Question

On January 1, 2016, Cayce Corporation acquired 100 percent of Simbel Company for consideration transferred with a fair value of $141,300. Cayce is a U.S.-based company headquartered in Buffalo, New York, and Simbel is in Cairo, Egypt. Cayce accounts for its investment in Simbel under the initial value method. Any excess of fair value of consideration transferred over book value is attributable to undervalued land on Simbel’s books. Simbel had no retained earnings at the date of acquisition. Following are the 2017 financial statements for the two operations. Information for Cayce and for Simbel is in U.S. dollars ($) and Egyptian pounds (£E), respectively.

	Cayce Corporation				Simbel Company
Sales	$	228,800			£E	882,900
Cost of goods sold		(108,200	)			(463,300	)
Salary expense		(22,600	)			(81,200	)
Rent expense		(8,800	)			(49,600	)
Other expenses		(26,400	)			(64,400	)
Dividend income—from Simbel		18,700				0
Gain on sale of building, 10/1/17		0				48,000
Net income	$	81,500			£E	272,400
Retained earnings, 1/1/17	$	336,000			£E	147,400
Net income		81,500				272,400
Dividends		(42,000	)			(68,000	)
Retained earnings, 12/31/17	$	375,500			£E	351,800
Cash and receivables	$	112,600			£E	165,800
Inventory		99,800				336,600
Prepaid expenses		30,000				0
Investment in Simbel (initial value)		141,300				0
Property, plant & equipment (net)		455,600				473,000
Total assets	$	839,300			£E	975,400
Accounts payable	$	68,000			£E	59,400
Notes payable—due in 2020		162,200				145,400
Common stock		138,000				258,000
Additional paid-in capital		95,600				160,800
Retained earnings, 12/31/17		375,500				351,800
Total liabilities and equities	$	839,300			£E	975,400

Additional Information

• During 2016, the first year of joint operation, Simbel reported income of £E 181,000 earned evenly throughout the year. Simbel declared a dividend of £E 33,600 to Cayce on June 1 of that year. Simbel also declared the 2017 dividend on June 1.

• On December 9, 2017, Simbel classified a £E 11,800 expenditure as a rent expense, although this payment related to prepayment of rent for the first few months of 2018.

• The exchange rates for 1 £E are as follows:

January 1, 2016	$	0.300
June 1, 2016		0.290
Weighted average rate for 2016		0.288
December 31, 2017		0.280
June 1, 2017		0.275
October 1, 2017		0.273
Weighted average rate for 2017		0.274
December 31, 2017		0.270

Translate Simbel’s 2017 financial statements into U.S. dollars and prepare a consolidation worksheet for Cayce and its Egyptian subsidiary. Assume that the Egyptian pound is the subsidiary’s functional currency.

CAYCE CORPORATION TRANSLATION WORKSHEET EgyptianExchange Dollars Rate Account Pounds Sales Cost of goods sold Salary expense Rent expense (adjusted) Other expenses Gain on sale of fixed asset, 10/1/17 Net income Retained earnings, 1/1/17 Net income Dividends Retained earnings, 12/31/17 Cash and receivables Inventory Prepaid rent (adjusted) Property, plant & equipment Total assets Accounts payable Notes payable Common stock Additional paid-in capital Retained earnings, 12/31/17 Subtotal Total liabilities and equities

Answer 1

Answer :

Translation Worksheet
Accounts	Pounds (£E)	Rate	Dollar ($)
Sales	-(882,900)	0.274	-(241,915)
Cost of Goods sold	463,300	0.274	126,944
Salary expense	81,200	0.274	22,249
Rent expense (Adjusted)*	37,800	0.274	10,357
Other expense	64,400	0.274	17,646
Gain on sale of building, 10/1/17	-(48,000)	0.273	-(13,104)
Net Income	-(284,200)		-(77,823)
Retained earnings 1/1/17	-(147,400)	W.N 1	-(42,384)
Net income	-(284,200)	above	-(77,823)
Dividends	68,000	0.275	18,700
Retained Earnings 12/31/17	-(363,600)		-(101,507)
Cash and receivables	165,800	0.270	44,766
Inventory	336,600	0.270	90,882
Prepaid rent (adjusted)*	11,800	0.270	3,186
Property, plant and equipment	473,000	0.270	127,710
Total Assets	£E 987,200		$266,544
Account payable	-(59,400)	0.270	-(16,038)
Notes payable	-(145,400)	0.270	-(39,258)
Common stock	-(258,000)	0.300	-(77,400)
Additional paid in capital	-(160,800)	0.300	-(48,240)
Retained earnings 12/31/17	-(363,600)	above	-(101,507)
Subtotal			-(282,443)
Cumulative translation adjustment (negative)		W.N 2	15,899
Total liabilities and equity	£E(987,200)		$(266,544)

* Prepayment of rent made for 2018 for £E 11,800 should be reclassified from rent expense as prepaid rent paid in Simbel's book.

Working Notes :

1. Translation of Retained earnings on 1/1/18 -

Retained earnings 1/1/17	-0-		-0-
Net income for 2017	(181,000)	0.288	(52,128)
Dividend paid 6/1/17	33,600	0.290	9,744
Retained earnings 1/1/18	£E(147,400)		$(42,384)

2. Calculation of cumulative translation adjustment:

	Pounds (£E)	Rate	Dollar ($)
Net assets 1/1/17 (258,000 + 160,800)	(418,800)	0.300	(125,640)
Net Income, 2017	(181,000)	0.288	(52,128)
Dividends , 6/1/17	33,600	0.290	9,744
Net assets, 12/31/17	(566,200)		(168,024)
Net assets, 12/31/17 at current exchange rates	(566,200)	0.280	(158,536)
Translation adjustment, 2017 (negative) (1)			(9,488)
Net assets, 1/1/18	(566,200)	0.280	(158,536)
Net Income, 2018	(284,200)	above	(77,823)
Dividends, 6/1/18	68,000	0.275	18,700
Net assets , 12/31/18	(782,400)		(217,659)
Net assets 12/31/18 at current exchange rate	(782,400)	0.270	(211,248)
Translation adjustment, 2018 (negative) (2)			(6,411)
Cumulative translation adjustment, 12/31/2018 (negative)		(1) + (2)	$(15,899)

2.Preparation of Consolidated Worksheet for Cayce Corporation :

Consolidated Worksheet of Cayce Corporation
Accounts	Cayce ($)	Simbel ($)	Debit($)	Credit($)	Balance ($)
Sales	(228,800)	(241,915)			(470,715)
Cost of Goods sold	108,200	126,944			235,144
Salary expense	22,600	22,249			44,849
Rent expense	8,800	10,357			19,157
Other expense	26,400	17,646			44,046
Dividend income	(18,700)	-	18,700		-0-
Gain on sale of building, 10/1/17	-	(13,104)			(13,104)
Net Income	(81,500)	(77,823)			(159,323)
Retained earnings 1/1/17	(336,000)	(42,384)	42,384	42,384	(378,384)
Net Income	(81,500)	(77,823)			(159,323)
Dividend paid	42000	18,700		18,700	42,000
Retained earnings 12/31/17	(375,500)	(101,507)			(495,707)
Cash and receivables	112,600	44,766			157,366
Inventory	99,800	90,882			190,682
Prepaid expenses	30,000	3,186			33,186
Investment in Simbel	141,300	-	42,384	183,684	-0-
Plant, property and equipment	455,600	127,710	15,660	1566	597,404
Total Assets	839,300	266,544			978,638
Accounts payable	(68,000)	(16,038)			(84,038)
Notes payable	(162,200)	(39,258)			(201,458)
Common stock	(138,000)	(77,400)	77,400		(138,000)
Additional paid in capital	(95,600)	(48,240)	48,240		(95,600)
Retained earnings, 12/31/17	(375,500)	(101,507)			(477,007)
Subtotal		(282,443)			(996,103)
Cumulative translation adjustment		15,899	1,566		17,465
Total Liabilities and equity	$(839,300)	$(266,544)			$(978,638)

Working Notes :

3. Calculation of excess of cost over book value -

Purchase Price (given)	$141,300
Less :
Common stock	(77,400)
Additional paid in capital	(48,240)
Excess of purchase price over book value	$ 15,660

4. Excess of cost over book value is 52,200 ( 15,660÷ 0.300)

Equivalent US dollar at 12/31/18 = 52,200 * 0.270 = $14,094

Equivalent US dollar at 1/1/17 = 52,200 * 0.300 = $15,660

Cumulative translation adjustment (negative) = 14,094 - 15,660 = $ 1,566