Question
Palermo Inc. purchased 80 percent of the outstanding stock of Salina Ranching Company, located in Australia, on January 1, 20X3. The purchase price in Australian
Palermo Inc. purchased 80 percent of the outstanding stock of Salina Ranching Company, located in Australia, on January 1, 20X3. The purchase price in Australian dollars (A$) was A$200,000, and A$40,000 of the differential was allocated to plant and equipment, which is amortized over a 10-year period. The remainder of the differential was attributable to a patent. Palermo Inc. amortizes the patent over 10 years. Salina Ranchings trial balance on December 31, 20X3, in Australian dollars is as follows:
Debits | Credits | |||||
Cash | A$ | 44,100 | ||||
Accounts Receivable (net) | 72,000 | |||||
Inventory | 86,000 | |||||
Plant and Equipment | 240,000 | |||||
Accumulated Depreciation | A$ | 60,000 | ||||
Accounts Payable | 53,800 | |||||
Payable to Palermo Inc. | 10,800 | |||||
Interest Payable | 3,000 | |||||
12% Bonds Payable | 100,000 | |||||
Premium on Bonds | 5,700 | |||||
Common Stock | 90,000 | |||||
Retained Earnings | 40,000 | |||||
Sales | 579,000 | |||||
Cost of Goods Sold | 330,000 | |||||
Depreciation Expense | 24,000 | |||||
Operating Expenses | 131,500 | |||||
Interest Expense | 5,700 | |||||
Dividends Paid | 9,000 | |||||
Total | A$ | 942,300 | A$ | 942,300 | ||
Assume that the Australian dollar (A$) is the functional currency and that Palermo uses the fully adjusted equity method for accounting for its investment in Salina Ranching. A December 31, 20X3, trial balance for Palermo Inc. follows.
Item | Debits | Credits | ||||
Cash | $ | 38,000 | ||||
Accounts Receivable (net) | 140,000 | |||||
Receivable from Salina Ranching | 6,480 | |||||
Inventory | 128,000 | |||||
Plant & Equipment | 500,000 | |||||
Investment in Salina Ranching | 152,064 | |||||
Cost of Goods Sold | 600,000 | |||||
Depreciation Expense | 28,000 | |||||
Operating Expenses | 204,000 | |||||
Interest Expense | 2,000 | |||||
Dividends Declared | 50,000 | |||||
Translation Adjustment | 22,528 | |||||
Accumulated Depreciation | $ | 90,000 | ||||
Accounts Payable | 60,000 | |||||
Interest Payable | 2,000 | |||||
Common Stock | 500,000 | |||||
Retained Earnings, January 1, 20X3 | 179,656 | |||||
Sales | 1,000,000 | |||||
Income from Subsidiary | 39,416 | |||||
Total | $ | 1,871,072 | $ | 1,871,072 | ||
Additional Information:
- Salina Ranching uses average cost for cost of goods sold. Inventory increased by A$20,000 during the year. Purchases were made uniformly during 20X3. The ending inventory was acquired at the average exchange rate for the year.
- Plant and equipment were acquired as follows:
Date | Cost | |||
January 20X1 | A$ | 180,000 | ||
January 1, 20X3 | 60,000 | |||
- Plant and equipment are depreciated using the straight-line method and a 10-year life with no residual value.
- The payable to Palermo is in Australian dollars. Palermos books show a receivable from Salina Ranching of $6,480.
- The 10-year bonds were issued on July 1, 20X3, for A$106,000. The premium is amortized on a straight-line basis. The interest is paid on April 1 and October 1.
- The dividends were declared and paid on April 1.
- Exchange rates were as follows:
A$ | $ | ||||||
January 20X1 | 1 | = | 0.93 | ||||
August 20X1 | 1 | = | 0.88 | ||||
January 1, 20X3 | 1 | = | 0.70 | ||||
April 1, 20X3 | 1 | = | 0.67 | ||||
July 1, 20X3 | 1 | = | 0.64 | ||||
December 31, 20X3 | 1 | = | 0.60 | ||||
20X3 average | 1 | = | 0.65 | ||||
Required: a. Prepare a set of consolidating entries, in general journal form, for the entries required to prepare a comprehensive consolidation worksheet (including other comprehensive income) as of December 31, 20X3. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
b. Prepare a comprehensive consolidation worksheet as of December 31, 20X3. (Values in the first two columns (the "parent" and "subsidiary" balances) that are to be deducted should be indicated with a minus sign, while all values in the "Consolidation Entries" columns should be entered as positive values. For accounts where multiple adjusting entries are required, combine all debit entries into one amount and enter this amount in the debit column of the worksheet. Similarly, combine all credit entries into one amount and enter this amount in the credit column of the worksheet.)
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