On January 1, 20X5, Pirate Company acquired all of the outstanding stock of Ship Incorporated, a Norwegian company, at a cost of $153,000. Ship’s net assets on the date of acquisition were 700,000 kroner (NKr). On January 1, 20X5, the book and fair values of the Norwegian subsidiary’s identifiable assets and liabilities approximated their fair values except for property, plant, and equipment and patents acquired. The fair value of Ship’s property, plant, and equipment exceeded its book value by $18,000. The remaining useful life of Ship’s equipment at January 1, 20X5, was 10 years. The remainder of the differential was attributable to a patent having an estimated useful life of 5 years. Ship’s trial balance on December 31, 20X5, in kroner, follows:   Debits Credits Cash NKr 153,000   Accounts Receivable (net) 229,000   Inventory 278,000   Property, Plant and Equipment 614,000   Accumulated Depreciation   NKr 163,000 Accounts Payable   106,000 Notes Payable   207,000 Common Stock   440,000 Retained Earnings   260,000 Sales   746,000 Cost of Goods Sold 419,000   Operating Expenses 122,000   Depreciation Expense 53,000   Dividends Paid 54,000   Total NKr 1,922,000 NKr 1,922,000 Additional Information: Ship uses the FIFO method for its inventory. The beginning inventory was acquired on December 31, 20X4, and ending inventory was acquired on December 15, 20X5. Purchases of NKr430,000 were made evenly throughout 20X5. Ship acquired all of its property, plant, and equipment on July 1, 20X3, and uses straight-line depreciation. Ship’s sales were made evenly throughout 20X5, and its operating expenses were incurred evenly throughout 20X5. The dividends were declared and paid on July 1, 20X5. Pirate’s income from its own operations was $272,000 for 20X5, and its total stockholders’ equity on January 1, 20X5, was $3,500,000. Pirate declared $150,000 of dividends during 20X5. Exchange rates were as follows: July 1, 20X3 NKr 1 = $ 0.15 December 30, 20X4 NKr 1 = $ 0.18 January 1, 20X5 NKr 1 = $ 0.18 July 1, 20X5 NKr 1 = $ 0.19 December 15, 20X5 NKr 1 = $ 0.205 December 31, 20X5 NKr 1 = $ 0.21 Average for 20X5 NKr 1 = $ 0.20 Assume the U.S. dollar is the functional currency, not the krone. Required: Prepare a schedule remeasuring the trial balance from Norwegian kroner into U.S. dollars. Assume that Pirate uses the fully adjusted equity method. Record all journal entries that relate to its investment in the Norwegian subsidiary during 20X5. Provide the necessary documentation and support for the amounts in the journal entries. Prepare a schedule that determines Pirate's consolidated net income for 20X5. Compute Pirate's total consolidated stockholders' equity at December 31, 20X5.

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Chapter1: Financial Statements And Business Decisions
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On January 1, 20X5, Pirate Company acquired all of the outstanding stock of Ship Incorporated, a Norwegian company, at a cost of $153,000. Ship’s net assets on the date of acquisition were 700,000 kroner (NKr). On January 1, 20X5, the book and fair values of the Norwegian subsidiary’s identifiable assets and liabilities approximated their fair values except for property, plant, and equipment and patents acquired. The fair value of Ship’s property, plant, and equipment exceeded its book value by $18,000. The remaining useful life of Ship’s equipment at January 1, 20X5, was 10 years. The remainder of the differential was attributable to a patent having an estimated useful life of 5 years. Ship’s trial balance on December 31, 20X5, in kroner, follows:

  Debits Credits
Cash NKr 153,000  
Accounts Receivable (net) 229,000  
Inventory 278,000  
Property, Plant and Equipment 614,000  
Accumulated Depreciation   NKr 163,000
Accounts Payable   106,000
Notes Payable   207,000
Common Stock   440,000
Retained Earnings   260,000
Sales   746,000
Cost of Goods Sold 419,000  
Operating Expenses 122,000  
Depreciation Expense 53,000  
Dividends Paid 54,000  
Total NKr 1,922,000 NKr 1,922,000

Additional Information:

  1. Ship uses the FIFO method for its inventory. The beginning inventory was acquired on December 31, 20X4, and ending inventory was acquired on December 15, 20X5. Purchases of NKr430,000 were made evenly throughout 20X5.
  2. Ship acquired all of its property, plant, and equipment on July 1, 20X3, and uses straight-line depreciation.
  3. Ship’s sales were made evenly throughout 20X5, and its operating expenses were incurred evenly throughout 20X5.
  4. The dividends were declared and paid on July 1, 20X5.
  5. Pirate’s income from its own operations was $272,000 for 20X5, and its total stockholders’ equity on January 1, 20X5, was $3,500,000. Pirate declared $150,000 of dividends during 20X5.
  6. Exchange rates were as follows:
    July 1, 20X3 NKr 1 = $ 0.15
    December 30, 20X4 NKr 1 = $ 0.18
    January 1, 20X5 NKr 1 = $ 0.18
    July 1, 20X5 NKr 1 = $ 0.19
    December 15, 20X5 NKr 1 = $ 0.205
    December 31, 20X5 NKr 1 = $ 0.21
    Average for 20X5 NKr 1 = $ 0.20

Assume the U.S. dollar is the functional currency, not the krone.

Required:

  1. Prepare a schedule remeasuring the trial balance from Norwegian kroner into U.S. dollars.

  2. Assume that Pirate uses the fully adjusted equity method. Record all journal entries that relate to its investment in the Norwegian subsidiary during 20X5. Provide the necessary documentation and support for the amounts in the journal entries.

  3. Prepare a schedule that determines Pirate's consolidated net income for 20X5.

  4. Compute Pirate's total consolidated stockholders' equity at December 31, 20X5.

     

     

     

 
 
 
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