Fundamentals of Advanced Accounting
Fundamentals of Advanced Accounting
6th Edition
ISBN: 9780077862237
Author: Joe Ben Hoyle, Thomas Schaefer, Timothy Doupnik
Publisher: McGraw-Hill Education
Question
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Chapter 8, Problem 36P
To determine

Translate Simbel’s 2015 financial statements into US Dollar and prepare a consolidation worksheet for Cayce and its Egyptian subsidiary. Assume that the Egyptian pound is the subsidiary functional currency.

Expert Solution & Answer
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Explanation of Solution

Translate foreign currency financial statement and prepare consolidation worksheet:

Simbel’s financial statements are first translated into US Dollar after reclassification of 10,000 pounds expenditure for rent from rent expenses to prepaid rent and accordingly. The balances as follows:

Translation Worksheet
AccountsPoundsRateDollars
Sales800,0000.274(219,200)
Cost of goods sold420,0000.274115,080
Salary expenses74,0000.27420,276
Rent expenses( Adjusted)36,0000.2749,864
Other expenses59,0000.2741,617
Gain on sale of fixed assets (10/1/2015)( Building)(30,000)0.274(8,190)
 
Net income241,0000.273(66,004)
 
Retained earnings (11/1/2015(133,000)
Net income(241,000)(66,004)
Dividend paid50,0000.27513,750
Retained earnings (12/31/2015)(324,000)(90,498)
 
Cash and receivables146,0000.2739,420
Inventory297,0000.2780,190
Prepaid rent ( adjusted)10,0000.272,700
Fixed assets455,0000.27122,850
Total908,000245,160
 
Accounts Payable(54,000)
Notes Payable(140,000)
Common stock(240,000)
Additional paid in capital(150,000)
 
Retained earnings ( 12/31/2015)(324,000)(90,498)
 
Subtotal(259,878)

Cumulative translation adjustment

( negative)

14,718
 
Total908,000(245,160)

Table: (1)

Schedule 1: Translation of 1/1/2017 retained earnings:

AccountsPoundsRateDollars
Retained earnings ( 1/1/2014)000
Net income,2014(163,000)0.288(46,944)
Dividend 6/1/201430,0000.2908,700
Retained earnings ( 1/1/2015)133,000(38,244)

Table: (2)

Schedule 2: Calculation of cumulative Translation adjustment at 12/31/2015:

AccountsPoundsRateDollars
Net assets ( 1/1/2014)(390,000)0.3(117,000)
Net income,2014(163,000)0.288(46,944)
Dividend 6/1/201430,0000.2908,700
Net assets 12/31/2014523,000(155,244)
Net assets 12/31/2014 at current exchange rate 523,000×0.280146,440
Translation adjustment 2014 ( Negative)8,804

Table: (3)

AccountsPoundsRateDollars
Net assets ( 1/1/2015)(523,000)0.280(146,440)
Net income,2015(241,000)(66004)
Dividend 6/1/201450,0000.27513750
Net assets 12/31/2015714,000198,694
Net assets 12/31/2015 at current exchange rate 714,000×0.270192,780
Translation adjustment 2015 ( Negative)8,804
Cumulative Translation adjustment 12/31/2015 ( Negative)(14,718)

Table: (4)

Cayce and Simbel’s US Dollar accounts are then consolidated:

Consolidation Worksheet
AccountsCayce DollarSimbel DollarAdjustment and EliminationConsolidation Balance
   DebitCredit 
Sales($200,000)($219,200)  ($419,200)
Cost of goods sold$93,800$115,080  $208,880
Salary expenses$19,000$20,276  $39,276
Rent expenses$7,000$9,864  $16,864
Other expenses$21,000$16,166  $37,166
Dividend income($13,750)$0$13,750 $0
Gain (10/1/2015)$0($8,190)  ($8,190)
      
Net income($72,950)($66,004)  ($125,204)
      
Retained earnings (1/1/2015)($318,000)($38,244)$38,244($38,244)($356,244)
Net income($72,950)($66,004)  ($125,204)
Dividend paid$24,000$13,750 ($13,750)$24,000
Retained earnings (12/31/2015)($366,950)($90,498)  ($457,448)
      
Cash and receivables$110,750$39,420  $150,170
Inventory$98,000$80,190   
Prepaid rent$30,000$2,700   
Investment$126,000$0$38,244($164,244)$6
Fixed assets$398,000$122,850$9,000$900$528,950
Total$762,750$245,160  $890,010
      
Accounts Payable($60,800)$39,420  ($75,380)
Notes Payable($132,000)($37,800)  ($169,800)
Common stock($120,000)($72,000)$72,000 ($120,000)
Additional paid in capital($83,000)($45,000)$45,000 ($83,000)
      
Retained earnings ( 12/31/2015)($366,950)($90,498)  ($457,448)
      
Subtotal ($259,878)   
Cumulative translation adjustment ( negative) $14,718$900 $15,618
      
Total$762,750($245,160)$217,138$217,138$890,010

Table: (5)

Explanation entries:

DateAccounts title and ExplanationPost Ref.Debit($)Credit($)
     
1.Dividend income13,750
Dividend paid 13,750
( To eliminate intercompany dividend payments recorded by parent as income)   
   
2.Common stock ( Simbel) 72,000
 Additional PIC ( Simbel) 45,000
  Retained earnings (1/1/2015)(Simbel) 38,244
Fixed assets ( Revaluation)9,000
  Investment in Simbel 164,244
(To eliminate subsidiary’s stockholder’s equity accounts and allocate the excess of purchase price over book value to land.)

Table: (6)

The excess of cost over book value is calculated as follows:

ParticularsAmounts ( $)
Purchase Price126,000
Book value,(1/1/2015):
Common stock(72,000)
Additional paid in capital( 45,000)
Excess of purchase price over book value9,000

Table: (7)

The excess of cost over the book value is pounds 30,000. This US & will be $9,000($30,000×0.3) .

Explanatory entries:

DateAccounts title and ExplanationPost Ref.Debit($)Credit($)
     
3.Investment in Simbel38,244
Retained earnings ( 1/1/2015) 38,244
( To accrue 2015 increase in subsidiary book value entry is needed because parent is using the cost method)
4.Cumulative Translation adjustment900
Fixed assets( realization)900
( To revalue the excess of cost over book value for the change in exchange rate since the date of acquisition with the consolidated cumulative transition adjustment)

Table: (8)

The revalution of ‘’excess’’ is calculated as follows:

ParticularsAmounts ( $)
Excess of cost over book value US Dollar equivalent at 12/31/2015 Pound30,000×$0.27 8,100
US Dollar equivalent at 1/1/2015 Pound30,000×$0.309,000
Cumulative translation adjustment related to excess (1/31/2015)(900)

Table: (9)

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