(102,900)$0.24(24,696)
Net cash flows from financing activities381,220$86,652
Net change in cash592,410$129,350
Effect of exchange rate on cashplug129,635
Beginning cash1,499,400$0.19284,886
Ending cash2,091,810$0.26$543,871

b.

To determine

Compute the ending Cumulative Translation Adjustment and also prepare the required journal entries made by the parent company as a result of this computation.

b.

Expert Solution
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Explanation of Solution

Cumulative Translation Adjustment (CTA) is an introduction in the aggregate other comprehensive income section of the translated balance sheet interpreting gains and losses arising from varying exchange rates over time.

ASC 830-30-45-18 outlines issues concerning the presentation of changes to cumulative translation adjustments. It provides that an analysis of the reported CTA changes in equity over the period should be reported in any of the following ways:

•    In a separate financial statement

•    In notes to financial statements

•    As part of a statement of changes in equity

The computation of the cumulative Translation Adjustment is as follows:

BOY Net assets x EOY -BOY Exchange rates4,961,250$0.07$347,288$0.26$0.19
Net income x EOY -Avg. Exchange rates1,029,000$0.0441,160$0.26$0.22
Dividends x EOY -Div. Exchange rates(102,900)$0.02(2,058)$0.26$0.24
$386,390
BOY Cumulative Translation Adjustment248,062
EOY Cumulative Translation Adjustment$634,452
BOY Net assets @ BOY Exchange rate4,961,250$0.19$942,638
Net income1,029,000$0.22226,380
Dividends(102,900)$0.24(24,696)
$1,144,322
EOY Net assets @ EOY Exchange rate5,887,350$0.261,530,711
Translation Adjustment for the year$386,389
BOY Cumulative Translation Adjustment248,062
EOY Cumulative Translation Adjustment$634,451

The required journal entry made by the parent for the year based on this computation is as follows:

DateAccounting ExplanationAmount ($)Amount ($)
a.Equity Investment386,390 
 Other comprehensive income 386,390
 (To record the translation adjustment for the year)  

The parent will also accrue the translation or loss for the year relating to the AAP assets as follows:

 Rrate$ 
 BOY Balance270,0000.1951,300 
 Amortization - Year 2(30,000)0.22(6,600) 
  44,700 
 EOY Balance240,0000.2662,400 
 AAP translation gain (loss)17,700 

Based on the AAP computation of an AAP asset related to a patent, the Parent makes the following journal entry (to recognize the AAP translation gain for the year):

DateAccounting ExplanationAmount ($)Amount ($)
b.Equity Investment$17,700 
 Other comprehensive income $17,700
 (To recognize the AAP translation gain for the year)  

c.

To determine

  1. i. Compute the equity investment account balance on the balance sheet for the parent’s company.
  2. ii. Compute the equity income reported by the parent in its income statement.

c.

Expert Solution
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Explanation of Solution

An equity investment is money invested in a business by buying that company's shares in

the stock market. Usually those shares are traded on a stock exchange.

  1. i.
Equity Investment
BOYCommon Stock34,300
BOYAPIC42,875
BOYRet Earnings617,400
BOYUnamort. AAP51,300(R270,000 x $0.19/R)
BOYCTA248,062
Equity income219,78024,696dividends
Trans adj386,390
OCI17,700
1,617,80724,696
APIC1,593,111
  1. ii.

Equity income is money earned from stock dividends that investors can access through buying stocks that have declared dividends, or through buying funds that invest in dividend-paying stocks.

Equity income of $219,780 is equal to the subsidiary's net income, ($226,380) less the

amortization of the AAP in the amount of $6,600.

d.

To determine

Prepare the consolidation spreadsheet for the year by using the translated subsidiary

financial statements and the parent’s financial data.

d.

Expert Solution
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Explanation of Solution

Consolidated financial statements are a group of entities financial statements that are presented as those of a single economic entity. They are the financial statements of a group in which the parent company and its subsidiaries introduce their assets, liabilities, equity, revenue, expenses and cash flows as those of a single business organization.

A consolidated balance sheet provides a parent company's assets and liabilities and all of its subsidiaries in a legal document, without any differentiation on which items pertain to which companies. A party outside the economic unit embodied in the consolidated financial statements does not retain the equity of the shareholders of the subsidiary, and therefore should not be included in the consolidated shareholders' equities.

Consolidation worksheet is an instrument used to prepare a parent's consolidated financial statements and their subsidiaries. It demonstrates the individual book values of companies, the adjustments and eliminations necessary, and the consolidated final values.

The consolidated spreadsheet is shown below:

      Elimination entries  
Income Statement Parent Subsidiary Dr Cr Consolidated
Sales30,310,0001,617,00031,927,000
Cost of goods sold    (21,217,000) (970,200)      (22,187,200)
Gross Profit9,093,000646,8009,739,800
Equity Income219,780[C]219,7800
Operating Expenses       (5,758,900)    (420,420)[D]6,600      (6,185,920)
Net Income3,553,880226,3803,553,880
  
Statement of Retained Earnings 
Beginning Retained Earnings23,940,718617,400[E]617,40023,940,718
Net Income3,553,880226,3803,553,880
Dividends       (957,628)      (24,696)[C]24,696         (957,628)
Ending retained Earnings26,536,970819,08426,536,970
  
Statement of Accum. Comp. Income:
BOY Cumulative Translation Adjustment248,062248,062[E]248,062248,062
Current Year Translation Gain (Loss)404,090386,390[C]404,090[D]17,700404,090
EOY Cumulative Translation Adjustment652,152634,452652,152
Balance Sheet 
Assets 
Cash7,297,685543,8717,841,556
Accounts receivable3,879,680443,3524,323,032
Inventory5,880,140569,4786,449,618
Equity investment1,593,111[C]599,1740
[E]942,637
[A]51,300
PPE, net31,316,2921,053,343[A]51,300       32,432,035
[D]11,1000
0
 49,966,9082,610,04451,046,241
  
Liabilities and Stockholder's Equity 
Current liabilities2,427,833324,1062,751,937
Long-term Liabilities8,750,000755,2279,505,227
Common stock2,053,58034,3002,053,580
APIC9,546,37642,875[E]34,3009,546,376
Retained earnings26,536,970819,084[E]42,87526,536,970
Cumulative Translation Adjustment652,152634,452652,152
  
Total liabilities and stockholders’ equity49,966,9082,610,0441,635,5071,635,50751,046,241
           

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