Chapter 8, Problem 32P

a.

To determine

Translate the subsidiary's income statement, retained earnings statement, balance sheet,

statement of cash flows into $US.

Explanation of Solution

Translation is a process used to express the financial results of a separate entity in such a way that it can be included in the consolidated financial statements of the parent entity when the functional currency of the separate entity is different from that of the parent. The translation adjustments resulting from the transfer of the entity's financial statements to the reporting currency shall be reported in other comprehensive income rather than in determining net income.

	Subsidiary(in €)		Translation Rate		Subsidiary(in $)
Income statement:
Sales	4,410,000	$1.11		$4,895,100
Cost of goods sold	(2,646,000)	$1.11		(2,937,060)
Gross Profit	1,764,000			1,958,040
Operating expenses	(1,146,600)	$1.11		(1,272,726)
Net income	617,400			$685,314
Statement of retained earnings:
BOY retained earnings	2,315,250	given		$4,096,449
Net income	617,400	above		685,314
Dividends	(61,740)	$1.13		(69,766)
Ending retained earnings	2,870,910	computed		$4,711,997
Balance sheet:
Assets
Cash	1,255,086	$1.14		$1,430,798
Accounts receivable	1,023,120	$1.14		1,166,357
Inventory	1,314,180	$1.14		1,498,165
PPE, net	2,430,792	$1.14		2,771,103
Total Assets	6,023,178			$6,866,423
Liabilities and Stockholders’ Equity
Current Liabilities	747,936	$1.14		$852,647
Long-term Liabilities	1,742,832	$1.14		1,986,828
Common Stock	294,000	$0.90		264,600
APIC	367,500	$0.90		330,750
Retained Earnings	2,870,910	above		4,711,997
Cumulative translation adjustment		plug		(1,280,399)
Total Liabilities & Equity	6,023,178			$6,866,423

	Subsidiary(in €)		Translation Rate		Subsidiary(in $)
Statement of cash flows:
Net income	617,400	$1.11		$685,314
Change in Accounts Receivable	(170,520)	$1.11		(189,277)
Change in Inventories	(219,030)	$1.11		(243,123)
Change in Current Liabilities	124,656	$1.11		138,368
Net cash flows from operating activities	352,506			$391,282
Change in PPE, net	(225,792)	$1.12		($252,887)
Net cash flows from investing activities	(225,792)			($252,887)
Change in long-term debt	290,472	$1.12		$325,329
Dividends	(61,740)	$1.13		(69,766)
Net cash flows from financing activities	228,732			$255,563
Net change in cash	355,446			$393,958
Effect of exchange rate on cash		plug		56,232
Beginning cash	899,640	$1.09		980,608
Ending cash	1,255,086	$1.14		$1,430,798

b.

To determine

Compute the ending Cumulative Translation Adjustment and also prepare the required journal entries made by the parent company as a result of this computation.

Explanation of Solution

Cumulative Translation Adjustment (CTA) is an introduction in the aggregate other comprehensive income section of the translated balance sheet interpreting gains and losses arising from varying exchange rates over time.

ASC 830-30-45-18 outlines issues concerning the presentation of changes to cumulative translation adjustments. It provides that an analysis of the reported CTA changes in equity over the period should be reported in any of the following ways:

•    In a separate financial statement

•    In notes to financial statements

•    As part of a statement of changes in equity

The computation of the cumulative Translation Adjustment is as follows:

BOY Net assets x EOY -BOY Exchange rates	2,976,750	$0.05	$148,837	$1.14	−	$1.09
Net income x EOY -Avg. Exchange rates	617,400	$0.03	18,522	$1.14	−	$1.11
Dividends x EOY -Div. Exchange rates	(61,740)	$0.01	(617)	$1.14	−	$1.13
			$166,742
BOY Cumulative Translation Adjustment			1,447,141
EOY Cumulative Translation Adjustment			$1,280,399
BOY Net assets @ BOY Exchange rate	2,976,750	$1.09	$3,244,657
Net income	617,400	$1.11	685,314
Dividends	(61,740)	$1.13	(69,766)
			$3,860,205
EOY Net assets @ EOY Exchange rate	3,532,410	$1.14	4,026,947
Translation Adjustment for the year			$166,742
BOY Cumulative Translation Adjustment			1,447,141
EOY Cumulative Translation Adjustment			$1,280,399

The required journal entry made by the parent for the year based on this computation is as follows:

Date	Accounting Explanation	Amount ($)	Amount ($)
a.	Equity Investment	$166,742$
	Cumulative translation adjustment		$166,742$
	(To record the translation adjustment for the year)

There is no amortization of the AAP asset relating to Land.

The $15,000 Adjustment to the Accumulated Currency Translation AOCI account is

based on the following calculation:

	£	Rate	US $
BOY Balance	300,000	1.09	327,000
Amortization	-		-
			327,000
EOY Balance	300,000	1.14	342,000
AAP translation gain (loss)			15,000

The required journal entry made by the parent for the year based on the AAP computation is as follows:

Date	Accounting Explanation	Amount ($)	Amount ($)
b.	Equity Investment	$\$15,000$
	Cumulative Translation Adjustment		$\$15,000$
	(To record the translation adjustment for the AAP during the year)

c.

To determine

Compute the equity investment account balance on the balance sheet for the parent’s company.

Explanation of Solution

An equity investment is money invested in a business by buying that company's shares in

the stock market. Usually those shares are traded on a stock exchange.

		Equity Investment
BOY	Common Stock	264,600
BOY	APIC	330,750
BOY	Ret Earnings	4,096,449
BOY	Unamort. AAP	327,000		(€270,000 of 1.09/€)
BOY	CTA	1,447,141
	Equity income	685,314	69,766	dividends
	Trans adj	166,742
	OCI	15,000		(€300,000 x [$1.09 − $1.14]/€)
		4,438,714	69,766
	APIC	4,368,948

Equity income is money earned from stock dividends that investors can access through buying stocks that have declared dividends, or through buying funds that invest in dividend-paying stocks.

Equity income of $685,314 is equal to the subsidiary's net income, as the land asset is not

depreciated.

d.

To determine

Prepare the consolidation spreadsheet for the year by using the translated subsidiary

financial statements and the parent’s financial data.

Explanation of Solution

Consolidated financial statements are a group of entities financial statements that are presented as those of a single economic entity. They are the financial statements of a group in which the parent company and its subsidiaries introduce their assets, liabilities, equity, revenue, expenses and cash flows as those of a single business organization.

A consolidated balance sheet provides a parent company's assets and liabilities and all of its subsidiaries in a legal document, without any differentiation on which items pertain to which companies. A party outside the economic unit embodied in the consolidated financial statements does not retain the equity of the shareholders of the subsidiary, and therefore should not be included in the consolidated shareholders' equities.

Consolidation worksheet is an instrument used to prepare a parent's consolidated financial statements and their subsidiaries. It demonstrates the individual book values of companies, the adjustments and eliminations necessary, and the consolidated final values.

The consolidated spreadsheet is shown below:

						Elimination entries
Income Statement		Parent		Subsidiary		Dr		Cr		Consolidated
Sales		19,341,000		4,895,100						24,236,100
Cost of goods sold		(13,538,700)		(2,937,060)						(16,475,760)
Gross Profit		5,802,300		1,958,040						7,760,340
Equity Income		685,314			[C]	685,314				0
Operating Expenses		(3,674,790)		(1,272,726)						(4,947,516)
Net Income		2,812,824		685,314						2,812,824
Statement of Retained Earnings
Beginning Retained Earnings		16,657,200		4,096,449	[E]	4,096,449				16,657,200
Net Income		2,812,824		685,314						2,812,824
Dividends		(666,288)		(69,766)			[C]	69,766		(666,288)
Ending retained Earnings		18,803,736		4,711,997						18,803,736
Statement of Accum. Comp. Income:
BOY Cumulative Translation Adjustment		1,447,141		1,447,141	[E]	(1,447,141)				(1,447,141)
Current Year Translation Gain (Loss)		181,742		166,742	[C]	181,742	[D]	15,000		181,742
EOY Cumulative Translation Adjustment		(1,265,399)		(1,280,399)						(1,265,399)
Balance Sheet
Assets
Cash		1,961,828		1,430,798						3,392,626
Accounts receivable		2,475,648		1,166,357						3,642,005
Inventory		3,752,154		1,498,165						5,250,319
Equity investment		4,368,948					[C]	797,290		0
							[E]	3,244,658
							[A]	327,000
PPE, net		19,983,121		2,771,103	[A]	327,000				23,096,224
					[D]	15,000				0
										0
		32,541,699		6,866,423						35,381,174
Liabilities and Stockholder's Equity
Current liabilities		1,549,214		852,647						2,401,861
Long-term Liabilities		1,050,000		1,986,828						3,036,828
Common stock		2,195,949		264,600						2,195,949
APIC		10,208,199		330,750	[E]	264,600				10,208,199
Retained earnings		18,803,736		4,711,997	[E]	330,750				18,803,736
Cumulative Translation Adjustment		1,265,399		1,280,399						(1,265,399)
Total liabilities and stockholders’ equity		32,541,699		6,866,423		4,453,714		4,453,714		35,381,174