Question

On January 1, 2019, Purple Inc. acquired Yellow Company as a wholly-owned subsidiary in Canada for $51,000 (US$). Yellow’s Dec 31, 2019 pre-closing Trial Balance in Canadian dollar (CAN$) is as follows:

	(in CAN$)
Accounts	Debit	Credit
Current assets	57,000
PP&E, net	90,000
Liabilities		62,000
Common stock		60,000
Retained earnings		0
Sales		150,000
COGS and Expenses	110,000
Dividends	15,000
Total	272,000	272,000

Additional information:

a) Canadian dollar is the functional currency for Yellow Company.

b) Dividends were declared and paid on Nov. 1, 2019.

c) Spot rates at various dates for 2019 follow:

            January 1                     CAN $1 = US $0.75

            November 1 CAN $1 = US $0.77

            December 31               CAN $1 = US $0.80

            Annual Average CAN $1 = US $0.78

d) Assume Yellow's revenues, purchases, operating expenses, depreciation expense, and income taxes were incurred evenly throughout 2019.

Requirements (type your answers in the space provided below):

1) Compute AOCI-Translation Adjustment using equity accounts.

2) Assume all AAP is related to a patent with a 4-year economic life on the acquisition date. Prepare a schedule to show the beginning and ending balances and the amortization of the patent in US for 2019. Show the translation adjustment for AAP in 2019, if any.

3) Assume Purple uses full equity method to record investments. What’s the balance of Purple’s Equity Investment in Yellow on 12/31/2019?

4)  Prepare the [C] entry on 12/31/2019 for consolidation.

5)  Prepare the [D] entries on 12/31/2019 for consolidation.

Answer 1

Answer 1
AOCI-Translation Adjustment using equity accounts.
	CAN $	USD Equivalent
Accounts	Debit	Credit	Debit	Credit	Comments
Current assets	57,000		45,600.0		Converted as at 31 Dec 2019 rate
PP&E, net	90,000		72,000.0		Converted as at 31 Dec 2019 rate
Liabilities		62,000		49,600.0	Converted as at 31 Dec 2019 rate
Common stock		60,000		48,000.0	Converted as at 31 Dec 2019 rate
Retained earnings		-
Sales		150,000		117,000.00	Converted based on the average rate
COGS and Expenses	110,000		85,800.00		Converted based on the average rate
Dividends	15,000		11,550.00		Converted based on the rate on the date of payment
Translation Adjustment				350	The difference between the credit and debit for the period
Total	272,000	272,000	214,950	214,950

Answer 2
Details	USD	CAN $ Equivalent	Exchange rate
Purcahse consideration paid by Purple (A)	51,000	68,000	0.75
Common Stock Value as at 31 Dec 19 (B)	45,000	60,000	0.75
AAP = (A -B) Beginning Balance	6,000	8,000	0.75
Amortisation for the year	1,560	2,000	0.78
Translation Adjustment	(300)
Closing Balance	4,500	6,000	0.8

Answer 3
Details	USD	CAN $ Equivalent	Exchange rate
Initial Recognition	51,000
Profits of Subsidiary	20,000	25,000	0.8
Amortisation of AAP	(1,500)
Closing Balance	69,500