Chapter 12, Problem 12.16P

a

To determine

Introduction: Translation adjustment is the method used to convert the local currency into the parents' functional currency when the local currency is the foreign entity’s functional currency. The current rate is used to translate the financial statements that are the exchange rate on the balance sheet date. The average rate is used to translate revenue and expenses as it is assumed that it occurs uniformly over the period. Any gain or loss on account of translation adjustment is recognized in the comprehensive income statement.

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	0.70	6,300
Trademark	45,000	0.70	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	0.80	8,000
Less: Amortization (10,000 / 10 years)	(1,000)	0.75	(750)
Remaining balance	9,000		7,250
Trademark	50,000	0.80	40,000
Less: Amortization ($10,000 / 10 years)	(5,000)	0.75	(3.750)
Remaining balance	45,000		36,250
Balance sheet:
Remaining balance on December 31, 20X1:
Plant and equipment	9,000	0.70	6,300
Trademark	45,000	0.70	31,500

b

To determine

Introduction: Translation adjustment is the method used to convert the local currency into the parents' functional currency when the local currency is the foreign entity’s functional currency. The current rate is used to translate the financial statements that are the exchange rate on the balance sheet date. The average rate is used to translate revenue and expenses as it is assumed that it occurs uniformly over the period. Any gain or loss on account of translation adjustment is recognized in the comprehensive income statement.

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

Answer to Problem 12.16P

Explanation of Solution

Parent company journal entries 20X1

Particulars	Debit $	Credit $
1. Purchase of investment in SB
Investment in SB	120,000
Cash		120,000
(Paid cash to acquire foreign investment)
2. To record equity accrual for P’s share of SB’s income
Investment in SB company	15,000
Income in Subsidiary		15,000
(Investment in SB is recognized)
3. To record dividends declared and paid by SB
Cash	6,000
Investment in SB company		6,000
(Cash received on account of dividends)
4. To record amortization of differential
Income from Subsidiary	4,500
Investment in SB company		4,500
(Amortization of differential recognized)
5. To recognize translation adjustment on differential
Other comprehensive income − translation adjustment	5,700
Investment in SB 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 method used to convert the local currency into the parents' functional currency when the local currency is the foreign entity’s functional currency. The current rate is used to translate the financial statements that are the exchange rate on the balance sheet date. The average rate is used to translate revenue and expenses as it is assumed that it occurs uniformly over the period. Any gain or loss on account of translation adjustment is recognized in the comprehensive income statement.

The schedule showing the proof of the translation adjustment for SB and 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 SB company		9,600
(Translation adjustment recognized)

Explanation of Solution

P and SB 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	0.80	72,000
Adjustment for changes in assets position during the year:
Net income for the year	20,000	0.75	15,000
Dividends paid	(8,000)	0.75	(6,000)
Net assets translated at rates in effect			81,000
Net assets at end of year	102,000	0.70	71,400
Change in other comprehensive income- translation adjustment during year − net decrease (debit)			9,600

d

To determine

Introduction: Translation adjustment is the method used to convert the local currency into the parents' functional currency when the local currency is the foreign entity’s functional currency. The current rate is used to translate the financial statements that are the exchange rate on the balance sheet date. The average rate is used to translate revenue and expenses as it is assumed that it occurs uniformly over the period. Any gain or loss on account of translation adjustment is recognized in the comprehensive income statement.

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.

Answer to Problem 12.16P

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

Explanation of Solution

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