Chapter 12, Problem 12.17P

a

To determine

Introduction: Translation adjustment is the most common method used and is applied when the local currency is the foreign entity’s functional currency. The subsidiary statement must be translated from its local currency to the parents’ functional currency. To translate the financial statements, the company will use the current rate, which is the exchange rate on balance sheet date, to convert the local currency. Because revenues and expenses are assumed to occur uniformly over the period, revenues and expenses on the income statement are translated using the average rate for the reporting period. Any translation adjustment that occurs is a component of comprehensive income. The method used to translate financial statement from the local currency to functional currency is called current rate method.

Preparation of a schedule translating the trial balance from N kroner to dollar assuming the krone is the functional currency.

Answer to Problem 12.17P

The trial balance total after transaction adjustment December 31 20X4 $267,420.

Explanation of Solution

V Inc.

Trial balance translation

For the year ended December 31, 20X5

Particulars	Kroner	Exchange rate	U.S. Dollars
Cash	150,000	.21	31,500
Accounts receivable	200,000	.21	42,000
Inventory	270,000	.21	56,700
Property, Plant and equipment	600,000	.21	126,000
Cost of goods sold	410,000	.20	82,000
Operating expenses	100,000	.20	20,000
Depreciation expenses	50,000	.20	10,000
Dividends paid	40,000	.19	7,600
Total debit	1,820,000		375,800
Accumulated depreciation	150,000	.21	31,500
Accounts payable	90,000	.21	18,900
Notes payable	190,000	.21	39,900
Common stock	450,000	.18	81,000
Retained earnings	250,000	.18	45,000
Sales	690,000	.20	138,000
Total	1,820,000		354,300
Accumulated other comprehensive income –translation adjustment credit	24,000	.20	4,800 21,500
Total credit			375,800

b

To determine

Introduction: Translation adjustment is the most common method used and is applied when the local currency is the foreign entity’s functional currency. The subsidiary statement must be translated from its local currency to the parents’ functional currency. To translate the financial statements, the company will use the current rate, which is the exchange rate on balance sheet date, to convert the local currency. Because revenues and expenses are assumed to occur uniformly over the period, revenues and expenses on the income statement are translated using the average rate for the reporting period. Any translation adjustment that occurs is a component of comprehensive income. The method used to translate financial statement from the local currency to functional currency is called current rate method.

The journal entries that relate to its investment in N subsidiary during 20X5 assuming T uses fully adjusted equity method.

Explanation of Solution

Date	Particulars	Amount $	Amount $
Jan 1	Investment in V company Stock	151,200
	Cash		151,200
	(cash paid for purchase of investment from V)
July 1	Cash	7,600
	Investment in V company		7,600
	(Cash received on account of dividends)
Dec 31	Investment in V’s common stock	26,000
	Income from subsidiary		26,000
	(recognition of equity in net income from subsidiary
	Investment in V common stock other income	21,500
	Translation adjustment		21,500
	(Translation adjustment is recognized)
	Income from subsidiary	3,600
	Investment in V company		3,600
	(amortization of differential)
	Investment in V Company common stock other comprehensive income	4,020
	Translation adjustment		4,020

Working Notes:

1. Purchase of investment from V Inc. recorded.
2. Cash received on account of dividends from V $\$7,600=NKr40,000\times \$.19$
3. Equity in net income from subsidiary recognized $\$26,000=NKr130,000\times \$.20$
4. Parents share of translation adjustment recorded.
5. Amortization of differential recognized.

Determination of differential in amortization Schedule 1

Particulars	Kroner	Exchange rate	U.S. Dollars
Property, plant, and equipment:
Income statement:
Difference at beginning of the year	100,000	.18	18,000
Amortization 20X5 $NKr100,000\text{}÷10years$	(10,000)	.20	(2,000)
Balance	90,000		16,000
Balance sheet:
Remaining balance on December 31, 20X5	90,000	.21	18,900
Difference to other comprehensive income – translation adjustment			2,900
Patients:
Income statement:
Difference at the beginning of year	40,000	.18	7,200
Amortization 20X5 $NKr40,000\text{}÷5years$	(8,000)	.20	(1,600)
Remaining balance	32,000		5,600
Balance sheet:
Balance on December 31,20X5	32,000	.21	6,720
Differential other comprehensive income – translation adjustment			1,120

Amortization of differential

Property plant and equipment $2,900

Patient $1,120

Total $4,020

c

To determine

Introduction: Translation adjustment is the most common method used and is applied when the local currency is the foreign entity’s functional currency. The subsidiary statement must be translated from its local currency to the parents’ functional currency. To translate the financial statements, the company will use the current rate, which is the exchange rate on balance sheet date, to convert the local currency. Because revenues and expenses are assumed to occur uniformly over the period, revenues and expenses on the income statement are translated using the average rate for the reporting period. Any translation adjustment that occurs is a component of comprehensive income. The method used to translate financial statement from the local currency to functional currency is called current rate method.

Preparation of a schedule for T’s consolidated comprehensive income for 20X5.

Answer to Problem 12.17P

T’s consolidated comprehensive income $322,920.

Explanation of Solution

Computation of T’s comprehensive income

Particulars	U.S. Dollars
Income from T’s operations for 20X5	275,000
Add: Income from the N subsidiary	26,000
Less: Amortization of differential	(3,600)
T’s net income	297,400
Add: translation adjustment $21,500 + 4,020	25,520
Total consolidated comprehensive income	322,920

d

To determine

Introduction: Translation adjustment is the most common method used and is applied when the local currency is the foreign entity’s functional currency. The subsidiary statement must be translated from its local currency to the parents’ functional currency. To translate the financial statements, the company will use the current rate, which is the exchange rate on balance sheet date, to convert the local currency. Because revenues and expenses are assumed to occur uniformly over the period, revenues and expenses on the income statement are translated using the average rate for the reporting period. Any translation adjustment that occurs is a component of comprehensive income. The method used to translate financial statement from the local currency to functional currency is called current rate method.

T’s total consolidated stockholders equity at December 31, 20X5.

Answer to Problem 12.17P

T’s total consolidated stockholders equity at December 31, 20X5 $3,722,920.

Explanation of Solution

Computation of T’s stockholders’ equity for December 31, 20X5.

Particulars	U.S. Dollars
T’s stockholders’ equity at January 1, 20X5	3,500,000
Add: Net income for 20X5	297,400
Less: Dividends declared by T during 20X5	(100,000)
Add: Accumulated other comprehensive income – translation adjustment	25,520
Consolidated stockholders’ equity at December 31, 20X5	3,722,920