Question

On January 1, 20X5, Pirate Company acquired all of the outstanding stock of Ship Ic., a Norwegian company, at a cost of $167,400. 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 Accounts Receivable (net) Inventory Property, Plant & Equipment Accumulated Depreciation Accounts Payable Notes Payable Common Stock 163, e00 222,000 286, e00 630, e00 NKr 161, e00 97,e00 191,e00 440, e00 260, e00 791, e00 NKr Retained Earnings Sales Cost of Goods Sold 411, e00 120, e0e 67, e00 41, e00 Operating Expenses Depreciation Expense Dividends Paid Total NKr1,940, e0e NKr1,940, e0e Addltlonal 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 $254,000 for 20X5, and its total stockholders' equity on January 1, 20X5, was $3.600,000. Pirate declared $130,000 of dividends during 20X5. 6. Exchange rates were as follows: NKr July 1, 20x3 December 30, 20x4 January 1, 2ex5 July 1, 20x5 December 15, 20x5 December 31, 20x5 Average for 20x5 = 0.15 1 = 0.18 = 0.18 = 0.19 = 0. 205 = 0.21 = 0.20

Answer 1

Part A

Items	Norweign Kroner	Exchange rate	U.S. Dollar
Cash	163000	0.21	34230
Accounts receivable (net)	222000	0.21	46620
Inventory	286000	0.21	60060
Property, plant and equipment	630000	0.21	132300
Cost of goods sold	411000	0.20	82200
Operating expenses	120000	0.20	24000
Depreciation expenses	67000	0.20	13400
Dividend paid	41000	0.19	7790
Total	1940000		400600
Accumulated depreciation[P1]	161000	0.21	33810
Accounts payable	97000	0.21	20370
Notes payable	191000	0.21	40110
Common stock	440000	0.18	79200
Retained earnings	260000	0.18	46800
Sales	791000	0.20	158200
Total	1940000		378490
Accumulated other comprehensive income – translation adjustment (Credit)			22110
Total credits	1940000		400600

Part B

No.	Date	General journal	Debit	Credit
1	January 1	Investment in Ship company	167400
		Cash		167400
		(to record purchase of Ship company)
2	July 1	Cash (41000*0.19)	7790
		Investment in Ship company		7790
		(to record dividend received from subsidiary)
3	December 31	Investment in Ship company (791000-411000-120000-67000)*0.20	38600
		Income from Subsidiary		38600
		(to record equity in net income of foreign subsidiary)
4	December 31	Investment in Ship company	22110
		Other comprehensive income – Translation Adjustment		22110
		(to record parent’s share of translation adjustment from translation of subsidiary’s accounts
5	December 31	Income from Subsidiary	7200
		Investment in Ship company (2000+5200)		7200
		(to record amortization)
6	December 31	Investment in Ship company (2900+3640)	6540
		Other comprehensive income – Translation Adjustment		6540
		(to record translation adjustment applicable to the differential)

Differential = 167400-(700000*0.18) = 41400

Differential allocated of plant property and equipment = $18000

Differential allocated to patent = 41400-18000 = $23400

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 = 23400/0.18 = $130000

Amortization of plant property and equipment in NKr = 130000/5 = NKr 26000

Amortization of plant property and equipment in $ = 26000*0.20 = $5200

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

(130000*0.18)-(26000*0.20)-((130000-26000)*0.21) = 3640

Part C

Income from Pirate’s operations for 20X5, exclusive of income from the Norwegian subsidiary	254000
Add: Income from the Norwegian subsidiary for 20X5 (791000-411000-120000-67000)*0.20	38600
Deduct: Amortization of differential	(7200)
Pirate’s Net Income	285400
Add: Translation Adjustment ($22110+6540)	28950
Pirate’s Consolidated Comprehensive Income	$314350

Part D

Pirate’s stockholders’ equity at Jan. 1, 20X5	3600000
Add: Net income for 20X5	314350
Deduct: Dividends declared by Pirate during 20X5	(130000)
Add: Accumulated other comprehensive income:
Foreign currency translation adjustment	28950
Consolidated Stockholders’ Equity at Dec. 31, 20X5	$3813300

[P1]