Question

On January 1, 20X5, Pirate Company acquired all of the outstanding stock of Ship Inc., a Norwegian company, at a cost of $151,200. 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
Cash	NKr	150,000
Accounts Receivable (net)		200,000
Inventory		270,000
Property, Plant and Equipment		600,000
Accumulated Depreciation					NKr	150,000
Accounts Payable						90,000
Notes Payable						190,000
Common Stock						450,000
Retained Earnings						250,000
Sales						690,000
Cost of Goods Sold		410,000
Operating Expenses		100,000
Depreciation Expense		50,000
Dividends Paid		40,000
Total	NKr	1,820,000			NKr	1,820,000

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 $275,000 for 20X5, and its total stockholders’ equity on January 1, 20X5, was $3,500,000. Pirate declared $100,000 of dividends during 20X5.
6. Exchange rates were as follows:

  

	NKr		$
July 1, 20X3	1	=	0.15
December 30, 20X4	1	=	0.18
January 1, 20X5	1	=	0.18
July 1, 20X5	1	=	0.19
December 15, 20X5	1	=	0.205
December 31, 20X5	1	=	0.21
Average for 20X5	1	=	0.20

   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, including a schedule of the translation adjustment related to the differential. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) 3 Record the equity in the net income of the foreign subsidiary. 4 Record the parent's share of the translation adjustment from the translation of the subsidiary's accounts. 5. Record the amortization of the differential. 6. Record the translation adjustment applicable to the differential.

c. Prepare a schedule that determines Pirate’s consolidated comprehensive income for 20X5.(Amounts to be deducted should be indicated with a minus sign.)

d. Compute Pirate’s total consolidated stockholders’ equity at December 31, 20X5.

Answer 1

Items	Norweign Kroner	Exchange rate	U.S. Dollar
Cash	150000	0.21	31500
Accounts receivable (net)	200000	0.21	42000
Inventory	270000	0.21	56700
Property, plant and equipment	600000	0.21	126000
Cost of goods sold	410000	0.20	82000
Operating expenses	100000	0.20	20000
Depreciation expenses	50000	0.20	10000
Dividend paid	40000	0.19	7600
Total	1820000		375800
Accumulated depreciation[P1]	150000	0.21	31500
Accounts payable	90000	0.21	18900
Notes payable	190000	0.21	39900
Common stock	450000	0.18	81000
Retained earnings	250000	0.18	45000
Sales	690000	0.20	138000
Total	1820000		354300
Accumulated other comprehensive income – translation adjustment (Credit)			21500
Total credits	1820000		375800

Part B

No.	Date	General journal	Debit	Credit
1	January 1	Investment in Ship company	151200
		Cash		151200
		(to record purchase of Ship company)
2	July 1	Cash (40000*0.19)	7600
		Investment in Ship company		7600
		(to record dividend received from subsidiary)
3	December 31	Investment in Ship company (690000-410000-100000-50000)*0.20	26000
		Income from Subsidiary		26000
		(to record equity in net income of foreign subsidiary)
4	December 31	Investment in Ship company	21500
		Other comprehensive income – Translation Adjustment		21500
		(to record parent’s share of translation adjustment from translation of subsidiary’s accounts
5	December 31	Income from Subsidiary	3600
		Investment in Ship company (2000+1600)		3600
		(to record amortization)
6	December 31	Investment in Ship company (2900+1120)	4020
		Other comprehensive income – Translation Adjustment		4020
		(to record translation adjustment applicable to the differential)

Differential = 151200-(700000*0.18) = 25200

Differential allocated of plant property and equipment = $18000

Differential allocated to patent = 25200-18000 = $7200

Differential allocated of plant property and equipment in NKr = 18000/0.18 = $100000

Amortization of plant property and equipment in NKr = 100000/10 = NKr 10000

Amortization of plant property and equipment in $ = 10000*0.20 = $2000

Differential allocated of plant property and equipment in NKr = 7200/0.18 = $40000

Amortization of plant property and equipment in NKr = 40000/5 = NKr 8000

Amortization of plant property and equipment in $ = 8000*0.20 = $1600

(100000*0.18)-(10000*0.20)-((100000-10000)*0.21) = 2900

(40000*0.18)-(8000*0.20)-((40000-8000)*0.21) = 1120

Part C

Income from Pirate’s operations for 20X5, exclusive of income from the Norwegian subsidiary	275000
Add: Income from the Norwegian subsidiary for 20X5 ((690000-410000-100000-50000)*0.20)	26000
Deduct: Amortization of differential	(3600)
Pirate’s Net Income	297400
Add: Translation Adjustment (21500+4020)	25520
Pirate’s Consolidated Comprehensive Income	$322920

Part D

Pirate’s stockholders’ equity at Jan. 1, 20X5	3500000
Add: Net income for 20X5	322920
Deduct: Dividends declared by Pirate during 20X5	(100000)
Add: Accumulated other comprehensive income:
Foreign currency translation adjustment	25520
Consolidated Stockholders’ Equity at Dec. 31, 20X5	$3748440

[P1]

Answer 2

Consolidated Stockholders equity is 3,722,920 as the translation adjustment had already been accounted for in part c.