On January 1,20X8,Pullman Corporation acquired 75 percent interest in Steamship Company for $300,000.Steamship is a Norwegian company.The recording currency is the Norwegian kroner (NKr).The acquisition resulted in an excess of cost-over-book value of $25,000 due solely to a patent having a remaining life of 5 years.Pullman uses the fully adjusted equity method to account for its investment.Steamship's December 31,20X8,trial balance has been translated into U.S.dollars,requiring a translation adjustment debit of $8,000.Steamship's net income translated into U.S.dollars is $35,000.It declared and paid an NKr 20,000 dividend on June 1,20X8.Relevant exchange rates are as follows:
Assume the kroner is the functional currency.
-Based on the preceding information,what amount of translation adjustment is required for increase in differential?
A)$3,000
B)$5,500
C)$4,500
D)$5,000

Question

On January 1,20X8,Pullman Corporation acquired 75 percent interest in Steamship Company for $300,000.Steamship is a Norwegian company.The recording currency is the Norwegian kroner (NKr).The acquisition resulted in an excess of cost-over-book value of $25,000 due solely to a patent having a remaining life of 5 years.Pullman uses the fully adjusted equity method to account for its investment.Steamship's December 31,20X8,trial balance has been translated into U.S.dollars,requiring a translation adjustment debit of $8,000.Steamship's net income translated into U.S.dollars is $35,000.It declared and paid an NKr 20,000 dividend on June 1,20X8.Relevant exchange rates are as follows:
  Assume the kroner is the functional currency.
-Based on the preceding information,what amount of translation adjustment is required for increase in differential?
A)$3,000 
B)$5,500 
C)$4,500 
D)$5,000

Quizplus · Accepted Answer

The excess of cost-over-book value due solely to a patent having a remaining life of 5 years is related to a temporary difference. Therefore, it should not be amortized and the full amount of $25,000 should be allocated to the patent.

Calculation of the carrying value of investment in Steamship Company: 
Initial Investment = $300,000
Share of Steamship Company's Net Income = $35,000 x 75% = $26,250
Share of Steamship Company's Dividends = NKr 20,000 x 0.125 x 8.5 = $2,125
Carrying Value of Investment = $300,000 + $26,250 - $2,125 + $25,000 = $349,125

Calculation of the translation adjustment: 
Beginning Investment in NKr = NKr 2,25,00,000
Ending Investment in NKr = NKr 2,50,00,000
Change in Investment Value = NKr 2,50,00,000 - NKr 2,25,00,000 = NKr 25,00,000
Translation Adjustment = NKr 25,00,000 x 0.14 - $8,000 = $3,500
Increase in Differential = $25,000 - $3,500 = $21,500
The translation adjustment required for the increase in differential is $4,500 (Option C).

On January 1,20X8,Pullman Corporation Acquired 75 Percent Interest in Steamship