A parent company acquired 70% of the stock of a subsidiary company on January 1, Year 1, for $180,000. The subsidiary company does not qualify as a VIE, and the parent company is determined to have control. On this date, the balances of the subsidiary's stockholders' equity accounts were Common Stock, $100,000, and Retained Earnings, $40,000. On January 1, Year 1, the market value for the 30% of shares not purchased by the parent was $60,000. On January 1, Year 1, the subsidiary's recorded book values were equal to fair values for all items except three: 1. Accounts Receivable had a book value of $30,000 and a fair value of $23,000 2. Buildings and Equipment, net had a book value of $50,000 and a fair value of $62,000 3. Licenses intangible asset had a book value of $35,000 and a fair value of $70,000 Both companies use the FIFO inventory method and turnover their inventories at least once per year. The net balance of accounts receivable is collected in the following year. On the acquisition date, the subsidiary's buildings and equipment, net had a remaining useful life of 4 years and the licenses had a remaining useful life of 7 years. On December 31, Year 4 the Subsidiary Company issued $500,000 face value bonds to an unaffiliated company for $ 480,000. The bonds pay interest annual on December 31, and the bond discount is amortized using the straight line method. The bond amortization schedule from the initial issuance date is provided in the excel doc. The parent accounts for its Equity Investment in the subsidiary using the equity method. Unconfirmed profits are allocated pro-rata. In Year 5: The subsidiary reported net income of $14,300, and declared dividends of $10,000. During Year 5, the Subsidiary company sold Inventory to the Parent company with a profit margin of 25 percent of selling price. The intercompany sales amounted to $20,000, of which $3,000 of merchandise remained in the ending inventory of the parent at 12/31/Y5. The Parent sold land to the Subsidiary on 7/1/Year 5 for $25,000. The land was originally purchased by the parent for $20,000. 1. Prepare the Consolidation entries for Year 5. In Year 6: On January 1, Year 6, the Parent company acquires an additional 10% ownership in the Subsidiary for $32,000. 2. Prepare the journal entry to record this transaction on the Parent's books. O On December 31, Year 6 the Parent paid $509,000 to purchase all of the outstanding Subsidiary bonds (issued in Year 4, as noted above.) The bond premium is amortized using the straight line method. The bond amortization schedule for the Parent's bond investment is provided in the excel doc. The Subsidiary reported net income of $60,000 and declared dividends of $18,000. 3. Prepare the Consolidation entries for Year 6. In Year 7: The subsidiary relocated to Great Britain as of the beginning of the year. Its transactions are now completed almost entirely in the British pound (GBP). Its books are also kept in British pounds. The relevant exchange rate for the $US value of the British pound (GBP) are included in the excel doc. 4. Translate the subsidiary's financial statements into the appropriate reporting currency, using the table provided in the excel doc. o The Subsidiary sold the land it purchased from the Parent to an unaffiliated U.S. company for $28,300 (USD). 5. Prepare all necessary journal entries for this transaction. O The Subsidiary sold inventory costing $307,000 to an unaffiliated German company for 321,000 Euros. The inventory is sold on May 1 with payment due in 90 days. To protect against currency fluctuation risk specific to this transaction, the Subsidiary also purchases a futures contract. The relevant rates are as follows: Forward Rate (for July settlement) Spot Rate May. June 30.. July.. $1.32:1 $1.27:1 $1.25:1 $1.29:1 $1.26:1 n/a O 6. Prepare all necessary journal entries for this transaction. NOTE: Journal entries must be in proper form. For example: 1/1/Y5 Cash 10,000 Accounts Receivable To record payment on account. 10,000 BOY Rate EOY rate Avg. rate PPE purchase date rate LTD borrowing date rate Dividend rate Historical rate $1.47 $1.53 $1.51 $1.49 $1.49 $1.50 $0.60 Subsidiary (in GBP) Translation Rate Subsidiary (in $) Income statement: Sales Cost of goods sold Gross Profit Operating expenses Net Income 3,750,000 (2,180,000) 1,570,000 (681,500) 888,500 Statement of retained eamings: BOY retained earings Net Income Dividends Ending retained eamings given above 2,205,000 888,500 (45,000) 3,048,500 Balance sheet: Assets Cash Accounts receivable Inventory PPE, net Total Assets 413,500 1,855,000 1,160,000 2,440,000 5,868,500 Liabilities and Stockholders' Equity Current Liabilities Long-term Liabilities Common Stock APIC Retained Eamings Cumulative translation adjustment Total Liabilities & Equity 650,000 1,370,000 300,000 500,000 3,048,500 above 5,868,500 Statement of cash flows: Net income Change in Accounts Receivable Change in Inventories Change in Current Liabilities Net cash flows from operating activities Change in PPE, net Net cash flows from investing activities 888,500 62,400 (208,600) (167,360) 574,940 (215,040) (215,040) Change in long-term debt Dividends Net cash flows from financing activities (165,400) (45,000) (210,400) 149,500 Net change in cash Effect of exchange rate on cash Beginning cash Ending cash 264,000 413,500 0 413,500 Cash above Check A parent company acquired 70% of the stock of a subsidiary company on January 1, Year 1, for $180,000. The subsidiary company does not qualify as a VIE, and the parent company is determined to have control. On this date, the balances of the subsidiary's stockholders' equity accounts were Common Stock, $100,000, and Retained Earnings, $40,000. On January 1, Year 1, the market value for the 30% of shares not purchased by the parent was $60,000. On January 1, Year 1, the subsidiary's recorded book values were equal to fair values for all items except three: 1. Accounts Receivable had a book value of $30,000 and a fair value of $23,000 2. Buildings and Equipment, net had a book value of $50,000 and a fair value of $62,000 3. Licenses intangible asset had a book value of $35,000 and a fair value of $70,000 Both companies use the FIFO inventory method and turnover their inventories at least once per year. The net balance of accounts receivable is collected in the following year. On the acquisition date, the subsidiary's buildings and equipment, net had a remaining useful life of 4 years and the licenses had a remaining useful life of 7 years. On December 31, Year 4 the Subsidiary Company issued $500,000 face value bonds to an unaffiliated company for $ 480,000. The bonds pay interest annual on December 31, and the bond discount is amortized using the straight line method. The bond amortization schedule from the initial issuance date is provided in the excel doc. The parent accounts for its Equity Investment in the subsidiary using the equity method. Unconfirmed profits are allocated pro-rata. In Year 5: The subsidiary reported net income of $14,300, and declared dividends of $10,000. During Year 5, the Subsidiary company sold Inventory to the Parent company with a profit margin of 25 percent of selling price. The intercompany sales amounted to $20,000, of which $3,000 of merchandise remained in the ending inventory of the parent at 12/31/Y5. The Parent sold land to the Subsidiary on 7/1/Year 5 for $25,000. The land was originally purchased by the parent for $20,000. 1. Prepare the Consolidation entries for Year 5. In Year 6: On January 1, Year 6, the Parent company acquires an additional 10% ownership in the Subsidiary for $32,000. 2. Prepare the journal entry to record this transaction on the Parent's books. O On December 31, Year 6 the Parent paid $509,000 to purchase all of the outstanding Subsidiary bonds (issued in Year 4, as noted above.) The bond premium is amortized using the straight line method. The bond amortization schedule for the Parent's bond investment is provided in the excel doc. The Subsidiary reported net income of $60,000 and declared dividends of $18,000. 3. Prepare the Consolidation entries for Year 6. In Year 7: The subsidiary relocated to Great Britain as of the beginning of the year. Its transactions are now completed almost entirely in the British pound (GBP). Its books are also kept in British pounds. The relevant exchange rate for the $US value of the British pound (GBP) are included in the excel doc. 4. Translate the subsidiary's financial statements into the appropriate reporting currency, using the table provided in the excel doc. o The Subsidiary sold the land it purchased from the Parent to an unaffiliated U.S. company for $28,300 (USD). 5. Prepare all necessary journal entries for this transaction. O The Subsidiary sold inventory costing $307,000 to an unaffiliated German company for 321,000 Euros. The inventory is sold on May 1 with payment due in 90 days. To protect against currency fluctuation risk specific to this transaction, the Subsidiary also purchases a futures contract. The relevant rates are as follows: Forward Rate (for July settlement) Spot Rate May. June 30.. July.. $1.32:1 $1.27:1 $1.25:1 $1.29:1 $1.26:1 n/a O 6. Prepare all necessary journal entries for this transaction. NOTE: Journal entries must be in proper form. For example: 1/1/Y5 Cash 10,000 Accounts Receivable To record payment on account. 10,000 BOY Rate EOY rate Avg. rate PPE purchase date rate LTD borrowing date rate Dividend rate Historical rate $1.47 $1.53 $1.51 $1.49 $1.49 $1.50 $0.60 Subsidiary (in GBP) Translation Rate Subsidiary (in $) Income statement: Sales Cost of goods sold Gross Profit Operating expenses Net Income 3,750,000 (2,180,000) 1,570,000 (681,500) 888,500 Statement of retained eamings: BOY retained earings Net Income Dividends Ending retained eamings given above 2,205,000 888,500 (45,000) 3,048,500 Balance sheet: Assets Cash Accounts receivable Inventory PPE, net Total Assets 413,500 1,855,000 1,160,000 2,440,000 5,868,500 Liabilities and Stockholders' Equity Current Liabilities Long-term Liabilities Common Stock APIC Retained Eamings Cumulative translation adjustment Total Liabilities & Equity 650,000 1,370,000 300,000 500,000 3,048,500 above 5,868,500 Statement of cash flows: Net income Change in Accounts Receivable Change in Inventories Change in Current Liabilities Net cash flows from operating activities Change in PPE, net Net cash flows from investing activities 888,500 62,400 (208,600) (167,360) 574,940 (215,040) (215,040) Change in long-term debt Dividends Net cash flows from financing activities (165,400) (45,000) (210,400) 149,500 Net change in cash Effect of exchange rate on cash Beginning cash Ending cash 264,000 413,500 0 413,500 Cash above Check