On January 2, 2014, P Company, a U.S.-based company, acquired for 2,000,000 fran
ID: 2493483 • Letter: O
Question
On January 2, 2014, P Company, a U.S.-based company, acquired for 2,000,000 francs an 80% interest in SFr Company, a Swiss company. On January 2, 2014, SFr Company reported a retained earnings balance of 480,000 francs. SFr's books are maintained in francs and are in conformity with U.S. generally accepted accounting principles. Trial balances of the two companies as of December 31, 2015, are presented here:
Debits
P Company (Dollars)
SFr Company (Francs)
Cash
500,200
962,500
Accounts Receivable
516,400
660,000
Inventories (FIFO cost)
627,800
1,037,500
Investment in SFr Company
300,000
—
Land
450,000
500,000
Buildings (net)
610,000
550,000
Equipment (net)
290,000
405,000
Dividends Declared
200,000
375,000
Cost of Goods Sold
2,720,000
2,312,500
Depreciation Expense
210,000
125,000
Other Expense
914,000
818,750
Income Tax Expense
100,000
102,500
Totals
7,438,400
7,848,750
Credits
P Company (Dollars)
SFr Company (Francs)
Accounts Payable
540,000
800,000
Short-term Notes Payable
300,000
650,750
Bonds Payable
700,000
850,000
Common Stock
800,000
960,000
Additional Paid-in Capital
300,000
300,000
Retained Earnings, 1/1
544,400
513,000
Sales
4,200,000
3,775,000
Dividend Income
54,000
—
Totals
7,438,400
7,848,750
Other information related to the subsidiary follows:
Beginning inventory of 830,000 francs was acquired when the exchange rate was $.165.
Purchases made uniformly throughout 2015 were 2,520,000 francs.
The franc is identified as the subsidiary's functional currency.
The subsidiary's beginning (1/1/15) retained earnings and cumulative translation adjustment (credit) in dollars were $75,948 and $36,462, respectively.
All plant assets were acquired before the parent obtained a controlling interest in the subsidiary.
Sales are made and all expenses are incurred uniformly throughout the year.
The ending inventory was acquired during the last quarter.
The subsidiary declared and paid dividends of 375,000 francs on September 2.
The following direct exchange rate quotations were available:
Date of subsidiary acquisition
$.15
Average for 2014
.156
January 1, 2015
.17
September 2, 2015
.18
December 31, 2015
.19
Average for the 4th quarter, 2015
.185
Average for 2015
.176
Required:
Prepare a translated balance sheet and combined statement of income and retained earnings for the subsidiary.
Prepare a schedule to verify the translation adjustment.
Compute the following ratios based on the franc and the U.S. dollar financial statements.
Current ratio.
Debt to equity.
Gross profit percentage.
Net income to sales.
Debits
P Company (Dollars)
SFr Company (Francs)
Cash
500,200
962,500
Accounts Receivable
516,400
660,000
Inventories (FIFO cost)
627,800
1,037,500
Investment in SFr Company
300,000
—
Land
450,000
500,000
Buildings (net)
610,000
550,000
Equipment (net)
290,000
405,000
Dividends Declared
200,000
375,000
Cost of Goods Sold
2,720,000
2,312,500
Depreciation Expense
210,000
125,000
Other Expense
914,000
818,750
Income Tax Expense
100,000
102,500
Totals
7,438,400
7,848,750
Credits
P Company (Dollars)
SFr Company (Francs)
Accounts Payable
540,000
800,000
Short-term Notes Payable
300,000
650,750
Bonds Payable
700,000
850,000
Common Stock
800,000
960,000
Additional Paid-in Capital
300,000
300,000
Retained Earnings, 1/1
544,400
513,000
Sales
4,200,000
3,775,000
Dividend Income
54,000
—
Totals
7,438,400
7,848,750
Explanation / Answer
Current ratio= current asset/current liabilities USD Franc Cash 500,200 962,500 Accounts Receivable 516,400 660,000 Inventories (FIFO cost) 627,800 1,037,500 Total Current asset 1,644,400 2,660,000 Accounts Payable 540,000 800,000 Short-term Notes Payable 300,000 650,750 Total Current liabilities 840,000 1,450,750 Current ratio 1.96 1.83 Debt to equity. Total Current liabilities 840,000 1,450,750 Bonds Payable 700,000 850,000 Total debt 1,540,000 2,300,750 Common Stock 800,000 960,000 Additional Paid-in Capital 300,000 300,000 Retained Earnings, 1/1 544,400 513,000 Total shareholders equity 1,644,400 1,773,000 Debt Equity ratio(Debt/Equity) 0.94 1.30 Gross profit percentage(grossprofit/sales)*100 converted balance to $ P companys's share total Sales 4,200,000 3,775,000 664,400 531,520.0 4,731,520 Cost of goods sold 2,720,000 2,312,500 407,000 325,600.0 3,045,600 Gross profit 1,480,000 1,462,500 257,400 205,920.0 1,685,920 Gross profit percentage 35.24% 38.74% Depreciation Expense 210,000 125,000 22,000 17,600.0 227,600 Other Expense 914,000 818,750 144,100 115,280.0 1,029,280 Income Tax Expense 100,000 102,500 18,040 14,432.0 114,432 total expenses 1,224,000 1,046,250 184,140 147,312.0 1,371,312 Net income 256,000 416,250 73,260 58,608.0 314,608 Net income/ sales*100 6.10% 11.03%
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