Chapter 12, Problem 12.16P

a

To determine

Introduction: Translation adjustment is the most common method applied when the functional currency of foreign entities is its local currency. For the purpose of reporting the financial statements, the subsidiary must be translated to the parents’ functional currency at the current rate, which is the exchange rate on balance sheet date, revenues and expenses on the income statement are translated using the average rate for the reporting period as revenues and expenses are assumed to occur uniformly over the period. Any gain or loss on translation adjustment will be adjusted in comprehensive income. The method used to translate financial statements from the local currency to functional currency is called the current rate method.

The differential allocation and amortization for 20X1, in a schedule containing both Canadian dollars and U.S. dollars.

Answer to Problem 12.16P

The differential allocation and amortization for 20X1

Items	Canadian Dollars	Exchange rate	U.S. Dollars
Plant and equipment	9,000	.70	6,300
Trademark	45,000	.70	31,500

Explanation of Solution

Items	Canadian Dollars	Exchange rate	U.S. Dollars
Income statement:
Differential at date of acquisition:
Plant and equipment	10,000	.80	8,000
Less: Amortization (10,000 / 10 years)	(1,000)	.75	(750)
Remaining balance	9,000		7,250
Trademark	50,000	.80	40,000
Less: Amortization ($10,000 / 10 years)	(5,000)	.75	(3.750)
Remaining balance	45,000		36,250
Balance sheet:
Remaining balance on December 31, 20X1:
Plant and equipment	9,000	.70	6,300
Trademark	45,000	.70	31,500

b

To determine

Introduction: Translation adjustment is the most common method applied when the functional currency of foreign entities is its local currency. For the purpose of reporting the financial statements, the subsidiary must be translated to the parents’ functional currency at the current rate, which is the exchange rate on balance sheet date, revenues, and expenses on the income statement are translated using the average rate for the reporting period as revenues and expenses are assumed to occur uniformly over the period. Any gain or loss on translation adjustment will be adjusted in comprehensive income. The method used to translate financial statements from the local currency to functional currency is called the current rate method.

The entries that would be recorded in 20X1 for investment in NB when full adjusted equity method is used.

Explanation of Solution

Parent company journal entries 20X1

Particulars	Debit $	Credit $
Purchase of investment in NB
Investment in NB	120,000
Cash		120,000
(paid cash to acquire foreign investment)
To record equity accrual for P’s share of NB’s income
Investment in NB company	15,000
Income in Subsidiary		15,000
(investment in NB is recognized)
To record dividends declared and paid by NB
Cash	6,000
Investment in NB company		6,000
(cash received on account of dividends)
To record amortization of differential
Income from Subsidiary	4,500
Investment in NB company		4,500
(amortization of differential recognized)
To recognize translation adjustment on differential
Other comprehensive income − translation adjustment	5,700
Investment in NB company		5,700
(translation adjustment recognized)

1. Acquired investment in foreign subsidiary
2. Equity in income of subsidiary recognized $\$15,000=C\$20,000\times .75$
3. Received dividends from foreign subsidiary $\$6,000=C\$8,000\times .75$
4. Amortization of differential in plant and equipment and trademark recognized

Plant and Equipment	$750
Trademark	$3,750
Total	4,500

5. Translation adjustment in buildings and equipment and trademark recognized

Plant and Equipment	$950
Trademark	$4,750
Total	5,700

c

To determine

Introduction: Translation adjustment is the most common method applied when the functional currency of foreign entities is its local currency. For the purpose of reporting the financial statements, the subsidiary must be translated to the parents’ functional currency at the current rate, which is the exchange rate on balance sheet date, revenues, and expenses on the income statement are translated using the average rate for the reporting period as revenues and expenses are assumed to occur uniformly over the period. Any gain or loss on translation adjustment will be adjusted in comprehensive income. The method used to translate financial statements from the local currency to functional currency is called the current rate method.

The schedule showing the proof of the translation adjustment for NB, necessary entry P would record for its share in translation adjustment.

Answer to Problem 12.16P

The translation adjustment $9,600

Particulars	Debit $	Credit $
Other comprehensive income − translation adjustment	9,600
Investment in NB company		9,600
(translation adjustment recognized)

Explanation of Solution

P and NB Company

Proof of translation adjustment

Year ended December 31, 20X1

Items	Canadian dollars	Exchange rate	U.S. Dollars
Net assets at the beginning of year 1/1/20X1	90,000	.80	72,000
Adjustment for changes in assets position during the year:
Net income for the year	20,000	.75	15,000
Dividends paid	(8,000)	.75	(6,000)
Net assets translated at rates in effect			81,000
Net assets at end of year	102,000	.70	71,400
Change in other comprehensive income- translation adjustment during year − net decrease (debit)			9,600

d

To determine

Introduction: Translation adjustment is the most common method applied when the functional currency of foreign entities is its local currency. For the purpose of reporting the financial statements, the subsidiary must be translated to the parents’ functional currency at the current rate, which is the exchange rate on balance sheet date, revenues, and expenses on the income statement are translated using the average rate for the reporting period as revenues and expenses are assumed to occur uniformly over the period. Any gain or loss on translation adjustment will be adjusted in comprehensive income. The method used to translate financial statements from the local currency to functional currency is called the current rate method.

The entry required by P to restate the C$8,000 in foreign currency units account into its year-end U.S. dollar equivalent value.

Explanation of Solution

Particulars	Debit $	Credit $
Foreign currency transaction loss	400
Foreign currency units (C$)		400
(exchange loss on foreign currency unit recognized)

Items	Amount $
Equivalent U.S. dollar value of $C\$8,000\times \$.70$	5,600
Less: equivalent U.S. dollar value on date of receipt $C\$8,000\times \$.75$	6,000
Foreign currency transaction loss	400