Exam 12: Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements

Michigan-based Leo Corporation acquired 100 percent of the common stock of a British company on January 1, 20X8, for $1,100,000. The British subsidiary's net assets amounted to 500,000 pounds on the date of acquisition. On January 1, 20X8, the book values of its identifiable assets and liabilities approximated their fair values. As a result of an analysis of functional currency indicators, Leo determined that the British pound was the functional currency. On December 31, 20X8, the British subsidiary's adjusted trial balance, translated into U.S. dollars, contained $17,000 more debits than credits. The British subsidiary reported income of 33,000 pounds for 20X8 and paid a cash dividend of 8,000 pounds on October 25, 20X8. Included on the British subsidiary's income statement was depreciation expense of 3,500 pounds. Leo uses the fully adjusted equity method of accounting for its investment in the British subsidiary and determined that goodwill in the first year had an impairment loss of 25 percent of its initial amount. Exchange rates at various dates during 20X8 follow: -Based on the preceding information,what amount should Leo record as "income from subsidiary" based on the British subsidiary's reported net income?

The gain or loss on the effective portion of a U.S.parent company's hedge of a net investment in a foreign entity should be treated as:

On January 1, 20X8, Transport Corporation acquired 75 percent interest in Steamship Company for $300,000. Steamship is a Norwegian company. The local currency is the Norwegian kroner (NKr). The acquisition resulted in an excess of cost-over-book value of $25,000 due solely to a patent having a remaining life of 5 years. Transport uses the fully adjusted equity method to account for its investment. Steamship's December 31, 20X8, trial balance has been translated into U.S. dollars, requiring a translation adjustment debit of $8,000. Steamship's net income translated into U.S. dollars is $35,000. It declared and paid an NKr 20,000 dividend on June 1, 20X8. Relevant exchange rates are as follows: Assume the kroner is the functional currency. -Based on the preceding information,in the journal entry to record the amortization of the patent for 20X8 on the parent's books,Investment in Steamship Company will be debited for:

On January 1,2008,Pace Company acquired all of the outstanding stock of Spin PLC,a British Company,for $350,000.Spin's net assets on the date of acquisition were 250,000 pounds (£).On January 1,2008,the book and fair values of the Spin's identifiable assets and liabilities approximated their fair values except for property,plant,and equipment and trademarks.The fair value of Spin's property,plant,and equipment exceeded its book value by $25,000.The remaining useful life of Spin's equipment at January 1,2008,was 10 years.The remainder of the differential was attributable to a trademark having an estimated useful life of 5 years.Spin's trial balance on December 31,2008,in pounds,follows: Additional Information 1.Spin uses the FIFO method for its inventory.The beginning inventory was acquired on December 31,2007,and ending inventory was acquired on December 26,2008.Purchases of £300,000 were made evenly throughout 2008. 2.Spin acquired all of its property,plant,and equipment on March 1,2006,and uses straight-line depreciation. 3.Spin's sales were made evenly throughout 2008,and its operating expenses were incurred evenly throughout 2008. 4.The dividends were declared and paid on November 1,2008. 5.Pace's income from its own operations was $150,000 for 2008,and its total stockholders' equity on January 1,2008,was $1,000,000.Pace declared $50,000 of dividends during 2008. 6.Exchange rates were as follows: Required: 1)Prepare a schedule translating the trial balance from British pounds into U.S.dollars.Assume the pound is the functional currency. 2)Assume that Pace uses the fully adjusted equity method.Record all journal entries that relate to its investment in the British subsidiary during 2008.Provide the necessary documentation and support for the amounts in the journal entries,including a schedule of the translation adjustment related to the differential. 3)Prepare a schedule that determines Pace's consolidated comprehensive income for 2008. Problem 73 (continued):

Briefly explain the following terms associated with accounting for foreign entities: a)Functional Currency b)Translation c)Remeasurement

On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth Company for $3,100,000. Any excess cost over book value is attributable to a patent with a 10-year remaining life. At the date of acquisition, Perth's balance sheet contained the following information: Perth's income statement for 20X8 is as follows: The balance sheet of Perth at December 31, 20X8, is as follows: Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various dates for 20X8 follow: Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income taxes were incurred evenly throughout 20X8. -Refer to the above information.Assuming Perth's local currency is the functional currency,what is the amount of translation adjustments that result from translating Perth's trial balance into U.S.dollars at December 31,20X8?

Seattle,Inc.owns an 80 percent interest in a Portuguese subsidiary.For 20X8,Seattle reported income from operations of $2.0 million.The Portuguese company's income from operations,after foreign currency translation,was $1.1 million.The foreign currency translation adjustment was $120,000 (credit).Consolidated net income and consolidated comprehensive income for the year are:

Park Co.'s wholly-owned subsidiary,Schnell Corp.,maintains its accounting records in German marks.Because all of Schnell's branch offices are in Switzerland,its functional currency is the Swiss franc.Remeasurement of Schnell's 20X1 financial statements resulted in a $7,600 gain,and translation of its financial statements resulted in an $8,100 gain.What amount should Park report as a foreign exchange gain in its income statement for the year ended December 31,20X1?

Prepare a schedule providing a proof of the translation adjustment using the information provided below.

Certain balance sheet accounts of a foreign subsidiary of Rowan,Inc.(Rowan)at December 31,20X6,have been translated into U.S.dollars as follows: The subsidiary's functional currency is the currency of the country in which it is located. What total amount should be included in Rowan's December 31,20X6 consolidated balance sheet for the above accounts?

The British subsidiary of a U.S.company reported cost of goods sold of 75,000 pounds (sterling)for the current year ended December 31.The beginning inventory was 10,000 pounds,and the ending inventory was 15,000 pounds.Spot rates for various dates are as follows: Assuming the pound is the functional currency of the British subsidiary,the translated amount of cost of goods sold that should appear in the consolidated income statement is:

Barcode Corporation acquired 70% of the common stock of a Russian company on January 1,20X6.The goodwill associated with this acquisition was $12,520.Exchange rates at various dates during 20X6 follow: Goodwill suffered an impairment of 25 percent during the year.If the functional currency is the U.S.dollar,how much goodwill impairment loss should be reported on Barcode's consolidated statement of income for 20X6?

All of the following are benefits the U.S.will gain from the adoption of globally consistent accounting standards except for:

On January 1,2008,Pace Company acquired all of the outstanding stock of Spin PLC,a British Company,for $350,000.Spin's net assets on the date of acquisition were 250,000 pounds (£).On January 1,2008,the book and fair values of the Spin's identifiable assets and liabilities approximated their fair values except for property,plant,and equipment and trademarks.The fair value of Spin's property,plant,and equipment exceeded its book value by $25,000.The remaining useful life of Spin's equipment at January 1,2008,was 10 years.The remainder of the differential was attributable to a trademark having an estimated useful life of 5 years.Spin's trial balance on December 31,2008,in pounds,follows: Additional Information 1.Spin uses the FIFO method for its inventory.The beginning inventory was acquired on December 31,2007,and ending inventory was acquired on December 26,2008.Purchases of £300,000 were made evenly throughout 2008. 2.Spin acquired all of its property,plant,and equipment on March 1,2006,and uses straight-line depreciation. 3.Spin's sales were made evenly throughout 2008,and its operating expenses were incurred evenly throughout 2008. 4.The dividends were declared and paid on November 1,2008. 5.Pace's income from its own operations was $150,000 for 2008,and its total stockholders' equity on January 1,2008,was $1,000,000.Pace declared $50,000 of dividends during 2008. 6.Exchange rates were as follows: Assume the U.S.dollar is the functional currency,not the pound. Required: 1)Prepare a schedule remeasuring the trial balance from British pound into U.S.dollars. 2)Assume that Pace uses the fully adjusted equity method.Record all journal entries that relate to its investment in the British subsidiary during 2008.Provide the necessary documentation and support for the amounts in the journal entries. 3)Prepare a schedule that determines Pace's consolidated net income for 2008. Problem 75 (continued):

All of the following describe the International Accounting Standard Board (IASB)except for:

On October 15, 20X1, Jerry Company sold inventory to Garcia Corporation, its Mexican subsidiary. The goods cost Jerry $2,700 and were sold to Garcia for $3,500, payable in Mexican pesos. The goods are still on hand at the end of the year on December 31. The Mexican peso is the functional currency of Garcia. The exchange rates follow: -Based on the preceding information,at what amount is the inventory shown on the consolidated balance sheet for the year?

The balance in Newsprint Corp.'s foreign exchange loss account was $10,000 on December 31, 20X8, before any necessary year-end adjustment relating to the following: (1) Newsprint had a $15,000 debit resulting from the restatement in dollars of the accounts of its wholly owned foreign subsidiary for the year ended December 31, 20X8. (2) Newsprint had an account payable to an unrelated foreign supplier, payable in the supplier's local currency unit (LCU) on January 15, 20X9. The U.S. dollar-equivalent of the payable was $50,000 on the December 1, 20X8, invoice date and $53,000 on December 31, 20X8. -Based on the information provided,in Newsprint's 20X8 consolidated income statement,what amount should be included as foreign exchange loss in computing net income,if the LCU is the functional currency and the translation method is appropriate?

Dividends of a foreign subsidiary are translated at:

Nichols Company owns 90% of the capital stock of a foreign subsidiary located in Ireland.As a result of translating the subsidiary's accounts,a debit of $160,000 was needed in the translation adjustments account so that the foreign subsidiary's debits and credits were equal in U.S.dollars.How should Nichols report its translation adjustments on its consolidated financial statements?

On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth Company for $3,100,000. Any excess cost over book value is attributable to a patent with a 10-year remaining life. At the date of acquisition, Perth's balance sheet contained the following information: Perth's income statement for 20X8 is as follows: The balance sheet of Perth at December 31, 20X8, is as follows: Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various dates for 20X8 follow: Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income taxes were incurred evenly throughout 20X8. -Refer to the above information.Assuming Perth's local currency is the functional currency,what is the amount of translation adjustment that appears on Johnson's consolidated financial statements at December 31,20X8?