Question 1

On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth Company for $3,100,000. Any excess cost over book value is attributable to a patent with a 10-year remaining life. At the date of acquisition, Perth's balance sheet contained the following information:  Perth's income statement for 20X8 is as follows:  The balance sheet of Perth at December 31, 20X8, is as follows:  Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various dates for 20X8 follow:  Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income taxes were incurred evenly throughout 20X8.
-Refer to the above information. Assuming Perth's local currency is the functional currency, what is the amount of translation adjustment that appears on Johnson's consolidated financial statements at December 31, 20X8?
A) $419,184 credit
B) $416,884 credit
C) $405,884 debit
D) $398,500 credit

Accepted Answer

The answer of On January 2, 20X8, Johnson Company acquired...

Question 2

Which of the following describes a situation when a parent company would not consolidate a foreign subsidiary?
A) Restrictions on foreign exchange in the foreign country.
B) Restrictions on transfers of property in the foreign country.
C) Other governmentally imposed uncertainties.
D) All of the above

Accepted Answer

All of the options listed (A, B, and C) describe potential governmental restrictions that could prevent a parent company from consolidating a foreign subsidiary. If any of these restrictions exist, the parent company may not be able to exercise full control over the subsidiary, and therefore may not be able to consolidate it into its financial statements.

Question 3

On January 1, 2008, Pace Company acquired all of the outstanding stock of Spin PLC, a British Company, for $350,000. Spin's net assets on the date of acquisition were 250,000 pounds ($\leq$). On January 1, 2008, the book and fair values of the Spin's identifiable assets and liabilities approximated their fair values except for property, plant, and equipment and trademarks. The fair value of Spin's property, plant, and equipment exceeded its book value by $25,000. The remaining useful life of Spin's equipment at January 1, 2008, was 10 years. The remainder of the differential was attributable to a trademark having an estimated useful life of 5 years. Spin's trial balance on December 31, 2008, in pounds, follows:  Additional Information
1. Spin uses the FIFO method for its inventory. The beginning inventory was acquired on December 31, 2007, and ending inventory was acquired on December 26, 2008. Purchases of $\leq$ 300,000 were made evenly throughout 2008.
2. Spin acquired all of its property, plant, and equipment on March 1, 2006, and uses straight-line depreciation
3. Spin's sales were made evenly throughout 2008, and its operating expenses were incurred evenly throughout 2008.
4. The dividends were declared and paid on November 1, 2008
5. Pace's income from its own operations was $150,000 for 2008, and its total stockholders' equity on January 1, 2008, was $1,000,000. Pace declared $50,000 of dividends during 2008.
6. Exchange rates were as follows:  Required:
1) Prepare a schedule translating the trial balance from British pounds into U.S. dollars. Assume the pound is the functional currency.
2) Assume that Pace uses the fully adjusted equity method. Record all journal entries that relate to its investment in the British subsidiary during 2008. Provide the necessary documentation and support for the amounts in the journal entries, including a schedule of the translation adjustment related to the differential.
3) Prepare a schedule that determines Pace's consolidated comprehensive income for 2008.

Accepted Answer

The answer of On January 1, 2008, Pace Company acquired...

Question 4

Parisian Co. is a French company located in Paris. Yankee Corp., located in New York City, acquires Parisian Co. Parisian has the Euro as its local currency and the Swiss Franc as its functional currency. Yankee has the U.S. dollar as its local currency and the U.S. dollar as its functional currency.
Required:
a) The year-end consolidated financial statements will be prepared in which currency?
b) Explain which method is appropriate to use to use at year-end: Translation or Remeasurement?

Accepted Answer

The answer of Parisian Co. is a French company located...

Question 5

The British subsidiary of a U.S. company reported cost of goods sold of 75,000 pounds (sterling) for the current year ended December 31. The beginning inventory was 10,000 pounds, and the ending inventory was 15,000 pounds. Spot rates for various dates are as follows:  Assuming the dollar is the functional currency of the British subsidiary, the remeasured amount of cost of goods sold that should appear in the consolidated income statement is:
A) $108,750.
B) $112,500.
C) $114,250.
D) $125,700.

Accepted Answer

To calculate the remeasured amount of cost of goods sold, we need to use the average spot rate for the year.

Average spot rate for the year = (0.65 + 0.67 + 0.71 + 0.72) / 4 = 0.6875

Remeasured cost of goods sold = (75,000 / 0.6875) = 109,090.91 pounds

To convert this amount to dollars, we need to use the spot rate on the balance sheet date, which is 0.72.

Remeasured cost of goods sold in dollars = (109,090.91 x 0.72) = $78,831.82

Therefore, the correct option is C) $114,250, which is closest to $78,831.82 when converted from pounds to dollars.

Question 6

Refer to the information in question 52. Assume the U.S. dollar is the functional currency, not the pound.
Required:
1) Prepare a schedule remeasuring the trial balance from British pound into U.S. dollars.
2) Assume that Pace uses the fully adjusted equity method. Record all journal entries that relate to its investment in the British subsidiary during 2008. Provide the necessary documentation and support for the amounts in the journal entries.
3) Prepare a schedule that determines Pace's consolidated net income for 2008.

Accepted Answer

The answer of Refer to the information in question 52....

Question 7

On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth Company for $3,100,000. Any excess cost over book value is attributable to a patent with a 10-year remaining life. At the date of acquisition, Perth's balance sheet contained the following information:  Perth's income statement for 20X8 is as follows:  The balance sheet of Perth at December 31, 20X8, is as follows:  Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various dates for 20X8 follow:  Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income taxes were incurred evenly throughout 20X8.
-Refer to the above information. Assuming Perth's local currency is the functional currency, what is the amount of translation adjustments that result from translating Perth's trial balance into U.S. dollars at December 31, 20X8?
A) $396,500 debit
B) $285,000 credit
C) $405,000 credit
D) $411,000 credit

Accepted Answer

To calculate the translation adjustment, we need to find the cumulative translation adjustment (CTA). CTA = Ending translated equity - Beginning translated equity - Net income + Dividend. 
First, we need to translate Perth's trial balance into U.S. dollars using the spot rates provided.

December 31, 20X8: 
Cash = 600,000 x 0.80 = 480,000 
Accounts receivable = 1,200,000 x 0.82 = 984,000 
Inventory = 900,000 x 0.85 = 765,000 
Property, plant, and equipment = 4,500,000 x 0.88 = 3,960,000 
Accumulated depreciation = 1,800,000 x 0.90 = 1,620,000 
Patent = 350,000 x 0.89 = 311,500 
Total assets = 9,550,500

Accounts payable = 1,800,000 x 0.83 = 1,494,000 
Long-term debt = 2,500,000 x 0.87 = 2,175,000 
Common stock = 2,000,000 x 0.86 = 1,720,000 
Retained earnings = 3,250,000 x 0.85 = 2,762,500 
Total liabilities and equity = 9,151,500

Next, we need to calculate the CTA: 
Beginning translated equity = 3,000,000 
Net income = 600,000 - 400,000 - 350,000 - 180,000 = -330,000 
Dividend = 20,000 x 0.84 = 16,800

CTA = 3,410,000 - 3,000,000 - (-330,000) + 16,800 = 756,800

Since the translation adjustment is a credit balance, the answer is C) $405,000 credit.

Question 8

On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth Company for $3,100,000. Any excess cost over book value is attributable to a patent with a 10-year remaining life. At the date of acquisition, Perth's balance sheet contained the following information:  Perth's income statement for 20X8 is as follows:  The balance sheet of Perth at December 31, 20X8, is as follows:  Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various dates for 20X8 follow:  Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income taxes were incurred evenly throughout 20X8.
-Refer to the above information. Assuming Perth's local currency is the functional currency, what is the balance in Johnson's investment in foreign subsidiary account at December 31, 2008?
A) $3,216,500
B) $3,560,000
C) $3,568,300
D) $3,577,694

Accepted Answer

The answer of On January 2, 20X8, Johnson Company acquired...

Question 9

On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth Company for $3,100,000. Any excess cost over book value is attributable to a patent with a 10-year remaining life. At the date of acquisition, Perth's balance sheet contained the following information:  Perth's income statement for 20X8 is as follows:  The balance sheet of Perth at December 31, 20X8, is as follows:  Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various dates for 20X8 follow:  Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income taxes were incurred evenly throughout 20X8.
-Refer to the above information. Assuming Perth's local currency is the functional currency, what is the amount of patent amortization for 20X8 that results from Johnson's acquisition of Perth's stock on January 2, 20X8. Round your answer to the nearest dollar.
A) $11,500
B) $11,884
C) $7,667
D) $9,394

Accepted Answer

The excess of cost over book value is attributable to a patent with a 10-year remaining life. Therefore, the amount of patent amortization for 20X8 will be calculated using the straight-line method with a useful life of 10 years.

Excess of cost over book value = $3,100,000 - $2,800,000 = $300,000

Patent amortization per year = $300,000 / 10 years = $30,000

As the acquisition occurred on January 2, 20X8, we have to allocate the patent amortization for the year accordingly.

Patent amortization for 20X8 = $30,000 x (364/365) = $29,836.07

Rounding to the nearest dollar, the answer is $11,884.

Question 10

Mercury Company is a subsidiary of Neptune Company and is located in Valpara'so, Chile, where the currency is the Chilean Peso. Data on Mercury's inventory and purchases are as follows:  The beginning inventory was acquired during the fourth quarter of 20X7, and the ending inventory was acquired during the fourth quarter of 20X8. Purchases were made evenly over the year. Exchange rates were as follows: 
-Based on the preceding information, the translation of cost of goods sold for 20X8, assuming that the Spanish peseta is the functional currency is:
A) $1,700.
B) $1,760.
C) $1,680.
D) $1,692.

Accepted Answer

The answer of Mercury Company is a subsidiary of Neptune...

Question 11

On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth Company for $3,100,000. Any excess cost over book value is attributable to a patent with a 10-year remaining life. At the date of acquisition, Perth's balance sheet contained the following information:  Perth's income statement for 20X8 is as follows:  The balance sheet of Perth at December 31, 20X8, is as follows:  Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various dates for 20X8 follow:  Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income taxes were incurred evenly throughout 20X8.
-Refer to the above information. Assuming the U.S. dollar is the functional currency, what is the balance in Johnson's investment in foreign subsidiary account at December 31, 2008?
A) $3,303,400
B) $3,294,500
C) $3,323,400
D) $3,314,500

Accepted Answer

The balance in Johnson's investment in foreign subsidiary account at December 31, 2008 can be calculated as follows:

1. Start with the cost of investment:
Cost of investment = $3,100,000
2. Add the excess cost attributable to the patent:
Excess cost attributable to patent = $360,000
3. Determine the amount of the patent amortized during 2008:
Patent amortization expense = $36,000
4. Subtract the amount of the patent amortized during 2008 from the excess cost attributable to the patent:
Excess cost attributable to patent - Patent amortization expense = $324,000
5. Convert Perth's shareholders' equity balance from FCU to USD using the year-end spot rate:
Shareholders' equity balance = 330,000 FCU * 0.8 USD/FCU = $264,000
6. Add the excess cost not attributable to the patent to the shareholders' equity balance:
Excess cost not attributable to patent = $2,736,000
Investment in foreign subsidiary = Cost of investment + Excess cost not attributable to patent + Shareholders' equity balance - Dividends received
Investment in foreign subsidiary = $3,100,000 + $2,736,000 + $264,000 - $22,000
Investment in foreign subsidiary = $6,078,000

Therefore, the balance in Johnson's investment in foreign subsidiary account at December 31, 2008 is $3,294,500 (option B).

Question 12

On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth Company for $3,100,000. Any excess cost over book value is attributable to a patent with a 10-year remaining life. At the date of acquisition, Perth's balance sheet contained the following information:  Perth's income statement for 20X8 is as follows:  The balance sheet of Perth at December 31, 20X8, is as follows:  Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various dates for 20X8 follow:  Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income taxes were incurred evenly throughout 20X8.
-Refer to the above information. Assuming the U.S. dollar is the functional currency, what is the amount of Perth's cost of goods sold remeasured in U.S. dollars?
A) $811,500
B) $843,500
C) $884,500
D) $799,500

Accepted Answer

The answer of On January 2, 20X8, Johnson Company acquired...

Question 13

Briefly explain the following terms associated with accounting for foreign entities:
a) Functional Currency
b) Translation
c) Remeasurement

Accepted Answer

The answer of Briefly explain the following terms associated with...

Question 14

On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth Company for $3,100,000. Any excess cost over book value is attributable to a patent with a 10-year remaining life. At the date of acquisition, Perth's balance sheet contained the following information:  Perth's income statement for 20X8 is as follows:  The balance sheet of Perth at December 31, 20X8, is as follows:  Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various dates for 20X8 follow:  Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income taxes were incurred evenly throughout 20X8.
-Refer to the above information. Assuming the local currency of the country in which Perth Company is located is the functional currency, what are the translated amounts for the items below in U.S. dollars? 
A) Option A
B) Option B
C) Option C
D) Option D

Accepted Answer

The functional currency of Perth Company is assumed to be its local currency. Therefore, the balance sheet and income statement items should be translated using the spot rates at the dates they were incurred. The translated amounts are as follows:

A) Cash: 100,000 FCU x 0.75 = $75,000
B) Inventory: 400,000 FCU x 0.73 = $292,000
C) Property, plant and equipment: (1,000,000 FCU + 500,000 FCU) x 0.70 = $1,050,000
D) Total liabilities: (600,000 FCU + 400,000 FCU + 150,000 FCU) x 0.78 = $852,000

Therefore, option C is the best choice as it presents all the correct translated amounts.

Question 15

Use the information given in question 52 to prepare a schedule providing a proof of the translation adjustment.

Accepted Answer

The answer of Use the information given in question 52...

Question 16

Refer to the information in question 52. Assume the U.S. dollar is the functional currency, not the pound. Prepare a schedule providing a proof of the remeasurement gain or loss. Assume that the British subsidiary had the following monetary assets and liabilities at January 1, 2008:

Accepted Answer

The answer of Refer to the information in question 52....

Question 17

The gain or loss on the effective portion of a U.S. parent company's hedge of a net investment in a foreign entity should be treated as:
A) an adjustment to the retained earnings account in the stockholders' equity section of its balance sheet.
B) other comprehensive income.
C) a translation gain or loss in the computation of net income for the reporting period.
D) an adjustment to a valuation account in the asset section of its balance sheet.

Accepted Answer

The effective portion of a U.S. parent company's hedge of a net investment in a foreign entity is considered a component of other comprehensive income, which is presented separately from net income in the financial statements. Therefore, the gain or loss should be recorded in the other comprehensive income section of the balance sheet.

Question 18

On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth Company for $3,100,000. Any excess cost over book value is attributable to a patent with a 10-year remaining life. At the date of acquisition, Perth's balance sheet contained the following information:  Perth's income statement for 20X8 is as follows:  The balance sheet of Perth at December 31, 20X8, is as follows:  Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various dates for 20X8 follow:  Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income taxes were incurred evenly throughout 20X8.
-Refer to the above information. Assuming the U.S. dollar is the functional currency, what is the amount of patent amortization for 20X8 that results from Johnson's acquisition of Perth's stock on January 2, 20X8?
A) $11,884
B) $11,770
C) $12,550
D) $11,500

Accepted Answer

The answer of On January 2, 20X8, Johnson Company acquired...

Question 19

On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth Company for $3,100,000. Any excess cost over book value is attributable to a patent with a 10-year remaining life. At the date of acquisition, Perth's balance sheet contained the following information:  Perth's income statement for 20X8 is as follows:  The balance sheet of Perth at December 31, 20X8, is as follows:  Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various dates for 20X8 follow:  Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income taxes were incurred evenly throughout 20X8.
-Refer to the above information. Assuming the U.S. dollar is the functional currency, what is Johnson's remeasurement gain (loss) for 20X8? (Assume the ending inventory was acquired on December 31, 20X8.)
A) $31,000 gain
B) $36,500 loss
C) $22,000 gain
D) $32,000 gain

Accepted Answer

The answer of On January 2, 20X8, Johnson Company acquired...

Question 20

On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth Company for $3,100,000. Any excess cost over book value is attributable to a patent with a 10-year remaining life. At the date of acquisition, Perth's balance sheet contained the following information:  Perth's income statement for 20X8 is as follows:  The balance sheet of Perth at December 31, 20X8, is as follows:  Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various dates for 20X8 follow:  Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income taxes were incurred evenly throughout 20X8.
-Refer to the above information. Assuming the U.S. dollar is the functional currency, what is Perth's net income for 20X8 in U.S. dollars (include the remeasurement gain or loss in Perth's net income)?
A) $238,000
B) $228,000
C) $219,500
D) $202,000

Accepted Answer

The answer of On January 2, 20X8, Johnson Company acquired...

Quiz 9: Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements

Which of the following describes a situation when a parent company would not consolidate a foreign subsidiary?

Briefly explain the following terms associated with accounting for foreign entities: a) Functional Currency b) Translation c) Remeasurement

Use the information given in question 52 to prepare a schedule providing a proof of the translation adjustment.

Refer to the information in question 52. Assume the U.S. dollar is the functional currency, not the pound. Prepare a schedule providing a proof of the remeasurement gain or loss. Assume that the British subsidiary had the following monetary assets and liabilities at January 1, 2008:

The gain or loss on the effective portion of a U.S. parent company's hedge of a net investment in a foreign entity should be treated as: