Case 1 - Advanced Accounting

Part II Foreign Currency Accounting Facts: Parent Co, a U.S. firm, paid $525,000 cash to acquire all of the stock of the British firm Sub Co when the book value of Subs net assets was equal to fair value. This business combination occurred on December 31, 2020, when the exchange rate for British pounds was $1.50. During 2021 the British pound weakened against the U.S. dollar, resulting in a year- end current exchange rate of $1.47. Average exchange rates for 2021 were $1.49. Sub Co paid a 20,000 dividend to Parent Co on December 1, 2021 when the exchange rate was $1.48 per British pound. The only intercompany transaction between the firms was an $84,000 (56,000) noninterest-bearing advance by Sub Co to Parent Co that occurred on January 4, 2021 when the exchange rate was still $1.50. The advance is denominated in U.S. dollars. Sub Cos functional currency is British pounds, so the advance to Parent Co is a foreign currency transaction from Sub Cos perspective, but not to Parent Co because it is denominated in U.S. dollars. Sub Cos assets, liabilities and stockholders equity at acquisition were as follows:

Required: In the Excel file Case 1 - Advanced accounting topics and the worksheet Foreign Currency you will find Sub Cos adjusted trial balance at December 31, 2021 in British pounds. Please prepare the following: 1) Convert Sub Cos accounts to U.S. dollars showing the exchange rate and U.S. dollar amount for each account. 2) Prepare Sub Cos December 31, 2021 financial statements in U.S. dollars: Balance Sheet (in classified format), Income Statement (in multiple-step format) and Statement of Retained Earnings. 3) Prepare Sub Cos December 31, 2021 Statement of Cash Flows, assuming the following: - No plant and equipment was sold during 2021 - No bonds payable was issued (i.e., borrowed) during 2021 - No common stock was issued during 2021 - No common stock was purchased from stockholders (i.e., treasury stock) - Any effects of foreign exchange rate changes are classified on the Statement of Cash Flows as Effects of foreign exchange rate changes (see the Discussion Case - FSA (Data) Excel file for an example of the format).

Required: In the Excel file Case 1 - Advanced accounting topics and the worksheet Foreign Currency you will find Sub Cos adjusted trial balance at December 31, 2021 in British pounds. Please prepare the following: 1) Convert Sub Cos accounts to U.S. dollars showing the exchange rate and U.S. dollar amount for each account. 2) Prepare Sub Cos December 31, 2021 financial statements in U.S. dollars: Balance Sheet (in classified format), Income Statement (in multiple-step format) and Statement of Retained Earnings. 3) Prepare Sub Cos December 31, 2021 Statement of Cash Flows, assuming the following: - No plant and equipment was sold during 2021 - No bonds payable was issued (i.e., borrowed) during 2021 - No common stock was issued during 2021 - No common stock was purchased from stockholders (i.e., treasury stock) - Any effects of foreign exchange rate changes are classified on the Statement of Cash Flows as Effects of foreign exchange rate changes (see the Discussion Case - FSA (Data) Excel file for an example of the format).

British Pounds Exchange Rate U.S. Dollars Assets Cash Accounts receivable Inventory Plant assets, net 140,000 40,000 120,000 80,000 $1.50 1.50 1.50 1.50 $210,000 60,000 180,000 120,000 Total assets 380,000 $570,000 Liabilities & Stockholder's Equity Accounts payable Bonds payable Common stock Retained earnings Total liabilities & stockholder's equity 30,000 100,000 200,000 50,000 380,000 $1.50 1.50 1.50 1.50 $45,000 150,000 300,000 75,000 $570,000 Sub Co adjusted its advance to Parent Co at year-end 2021 to reflect the $1.47 current exchange rate. Sub Co recorded an exchange gain because there is no evidence that the advance is of a long-term investment nature. The entry recorded on Sub Co's books was: DR CR 1,143 1,143 Advance to parent Exchange gain To adjust receivable denominated in U.S. dollars (($84,000 / $1.47) - 56,000) D E Sub Co 480,000 288,050 191,950 106,950 85,000 0 85,000 17,850 67,150 148,000 67,150 (10,080) 205,070 A B C. 1 Consolidation Accounting 2 3 Parent Co 4 Income Statement 5 Sales 5,700,000 6 Cost of goods sold 3,990,000 7 Gross profit 1,710,000 8 Operating expenses 903,800 9 Income from operations 806, 200 10 Equity income 67,150 11 Income before income tax 873,350 12 Income tax 179,200 13 Net income 694, 150 14 15 Statement of Retained Earnings 16 Beginning retained earnings 2,863,680 17 Net income 694, 150 18 Dividends (134, 840) 19 Ending retained earnings 3,422,990 20 21 Balance Sheet 22 Assets 23 Cash 454,870 24 Accounts receivable 729,600 25 Inventory 1,105,800 26 Total current assets 2,290,270 27 Property, plant and equipment, net 5,319,240 28 Investment in subsidiary 757,070 29 Total assets 8,366,580 30 Liabilities & Stockholders' Equity 31 Other liabilities 819,090 32 Total current liabilities 819,090 33 Notes payable 2,500,000 34 Common stock 931,950 35 Retained earnings 3,422,990 36 Additional paid in capital 692,550 37 Total stockholders' equity 5,047,490 38 Total liab & stockholders' eq 8,366,580 39 40 41 42 129,390 111,360 143,040 383,790 164,640 0 548,430 111,360 111,360 160,000 32,000 205,070 40,000 277,070 548,430 Foreign Currency Accounting Trial Balance Exchange Rate Trial Balance Sub Co Trial Balance in British Pounds $ 1 Debits 5 Cash 5 Accounts receivable - Inventory 3 Plant assets Advance to parent 0 Cost of sales 1 Depreciation expense 2 Wages and salaries expense 3 Other expenses 4 Dividends declared 5 110,000 $ 47,250 113,000 100,000 57,143 340,000 14,285 78,545 57,460 20,000 937,683 6 Credits 7 Accounts payable 8 Bonds payable 9 Common stock o Retained earnings 1 Sales 2 Exchange gain (on the advance to parent) 3 4 46,540 100,000 200,000 50,000 540,000 1,143 937,683