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 () as its functional currency. HINT: For all parts of this problem, use a negative sign with your answers to indicate a reduction. a. Translate the subsidiary's income statement, statement of retained earnings, balance sheet, and statement of cash flows from British pounds () into $US (assume that the BOY Retained Earnings for the subsidiary is $1,960,690). The relevant exchange rates ($:1) are as follows: $1.90 BOY rate EOY rate $2.00 Avg. rate $1.95 PPE purchase date rate $1.96 LTD borrowing date rate $1.97 Dividend rate $1.98 Historical rate (common stock and APIC) $1.70 Round all answers in the "In US Dollars" column to the nearest dollar. Translation (in ) Rate US Dollars Income Statement: Sales 2,100,000 Cost of goods sold (1,260,000) Gross profit 840,000 Operating expenses (546,000) Net income 294,000 Statement of retained earnings: BOY ret. earnings 1,102.500 Net income 294,000 Dividends (29,400) EOY ret. earnings 1,367,100 Balance sheet: Assets Cash 597,660 Accounts receivable 487,200 Inventory 625,800 Property, plant and equipment (PPE), net 1,157,520 Total assets 2,868,180 Liabilities and stockholders' equity Current liabilities 356,160 Long-term liabilities 829,920 Common stock 140,000 APIC 175,000 Ret. earnings 1,367,100 2.868.180 Total liabilities and equity Statement of cash flows: Net income Change in accounts receivable Change in inventories Change in current liabilities Net cash from operating activities 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 294,000 (81,200) (104.300) 59,360 167,860 (107,520) (107.520) 138,320 (29,400) 108,920 169,260 428,400 597,660 b. Compute the ending Cumulative Translation Adjustment directly, assuming a BOY balance of $197,060. What journal entry did the parent company make as a result of this computation? Direct computation of translation adjustment: $ Net income x (EOY - Average exchange rate) EOY cumulative translation adjustment General Journal Description Debit Credit To record the translation adjustment for the year C. Selected financial statement accounts for the parent follow in d. below: Assume the following information: The purchase price for the subsidiary included an AAP asset relating to Land that the parent estimated was worth 200,000 more than its book value on the subsidiary's balance sheet. The exchange rate in effect when the subsidiary was acquired was $1.70:1. Compute the balance of the Equity Investment account of $3,764,200 on the parent's balance sheet. Equity Investment BOY Common stock BOY APIC BOY Retained earnings BOY AAP BOY Cumulative translation adjustment Equity income Dividends Current translation adjustment AAP Translation adjustment (AOCI) Balance 3,764,200 d. Prepare the consolidation spreadsheet for the year. Elimination Entries Cr Parent Sub Dr Consolidated $9,210,000 $ (6,447,000) 2,763,000 573,300 (1,749,900) $1,586,400 $ Income statement: Sales Cost of goods sold Gross profit Equity income Operating expenses Net income Statement of retained earnings: BOY retained earnings Net income Dividends EOY retained earnings Statement of Accumulated Comprehensive Income: BOY cumulative translation adjustment Current-year translation gain (loss) EOY cumulative translation adjustment Balance sheet: Assets Cash Accounts receivable Inventory Equity investment $7,932,000 $ 1,586,400 (317,280) $9,201,120 $ $197,060 $ 175,862 372,922 $ $482,908 $ 1,178,880 1,786,740 3,764,200 Property, plant and equipment (PPE), net 9.515,772 $16,728,500 $ Total assets Liabilities and stockholders' equity Current liabilities Long-term liabilities Common stock APIC Retained earnings Cumulative translation adjustment Total liabilities and equity 737,721 500,000 1,045,690 4,871,047 9,201,120 372,922 $16,728,500 $ CE