Chp 11 Class Question
On December 31, Year 6, Pilsner Enterprises of Edmonton paid $US7,200,000 for 90%
of the outstanding shares of Sam Corp of the United States. Sam's fair values
approximated its book values on that date except for equipment.
Sam’s comparative balance sheets for Year 6 and Year 7 are shown below:
Balance Sheet as at December 31 (in U.S. Dollars)
Current Monetary Assets
Inventory
Plant and Equipment (Net)
Total Assets
Year 7
US $8,000,000
$2,000,000
$1,500,000
$11,500,000
Year 6
US$7,500,000
$3,000,000
$1,800,000
$12,300,000
Current Liabilities
Bonds Payable
Common Shares
Retained Earnings
Total Liabilities and Equity
US$1,100,000
$5,000,000
$4,000,000
$1,400,000
$11,500,000
US$2,300,000
$5,000,000
$4,000,000
$1,000,000
$12,300,000
Income Statement for the Year ended December 31, Year 7 (in U.S. Dollars)
Sales
US$5,000,000
Inventory, January 1’7
Purchases
Inventory, December 31’7
Depreciation Expense
Other Expenses
$3,000,000
$3,000,000
($2,000,000)
$300,000
$200,000
$4,500,000
Net Income
Other Information:
$500,000
Exchange Rates:
December 31, Yr 6:
September 30, Yr 7:
December 31, Yr 7:
Average for Yr 7:
US $1 = CDN $1.180
US $1 = CDN $1.197
US $1 = CDN $1.205
US $1 = CDN $1.190
Sam paid US$100,000 in dividends on September 30, Year 7. The inventories on hand at
the end of Year 7 were purchased when the exchange rate was US$1 = CDN$1.195.
Pilsner partial Balance Sheet as at December 31 (in CDN Dollars)
Year 7
Current Liabilities
Bonds Payable
Common Shares
Retained Earnings
Total Liabilities and Equity
$2,000,000
$3,000,000
$6,000,000
$2,300,000
$13,300,000
Part a.
Assuming Sam is considered to be an integrated subsidiary (i.e., the functional currency
of the foreign operation is the same as the parent):
i) Translate Sam’s Income Statement for Year 7
ii) Translate Sam’s Statement of Retained Earnings for Year 7
iii) Translate Sam’s Balance Sheet for Year 7
Part b.
Assuming Sam is considered to be a self-sustaining foreign operation (i.e., the functional
currency of the foreign operation is different than the parent):
i) Calculate the translated comprehensive income for Year 7
ii) Prepare the calculation for equipment FVI that would appear on the consolidated
balance sheet at December 31, Year 7 assuming all acquisition differential goes to
equipment. Also prepare the calculation for the exchange gain/loss on the translation of
equipment that would be included in accumulated other comprehensive income (AOCI).
Assume the equipment has a useful life of 10 years
iii) Prepare account balances for the liabilities and shareholders’ equity portion of the
consolidated balance sheet at December 31, Year 7. Your answer should include a detailed
calculation of consolidated RE, accumulated other comprehensive income and noncontrolling interest.
2
Solution
Part a.
i)
U.S. Dollars
CDN Dollars
Balance, Jan 1’7
($7,500 - $2,300 - $5,000)
$200,000
x 1.18
$236,000
Changes – ‘7
Sales
Purchases
Other Expenses
Dividends
$5,000,000
($3,000,000)
($200,000)
($100,000)
x 1.19
x 1.19
x 1.19
x 1.197
$5,950,000
($3,570,000)
($238,000)
($119,700)
Calculated Monetary Position:
Actual Position, Dec 31’7
($8,000 - $1,100 - $5,000)
$2,258,300
$1,900,000
x 1.205
Exchange Gain – Yr 7
$2,289,500
$31,200
U.S. Dollars
$5,000,000 x 1.19
CDN Dollars
$5,950,000
Inventory, January 1’7
Purchases
Inventory, December 31’7
Depreciation Expense
Other Expenses
Exchange Gain
$3,000,000
$3,000,000
($2,000,000)
$300,000
$200,000
$3,540,000
$3,570,000
($2,390,000)
$354,000
$238,000
Add $31,200
Net Income
$500,000
Sales
x 1.18
x 1.19
x 1.195
x 1.180
x 1.19
$669,200
Note: CGS = CDN$ 4,720 (3,540 + 3,570 – 2,390)
ii)
Balance, January 1’7
Add: Net Income
Less: Dividends
U.S. Dollars
$1,000,000 x 1.180
$500,000
($100,000) x 1.197
CDN Dollars
$1,180,000
$669,200
($119,700)
Retained Earnings
$1,400,000
$1,729,500
3
iii)
Balance Sheet as at
December 31, Year 7
U.S Dollars
$8,000,000 x 1.205
$2,000,000 x 1.195
$1,500,000 x 1.180
$11,500,000
CDN Dollars
$9,640,000
$2,390,000
$1,770,000
$13,800,000
Current Liabilities
$1,100,000 x 1.205
Bonds Payable (due Dec 31, Year 12) $5,000,000 x 1.205
Common Shares
$4,000,000 x 1.18
Retained Earnings
$1,400,000
Total Liabilities and Equity
$11,500,000
$1,325,500
$6,025,000
$4,720,000
$1,729,500
$13,800,000
Current Monetary Assets
Inventory
Plant and Equipment (Net)
Total Assets
Part b.
i)
Net Assets, Dec 31’6
Net Income – Yr 7
Dividends – Yr 7
Calculated Net Assets, Dec 31’7
Actual Net Assets
U.S. Dollars
$5,000,000 x 1.18
$500,000
x 1.19
($100,000) x 1.197
$5,400,000 x 1.205
Exchange Gain: (Other Comprehensive
Income)
Net income $500,000US x 1.19 =
+ OCI
Comprehensive income
CDN Dollars
$5,900,000
$595,000
($119,700)
$6,375,300
$6,507,000
$131,700
$595,000
131,700
$726,700
4
ii) Purchase price
Implied (7,200,000/0.90)
NBV acquired:
Common shares
Retained earnings
US 7,200,000
8,000,000
US 4,000,000
1,000,000
5,000,000
AD = Equipment - December 31’6
Depreciation (3000/10 yrs) - Yr 7
Calculated equipment FVI
3,000,000 × $1.180
300,000 × 1.190
$3,540,000
357,000
3,183,000
Actual Equipment - December 31’7
Exchange gain — OCI
2,700,000 × 1.205
3,253,500
$70,500
The amount of equipment FVI reported on the consolidated balance sheet at December
31, Year 7 would be $3,253,500.
iii) TEMPLATE: Par’s CV + Sub’s CV +/- AD amortization/goodwill impairment loss
+/- intercompany transactions.
Pilsner CORPORATION
Consolidated Partial Balance Sheet
December 31, Year 7
Current liabilities [2,000,000 + 1,100,000 (1.205)]
Bonds payable [3,000,000 + 5,000,000 (1.205)]
Common shares (only Parent)
Retained earnings1
Accumulated other comprehensive income2
Non controlling interest3
Total liabilities and equity
$ 3,325,500
9,025,000
6,000,000
2,406,470
181,980
976,050
$ 21,915,000
1
Calculation of consolidated retained earnings:
Retained earnings, Pilsner, December 31, 7
$ 2,300,000
Change in Sub’s RE:
Net income
US 500,000 × 1.19
595,000
Less: dividends
US (100,000) × 1.197 (119,700)
475,300
Less: AD Equip amort (part ii)
(357,000) 118,300 x.9 = 106,470
Consolidated retained earnings, Dec. 31, 7
$ 2,406,470
5
OR:
1
Calculation of consolidated retained earnings:
Retained earnings, Partners, December 31, 7
$ 2,300,000
Change in Sub’s RE:
Ending RE *
1,655,300*
Less: RE at acq.d ate US 1,000,000 × 1.18
(1,180,000)
475,300
Less: AD equip amort (part ii)
(357,000) = 118,300 x 0.9 = 106,740
Consolidated retained earnings, Dec. 31, 7
$ 2,406,470
*Ending RE
Bgn RE
US 1,000,000 x 1.180 = 1,180,000
Net income US 500,000 × 1.19
595,000
Less: divs
US (100,000) × 1.197
(119,700)
Ending RE
1,655,300
2
Calculation of AOCI
AOCI = Parent’s % of both sources of OCI:
Total OCI: OCI translation of net assets = $131,700 gain + OCI from translation of AD
schedule = $70,500 gain = $202,200.
Total AOCI on the consolidated balance sheet $202,200 x 90% = $181,980
3NCI:
10% (10% CV + actual AD left +/- upstreams P/G/L +/- OCI from change in net
assets
CV
translated CS 2,000,000 x 1.18 =
translated ending RE
+ actual AD left (equipment)
+/- Upstream
+ gain on translated net assets
4,720,000
1,655,300
6,375,300
3,253,500
0
131,700
9,760,500 x 10% = 976,050
6