Translation of financial statements and consolidation of a foreign subsidiary (no amortization of AAP)

Assume that your company owns a subsidiary operating in Great Britain. The subsidiary maintains its books in the British pound (GBP) as its functional currency.

The relevant exchange rates for the $US value of the British pound (GBP) are as follows:

BOY rate	$1.45
EOY rate	$1.52
Avg. rate	$1.48
PPE purchase date rate	$1.49
LTD borrowing date rate	$1.49
Dividend rate	$1.50
Historical rate (common stock and APIC)	$0.55

HINT: For all parts of this problem, use a negative sign with your answers to indicate a reduction.

a. Translate the subsidiarys income statement, statement of retained earnings, balance sheet, and statement of cash flows from British pounds (GBP) into $US (assume that the BOY Retained Earnings for the subsidiary is $2,926,035).

Round answers in the "In US Dollars" column to the nearest whole number.

	(in GBP)	Translation Rate	In US Dollars
Income Statement:
Sales	3,150,000	Answer	Answer
Cost of goods sold	(1,890,000)	Answer	Answer
Gross profit	1,260,000		Answer
Operating expenses	(819,000)	Answer	Answer
Net income	441,000		Answer
Statement of retained earnings:
BOY ret. earnings	1,653,750		Answer
Net income	441,000		Answer
Dividends	(44,100)	Answer	Answer
EOY ret. earnings	2,050,650		Answer
Balance sheet:
Assets
Cash	896,490	Answer	Answer
Accounts receivable	730,800	Answer	Answer
Inventory	938,700	Answer	Answer
Property, plant, and equipment (PPE), net	1,736,280	Answer	Answer
Total assets	4,302,270		Answer
Liabilities and stockholders' equity
Current liabilities	534,240	Answer	Answer
Long-term liabilities	1,244,880	Answer	Answer
Common stock	210,000	Answer	Answer
APIC	262,500	Answer	Answer
Ret. earnings	2,050,650		Answer
AnswerCumulative translation adjustmentEffect of exchange rate on cash			Answer
Total liabilities and equity	4,302,270		Answer
Statement of cash flows:
Net income	441,000	Answer	Answer
Change in accounts receivable	(121,800)	Answer	Answer
Change in inventories	(156,450)	Answer	Answer
Change in current liabilities	89,040	Answer	Answer
Net cash from operating activities	251,790		Answer
Change in PPE, net	(161,280)	Answer	Answer
Net cash from investing activities	(161,280)		Answer
Change in long-term debt	207,480	Answer	Answer
Dividends	(44,100)	Answer	Answer
Net cash from financing activities	163,380		Answer
Net change in cash	253,890		Answer
Effect of exchange rate on cash			Answer
Beginning cash	642,600	Answer	Answer
Ending cash	896,490	Answer	Answer

b. Compute the ending Cumulative Translation Adjustment directly, assuming a BOY balance of $(102,848). What journal entry did the parent company make as a result of this computation?

Round all answers to the nearest whole number.

Direct computation of translation adjustment:
AnswerEquity InvestmentCumulative Translation AdjustmentBOY cumulative translation adjustmentBOY net assets x (EOY - BOY exchange rates)BOY net assets x BOY exchange rateNet income x (EOY - Average exchange rate)Net income x average exchange rateDividends x (EOY - Dividend exchange rate)Dividends x dividend exchange rateEOY net assets x EOY exchange rateEOY cumulative translation adjustmentTranslation adjustment for the year	Answer
Net income x (EOY - Average exchange rate)	Answer
AnswerEquity InvestmentCumulative Translation AdjustmentBOY cumulative translation adjustmentBOY net assets x (EOY - BOY exchange rates)BOY net assets x BOY exchange rateNet income x (EOY - Average exchange rate)Net income x average exchange rateDividends x (EOY - Dividend exchange rate)Dividends x dividend exchange rateEOY net assets x EOY exchange rateEOY cumulative translation adjustmentTranslation adjustment for the year	Answer
	Answer
AnswerEquity InvestmentCumulative Translation AdjustmentBOY cumulative translation adjustmentBOY net assets x (EOY - BOY exchange rates)BOY net assets x BOY exchange rateNet income x (EOY - Average exchange rate)Net income x average exchange rateDividends x (EOY - Dividend exchange rate)Dividends x dividend exchange rateEOY net assets x EOY exchange rateEOY cumulative translation adjustmentTranslation adjustment for the year	Answer
EOY cumulative translation adjustment	Answer

General Journal
Description	Debit	Credit
AnswerEquity InvestmentCumulative Translation AdjustmentBOY cumulative translation adjustmentBOY net assets x (EOY - BOY exchange rates)BOY net assets x BOY exchange rateNet income x (EOY - Average exchange rate)Net income x average exchange rateDividends x (EOY - Dividend exchange rate)Dividends x dividend exchange rateEOY net assets x EOY exchange rateEOY cumulative translation adjustmentTranslation adjustment for the year	Answer	Answer
AnswerEquity InvestmentCumulative Translation AdjustmentBOY cumulative translation adjustmentBOY net assets x (EOY - BOY exchange rates)BOY net assets x BOY exchange rateNet income x (EOY - Average exchange rate)Net income x average exchange rateDividends x (EOY - Dividend exchange rate)Dividends x dividend exchange rateEOY net assets x EOY exchange rateEOY cumulative translation adjustmentTranslation adjustment for the year	Answer	Answer
To record the translation adjustment for the year

c. Following are selected financial statement accounts for the parent:

Income statement:			Balance sheet:
Sales	$13,815,000		Assets
Cost of goods sold	(9,670,500)		Cash	$1,526,569
Gross profit	4,144,500		Accounts receivable	1,768,320
Equity income	652,680		Inventory	2,680,110
Operating expenses	(2,624,850)		Equity investment	4,139,188
Net income	$2,172,330		Property, plant, and equipment (PPE), net	14,273,658
				$24,387,845
Statement of retained earnings:
BOY retained earnings	$11,898,000		Liabilities and stockholders equity
Net income	2,172,330		Current liabilities	$1,106,582
Dividends	(475,920)		Long-term liabilities	750,000
Ending retained earnings	$13,594,410		Common stock	1,568,535
			APIC	7,291,571
Statement of accum. comp. income:			Retained earnings	13,594,410
BOY cumulative translation adjustment	$(102,848)		Cumulative translation adjustment	76,748
Current-year translation gain (loss)	179,596			$24,387,845
EOY cumulative translation adjustment	$76,748

Assume the following information: The purchase price for the subsidiary included an AAP asset relating to Land that the parent estimated was worth GBP200,000 more than its book value on the subsidiarys balance sheet. Confirm the balance of the Equity Investment account of $4,139,188 on the parents balance sheet.

Equity Investment
BOY Common stock	Answer	Answer
BOY APIC	Answer	Answer
BOY Retained earnings	Answer	Answer
BOY AAP	Answer	Answer
BOY Cumulative translation adjustment	Answer	Answer
Equity income	Answer	Answer	Dividends
Current translation adjustment	Answer	Answer
AAP Translation adjustment (AOCI)	Answer	Answer
Balance	Answer