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 $0.22 EOY rate $0.29 Avg. rate $0.25 PPE purchase date rate $0.26 LTD borrowing date rate $0.26 Dividend rate $0.27 Historical rate (common stock and APIC) $0.10 $ 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 $649,373). 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 6,510,000 $ $ Cost of goods sold (3,906,000) $ Gross profit 2,604,000 Operating expenses (1,692,600) $ Net income 911,400 Statement of retained earnings BOY retained earnings 3,417,750 $649,373 Net income 911,400 Dividends (91,140) $ Ending retained earnings 4,238,010 $ Balance sheet Assets Cash 1,852,746 $ Accounts receivable 1,510,320 $ Inventory 1,939,980 $ Property, plant, and equipment, net 3,588,312 $ 8,891,358 $ Liabilities and stockholders' equity Current liabilities 1,104,096 $ $ Long-term liabilities 2,572,752 $ Common stock 434,000 $ APIC 542,500 $ Retained earnings 4,238,010 Cumulative translation adjustment 8,891,358 Statement of cash flows $ $ $ Cumulative translation adjustment 8,891,358 $ $ Statement of cash flows Net income Change in accounts receivable Change in inventories Change in current liabilities Net cash from operating activities 911,400 $ (251,720) $ (323,330) $ 184,016 $ 520,366 $ $ $ $ $ LA 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 (333,312) $ (333,312) 428,792 $ (91,140) $ 337,652 524,706 $ $ 1,328,040 $ 1,852,746 $ $ b. Compute the ending Cumulative Translation Adjustment directly, assuming a BOY balance of $219,711. What journal entry did the parent company make as a result of this computation? (in R$) Change in rate (in $) BOY Net assets $ $ Net income $ Dividends $ Translation adjustment for the year $ BOY Cumulative Translation Adjustment 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 Balance sheet Sales $26,846,000 Assets Cost of goods sold (18,792,200) Cash Gross profit 8,053,800 Accounts receivable Equity income 220,350 Inventory Operating expenses (5,100,740) Equity investment Net income $3,173,410 Property, plant, and equipment, net $6,320,609 3,436,288 5,208,124 1,581,807 27,737,287 $44,284,115 Statement of retained earnings BOY retained earnings Net income Dividends Ending retained earnings $2,150,365 7,750,000 1,818,885 Liabilities and stockholders' equity $21,204,636 Current liabilities 3,173,410 Long-term liabilities (848,185) Common stock $23,529,861 APIC Retained earnings Cumulative translation adjustment $219,711 8,455,362 23,529,861 579,642 $44,284,115 Statement of accum. comp. income: BOY cumulative translation adjustment Current-year translation gain (loss) EOY cumulative translation adjustment 359,931 $579,642 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 is BRL270,000. 1. Compute the balance of the Equity Investment account of $1,581,807 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 $1,581,807 2. Compute the equity income of $220,350 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 $220,350 $ $ $ $ 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. Parent Subsidiary Debit Credit Consolidated Income statement Sales $26,846,000 $ Cost of goods sold (18,792,200) Gross profit 8,053,800 Equity income 220,350 [C] Operating expenses (5,100,740) [D] Net income $3,173,410 $ Statement of retained earnings BOY retained earnings $21,204,636 [E] Net income 3,173,410 Dividends (848,185) [C] Ending retained earnings $23,529,861 Statement of accum. comp. income: BOY cumulative translation adjustment $219,711 [E] Current-year translation gain (loss) 359,931 [C] [D] EOY cumulative translation adjustment $579,642 $ Balance sheet Assets Cash $6,320,609 $ Accounts receivable 3,436,288 Inventory 5,208,124 Equity investment 1,581,807 [C] [E] [A] Property, plant, and equipment, net 27,737,287 [A] [D] $44,284,115 $ Liabilities and stockholders' equity Current liabilities $2,150,365 $ Long-term liabilities 7,750,000 Common stock 1,818,885 [E] APIC 8,455,362 [E] Retained earnings 23,529,861 Cumulative translation adjustment 579,642 $44,284,115 $ $ $ $ $ $ $ $ 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 $0.22 EOY rate $0.29 Avg. rate $0.25 PPE purchase date rate $0.26 LTD borrowing date rate $0.26 Dividend rate $0.27 Historical rate (common stock and APIC) $0.10 $ 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 $649,373). 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 6,510,000 $ $ Cost of goods sold (3,906,000) $ Gross profit 2,604,000 Operating expenses (1,692,600) $ Net income 911,400 Statement of retained earnings BOY retained earnings 3,417,750 $649,373 Net income 911,400 Dividends (91,140) $ Ending retained earnings 4,238,010 $ Balance sheet Assets Cash 1,852,746 $ Accounts receivable 1,510,320 $ Inventory 1,939,980 $ Property, plant, and equipment, net 3,588,312 $ 8,891,358 $ Liabilities and stockholders' equity Current liabilities 1,104,096 $ $ Long-term liabilities 2,572,752 $ Common stock 434,000 $ APIC 542,500 $ Retained earnings 4,238,010 Cumulative translation adjustment 8,891,358 Statement of cash flows $ $ $ Cumulative translation adjustment 8,891,358 $ $ Statement of cash flows Net income Change in accounts receivable Change in inventories Change in current liabilities Net cash from operating activities 911,400 $ (251,720) $ (323,330) $ 184,016 $ 520,366 $ $ $ $ $ LA 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 (333,312) $ (333,312) 428,792 $ (91,140) $ 337,652 524,706 $ $ 1,328,040 $ 1,852,746 $ $ b. Compute the ending Cumulative Translation Adjustment directly, assuming a BOY balance of $219,711. What journal entry did the parent company make as a result of this computation? (in R$) Change in rate (in $) BOY Net assets $ $ Net income $ Dividends $ Translation adjustment for the year $ BOY Cumulative Translation Adjustment 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 Balance sheet Sales $26,846,000 Assets Cost of goods sold (18,792,200) Cash Gross profit 8,053,800 Accounts receivable Equity income 220,350 Inventory Operating expenses (5,100,740) Equity investment Net income $3,173,410 Property, plant, and equipment, net $6,320,609 3,436,288 5,208,124 1,581,807 27,737,287 $44,284,115 Statement of retained earnings BOY retained earnings Net income Dividends Ending retained earnings $2,150,365 7,750,000 1,818,885 Liabilities and stockholders' equity $21,204,636 Current liabilities 3,173,410 Long-term liabilities (848,185) Common stock $23,529,861 APIC Retained earnings Cumulative translation adjustment $219,711 8,455,362 23,529,861 579,642 $44,284,115 Statement of accum. comp. income: BOY cumulative translation adjustment Current-year translation gain (loss) EOY cumulative translation adjustment 359,931 $579,642 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 is BRL270,000. 1. Compute the balance of the Equity Investment account of $1,581,807 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 $1,581,807 2. Compute the equity income of $220,350 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 $220,350 $ $ $ $ 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. Parent Subsidiary Debit Credit Consolidated Income statement Sales $26,846,000 $ Cost of goods sold (18,792,200) Gross profit 8,053,800 Equity income 220,350 [C] Operating expenses (5,100,740) [D] Net income $3,173,410 $ Statement of retained earnings BOY retained earnings $21,204,636 [E] Net income 3,173,410 Dividends (848,185) [C] Ending retained earnings $23,529,861 Statement of accum. comp. income: BOY cumulative translation adjustment $219,711 [E] Current-year translation gain (loss) 359,931 [C] [D] EOY cumulative translation adjustment $579,642 $ Balance sheet Assets Cash $6,320,609 $ Accounts receivable 3,436,288 Inventory 5,208,124 Equity investment 1,581,807 [C] [E] [A] Property, plant, and equipment, net 27,737,287 [A] [D] $44,284,115 $ Liabilities and stockholders' equity Current liabilities $2,150,365 $ Long-term liabilities 7,750,000 Common stock 1,818,885 [E] APIC 8,455,362 [E] Retained earnings 23,529,861 Cumulative translation adjustment 579,642 $44,284,115 $ $ $ $ $ $ $ $