Chapter 8, Problem 33P

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 BRL)		Translation Rate		Subsidiary(in $)
Income statement:
Sales	7,350,000	$0.22		$1,617,000
Cost of goods sold	(4,410,000)	$0.22		(970,200)
Gross Profit	2,940,000			646,800
Operating expenses	(1,911,000)	$0.22		(420,420)
Net income	1,029,000			$226,380
Statement of retained earnings:
BOY retained earnings	3,858,750	given		$617,400
Net income	1,029,000	above		226,380
Dividends	(102,900)	$0.24		(24,696)
Ending retained earnings	4,784,850	computed		$819,084
Balance sheet:
Assets
Cash	2,091,810	$0.26		$543,871
Accounts receivable	1,705,200	$0.26		443,352
Inventory	2,190,300	$0.26		569,478
PPE, net	4,051,320	$0.26		1,053,343
Total Assets	10,038,630			$2,610,044
Liabilities and Stockholders’ Equity
Current Liabilities	1,246,560	$0.26		$324,106
Long-term Liabilities	2,904,720	$0.26		755,227
Common Stock	490,000	$0.07		34,300
APIC	612,500	$0.07		42,875
Retained Earnings	4,784,850	above		819,084
Cumulative translation adjustment		plug		634,452
Total Liabilities & Equity	10,038,630			$2,610,044

	Subsidiary(in BRL)		Translation Rate		Subsidiary(in $)
Statement of cash flows:
Net income	1,029,000	$0.22		$226,380
Change in Accounts Receivable	(284,200)	$0.22		(62,524)
Change in Inventories	(365,050)	$0.22		(80,311)
Change in Current Liabilities	207,760	$0.22		45,707
Net cash flows from operating activities	587,510			$129,252
Change in PPE, net	(376,320)	$0.23		($86,554)
Net cash flows from investing activities	(376,320)			($86,554)
Change in long-term debt	484,120	$0.23		$111,348
Dividends	(102,900)	$0.24		(24,696)
Net cash flows from financing activities	381,220			$86,652
Net change in cash	592,410			$129,350
Effect of exchange rate on cash		plug		129,635
Beginning cash	1,499,400	$0.19		284,886
Ending cash	2,091,810	$0.26		$543,871

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	4,961,250	$0.07	$347,288	$0.26	−	$0.19
Net income x EOY -Avg. Exchange rates	1,029,000	$0.04	41,160	$0.26	−	$0.22
Dividends x EOY -Div. Exchange rates	(102,900)	$0.02	(2,058)	$0.26	−	$0.24
			$386,390
BOY Cumulative Translation Adjustment			248,062
EOY Cumulative Translation Adjustment			$634,452
BOY Net assets @ BOY Exchange rate	4,961,250	$0.19	$942,638
Net income	1,029,000	$0.22	226,380
Dividends	(102,900)	$0.24	(24,696)
			$1,144,322
EOY Net assets @ EOY Exchange rate	5,887,350	$0.26	1,530,711
Translation Adjustment for the year			$386,389
BOY Cumulative Translation Adjustment			248,062
EOY Cumulative Translation Adjustment			$634,451

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	$386,390$
	Other comprehensive income		$386,390$
	(To record the translation adjustment for the year)

The parent will also accrue the translation or loss for the year relating to the AAP assets as follows:

		R	rate	$
	BOY Balance	270,000	0.19	51,300
	Amortization - Year 2	(30,000)	0.22	(6,600)
				44,700
	EOY Balance	240,000	0.26	62,400
	AAP translation gain (loss)			17,700

Based on the AAP computation of an AAP asset related to a patent, the Parent makes the following journal entry (to recognize the AAP translation gain for the year):

Date	Accounting Explanation	Amount ($)	Amount ($)
b.	Equity Investment	$\$17,700$
	Other comprehensive income		$\$17,700$
	(To recognize the AAP translation gain for the year)

c.

To determine

1. i. Compute the equity investment account balance on the balance sheet for the parent’s company.
2. ii. Compute the equity income reported by the parent in its income statement.

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.

1. i.

		Equity Investment
BOY	Common Stock	34,300
BOY	APIC	42,875
BOY	Ret Earnings	617,400
BOY	Unamort. AAP	51,300		(R270,000 x $0.19/R)
BOY	CTA	248,062
	Equity income	219,780	24,696	dividends
	Trans adj	386,390
	OCI	17,700
		1,617,807	24,696
	APIC	1,593,111

1. ii.

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 $219,780 is equal to the subsidiary's net income, ($226,380) less the

amortization of the AAP in the amount of $6,600.

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		30,310,000		1,617,000						31,927,000
Cost of goods sold		(21,217,000)		(970,200)						(22,187,200)
Gross Profit		9,093,000		646,800						9,739,800
Equity Income		219,780			[C]	219,780				0
Operating Expenses		(5,758,900)		(420,420)	[D]	6,600				(6,185,920)
Net Income		3,553,880		226,380						3,553,880
Statement of Retained Earnings
Beginning Retained Earnings		23,940,718		617,400	[E]	617,400				23,940,718
Net Income		3,553,880		226,380						3,553,880
Dividends		(957,628)		(24,696)			[C]	24,696		(957,628)
Ending retained Earnings		26,536,970		819,084						26,536,970
Statement of Accum. Comp. Income:
BOY Cumulative Translation Adjustment		248,062		248,062	[E]	248,062				248,062
Current Year Translation Gain (Loss)		404,090		386,390	[C]	404,090	[D]	17,700		404,090
EOY Cumulative Translation Adjustment		652,152		634,452						652,152
Balance Sheet
Assets
Cash		7,297,685		543,871						7,841,556
Accounts receivable		3,879,680		443,352						4,323,032
Inventory		5,880,140		569,478						6,449,618
Equity investment		1,593,111					[C]	599,174		0
							[E]	942,637
							[A]	51,300
PPE, net		31,316,292		1,053,343	[A]	51,300				32,432,035
					[D]	11,100				0
										0
		49,966,908		2,610,044						51,046,241
Liabilities and Stockholder's Equity
Current liabilities		2,427,833		324,106						2,751,937
Long-term Liabilities		8,750,000		755,227						9,505,227
Common stock		2,053,580		34,300						2,053,580
APIC		9,546,376		42,875	[E]	34,300				9,546,376
Retained earnings		26,536,970		819,084	[E]	42,875				26,536,970
Cumulative Translation Adjustment		652,152		634,452						652,152
Total liabilities and stockholders’ equity		49,966,908		2,610,044		1,635,507		1,635,507		51,046,241