On January 1, 20X1, Par Company purchased all the outstanding stock of North Bay Company, located in

Question:

On January 1, 20X1, Par Company purchased all the outstanding stock of North Bay Company, located in Canada, for $120,000. On January 1, 20X1, the direct exchange rate for the Canadian dollar (C$) was C$1 = $0.80. North Bay's book value on January 1, 20X1, was C$90,000. The fair value of North Bay's plant and equipment was C$10,000 more than book value, and the plant and equipment are being depreciated over 10 years with no salvage value. The remainder of the differential is attributable to a trademark, which will be amortized over 10 years.

During 20X1, North Bay earned C$20,000 in income and declared and paid C$8,000 in dividends. The dividends were declared and paid in Canadian dollars when the exchange rate was C$1 = $0.75. On December 31, 20X1, Par continues to hold the Canadian currency received from the dividend. On December 31, 20X1, the direct exchange rate is C$1 = $0.70. The average exchange rate during 20X1 was C$1 = $0.75. Management has determined that the Canadian dollar is North Bay's appropriate functional currency.

Required

a. Prepare a schedule showing the differential allocation and amortization for 20X1. The schedule should present both Canadian dollars and U.S. dollars.

b. Par uses the fully adjusted equity method to account for its investment. Provide the entries that it would record in 20X1 for its investment in North Bay for the following items:

(1) Purchase of investment in North Bay.

(2) Equity accrual for Par's share of North Bay's income.

(3) Recognition of dividend declared and paid by North Bay.

(4) Amortization of differential.

(5) Recognition of translation adjustment on differential.

c. Prepare a schedule showing the proof of the translation adjustment for North Bay as a result of the translation of the subsidiary's accounts from Canadian dollars to U.S. dollars. Then provide the entry that Par would record for its share of the translation adjustment resulting from the translation of the subsidiary's accounts.

d. Provide the entry required by Par to restate the C$8,000 in the Foreign Currency Units account into its year-end U.S. dollar-equivalent value.

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their... Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...