Translation of financial statements and consolidation of a foreign subsidiary (amortization of AAP) Assume that your company owns a subsidiary operating in Brazil. The subsidiary maintains its books in the Brazilian real (BRL) as its functional currency. The relevant exchange rates for the $US value of the Brazilian real (BRL) are as follows: BOY rate EOY rate Avg. rate PPE purchase date rate LTD borrowing date rate Dividend rate $0.19 $0.26 $0.22 $0.23 $0.23 $0.24 Historical rate (common stock and APIC) $0.07 Round answers to the nearest dollar. Use rounded answers for subsequent calculations. Use negative signs with answers that are reductions (COGS, expenses, dividends, cash outflows, losses, etc.). a. Translate the subsidiary's income statement, statement of retained earnings, balance sheet, and statement of cash flows into $US (assume that the BOY Retained Earnings is $617,400). Use a negative sign with your answers in the "Subsidiary (in $)" column if corresponding figure in the "Subsidiary (in R$)" is shown in parenthesis. (Examples: Cost of goods sold, Operating expenses, Dividends and Changes in accounts in the Statement of Cash Flows) Subsidiary Translation Subsidiary (in R$) Rate (in $) Income statement Sales Cost of goods sold 7,350,000 $ (4,410,000) $ $ Gross profit 2,940,000 Operating expenses (1,911,000) $ Net income 1,029,000 $ Statement of retained earnings BOY retained earnings 3,858,750 Net income 1,029,000 Dividends Ending retained earnings Balance sheet (102,900) $ 4,784,850 $ Assets Cash 2,091,810 $ $ Accounts receivable 1,705,200 $ Inventory 2,190,300 $ Property, plant, and equipment, net 4,051,320 $ 10,038,630 $ Liabilities and stockholders' equity Current liabilities 1,246,560 $ $ Long-term liabilities 2,904,720 $ Common stock 490,000 $ APIC 612,500 $ Retained earnings Cumulative translation adjustment 4,784,850 10,038,630 $ Statement of cash flows Net income 1,029,000 $ $ Change in accounts receivable (284,200) $ Change in inventories (365,050) $ Change in current liabilities 207,760 $ $617,400 in current liabilities Change in accounts receivable Change in inventories Change (284,200) $ (365,050) $ 207,760 $ Net cash from operating activities 587,510 $ Change in PPE, net Net cash from investing activities Change in long-term debt Dividends Net cash from financing activities Net change in cash Effect of exchange rate on cash Beginning cash Ending cash (376,320) $ $ (376,320) $ 484,120 $ $ (102,900) $ 381,220 592,410 $ $ 1,499,400 $ 2,091,810 $ $ b. Compute the ending Cumulative Translation Adjustment directly, assuming a BOY balance of $248,062. What journal entry did the parent company make as a result of this computation? Change in rate (in $) BOY Net assets Net income Dividends Translation adjustment for the year BOY Cumulative Translation Adjustment $ (in R$) $ $ $ $ EOY Cumulative Translation Adjustment General Journal Description Debit Credit = $ To record translation adjustment for the year. c. Following are selected balance sheet accounts for the parent: Income statement Sales Cost of goods sold Gross profit Balance sheet $30,310,000 Assets Equity income Operating expenses Net income (21,217,000) Cash 9,093,000 Accounts receivable 219,780 Inventory $7,297,685 3,879,680 5,880,140 (5,758,900) Equity investment 1,593,111 $3,553,880 Property, plant, and equipment, net 31,316,292 $49,966,908 Statement of retained earnings Liabilities and stockholders' equity BOY retained earnings Net income Dividends Ending retained earnings Statement of accum.comp. income: BOY cumulative translation adjustment Current-year translation gain (loss) EOY cumulative translation adjustment $26,536,970 APIC $23,940,718 Current liabilities $2,427,830 3,553,880 Long-term liabilities 8,750,000 (957,628) Common stock 2,053,580 9,546,376 Retained earnings 26,536,970 Cumulative translation adjustment 652,152 $248,062 $49,966,908 404,090 $652,152 EOY cumulative translation adjustment $652,152 Assume the following information: The purchase price for the subsidiary included an AAP asset relating to a Patent that the parent estimated was worth BRL300,000 more than its book value on the subsidiary's balance sheet. The patent is being amortized at the rate of BRL30,000 per year and the BOY unamortized AAP related to the Patent BRL270,000. 1. Compute the balance of the Equity Investment account of $1,593,111 on the parent's balance sheet. Use a negative sign with answers that reduce the equity investment balance. BOY Common stock BOY APIC BOY Retained earnings BOY Unamortized AAP BOY Cumulative translation adjustment Equity income Dividends Translation adjustment Other comprehensive income Equity investment balance $1,593,111 2. Compute the equity income of $219,780 reported by the parent in its income statement. Use a negative sign with your answer, if it reduces the income. Net income AAP amortization Equity income $219,780 d. Using your translated subsidiary financial statements from Part a and the parent's financial data provided in Part c, prepare the consolidation spreadsheet for the year. Use negative signs with your answers in the Consolidated column for: Cost of goods sold, Operating expenses and Dividends. Income statement Sales Cost of goods sold Gross profit Parent $30,310,000 $ (21,217,000) 9,093,000 219,780 Subsidiary Debit Credit Consolidated $ Equity income Operating expenses (5,758,900) [C] [D] Net income $3,553,880 $ Statement of retained earnings BOY retained earnings $23,940,718 [E] Net income 3,553,880 Dividends (957,628) [C] Ending retained earnings Statement of accum. comp. income: BOY cumulative translation adjustment Current-year translation gain (loss) EOY cumulative translation adjustment Balance sheet Assets $26,536,970 $248,062 [E] $ 404,090 [C] [D] $652,152 $ $ Cash Accounts receivable $7,297,685 $ 3,879,680 LEJ [A] Property, plant, and equipment, net 31,316,292 [A] [D] $49,966,908 $ $ Liabilities and stockholders' equity Current liabilities Long-term liabilities $2,427,830 $ 8,750,000 Common stock APIC 2,053,580 [E] 9,546,376 [E] Retained earnings 26,536,970 Cumulative translation adjustment 652,152 $49,966,908 $ $ $