Question

Atlantic Imports, a U.S. company, acquired a wholly-owned subsidiary, located in Portugal, on January 1, 2018 for €200,000,000. The subsidiary’s functional currency is the euro. The balance sheet of the subsidiary at the date of acquisition was as follows: Assets Current assets € 30,000,000 Noncurrent assets, net 150,000,000 Total assets €180,000,000 Liabilities and Stockholders' Equity Liabilities € 60,000,000 Capital stock 80,000,000 Retained earnings 40,000,000 Total liabilities and stockholders' equity €180,000,000 Appropriate revaluations of the subsidiary’s assets at the date of acquisition are as follows: Inventories are undervalued by €500,000. The subsidiary uses FIFO. Noncurrent assets are undervalued by €10,000,000. The noncurrent assets have a 10-year remaining life, straight-line. Identifiable indefinite life intangible assets, previously unreported, have a fair value of €5,000,000. During 2018 there was no impairment of either identifiable intangible assets or goodwill. The exchange rate on January 1, 2018 was $1.10/€. The average rate for 2018 was $1.12/€, and the rate at the end of 2018 was $1.15/€. The excess of acquisition cost over book value for this acquisition, in U.S. dollars, is: The entries required to consolidate the balance sheets of Atlantic Imports and its subsidiary at the date of acquisition include recognition of goodwill of: The entries required to consolidate the balance sheets of Atlantic Imports and its subsidiary at the date of acquisition include an increase in the subsidiary's noncurrent assets in the amount of: At the end of 2018, consolidation eliminating entry (R) includes a debit to current assets in the amount of: At the end of 2018, consolidation eliminating entry (O) includes a debit to depreciation expense in the amount of: At the end of 2018, consolidation eliminating entries (R) and (O) together will have what effect on consolidated other comprehensive income (increase or decrease)?

Answer 1

Answer 1 :

(1) Computation of excess of acquisition cost over book value for this acquisition, in U.S. dollars, is :

    a)    Cost of acquisition                                 -    € 200,000,000

    b)   Fair market values net benefit acquired (see note below)                                                             -   € 135,000,000

         Excess of acquisition cost over book value                                                                                  € 65,000,000

        Amount in U S D   ( € 65,000,000 X $1.10/€ )    $    71.50

Note : Computation of net benefit or net asset acquired :

1) Current Assets (undervalued, so it is to be increased by € 5,000,000)                 - € 35,000,000

         2) Non Current Assets (undervalued, so it is to increase by € 10,000,000)           -    € 160,000,000

                 Total Assets                                                                                          - € 195,000,000

         3)   Liabilities                                                                                                 €   60,000,000

                F M V of net assets acquired (Total Asset - Liabilities)       € 135,000,000

Answer 2 :

The entries required to consolidate the balance sheets of Atlantic Imports and its subsidiary at the date of acquisition include recognition of goodwill of:

January 1, 2018

Particular                                              Debit ( € )                Credit ( € )

1. Current Assets A/c            Debit         35,000,000    Non-Current Assets A/c     Debit             160,000,000 Goodwill A/c                     Debit               65,000,000          To Liabilities A/c                                    60,000,000          To Consideration A/c                      200,000,000 (being Atlantic Imports, a U.S. company, acquired a wholly-owned subsidiary, located in Portugal, on January 1, 2018 for €200,000,000 )

2. Consideration A/c           Debit                    200,000,000            To Cash A/c                                                                       200,000,000 ( being consideration paid)

Answer 3 :

The entries required to consolidate the balance sheets of Atlantic Imports and its subsidiary at the date of acquisition include an increase in the subsidiary's non-current assets in the amount of:

January 1, 2018

Particular                                              Debit ( € )                Credit ( € )

1. Non - Current A/c                    Debit               10,000,000          To Revaluation Reserve A/c                                                       10,000,000 (being non-current asset is revalued by increasing € 10,000,000 to be adjusted by creating revaluation adjustment a/c)

Answer 4 :

At the end of 2018, consolidation eliminating entry (R) includes a debit to current assets in the amount of:

December 31st, 2018

Particular                                              Debit ( € )                Credit ( € )

1. Current Assets A/c            Debit        5,000,000        To Revaluation Reserve A/c                                5,000,000                         (being current asset is revalued by increasing € 5,000,000 to be adjusted by creating revaluation adjustment a/c )

Answer 5 : At the end of 2018, consolidation eliminating entry (O) includes a debit to depreciation expense in the amount of:

December 31, 2018

Particular                                              Debit ( € )                Credit ( € )

1. Depreciation A/c                       Debit               16,000,000          To Accumulated Depreciation A/c                                  16,000,000 (being depreciation charged for year 2018)

Answer 6 : At the end of 2018, consolidation eliminating entries (R) and (O) together will have effect on consolidated other comprehensive income (increase or decrease) as.

December 31, 2018

Particular                                           Debit ( € )                Credit ( € )

1. Retained Earning A/c                     Debit               15,000,000      To Revaluation A/c -Current Asset                                5,000,000      To Revaluation A/c -Non -current Asset                      10,000,000 (being revalued amount to be adjusted against retained earnings ) 2. Retained Earning A/c                   Debit                  16,000,000               To Depreciation A/c                                                             16,000,000 (being depreciation expensed off)