Accounting for the Translation Adjustment Sonoma Company has owned 100 percent of...

Accounting for the Translation Adjustment

Sonoma Company has owned 100 percent of the outstanding common stock of Valencia Corporation, a Spanish subsidiary, for the past 15 years. The Spanish company’s functional currency is the euro, and its financial statements are translated into U.S. dollars prior to consolidation.

In the current year, Sonoma sold 30 percent of Valencia’s voting common stock to a nonaffiliated company. Sonoma’s controller, Renee Voll, calculated a gain on the sale of this portion of its investment in Valencia. The consolidated balance sheet at the end of last year contained a debit balance cumulative translation adjustment related to the Spanish subsidiary. Voll believes that the decrease in Sonoma’s share of Valencia’s translation adjustment will be automatically included in other comprehensive income as the year-end translation adjustment is calculated and that Sonoma’s share is included in the consolidated financial statements. However, she has asked you, as an accountant in her department, to research the accounting for the translation adjustment as a result of the sale of a part of the investment in the Spanish subsidiary.

Required

Research the most current standards on accounting for the translation adjustment resulting from translating the trial balance of a foreign affiliate using the Accounting Standards Codification. Write a memo to Renee reporting the results of your research. Support your recommendations with citations and quotations from the authoritative financial reporting standards.