Chapter 10, Problem 36P

To determine

Translate Simbel’s 2015 financial statements into US Dollar and prepare a consolidation worksheet for Cayce and its Egyptian subsidiary. Assume that the Egyptian pound is the subsidiary functional currency.

Explanation of Solution

Translate foreign currency financial statement and prepare consolidation worksheet:

Simbel’s financial statements are first translated into US Dollar after reclassification of 10,000 pounds expenditure for rent from rent expenses to prepaid rent and accordingly. The balances as follows:

Translation Worksheet
Accounts	Pounds	Rate	Dollars
Sales	800,000	0.274	(219,200)
Cost of goods sold	420,000	0.274	115,080
Salary expenses	74,000	0.274	20,276
Rent expenses( Adjusted)	36,000	0.274	9,864
Other expenses	59,000	0.274	1,617
Gain on sale of fixed assets (10/1/2015)( Building)	(30,000)	0.274	(8,190)
Net income	241,000	0.273	(66,004)
Retained earnings (11/1/2015	(133,000)
Net income	(241,000)		(66,004)
Dividend paid	50,000	0.275	13,750
Retained earnings (12/31/2015)	(324,000)		(90,498)
Cash and receivables	146,000	0.27	39,420
Inventory	297,000	0.27	80,190
Prepaid rent ( adjusted)	10,000	0.27	2,700
Fixed assets	455,000	0.27	122,850
Total	908,000		245,160
Accounts Payable	(54,000)
Notes Payable	(140,000)
Common stock	(240,000)
Additional paid in capital	(150,000)
Retained earnings ( 12/31/2015)	(324,000)		(90,498)
Subtotal			(259,878)
Cumulative translation adjustment ( negative)			14,718
Total	908,000		(245,160)

Table: (1)

Schedule 1: Translation of 1/1/2017 retained earnings:

Accounts	Pounds	Rate	Dollars
Retained earnings ( 1/1/2014)	0	0	0
Net income,2014	(163,000)	0.288	(46,944)
Dividend 6/1/2014	30,000	0.290	8,700
Retained earnings ( 1/1/2015)	133,000		(38,244)

Table: (2)

Schedule 2: Calculation of cumulative Translation adjustment at 12/31/2015:

Accounts	Pounds	Rate	Dollars
Net assets ( 1/1/2014)	(390,000)	0.3	(117,000)
Net income,2014	(163,000)	0.288	(46,944)
Dividend 6/1/2014	30,000	0.290	8,700
Net assets 12/31/2014	523,000		(155,244)
Net assets 12/31/2014 at current exchange rate $523,000\times 0.280$			146,440
Translation adjustment 2014 ( Negative)			8,804

Table: (3)

Accounts	Pounds	Rate	Dollars
Net assets ( 1/1/2015)	(523,000)	0.280	(146,440)
Net income,2015	(241,000)		(66004)
Dividend 6/1/2014	50,000	0.275	13750
Net assets 12/31/2015	714,000		198,694
Net assets 12/31/2015 at current exchange rate $714,000\times 0.270$			192,780
Translation adjustment 2015 ( Negative)			8,804
Cumulative Translation adjustment 12/31/2015 ( Negative)			(14,718)

Table: (4)

Cayce and Simbel’s US Dollar accounts are then consolidated:

Consolidation Worksheet
Accounts	Cayce Dollar	Simbel Dollar	Adjustment and Elimination		Consolidation Balance
			Debit	Credit
Sales	($200,000)	($219,200)			($419,200)
Cost of goods sold	$93,800	$115,080			$208,880
Salary expenses	$19,000	$20,276			$39,276
Rent expenses	$7,000	$9,864			$16,864
Other expenses	$21,000	$16,166			$37,166
Dividend income	($13,750)	$0	$13,750		$0
Gain (10/1/2015)	$0	($8,190)			($8,190)
Net income	($72,950)	($66,004)			($125,204)
Retained earnings (1/1/2015)	($318,000)	($38,244)	$38,244	($38,244)	($356,244)
Net income	($72,950)	($66,004)			($125,204)
Dividend paid	$24,000	$13,750		($13,750)	$24,000
Retained earnings (12/31/2015)	($366,950)	($90,498)			($457,448)
Cash and receivables	$110,750	$39,420			$150,170
Inventory	$98,000	$80,190
Prepaid rent	$30,000	$2,700
Investment	$126,000	$0	$38,244	($164,244)	$6
Fixed assets	$398,000	$122,850	$9,000	$900	$528,950
Total	$762,750	$245,160			$890,010
Accounts Payable	($60,800)	$39,420			($75,380)
Notes Payable	($132,000)	($37,800)			($169,800)
Common stock	($120,000)	($72,000)	$72,000		($120,000)
Additional paid in capital	($83,000)	($45,000)	$45,000		($83,000)
Retained earnings ( 12/31/2015)	($366,950)	($90,498)			($457,448)
Subtotal		($259,878)
Cumulative translation adjustment ( negative)		$14,718	$900		$15,618
Total	$762,750	($245,160)	$217,138	$217,138	$890,010

Table: (5)

Explanation entries:

Date	Accounts title and Explanation	Post Ref.	Debit($)	Credit($)
1.	Dividend income		13,750
	Dividend paid			13,750
	( To eliminate intercompany dividend payments recorded by parent as income)
2.	Common stock ( Simbel)		72,000
	Additional PIC ( Simbel)		45,000
	Retained earnings (1/1/2015)(Simbel)		38,244
	Fixed assets ( Revaluation)		9,000
	Investment in Simbel			164,244
	(To eliminate subsidiary’s stockholder’s equity accounts and allocate the excess of purchase price over book value to land.)

Table: (6)

The excess of cost over book value is calculated as follows:

Particulars	Amounts ( $)
Purchase Price	126,000
Book value,(1/1/2015):
Common stock	(72,000)
Additional paid in capital	( 45,000)
Excess of purchase price over book value	9,000

Table: (7)

The excess of cost over the book value is pounds 30,000. This US & will be $\$9,000\left(\$30,000\times 0.3\right)$ .

Explanatory entries:

Date	Accounts title and Explanation	Post Ref.	Debit($)	Credit($)
3.	Investment in Simbel		38,244
	Retained earnings ( 1/1/2015)			38,244
	( To accrue 2015 increase in subsidiary book value entry is needed because parent is using the cost method)
4.	Cumulative Translation adjustment		900
	Fixed assets( realization)			900
	( To revalue the excess of cost over book value for the change in exchange rate since the date of acquisition with the consolidated cumulative transition adjustment)

Table: (8)

The revalution of ‘’excess’’ is calculated as follows:

Particulars	Amounts ( $)
Excess of cost over book value US Dollar equivalent at 12/31/2015 $\text{Pound}30,000\times \$0.27$	8,100
US Dollar equivalent at 1/1/2015 $\text{Pound}30,000\times \$0.30$	9,000
Cumulative translation adjustment related to excess (1/31/2015)	(900)

Table: (9)