topic consolidation of foreign subsidiary using current rate method lo 1 2 assume th 4314340

topic consolidation of foreign subsidiary using current rate method lo 1 2 assume th 4314340

Topic:Consolidation of Foreign Subsidiary using Current-Rate Method

LO:1

2.Assume that our company owns a subsidiary operating in Great Britain. The subsidiary maintains is books in Pound sterling (£) as its functional currency. Following are the subsidiary’s financial statements (in £) for the most recent year:

Subsidiary (in  £)

Income statement:

Sales

5,100,000

Cost of goods sold

(3,060,000)

Gross Profit

2,040,000

Operating expenses

(1,326,000)

Net income

714,000

Statement of retained earnings:

BOY retained earnings

2,677,500

Net income

714,000

Dividends

(71,400)

Ending retained earnings

3,320,100

 

Balance sheet:

Assets

Cash

1,451,460

Accounts receivable

1,183,200

Inventory

1,519,800

PPE, net

2,811,120

Total Assets

6,965,580

Liabilities and Stockholders’ Equity

Current Liabilities

864,960

Long-term Liabilities

2,015,520

Common Stock

340,000

APIC

425,000

Retained Earnings

3,320,100

Cumulative translation adjustment

Total Liabilities & Equity

6,965,580

Statement of cash flows:

Net income

714,000

Change in Accounts Receivable

(197,200)

Change in Inventories

(253,300)

Change in Current Liabilities

144,160

Net cash flows from operating activities

407,660

Change in PPE, net

(261,120)

Net cash flows from investing activities

(261,120)

Change in long-term debt

335,920

Dividends

(71,400)

Net cash flows from financing activities

264,520

Net change in cash

411,060

Effect of exchange rate on cash

Beginning cash

1,040,460

Ending cash

1,451,460

The relevant exchange rates for the $US value of the Euro (€) are as follows:

BOY Rate

$1.50

EOY rate

$1.65

Avg. rate

$1.60

PPE purchase date rate

$1.57

LTD borrowing date rate

$1.63

Dividend rate

$1.64

Historical rate (Common Stock and APIC)

$0.65

Required:

a.Translate the subsidiary’s, income statement, statement of retained earnings, balance sheet, and statement of cash flows from Pounds Sterling (£) into $US (assume that the BOY Retained Earnings for the subsidiary is $2,671,552.

b.Compute the end Cumulative Translation Adjustment directly, assuming a BOY balance of $1,994,948.

c.Refer to the selected financial statement accounts for the parent, below.

Assume the following information: The purchase price for the subsidiary included an AAP asset relating to Land that the parent estimated was worth £400,000 more than book value on the subsidiary’s balance sheet. The exchange rate in effect when the subsidiary was acquired was $1.15:£1.

i.Compute the balance of the Equity Investment account of $7,200,415 on the parent’s balance sheet. 

ii.Prepare the consolidation spreadsheet for the year.

Parent

Income statement:

Sales

$8,500,000

Cost of goods sold

(5,950,000)

Gross Profit

2,550,000

Equity income

1,142,400

Operating expenses

(1,615,000)

Net income

$2,077,400

Statement of retained earnings:

BOY retained earnings

$6,103,000

Net income

2,077,400

Dividends

(244,120)

Ending retained earnings

$7,936,280

Balance sheet:

Assets

Cash

$473,653

Accounts receivable

1,088,000

Inventory

1,649,000

Equity Investment

7,200,416

PPE, net

8,782,200

$19,193,269

Liabilities and Stockholders’ Equity

Current liabilities

$3,314,630

Long-term Liabilities

3,500,000

Common Stock

335,664

APIC

1,560,386

Retained Earnings

7,936,280

Cumulative Translation Adjustment

2,546,309

$19,193,269

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