Part III

Foreign Currency Accounting

Facts: Parent Co, a U.S. firm, paid $661,500 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, Year 1, when the exchange rate for British pounds was $1.50. During Year 2 the British pound weakened against the U.S. dollar, resulting in a year-end current exchange rate of $1.40. Average exchange rates for Year 2 were $1.45.

Sub Co paid a 37,800 dividend to Parent Co on December 1, Year 2 when the exchange rate was $1.42 per British pound. The only intercompany transaction between the firms was a $105,840 (70,560) noninterest-bearing advance by Sub Co to Parent Co that occurred on January 4, Year 2 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:

	British Pounds	Exchange Rate	U.S. Dollars
Assets
Cash	176,400	$1.50	$264,600
Accounts receivable	50,400	1.50	75,600
Inventory	151,200	1.50	226,800
Plant assets	126,000	1.50	189,000
Less: Accumulated depreciation	-25,200	1.50	-37,800
Total assets	478,800		$718,200
Liabilities & Stockholders Equity
Accounts payable	37,800	$1.50	$56,700
Bonds payable	126,000	1.50	189,000
Common stock	252,000	1.50	378,000
Retained earnings	63,000	1.50	94,500
Total liabilities & stockholders equity	478,800		$718,200

Sub Co adjusted its advance to Parent Co at year-end Year 2 to reflect the $1.40 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 Cos books was:

	DR	CR
Advance to parent	5,040
Exchange gain		5,040
To adjust receivable denominated in U.S. dollars (($105,840 / $1.40) - 70,560)

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, Year 2 in British pounds. Please prepare the following:

• Convert Sub Cos accounts to U.S. dollars showing the exchange rate and U.S. dollar amount for each account.
• Prepare Sub Cos December 31, Year 2 financial statements in U.S. dollars: Income Statement (in multiple-step format), Statement of Retained Earnings, and Balance Sheet (in classified format).

Foreign Currency Accounting Trial Balance Exchange Rate Trial Balance Sub Co Trial Balance in British Pounds Debits Cash Accounts receivable Inventory Plant assets Advance to parent Cost of sales Depreciation expense Wages and salaries expense Other expenses Dividends declared Accumulated other comprehensive income 138,600 100,800 151,200 126,000 75,600 340,200 12,600 151,200 75,600 37,800 1.40 $ 1.40 1.40 1.40 1.40 1.45 194,040 141,120 211,680 176,400 105,840 493,290 18,270 219,240 109,620 53,676 36,036 1.45 1.45 1.45 1.42 1,209,600 1,759,212 E E Credits Accumulated depreciation Accounts payable Bonds payable Common stock Retained earnings Sales Exchange gain (on the advance to parent) E 1.40 1.40 1.40 1.50 37,800 45,360 126,000 252,000 63,000 680,400 5,040 1,209,600 52,920 63,504 176,400 378,000 94,500 986,580 7,308 1,759,212 1.45 1.45