Problem 1: Adjust to U.S. GAAP and translate trial balance. On January 1, 20X8, Richter Corporation acquired an 80% interest in Morgan Company, a foreign company, for 9,000,000 FC. On the date of acquisition, Morgan's equity consisted of common stock of 3,000,000 FC and retained earnings of 5,500,000 FC. Any excess of cost over book value is attributable to additional depreciable assets, which have a useful life of 20 years. The unadjusted trial balances for Richter and Morgan as of December 31, 20X9, are as follows:
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Obligation Under Capital Lease ..........................................
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(3,170,000)
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|
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Common Stock ....................................................................
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(10,000,000)
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(3,000,000)
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Retained Earnings, January 1, 20X9......................................
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(18,460,000)
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(15,656,000)
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Soles ..................................................................
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(25,000,000)
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(18,000,000)
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Cost of Goods Sold ........................................................................................
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16,500,000
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11,600,000
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Depreciation Expense....................................................................................
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2,875,000
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1,550,000
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Interest Expense.............................................................................................
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150,000
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Research and Development Expense.................................................................................
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740,000
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Rent Expense....................................................................................................
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8,000
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Other Expenses..............................................................................................
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955,000
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748,000
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OCI-Unrealized Holding Gain-AFS.................................
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(900,000)
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Total...................................................................................
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0
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OK
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Morgan's trial balance is based, in part, on certain national accounting principles that are accepted in the country in which Morgan operates. However, these principles do not conform to U.S. GAAP. These differences include the following:
Short-Term Investments-All of these available-for-sale investments, acquired on January 1, 20X9, have been recorded at cost, without consideration of fair value. As of December 31, 20X9, fair value is 1,500,000 FC for these investments.
Research and Development-Research and development costs have been capitalized, although GAM' require these costs to be expensed in the period incurred. Morgan has no prior R&D costs. Therefore, all capitalized R&D costs were incurred uniformly during 20X9.
Leases-On January 1, 20X9, Morgan entered into a contract to lease machinery from an outside company. Morgan treated the lease as operating; however, GAAP require that it be capitalized. The lease contract requires an 8,000 FC payment at the start of each year for four years. At the end of the lease term, title to the asset is transferred to Morgan. The machinery has a fair value of 27,215 FC and is depreciated using the straight-line method over its remaining five-year life. The implicit interest rate is 12%.
Morgan employs the FIFO inventory method. The most recent purchases of inventory occurred on August 1, 20X9, and November 15, 20X9, in the amounts of 1,000,000 FC and 2,000,000 FC, respectively. Morgan acquired additional equipment costing 5,000,000 FC on July 1, 20X9. Equipment is depreciated over 10 years, using the straight-line method. No other equipment has been acquired or disposed of since January 1, 20X9.
The cost of sales is traceable to goods purchased during 20X9 as follows:
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Acquired in the 4th quarter of 20X8 ........................................
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2,400,000 FC
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Acquired uniformly over the first six months of 20X9............................
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9,150,000 FC
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Acquired August 1, 20X9............................................................................................................................
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50,000 FC
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No dividends are paid. Morgan's 20X8 remeasured income (excluding any remeasurement gain or loss) was $8,370,000.
Relevant exchange rates are as follows:
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1FC =
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1 FC =
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January 1, 20X7..................................................................
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$0.78
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1st Quarter, 20X9 Average............
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$0.8 1
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20X7 Average.........................
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0.76
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1st Six months, 20X9 Average ..
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0.83
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January 1, 20X8 ..............
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0.77
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July 1, 20X9 ..................
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0.84
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(continued)
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December 31, 20X8.............
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1FC =
0.80
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August 1, 20X9...........................
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1FC =
0.83
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4th Quarter, 20X8 Average ........
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0.78
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November 15, 20X9...................
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0.86
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20X8 Average........................
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0.79
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December 31, 20X9 . . ....
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0.89
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January 1, 20X9 ..................
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0.82
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20X9 Average..............................
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0.88
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1. Prepare all relevant journal entries to adjust Morgan's trial balance to U.S. GAAP.
2. Assuming Morgan's functional currency is the U.S. dollar, prepare a consolidated worksheet through the "Eliminations and Adjustments" column.
Problem 2 Translate a trial balance and prepare a consolidation worksheet with amortization of patents. Keltner Enterprises has acquired an 80% interest in Jacklandia (a foreign company). The acquisition was accounted for as a purchase and occurred on January 1, 20X6, as follows:
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Purchase price of 7,200,000 FC for net assets with a book
value of $5,600,000 FC (7,000,000 FC x 80%) Allocation of excess paid:
Patents (10-year remaining likeAtffliShtiPPARfr.199q90)............
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1,600,000 FC
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A condensed trial balance for both Keltner and Jacldandia as of December 31, 20X8, is as follows:
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Kellner (in dollars)
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Jacklandia (in FC)
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Working Capitol .................................................................
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32,120,800
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9,550,000
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Due from Jacklandia .....................................................................................
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800,000
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Investment in Jacklandia ..............................................................................
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14,221,200
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Land...................................................................................
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5,120,000
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1,000,000
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Depreciable Assets ........................................................................................
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54,000,000
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6,000,000
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Accumulated Depreciation ...........................................................................
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(27,000,000)
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(2,000,000)
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Other Assets ......................................................................
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5,978,800
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1,500,000
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Due to Keltner ...............................................................................................
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(620,155)
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Other Long-Term Debt.................................................................................
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(31,320,800)
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(4,679,845)
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Common Stock (issued July 1, 20X5) ........................................................
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(30,000,000)
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(5,000,000)
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Paid-In Capital in Excess of Par.....................................................................
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(6,000,000)
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(1,000,000)
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Retained Earnings .........................................................................................
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(15,000,000)
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(3,450,000)
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20X8 Net Income .........................................................................................
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(2,920,000)
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(1,300,000)
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Jacklandia had net income for 20X6 and 20X7 of 1,400,000 FC and 2,250,000 FC, respectively. Furthermore, Jacldandia declared a dividend of 1,200,000 FC on February 1, 20X8.
The FC is Jacklandia's functional currency, and various exchange rates are as follows:
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July 1, 20X5 .............................
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1 FC = $1.39
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December 31, 20X7.............................
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1 FC = $1.32
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January 1, 20X6.............
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1 FC = 1.40
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20X8 Average..........................
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1 FC = 1.27
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20X6 Average.................
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1 FC = 1.42
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February 1, 20X8 ....................
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1 FC = 1.25
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20X7 Average.................
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1 FC = 1.35
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December 31, 20X8.............................
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1 FC = 1.29
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Prepare a columnar worksheet to present the combined income statement and balance sheet of Keltner and its foreign subsidiary, Jacklandia, with all amounts stated in U.S. dollars. Key and explain worksheet eliminations and adjustments, and show supporting computations in good form. Ignore income taxes, and assume use of the simple equity method.