b. Assume that Pirate uses the fully adjusted equity method. Record all journal
ID: 2391381 • Letter: B
Question
b. Assume that Pirate uses the fully adjusted equity method. Record all journal entries that relate to its investment in the Norwegian subsidiary during 20X5. Provide the necessary documentation and support for the amounts in the journal entries. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
1) Record the purchase of Ship Inc.
2) Record the dividend received from the foreign subsidiary
3) Record the equity in the net income of the foreign subsidiary.
4) Record the amortization of the differential.
On January 1, 20X5, Pirate Company acquired all of the outstanding stock of Ship Inc., a Norwegian company, at a cost of $169,200 Ship's net assets on the date of acquisition were 700,000 kroner (NKr). On January 1, 20X5, the book and fair values of the Norwegian subsidiary's identifiable assets and liabilities approximated their fair values except for property, plant, and equipment and patents acquired. The fair value of Ship's property, plant, and equipment exceeded its book value by $18,000. The remaining useful life of Ship's equipment at January 1, 20X5, was 10 years. The remainder of the differential was attributable to a patent having an estimated useful life of 5 years. Ship's trial balance on December 31, 20X5, in kroner, follows Debits Credits NKr 163,000 223,000 291,000 603,000 Cash Accounts Receivable (net) Inventory Property, Plant & Equipment Accumulated Depreciation Accounts Payable Notes Pavable Common Stock Retained Earnings Sales Cost of Goods Sold Operating Expenses Depreciation Expense Dividends Paid Total NKr 151,000 92,000 192,000 440,000 260,000 801,000 421,000 121,000 66,000 48,000 NKr1,936,000 NKr1,936,000 Additional Information: 1. Ship uses the FIFO method for its inventory. The beginning inventory was acquired on December 31, 20X4, and ending inventory was acquired on December 15, 20X5. Purchases of NKr420,000 were made evenly throughout 20X5 2. Ship acquired all of its property, plant, and equipment on July 1, 20X3, and uses straight-line depreciation 3. Ship's sales were made evenly throughout 20X5, and its operating expenses were incurred evenly throughout 20X5 4. The dividends were declared and paid on July 1, 20X5 5. Pirate's income from its own operations was $227,000 for 20X5, and its total stockholders' equity on January 1, 20X5, was $3,500,000. Pirate declared $120,000 of dividends during 20X5. 6. Exchange rates were as follows:Explanation / Answer
a.
Ship Inc.
Trial Balance Translation
December 31, 20X5
Balance
Exchange
Balance
Item
Kroner
Rate
Dollars
Cash
NKr 163,000
.21
$ 34,230
Accounts Receivable (net)
223,000
.21
46,830
Inventory
291,000
.21
61,110
Property, Plant, and Equipment
603,000
.21
126,630
Cost of Goods Sold
421,000
.20
84,200
Operating Expenses
121,000
.20
24,200
Depreciation Expense
66,000
.20
13,200
Dividends Paid
48,000
.19
9,120
Total Debits
NKr 1,936,000
$399,520
Accumulated Depreciation
NKr 151,000
.21
$ 31,710
Accounts Payable
92,000
.21
19,320
Notes Payable
192,000
.21
40,320
Common Stock
440,000
.18
79,200
Retained Earnings
260,000
.18
46,800
Sales
801,000
.20
160,200
Total
NKr 1,936,000
$377,550
Accumulated Other Comprehensive
Income — Translation Adjustment
(credit)
21,970
Total Credits
$399,520
b.
Entries for 20X5:
January 1
Investment in Ship Inc
169,200
Cash
169,200
Purchase of Ship Inc.
July 1
Cash
9,120
Investment in Ship Inc
9,120
Dividend received from foreign subsidiary:
$9,120 = NKr48,000 x $.19
December 31
Investment in Ship Inc
45,400
Income from Subsidiary
45,400
Equity in net income of foreign subsidiary:
$45,400 = Income of NKr 227,000 x $.20
Investment in Ship Inc
21,970
Other Comprehensive Income —
Translation Adjustment
21,970
Parent's share of translation adjustment
from translation of subsidiary's accounts:
$21,970 x 1.00
Income from Subsidiary
7,660
Investment in Ship Inc
7,660
Amortization of differential:
Property, plant, and equipment
$1,940
Patent
5,720
Total — see supporting schedule 2
$7,660
Investment in Ship Inc
6,877
Other Comprehensive Income —
Translation Adjustment
6,877
Translation adjustment applicable
to the differential:
Property, plant, and equipment
$2,833
Patent
4,004
Total — see supporting schedule 2
$6,877
Schedule 1: Determining the differential for 20X5:
Investment cost at January 1, 20X5
$ 169,200
Less: Book value of net assets acquired on
January 1, 20X5 (NKr700,000 x $.18)
(126,000)
Differential
$ 43,200
Differential allocated to:
Property, plant, and equipment
$ 17,460
Patent
25,740
Total
$ 43,200
Schedule 2: Determining the differential amortization for 20X5:
Norwegian
Translation
U.S.
Kroner
Rate
Dollars
Property, plant, and equipment:
Income statement:
Difference at beginning of year
NKr 97,000
.18
$17,460
Amortization for 20X5
(NKr97,000 / 10 years)
(9,700)
.20
(1,940)
Remaining balances
NKr 87,300
$15,500
Balance sheet:
Remaining balance on
December 31, 20X5, translated
at year-end exchange rate
NKr 87,300
.21
18,333
Difference to other comprehensive
income — translation adjustment
$ 2,833
Patent:
Income statement:
Difference at beginning of year
NKr 143,000
.18
$ 25,740
Amortization for 20X5
(NKr143,000 / 5 years)
(28,600)
.20
(5,720)
Remaining balances
NKr 114,400
$ 20,020
Balance sheet:
Remaining balance on
December 31, 20X5, translated
at year-end exchange rate
NKr 114,400
.21
24024
Difference to other comprehensive
income — translation adjustment
$ 4,004
Note that the property, plant, and equipment portion of the differential must be increased from $15,500 to $16833, requiring a debit of $2,833 to the investment account. The portion of the differential attributable to patent must be increased from $20,020 to $24,024, requiring a debit of $4,004 to the investment account. The corresponding credit is to the Other Comprehensive Income – Translation Adjustment account ($6,837 = $2,833 + $4,004).
c.
Pirate’s consolidated comprehensive income for 20X5:
1.
Income from Pirate’s operations for 20X5, exclusive
of income from the Norwegian subsidiary
$ 227,000
2.
Add: Income from the Norwegian subsidiary for 20X5
45,400
3.
Deduct: Amortization of differential for 20X5
(6,877)
Equals Net Income
$ 265,523
4.
Add: Translation Adjustment ($21,500 + $4,020)
43,200
Equals Consolidated Comprehensive Income
$ 308,723
d.
Pirate’s consolidated stockholders’ equity at December 31, 20X5
1.
Pirate’s stockholders’ equity at Jan. 1, 20X5
$3,500,000
2.
Add: Net income for 20X5
265,523
3.
Deduct: Dividends declared by Pirate during 20X5
(120,000)
4.
Add: Accumulated other comprehensive income:
Foreign currency translation adjustment
43,200
Consolidated Stockholders’ Equity at Dec. 31, 20X5
$3,688,723
a.
Ship Inc.
Trial Balance Translation
December 31, 20X5
Balance
Exchange
Balance
Item
Kroner
Rate
Dollars
Cash
NKr 163,000
.21
$ 34,230
Accounts Receivable (net)
223,000
.21
46,830
Inventory
291,000
.21
61,110
Property, Plant, and Equipment
603,000
.21
126,630
Cost of Goods Sold
421,000
.20
84,200
Operating Expenses
121,000
.20
24,200
Depreciation Expense
66,000
.20
13,200
Dividends Paid
48,000
.19
9,120
Total Debits
NKr 1,936,000
$399,520
Accumulated Depreciation
NKr 151,000
.21
$ 31,710
Accounts Payable
92,000
.21
19,320
Notes Payable
192,000
.21
40,320
Common Stock
440,000
.18
79,200
Retained Earnings
260,000
.18
46,800
Sales
801,000
.20
160,200
Total
NKr 1,936,000
$377,550
Accumulated Other Comprehensive
Income — Translation Adjustment
(credit)
21,970
Total Credits
$399,520
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