About the companies

TanCorp is a Chinese subsidiary of TechSmart Inc., a U$.$S$.$ technology manufacturer. TanCorp and TechSmart have a $12/31/$Y$1$ year end.

Foreign currency transaction

On November $10,$ Y$1,$ TechSmart sells services to a Chinese customer $($not TanCorp$)$ at a price of $12,400,000$ Yuan. This account was still unpaid by the customer on $12/31/$Y$1.$ The customer is expected to pay on January $10,$ Y$2.$

To protect against foreign currency risk associated with this transaction, on November $10,$ Y$1,$ TechSmart entered into a forward contract to sell $12,400,000$ Yuan on January $10,$ Y$2.$ TechSmart properly documented this transaction and designated the contract as a fair value hedge.

Note: The financial statements provided in the Excel template DO NOT include the effects of the foreign currency$/$hedging transactions described above or the original journal entry to record the sale. You will need to update the TechSmart financials to include these transactions on the tab titled $2.$ Updated TS FS$.$

Exchange rates

Relevant exchange rates are provided in the Excel template.

Accounting policies

TechSmart uses LIFO for its consolidated financial statements. TanCorp cannot use LIFO for reporting purposes; thus, their subsidiary$-$only financial statements utilize FIFO. Ending inventory measured under LIFO would be $280,800$ Yuan lower than when measured using FIFO; COGS would be $280,800$ higher.

TanCorp capitalized $350,400$ Yuan in development costs on December $31,$ Y$1$ as part of their Other Intangible Asset balance. Because this expenditure was made on $12/31/$Y$1,$ no amortization was recorded during Y$1.$

These changes affect TanCorp$$s financial income but not their taxable income reported to the Chinese government. Thus, these changes will have no effect on TanCorp$$s income tax expense.

Financial statement translation

TanCorp$$s $12/31/$Y$1$ income statement and balance sheet are presented in Chinese Yuan $($see Excel template, available in Canvas$).$ TechSmart$$s parent$-$only financial statements are also presented in the Excel template.

TechSmart management has deemed that the Yuan is deemed to be the functional currency of TanCorp. All stock was issued at $1/1/$Y$0,$ when TanCorp was incorporated as a subsidiary.

Translated ending retained earnings at $12/31/$Y$0$ were $$394,379.$

Financial statement consolidation

TechSmart owns $100\%$ of TanCorp. TanCorp is TechSmart$$s only majority$-$owned subsidiary. TanCorp declared and paid $12,000,000$ Yuan in dividends on $10/31/$Y$1,$ all to TechSmart.

At the time of acquisition on $1/1/$Y$0,$ TanCorp$$s translated stockholders$$ equity section was as follows:

Common stock: $$7,163,573$

APIC $$ common stock: $$8,861,806$

Retained earnings: $$0$

TanCorp is a wholly$-$owned subsidiary. When it was acquired, TechSmart paid consideration exactly equal to the book value of TanCorp. There were no intercompany transactions between the two companies during the year other than the dividend declared by TanCorp. TechSmart uses the cost method to account for this investment during the year. Because TanCorp began operations on $1/1/$Y$0$ and paid no dividends in Y$0,$ the $1/1/$Y$1$ balance of retained earnings is equal to TanCorp$$s Y$0$ net income.