Chapter 8, Problem 34P

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 CAD)	Translation Rate	Subsidiary         (in $)
Income statement:
Sales	3,360,000	$0.73	$2,452,800
Cost of goods sold	(2,016,000)	$0.73	(1,471,680)
Gross Profit	1,344,000		981,120
Operating expenses	(873,600)	$0.73	(637,728)
Net income	470,400		$343,392
Statement of retained earnings:
BOY retained earnings	1,764,000	given	$1,181,880
Net income	470,400	above	343,392
Dividends	(47,040)	$0.75	(35,280)
Ending retained earnings	2,187,360	computed	$1,489,992
Balance sheet:
Assets
Cash	956,256	$0.76	$726,755
Accounts receivable	779,520	$0.76	592,435
Inventory	1,001,280	$0.76	760,973
PPE, net	1,852,032	$0.76	1,407,544
Total Assets	4,589,088		$3,487,707
Liabilities and Stockholders’ Equity
Current Liabilities	569,856	$0.76	$433,091
Long-term Liabilities	1,327,872	$0.76	1,009,183
Common Stock	224,000	$0.60	134,400
APIC	280,000	$0.60	168,000
Retained Earnings	2,187,360	above	1,489,992
Cumulative translation adjustment		plug	253,041
Total Liabilities & Equity	4,589,088		$3,487,707

	Subsidiary        (in CAD)	Translation Rate	Subsidiary         (in $)
Statement of cash flows:
Net income	470,400	$0.73	$343,392
Change in Accounts Receivable	(129,920)	$0.73	(94,842)
Change in Inventories	(166,880)	$0.73	(121,822)
Change in Current Liabilities	94,976	$0.73	69,332
Net cash flows from operating activities	268,576		$196,060
Change in PPE, net	(172,032)	$0.74	($127,304)
Net cash flows from investing activities	(172,032)		($127,304)
Change in long-term debt	221,312	$0.74	$163,771
Dividends	(47,040)	$0.75	(35,280)
Net cash flows from financing activities	174,272		$128,491
Net change in cash	270,816		$197,247
Effect of exchange rate on cash		plug	49,700
Beginning cash	685,440	$0.70	479,808
Ending cash	956,256	$0.76	$726,755

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:

	Subsidiary        (in CAD)
BOY Net assets x EOY -BOY Exchange rates	2,268,000	$0.06	$136,080	$0.76	−	$0.70
Net income x EOY -Avg. Exchange rates	470,400	$0.03	14,112	$0.76	−	$0.73
Dividends x EOY -Div. Exchange rates	(47,040)	$0.01	(470)	$0.76	−	$0.75
			$149,722
BOY Cumulative Translation Adjustment			(103,319)
EOY Cumulative Translation Adjustment			$253,041
BOY Net assets @ BOY Exchange rate	2,268,000	$0.70	$1,587,600
Net income	470,400	$0.73	343,392
Dividends	(47,040)	$0.75	(35,280)
			1,895,712
EOY Net assets @ EOY Exchange rate	2,691,360	$0.76	2,045,434
Translation Adjustment for the year			$149,722
BOY Cumulative Translation Adjustment			(103,319)
EOY Cumulative Translation Adjustment			$253,041

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

Date	Accounting Explanation	Amount ($)	Amount ($)
a.	Equity Investment	$\$149,722$
	Cumulative Translation Adjustment		$\$149,722$
	(To record the translation adjustment for the year)

In addition, the parent will again accrue the translation or loss related to the AAP assets for the year as follows:

BOY Balance	450,000	0.70	315,000
Amortization	(50,000)	$0.73	(36,500)
			278,500
EOY Balance	400,000	0.76	304,000
AAP translation gain (loss)			25,500

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	$\$25,500$
	Cumulative Translation Adjustment		$\$25,500$
	(To record the translation adjustment for the AAP during 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.

			Equity Investment
	BOY	Common Stock	134,400
	BOY	APIC	168,000
	BOY	Ret Earnings	1,181,880
	BOY	AAP	315,000		(CAD450,000 of $0.70/CAD)
	BOY	CTA	103,319
		Equity income	306,892	35,280	dividends
		Translation adj.	149,722
		AAP CTA AOCI	25,500
			2,384,713	35,280
		Net balance	2,349,433

Equity income of $306,892 is equal to the subsidiary's net income ($343,392) less the

amortization of the AAP asset ($36,500).

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		13,856,000		2,452,800						16,308,800
Cost of goods sold		(9,699,200)		(1,471,680)						(11,170,880)
Gross Profit		4,156,800		981,120						5,137,920
Equity Income		306,892			[C]	306,892				0
Operating Expenses		(2,632,640)		(637,728)	[D]	36,500				(3,306,868)
Net Income		1,831,052		343,392						1,831,052
Statement of Retained Earnings
Beginning Retained Earnings		10,944,328		1,181,880	[E]	1,181,880				10,944,328
Net Income		1,831,052		343,392						1,831,052
Dividends		(437,773)		(35,280)			[C]	35,280		(437,773)
Ending retained Earnings		12,337,607		1,489,992						12,337,607
Statement of Accum. Comp. Income:
BOY Cumulative Translation Adjustment		103,319		103,319	[E]	103,319				103,319
Current Year Translation Gain (Loss)		175,222		149,722	[C]	175,222	[D]	25,500		175,222
EOY Cumulative Translation Adjustment		278,541		253,041						278,541
Balance Sheet
Assets
Cash		1,907,767		726,755						2,628,522
Accounts receivable		1,773,568		592,435						2,366,003
Inventory		2,688,064		760,973						3,499,037
Equity investment		2,349,433					[C]	446,834		0
							[E]	1,587,599
							[A]	315,000
PPE, net		14,316,019		1,407,544	[A]	315,000				16,027,563
					[D]	(11,000)				0
		21,228,770		5,853,955						24,471,125
Liabilities and Stockholder's Equity
Current liabilities		1,109,866		433,091						1,542,957
Long-term Liabilities		4,000,000		1,009,183						5,009,183
Common stock		938,779		134,400						938,779
APIC		4,364,058		168,000	[E]	134,400				6,319,361
Retained earnings		12,337,607		1,489,992	[E]	168,000				11,800,932
Cumulative Translation Adjustment		278,541		253,041						140,043
Total liabilities and stockholders’ equity		23,028,851		3,487,707		2,278,413		2,278,413		24,475,525