Chapter 8, Problem 31P

a.

To determine

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

statement of cash flows from British pounds (GBP) 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 GBP)	Translation Rate	Subsidiary         (in $)
Income statement:
Sales	3,150,000	$1.48	$4,662,000
Cost of goods sold	(1,890,000)	$1.48	(2,797,200)
Gross Profit	1,260,000		1,864,800
Operating expenses	(819,000)	$1.48	(1,212,120)
Net income	441,000		$652,680
Statement of retained earnings:
BOY retained earnings	1,653,750	given	$2,926,035
Net income	441,000	above	652,680
Dividends	(44,100)	$1.50	(66,150)
Ending retained earnings	2,050,650	computed	$3,512,565
Balance sheet:
Assets
Cash	896,490	$1.52	$1,362,665
Accounts receivable	730,800	$1.52	1,110,816
Inventory	938,700	$1.52	1,426,824
PPE, net	1,736,280	$1.52	2,639,146
Total Assets	4,302,270		$6,539,451
Liabilities and Stockholders’ Equity
Current Liabilities	534,240	$1.52	$812,045
Long-term Liabilities	1,244,880	$1.52	1,892,218
Common Stock	210,000	$0.55	115,500
APIC	262,500	$0.55	144,375
Retained Earnings	2,050,650	above	3,512,565
Cumulative translation adjustment		plug	62,748
Total Liabilities & Equity	4,302,270		$6,539,451

	Subsidiary        (in GBP)	Translation Rate	Subsidiary         (in $)
Statement of cash flows:
Net income	441,000	$1.48	$652,680
Change in Accounts Receivable	(121,800)	$1.48	(180,264)
Change in Inventories	(156,450)	$1.48	(231,546)
Change in Current Liabilities	89,040	$1.48	131,779
Net cash flows from operating activities	251,790		$372,649
Change in PPE, net	(161,280)	$1.49	($240,307)
Net cash flows from investing activities	(161,280)		($240,307)
Change in long-term debt	207,480	$1.49	$309,145
Dividends	(44,100)	$1.50	(66,150)
Net cash flows from financing activities	163,380		$242,995
Net change in cash	253,890		$375,337
Effect of exchange rate on cash		plug	55,558
Beginning cash	642,600	$1.45	931,770
Ending cash	896,490	$1.52	$1,362,665

b.

To determine

Compute the ending Cumulative Translation Adjustment and also prepare the required journal entries 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 GBP)
BOY Net assets x EOY -BOY Exchange rates	2,126,250	$0.07	$148,838	$1.52	−	$1.45
Net income x EOY -Avg. Exchange rates	441,000	$0.04	17,640	$1.52	−	$1.48
Dividends x EOY -Div. Exchange rates	(44,100)	$0.02	(882)	$1.52	−	$1.50
			$165,596
BOY Cumulative Translation Adjustment			(102,848)
EOY Cumulative Translation Adjustment			$62,748
BOY Net assets @ BOY Exchange rate	2,126,250	$1.45	$3,083,063
Net income	441,000	$1.48	652,680
Dividends	(44,100)	$1.50	(66,150)
			$3,669,593
EOY Net assets @ EOY Exchange rate	2,523,150	$1.52	3,835,188
Translation Adjustment for the year			$165,595
BOY Cumulative Translation Adjustment			(102,848)
EOY Cumulative Translation Adjustment			$62,747

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	$\$165,596$
	Cumulative Translation Adjustment		$\$165,596$
	(To record the translation adjustment for the year)

AAP asset relating to land is not amortized.

The AOCI Accumulated Currency Translation account adjustment of $14,000 is based on the calculation below:

	£	Rate	US $
BOY Balance	200,000	1.45	290,000
Amortization	-		-
			290,000
EOY Balance	200,000	1.52	304,000
AAP translation gain (loss)			14,000

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	$\$165,596$
	Cumulative Translation Adjustment		$\$165,596$
	(To record the translation adjustment for the AAP during the year)

c.

To determine

Validate the equity investment account balance on the balance sheet for the parent.

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	115,500
	BOY	APIC	144,375
	BOY	Ret Earnings	2,926,035
	BOY	AAP	290,000
	BOY	CTA	(102,848)
		Equity income	652,680	66,150	dividends
		Translation adj.	165,596
		AAP CTA AOCI	14,000
			4,205,338	66,150
		Net balance	4,139,188

Equity income of $652,680 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		13,815,000		4,662,000						18,477,000
Cost of goods sold		(9,670,500)		(2,797,200)						(12,467,700)
Gross Profit		4,144,500		1,864,800						6,009,300
Equity Income		652,680			[C]	652,680				0
Operating Expenses		(2,624,850)		(1,212,120)						(3,836,970)
Net Income		2,172,330		652,680						2,172,330
Statement of Retained Earnings
Beginning Retained Earnings		11,898,000		2,926,035	[E]	2,926,035				11,898,000
Net Income		2,172,330		652,680						2,172,330
Dividends		(475,920)		(66,150)			[C]	66,150		(475,920)
Ending retained Earnings		13,594,410		3,512,565						13,594,410
Statement of Accum. Comp. Income:
BOY Cumulative Translation Adjustment		(102,848)		(102,848)	[E]	[102,848]				(102,848)
Current Year Translation Gain (Loss)		179,596		165,596	[C]	179,596	[D]	14,000		179,596
EOY Cumulative Translation Adjustment		76,748		62,748						76,748
Balance Sheet
Assets
Cash		1,526,569		$1,362,665						$2,889,234
Accounts receivable		1,768,320		1,110,816						2,879,136
Inventory		2,680,110		430,000						4,106,934
Equity investment		4,139,188					[C]	766,126		0
							[E]	3,083,062
							[A]	290,000
PPE, net		14,273,658		2,693,146	[A]	290,000				17,216,804
					[D]	14,000				0
										0
		$24,387,845		$6,539,451						$27,092,108
Liabilities and Stockholder's Equity
Current liabilities		1,106,582		$812,045						1,918,627
Long-term Liabilities		750,000		1,892,218						2,642,218
Common stock		1,568,535		115,500						1,568,535
APIC		7,291,571		144,375	[E]	115,500				7,291,571
Retained earnings		13,594,410		3,512,565	[E]	144,375				13,594,410
Cumulative Translation Adjustment		76,748		62,748						76,748
Total liabilities and stockholders’ equity		24,387,845		$6,539,451		4,219,338		4,219,338		27,092,108