Solution manual advanced accounting 4e jeter ch13

Exercise 13-7 Adjusted Translation Adjusted Trial Balance £ Rate Trial Balance $ Consolidated Income and Retained Earnings Statement... Problem 13-2 continued Consolidated Statement of

CHAPTER 13 Note: The letter A or B indicated for a question, exercise, or problem means that the question, exercise, or problem relates to a chapter appendix

ANSWERS TO QUESTIONS

1 (1) The parent company must control more than 50 percent of the voting stock of the subsidiary (2) The intent of control should be permanent

(3) The control should rest with the majority owners

2 The functional currency of an entity is the currency of the primary economic environment in which the entity operates The FASB provided the following six economic indicators:

a The impact on the parent’s cash flow;

b The short-term responsiveness of the sales price to changes in the exchange rate;

c The sales market for the firm’s products;

d The currency in which labor, materials, and other factor inputs are primarily obtained;

e The currency in which debt is denominated and the ability of the foreign entity’s operations to generate amounts of that currency sufficient to service the debt;

f The volume of transactions between the foreign entity and its parent

3 Local currency, current rate

4 U.S dollar, temporal

5 The temporal method is used when a foreign subsidiary operates in a highly inflationary economy

6 Remeasurement is the process of translating the accounts of a foreign entity into its functional currency when they are stated in another currency

7 All assets and liabilities are translated using the current rate at the balance sheet date when the current rate method of translation is used

8 Assets and liabilities are translated at the rate in effect at the balance sheet date Common stock is translated at the historical rate when the stock was issued Retained earnings consists of various period’s net income (translated at the yearly average rates) less dividends converted at the historical rates on the declaration dates The cumulative translation adjustment is a balancing amount in equity, which results in total equity (including the cumulative adjustment) being driven back to the rate in effect at the balance sheet date Thus, the ratios will not change from their calculations using the local currency

9 Application of the temporal method produces translated amounts that reflect transactions as if they had been measured in dollars originally rather than in the local currency

10 Revenues and expenses are translated using the exchange rate in effect when they were recognized during the period except for expenses associated with nonmonetary items which are translated using historical rates Because it is impractical to translate numerous transactions, the use of an appropriate average is permitted

11 The translation adjustment is reported as a separate component of stockholders’ equity when the current rate method is used to translate the accounts

Business Ethics Solutions

Business ethics solutions are merely suggestions of points to address The objective is to raise the students' awareness of the topics, and to invite discussion In most cases, there is clear room for disagreement or conflicting viewpoints

1 Spring-loading is a contentious issue, and the following points are among those that may be considered in a discussion or debate of whether it should be allowed or not:

Though granting options is intended to motivate and incentivize the employees to generate more profits, granting an award that is already known (or strongly suspected) before-the-fact to

be in the money very soon seems counter to this intent

Companies engaged in spring-loading mislead investors by not disclosing that options are awarded with foreknowledge of the impending good news

Spring-loading is legal as long as the compensation committee awarding the options knows the same information as the recipient, and the company informs shareholders that it does not

withhold granting options when undisclosed, positive company information is pending

Companies suspected of spring-loading cannot be said to have advantage of prior market

reactions that have not actually taken place, and executives can argue, truthfully, that there is no way to know for certain how the market will react to impending news

Option manipulation is generally more likely to occur in circumstances in which the company

executives like CEOs have greater influence on the company’s pay-setting and governance processes, which suggests a lack of board oversight

2 Spring-loaded grants might violate insider-trading rules, particularly if managers with knowledge of the information gives options to themselves, or if executives conceal good news from directors while urging them to grant options

Also, see the following links: http://www.cfo.com/article.cfm/7880157/1/c_2984338

http://blog.issproxy.com/files/OptionsBackdating7806.pdf

http://www.aflcio.org/corporatewatch/paywatch/stockoptions.cfm

ANSWERS TO EXERCISES

U.S Dollar Local Currency

Exercise 13-4 Swiss Translation

Adjustment for changes in the net asset position during the year:

Exercise 13-5 Swiss Translation

Francs Rate $

Part A Balance Sheet

Part B Net monetary liability position - 1/1 ($20,000 - $30,000) (10,000)$.5987 (5,987)

Adjustment for changes in net monetary position during the year:

Less: Decrease in net asset position:

Net asset position translated using rate in effect at date of transaction - 12,437

Exercise 13-6 Part A Part B

Swiss Translation Brazilian Translation Franc Rate Real Rate $ Consolidated Income and Retained Earnings Statement

Exercise 13-7 Adjusted Translation Adjusted

Trial Balance (£) Rate Trial Balance ($) Consolidated Income and Retained Earnings Statement

Exercise 13-8 Adjusted Translation Adjusted

Trial Balance (£) Rate Trial Balance ($)

Schedule A - Translation of cost of goods sold

Exercise 13-9 Translation

Adjustment for changes in the net asset position during the year

Part B Exposed net monetary liability position - 1/1 (15,500 + 25,000 – 32,000) 8,500 $1.5403 13,093

Adjustment for changes in net monetary position during the year

Add: Decrease in monetary assets or increase in monetary liabilities

Operating expenses - less depreciation and office supplies used 14,400 1.5532 22,366

Net monetary asset position translated using rate in effect at date of transactions - 20,285 Exposed net monetary asset position-12/31 (35,000 - 6,900 – 15,000) 13,100 1.5961 20,909

Part C An entity’s accounting exposure to changes in the exchange rate is related to the set of accounts translated at the current rate Under

the current rate method, all assets and liabilities are translated at the current rate Thus, under this method, only the net asset position will result in a translation adjustment Under the current rate method, a gain results from a net asset position and an increase in the exchange rate In contrast, monetary assets and liabilities are translated at the current rate when using the temporal method In this exercise, the company went from a net monetary liability position to a net monetary asset position during the year

A translation gain results from an increase in the exchange rate

Exercise 13-10A

Part A 1 Inventory

5192

$

000,30

$

= 57,781 50% = 28,891 $.4994 = $14,428

Accounts Payable

4994

000,30

000,30

$

60,072

Date of transaction

5192

000,30

Part B Unrealized profit in ending inventory - $6,000 50% = $3,000

Part C 1 Measurement of accounts receivable

2 The transaction loss is reported in determining net income for the current period

3 A transaction loss (or gain) related to a loan of a long-term investment nature is deferred and reported in a separate component of stockholders’ equity

Problem 13-1 (continued) New Translation U.S

Zealand $ Rate $

Adjustments for changes in net asset position during the year:

Zealand $ Rate $

Part A Balance Sheet

Problem 13-2 (continued)

Consolidated Statement of Income and Retained Earnings

Schedule 2 - Translation of Depreciation Expense

* Translation rate is the January 1, 2008 rate, the date the equity interest was acquired, rather than the $.7480 rate in effect when the

inventory was purchased

Problem 13-2 (continued) New Translation U.S

Zealand $ Rate $

Part B Exposed net monetary liability position - 1/1 (295,000 + 600,000 – 500,000) 395,000 $.7924 312,998

Add: Decrease in monetary assets or increase in monetary liabilities:

Francs Rate U.S.$

Part A Consolidated Statement of Income and Retained Earnings

Adjustments for changes in net asset position during the year:

** Difference of $1.00 ($74,000 compared to $73,999) due to rounding

Problem 13-3 (continued) Francs $

Part C Current ratio

750,450,1

000,660,2

= 1.83

643,275

400,505

= 1.83

Debt to equity

250,814,1

750,300,2

= 1.27

707,344

143,437

= 1.27

Gross profit percentage

000,775,3

500,462,1

= 38.7%

400,664

400,257

= 38.7%

Net income to sales

000,775,3

250,416

= 11.0%

400,664

260,73

= 11.0%

Francs Rate U.S.$

Part A Balance Sheet

Problem 13-4 (continued) Translation

Francs Rate U.S.$

Consolidated Income and Retained Earnings Statement

Problem 13-4 (continued)

Adjustments for changes in net monetary position during the year:

Less: Increase in cash and receivables from sales (3,775,000) 176 (664,400) Add: Decrease in monetary assets or increase in monetary

liabilities from operations:

Problem 13-5 (continued) Translation

Canadian $ Rate U.S.$ Part C (1) Equipment:

(4) Cumulative Translation Adjustment - SFr Company ($73,999 80) 59,199

(5) Beginning Retained Earnings - P Company (1st yr’s depreciation*) 4,680

Noncontrolling Interest (37,500 $.156) x 20 1,170

Depreciation Expense (current yr’s depreciation) ($37,500 $.176) 6,600

Buildings, net (unamortized balance) ($300,000 19) 57,000

Cumulative Translation Adjustment ($13,200 + $15,400) 28,600

* (37,500 $.156) x 80

Problem 13-6A (continued)

Supporting computations for eliminating entries

Translation Francs Rate U.S.$

Book value of net assets

Total adjustment - $13,200 + $15,400 = $28,600

Problem 13-6A (continued) P COMPANY AND SUBSIDIARY

Consolidated Statement Workpaper For the Year Ended December 31, 2009

P SFr Eliminations Noncontrolling Consolidated

Retained Earnings Statement

Problem 13-6A (continued) P SFr Eliminations Noncontrolling Consolidated

3,728

$.15 = 37,500 $.15 = $5,625 Unamortized balance - 12/31/2009

Land 385,000 $.15 = $57,750

Building 375,000 - 37,500 - 37,500 = 300,000 $.15 = $45,000

Problem 13-7A (continued) P COMPANY AND SUBSIDIARY

Consolidated Statement Workpaper For the Year Ended December 31, 2009

P SFr Eliminations Noncontrolling Consolidated

Retained Earnings Statement

Problem 13-7A (continued) P SFr Eliminations Noncontrolling Consolidated

Problem 13-8A Adjusted Trial Translation Adjusted Trial

Part A Consolidated Income and Retained Earnings Statement

Adjustment for changes in the net asset position during the year:

Problem 13-8A (continued)

Part D

Supporting schedules for workpaper entries

Useful Amortization Translation Amortization

Net asset position translated using the rate in effect at date of transaction - 196,763

of Year Year Rate U.S $

Problem 13-8A (continued) BABBIT, INC AND FOREIGN SUBSIDIARY

Consolidated Statement Workpaper For the Year Ended December 31, 2008

Babbit Nakima Eliminations Noncontrolling Consolidated Inc Company Dr Cr Interest Balances

Retained Earnings Statement

Problem 13-8A (continued) Babbit Nakima Eliminations Noncontrolling Consolidated

Inc Company Dr Cr Interest Balances

(1) To eliminate investment account and create noncontrolling interest account

(2) To recognize parent’s share of cumulative translation adjustment

(3) To eliminate intercompany dividends

(4) To allocate the difference between implied and book value

Problem 13-9 (This is the same problem as Problem 13-3) Translation

Francs Rate U.S.$

Part A Consolidated Income and Retained Earnings Statement

Problem 13-9 (continued)

Part B Verification of the Translation Adjustment

Translation Francs Rate U.S.$

Adjustments for changes in net asset position during the year:

* *Difference of $1.00 ($74,000 compared to $73,999) due to rounding

000,660,2

= 1.83

643,275

400,505

= 1.83

Debt to equity

250,814,1

750,300,2

= 1.27

707,344

142,437

= 1.27

Gross profit percentage

000,775,3

500,462,1

= 38.7%

400,664

400,257

= 38.7%

Net income to sales

000,775,3

250,416

= 11.0%

400,664

260,73

= 11.0%

Problem 13-10 Translation

Francs Rate U.S.$

Part A Balance Sheet

Consolidated Statement of Income and Retained Earnings

Problem 13-10 (continued)

Adjustments for changes in net monetary position during the year:

Less: Increase in cash and receivables from sales (3,775,000) 176 (664,400) Add: Decrease in monetary assets or increase in monetary

liabilities from operations:

Part C Elimination Entries

(2) Beginning Retained Earnings - SFr Company 75,948

Cumulative Translation Adjustment ($13,200 + $15,400) 28,600 :

Problem 13-11A (continued)

Supporting computations for eliminating entries

Translation Francs Rate U.S.$

Book value of net assets

Total adjustment - $13,200 + $15,400 = $28,600

Problem 13-11A (continued)

Income Statement Company Company Dr Cr Interest Balances

Net Income to Retained Earnings 309,328 73,260 59,928 - 13,332 309,328

Retained Earnings Statement

Problem 13-11A (continued) P SFr Eliminations Noncontrolling Consolidated

Balance Sheet Company Company Dr Cr Interest Balances

$.15 = 37,500 $.15 = $5,625 Unamortized balance - 12/31/2009

Land 385,000 $.15 = $57,750

Building 375,000 - 37,500 - 37,500 = 300,000 $.15 = $45,000

Problem 13-12A (continued)

Income Statement Company Company Dr Cr Interest Balances

Retained Earnings Statement

Problem 13-12A (continued)

12/31 Noncontrolling Interest 76,814 76,814