Accounting Problems 11-1 and 11-3
Problem 11-1 (LO 6, 7) Remeasuring a trial balance and analyzing results.
In order to demonstrate the use of the remeasurement process, assume that at the beginning of the year a U.S. parent company invested 100,000 foreign currency B (FCB) to form a 100% owned subsidiary. The subsidiary immediately invested the foreign currency in land at a cost of 50,000 FCB and inventory with a cost of 50,000 FCB. At midyear, 50% of the inventory was sold for 40,000 FCB. At year-end, assume that the sale is still uncollected. Although FCB is the subsidiary's functional currency, the subsidiary maintains its books of record in foreign currency A (FCA). Assume the following exchange rates:
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Beginning of Year
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Mid Year
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End of Year
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1 FCB equals
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12.5 FCA
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8 FCA
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10 FCA
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1 FCA equals
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0.08 FCB
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0.125 FCB
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0.10 FCB
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1 FCA equals
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$0.20
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$0.40
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$0.30
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1 FCB equals
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$2.50
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$3.20
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$3.00
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Required
- 1. Prepare the entries to record the above transactions: (a) as they would have been recorded on the books of the subsidiary and (b) as they would have been recorded had they been recorded in terms of FCB. Also, prepare the trial balance that would have resulted under each of the recording models.
- 2. Prepare a schedule to remeasure the FCA trial balance into an FCB trial balance and then translate into U.S. dollars.
- 3. Prepare a schedule to directly calculate the translation adjustment to be reported in other comprehensive income.
- 4. Compare the remeasured FCB trial balance to the FCB trial balance in part (1) and comment regarding whether the objectives of translation have been achieved.
Problem 11-3 (LO 3, 5) Translate a trial balance and prepare a consolidation worksheet with excess of cost over book value traceable to equipment.
Due to increasing pressures to expand globally, Pueblo Corporation acquired a 100% interest in Sorenson Company, a foreign company, on January 1, 2016. Pueblo paid 12,000,000 FC, and Sorenson's equity consisted of the following:
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Common stock
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3,000,000 FC
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Paid-in capital in excess of par
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2,000,000
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Retained earnings
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4,200,000
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Total
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9,200,000 FC
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On the date of acquisition, equipment with a 10-year life was undervalued by 500,000 FC. Any remaining excess of cost over book value is attributable to additional equipment with a 20-year life. The trial balances for Pueblo and Sorenson as of December 31, 2018, are as follows:
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Pueblo Corporation
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Sorenson Company
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Cash
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4,050,000
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2,840,000 FC
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Accounts Receivable
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5,270,000
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3,990,000
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Inventory
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5,540,000
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5,800,000
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Investment in Sorenson
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20,969,000
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|
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Fixed Assets
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21,000,000
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15,000,000
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Accumulated Depreciation
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(12,560,000)
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(6,800,000)
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Accounts Payable
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(3,450,000)
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(1,580,000)
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Long-Term Debt
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(10,000,000)
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(5,000,000)
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Common Stock
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(4,000,000)
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(3,000,000)
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Paid-In Capital in Excess of Par
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(6,500,000)
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(2,000,000)
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Retained Earnings, January 1, 2018
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(12,180,000)
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(7,950,000)
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Sales
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(26,000,000)
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(10,000,000)
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Cost of Goods Sold
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16,380,000
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7,500,000
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Operating Expenses
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3,210,000
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1,200,000
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Subsidiary Income
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(1,729,000)
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|
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Totals
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0
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0 FC
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The investment in Sorenson consists of the following:
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Initial investment (12,000,000 FC × $1.20)
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$14,400,000
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2016 Income (1,750,000 FC × $1.28)
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2,240,000
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2017 Income (2,000,000 FC × $1.30)
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2,600,000
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2018 Income
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1,729,000
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Total
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$20,969,000
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Relevant exchange rates are as follows:
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1 FC =
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January 1, 2016
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$1.20
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2016 Average
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1.28
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January 1, 2017
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1.25
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2017 Average
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1.30
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December 31, 2018
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1.31
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2018 Average
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1.33
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Required
Assuming the FC is Sorenson's functional currency, prepare a consolidated worksheet.