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 R$)		Translation Rate		Subsidiary(in $)
Income statement:
Sales	6,510,000	$0.25		$1,627,500
Cost of goods sold	(3,906,000)	$0.25		(976,500)
Gross Profit	2,604,000			651,000
Operating expenses	(1,692,600)	$0.25		(423,150)
Net income	911,400			$227,850
Statement of retained earnings:
BOY retained earnings	3,417,750	given		$649,373
Net income	911,400	above		227,850
Dividends	(91,140)	$0.27		(24,608)
Ending retained earnings	4,238,010	computed		$852,615
Balance sheet:
Assets
Cash	1,852,746	$0.29		$537,296
Accounts receivable	1,510,320	$0.29		437,993
Inventory	1,939,980	$0.29		562,594
PPE, net	3,588,312	$0.29		1,040,610
Total Assets	8,891,358			$2,578,493
Liabilities and Stockholders’ Equity
Current Liabilities	1,104,096	$0.29		$320,188
Long-term Liabilities	2,572,752	$0.29		746,098
Common Stock	434,000	$0.10		43,400
APIC	542,500	$0.10		54,250
Retained Earnings	4,238,010	above		852,615
Cumulative translation adjustment		plug		561,942
Total Liabilities & Equity	8,891,358			$2,578,493

Statement of cash flows:
Net income	911,400	$0.25	$227,850
Change in Accounts Receivable	(251,720)	$0.25	(62,930)
Change in Inventories	(323,330)	$0.25	(80,833)
Change in Current Liabilities	184,016	$0.25	46,004
Net cash flows from operating activities	520,366		$130,091
Change in PPE, net	(333,312)	$0.26	($86,661)
Net cash flows from investing activities	(333,312)		($86,661)
Change in long-term debt	428,792	$0.26	$111,486
Dividends	(102,900)	$0.27	(24,608)
Net cash flows from financing activities	337,652		$86,878
Net change in cash	524,706		$130,308
Effect of exchange rate on cash		plug	114,819
Beginning cash	1,328,040	$0.22	292,169
Ending cash	1,852,746	$0.29	$537,296

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	4,394,250	$0.07	$307,598	$0.29	−	$0.22
Net income x EOY -Avg. Exchange rates	911,400	$0.04	36,456	$0.29	−	$0.25
Dividends x EOY -Div. Exchange rates	(91,140)	$0.02	(1,823)	$0.29	−	$0.27
			$342,231
BOY Cumulative Translation Adjustment			219,711
EOY Cumulative Translation Adjustment			$561,942
BOY Net assets @ BOY Exchange rate	4,394,250	$0.22	$966,735
Net income	911,400	$0.25	227,850
Dividends	(91,140)	$0.27	(24,608)
			$1,169,977
EOY Net assets @ EOY Exchange rate	5,214,510	$0.29	1,512,208
Translation Adjustment for the year			$342,231
BOY Cumulative Translation Adjustment			219,711
EOY Cumulative Translation Adjustment			$561,942

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	$342,231$
	Other comprehensive income		$342,231$
	(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	0.22	59,400
	Amortization - Year 2	(30,000)	0.25	(7,500)
				51,900
	EOY Balance	240,000	0.29	69,600
	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	43,400
BOY	APIC	54,250
BOY	Ret Earnings	649,373
BOY	Unamort. AAP	59,400		(R270,000 x 0.22/R)
BOY	CTA	219,712
	Equity income	220,350	24,608	dividends
	Trans adj	342,231
	OCI	17,700
		1,606,415	24,608
	APIC	1,581,807

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 $220,350 is equal to the subsidiary's net income, ($227,850) less the

amortization of the AAP in the amount of $7,500

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		26,846,000		1,627,500						28,473,500
Cost of goods sold		(18,792,200)		(976,500)						(19,768,700)
Gross Profit		8,053,800		651,000						8,704,800
Equity Income		220,350			[C]	220,350				0
Operating Expenses		(5,100,740)		(423,150)	[D]	7,500				(5,531,390)
Net Income		3,173,410		227,850						3,173,410
Statement of Retained Earnings
Beginning Retained Earnings		21,204,636		649,373	[E]	649,373				21,204,636
Net Income		3,173,410		227,850						3,173,410
Dividends		(848,185)		(24,608)			[C]	24,608		(848,185)
Ending retained Earnings		23,529,861		852,615						23,529,861
Statement of Accum. Comp. Income:
BOY Cumulative Translation Adjustment		219,712		219,712	[E]	219,712				219,712
Current Year Translation Gain (Loss)		359,931		342,231	[C]	359,931	[D]	17,700		359,931
EOY Cumulative Translation Adjustment		579,643		561,943						579,643
Balance Sheet
Assets
Cash		6,320,609		537,296						6,857,905
Accounts receivable		3,436,288		437,993						3,874,281
Inventory		5,208,124		562,594						5,770,718
Equity investment		1,581,807					[C]	555,673		0
							[E]	966,734
							[A]	59,400
PPE, net		27,737,287		1,040,610	[A]	59,400				28,847,497
					[D]	10,200				0
										0
		44,284,115		2,578,493						45,340,401
Liabilities and Stockholder's Equity
Current liabilities		2,150,365		320,188						2,470,553
Long-term Liabilities		7,750,000		746,098						8,496,098
Common stock		1,818,885		43,400						1,818,885
APIC		8,455,362		54,250	[E]	43,400				8,455,362
Retained earnings		23,529,861		852,615	[E]	54,250				23,529,861
Cumulative Translation Adjustment		579,642		561,942						579,642
Total liabilities and stockholders’ equity		44,284,115		2,578,493		1,624,115		1,624,115		45,350,401