Chapter 8, Problem 34P

a.

To determine

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

statement of cash flows into $US.

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 CAD)	Translation Rate	Subsidiary(in $)
Income statement:
Sales	4,200,000	$0.79	$3,318,000
Cost of goods sold	(2,520,000)	$0.79	(1,990,800)
Gross Profit	1,680,000		1,327,200
Operating expenses	(1,092,000)	$0.79	(862,680)
Net income	588,000		$464,520
Statement of retained earnings:
BOY retained earnings	2,205,000	given	$1,609,650
Net income	588,000	above	464,520
Dividends	(58,800)	$0.81	(47,628)
Ending retained earnings	2,734,200	computed	$2,026,542
Balance sheet:
Assets
Cash	1,195,320	$0.82	$980,162
Accounts receivable	974,400	$0.82	799,008
Inventory	1,251,600	$0.82	1,026,312
PPE, net	2,315,040	$0.82	1,898,333
Total Assets	5,736,360		$4,703,815
Liabilities and Stockholders’ Equity
Current Liabilities	712,320	$0.82	$584,102
Long-term Liabilities	1,659,840	$0.82	1,361,069
Common Stock	280,000	$0.66	184,800
APIC	350,000	$0.66	231,000
Retained Earnings	2,734,200	above	2,026,542
Cumulative translation adjustment		plug	316,302
Total Liabilities & Equity	5,736,360		$4,703,815

	Subsidiary(in CAD)	Translation Rate	Subsidiary(in $)
Statement of cash flows:
Net income	588,000	$0.79	$464,520
Change in Accounts Receivable	(162,400)	$0.79	(128,296)
Change in Inventories	(208,600)	$0.79	(164,794)
Change in Current Liabilities	118,720	$0.79	93,789
Net cash flows from operating activities	335,720		$265,219
Change in PPE, net	(215,040)	$0.80	($172,032)
Net cash flows from investing activities	(215,040)		($172,032)
Change in long-term debt	276,640	$0.80	$221,312
Dividends	(58,800)	$0.81	(47,628)
Net cash flows from financing activities	217,840		$173,684
Net change in cash	338,520		$266,871
Effect of exchange rate on cash		plug	62,123
Beginning cash	856,800	$0.76	651,168
Ending cash	1,195,320	$0.82	$980,162

b.

To determine

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

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 rates	2,835,000	$0.06	$170,100	$0.82	−	$0.76
Net income x EOY -Avg. Exchange rates	588,000	$0.03	17,640	$0.82	−	$0.79
Dividends x EOY -Div. Exchange rates	(58,800)	$0.01	(588)	$0.82	−	$0.81
			$187,152
BOY Cumulative Translation Adjustment			129,150
EOY Cumulative Translation Adjustment			$316,302
BOY Net assets @ BOY Exchange rate	2,835,000	$0.76	$2,154,600
Net income	588,000	$0.79	464,520
Dividends	(58,800)	$0.81	(47,628)
			$2,571,492
EOY Net assets @ EOY Exchange rate	3,364,200	$0.82	2,758,644
Translation Adjustment for the year			$187,152
BOY Cumulative Translation Adjustment			129,150
EOY Cumulative Translation Adjustment			$316,302

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

Date	Accounting Explanation	Amount ($)	Amount ($)
a.	Equity Investment	$\$187,152$
	Other comprehensive income		$\$187,152$
	(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:

*BOY Balance	450,000	0.76	342,000
Amortization	(50,000)	$0.79	(39,500)
			302,500
EOY Balance	400,000	0.82	328,000
AAP translation gain (loss)			25,500

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

Date	Accounting Explanation	Amount ($)	Amount ($)
b.	Equity Investment	$\$25,500$
	Other comprehensive income		$\$25,500$
	(To recognize the AAP translation gain for the year)

c.

To determine

i.    Compute the equity investment account balance on the balance sheet for the parent.

ii.    Compute the equity income reported by the parent in its income statement.

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
	BOY	Common Stock		184,800
	BOY	APIC		231,000
	BOY	Ret Earnings		1,609,650
	BOY	Unamort. AAP		342,000		(CAD450,000 of $0.76/CAD)
	BOY	CTA		129,150
		Equity income		425,020	47,628	dividends
		Trans adj		187,152
		OCI		25,500
				3,134,272	47,628
		net bal		3,086,644

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 asset ($39,500).

d.

To determine

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

financial statements and the parent’s financial data.

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
Sales		17,320,000		3,318,000						18,477,000
Cost of goods sold		(12,124,000)		(1,990,000)						(14,114,800)
Gross Profit		5,196,000		1,327,200						6,523,200
Equity Income		425,020			[C]	425,020				0
Operating Expenses		(3,290,800)		(862,680)	[D]	39,500				(4,192,980)
Net Income		2,330,220		464,520						2,330,220
Statement of Retained Earnings
Beginning Retained Earnings		13,680,410		1,609,650	[E]	1,609,650				13,680,410
Net Income		2,330,220		464,520						2,330,220
Dividends		(475,920)		(66,150)			[C]	47,628		(547,216)
Ending retained Earnings		15,463,414		2,026,542						15,463,414
Statement of Accum. Comp. Income:
BOY Cumulative Translation Adjustment		129,150		129,150	[E]	129,150				129,150
Current Year Translation Gain (Loss)		212,652		187,152	[C]	212,652	[D]	25,500		212,652
EOY Cumulative Translation Adjustment		341,802		316,302						341,802
Balance Sheet
Assets
Cash		2,262,386		980,162,						3,242,548
Accounts receivable		2,216,960		799,008						3,015,968
Inventory		3,360,080		1,026,312						4,386,392
Equity investment		3,086,644					[C]	590,044		0
							[E]	2,154,600
							[A]	342,000
PPE, net		17,895,024		1,898,333	[A]	342,000				20,121,357
					[D]	(14,000)				0
										0
		28,821,094		4,703,815						30,766,265
Liabilities and Stockholder's Equity
Current liabilities		1,387,332		584,102						1,971,434
Long-term Liabilities		5,000,000		1,361,069						6,361,069
Common stock		1,173,474		184,800						1,173,474
APIC		5,455,072		231,000	[E]	184,800				5,455,072
Retained earnings		15,463,414		2,026,542	[E]	231,000				15,463,414
Cumulative Translation Adjustment		341,802		316,302						341,802
Total liabilities and stockholders’ equity		28,821,094		4,703,815		3,159,772		3,159,772		30,766,265