On January 1, 20X1, Par Company purchased all the outstanding stock of South Bay
ID: 2391379 • Letter: O
Question
On January 1, 20X1, Par Company purchased all the outstanding stock of South Bay Company, located in Canada, for $145,800. On January 1, 20X1, the direct exchange rate for the Canadian dollar (C$) was C$1 = $0.81. South Bay’s book value on January 1, 20X1, was C$97,000. The fair value of South Bay’s plant and equipment was C$9,800 more than book value, and the plant and equipment are being depreciated over 10 years with no salvage value. The remainder of the differential is attributable to a trademark, which will be amortized over 10 years.
During 20X1, South Bay earned C$22,000 in income and declared and paid C$8,300 in dividends. The dividends were declared and paid in Canadian dollars when the exchange rate was C$1 = $0.75. On December 31, 20X1, Par continues to hold the Canadian currency received from the dividend. On December 31, 20X1, the direct exchange rate is C$1 = $0.64. The average exchange rate during 20X1 was C$1 = $0.76. Management has determined that the Canadian dollar is South Bay’s appropriate functional currency.
Required:
a. Prepare a schedule showing the differential allocation and amortization for 20X1. The schedule should present both Canadian dollars and U.S. dollars. (Amounts to be deducted should be entered with a minus sign. Round "Exchange Rate" answers to 2 decimal places and rest of answers to nearest whole dollar.)
b. Par uses the fully adjusted equity method to account for its investment. Provide the entries that it would record in 20X1 for its investment in South Bay for the following items: (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your answers to nearest whole dollar.)
1) Record the acquisition of South Bay Company.
2) Record the equity in income of the subsidiary.
3) Record the dividend from the foreign subsidiary.
4) Record the amortization of the differential.
5) Record the entry to recognize the translation adjustment on the differential.
c. Prepare a schedule showing the proof of the translation adjustment for South Bay as a result of the translation of the subsidiary’s accounts from Canadian dollars to U.S. dollars. Then provide the entry that Par would record for its share of the translation adjustment resulting from the translation of the subsidiary’s accounts. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Amounts to be deducted should be entered with a minus sign. Round "Exchange Rate" answers to 2 decimal places and rest of answers to nearest whole dollar.)
d. Provide the entry required by Par to restate the C$8,300 in the Foreign Currency Units account into its year-end U.S. dollar–equivalent value. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your answers to nearest whole dollar.)
Canadian DollarsExchange Rate U.S. Dollars Investment cost Book value of investment on January 1, 20X1 Differential C $ Canadian Dollars Exchange Rate U.S. Dollars Plant and quipment Plant and Trademark quipment Trademark Income Statement: Differential at date of acquisition Amortization this period: (10 years) Remaining balance Balance Sheet: Remaining balance on 12/31/X1 translated at year-end exchange ratesC Difference to OCI-translation adjustment:Explanation / Answer
a) Canadian Dollars Exchange Rate U.S. Dollars Investment Cost ($145800/.81) $180,000 0.81 $145,800 Book value of investment on Jan 1 20x1 $97,000 0.81 $78,570 Differential $83,000 $67,230 Income Statement Canadian Dollars Exchange Rate U.S. Dollars Differential at date of acquisition: Plant and Equipment Trademarks Plant and Equipment Trademarks $9,800 $73,200 0.81 $7,938 $59,292 Amortization this period (10 years) ($980) ($7,320) 0.76 ($744.80) ($5,563.20) Remaining balance: $8,820 $65,880 $7,193 $53,729 Balance sheet Remaining balance on 12/31/20x1 translated at year end exchange rate $8,820 $65,880 0.64 $5,644.80 $42,163.20 Difference to OCI- translation adjustment $1,548 $11,566 b) Debit Credit Investment in North Bay Company $145,800 Cash $145,800 Investment in North Bay Company $16,720 Income from Subsidiary $16,720 C$22,000 x .76 average exchange rate Foreign Currency Units (C$) $6,225 Investment in North Bay Company $6,225 Dividend from foreign subsidiary= C$8,300 x .75 Income from Subsidiary $6,308 Investment in North Bay Company $6,308 Amortization of differential: Plant and equipment $ 744.80 + Trademark $5563.20 = $6308 Other Comprehensive Income – Translation Adjustment $13,114 Investment in North Bay Company $13,114 Recognize translation adjustment on differential: Plant and equipment $ 1548 + Trademark $11566 = $13114 c. Canadian Dollars Exchange Rate U.S. Dollars Par Company and North Bay Company Proof of Translation Adjustment Year Ended December 31, 20X1 Net assets at beginning of year, 1/1/X1 $97,000 $0.81 $78,570 Adjustment for changes in assets position during year Net income for year $22,000 $0.76 $16,720 Dividends paid ($8,300) $0.75 ($6,225) Net assets translated at rates in effect for those items $89,065 Net assets at end of year $110,700 $0.64 $70,848 Change in other comprehensive income — translation adjustment during year — net decrease (debit) $18,217 December 31, 20X1 Other Comprehensive Income — Translation Adjustment $18,217 Investment in North Bay Company $18,217 d) Foreign Currency Transaction Loss $913 Foreign Currency Units (C$) $913 C$8300 x (.75 -.64)
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