Question

Shames Company is located in London, England. The local currency is the British pound (£). On January 1, 20X8, Pit Company purchased an 70 percent interest in Shames for $403,000, which resulted in an excess of cost-over-book value of $80,000 due solely to a trademark having a remaining life of 10 years. Pit uses the equity method to account for its investment.

Shames’s December 31, 20X8, trial balance has been translated into U.S. dollars, requiring a translation adjustment debit of $6,500. Shames’s net income translated into U.S. dollars is $71,000. It declared and paid a £20,000 dividend on May 1, 20X8.

Relevant exchange rates are as follows:

	€		$
January 1, 20X8	1	=	1.60
May 1, 20X8	1	=	1.64
December 31, 20X8	1	=	1.65
Average for 20X8	1	=	1.63

  
Required: DO JE
a. Record the dividend received by Pit from Shames.
b. Prepare the entries to record Pit’s equity in the net income of Shames and the parent’s share of the translation adjustment
(Record the equity accrual, Record the parent's share of subsidiary's translation adjustment.

c. Show a calculation of the differential reported on the consolidated balance sheet of December 31, 20X8, and the translation adjustment from differential. (Amounts to be deducted should be entered with a minus sign. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

	British pounds Exchange rate U.S. Dollars Income Statement: Differential Jan. 1, 20X8 Amortization for 20X8 Remaining balance £0 $0 Balance Sheet: Remaining balance on Dec. 31 translated at year-end rate Difference to translation adjustment $0

d. Record the entry to recognize the translation adjustment for the increase in the differential.

e. Record the entry to amortize the trademark for 20X1

f. Calculate the amount of the translation adjustment reported on the statement of comprehensive income as an element of other comprehensive income. (What amount and is it a credit or debit balance)

Answer 1

Note : Assumption : that Exchange rate given in question is in GBP (£) and in US Dollar ($). Wrongly in question Symbol of € is mentioned instead of GBP(£). So I have done all workings according to GBP (£).

(A) Record of dividend received by Pit from Shames:

Total Dividend declared and paid is £ 20,000

Share of Pit company in the shames company is 70%, so the share in dividend also is 70%.

Therefore, Pit has received 70% of £20,000 = £14,000

                 Converted in US $ = £14,000 * 1.64 = $22,960

Journals

                                       

Date           Account Name Debit          Credit

(Amount $)           (Amount $)

May 1,                           Cash                                                       Dr. 22,960                      

20X8                Investments in Shames Company                       Cr.                           22,960

                        (Being dividend received by Pit company

                      From shames company and converted in US$)

(B) Entries to record Pit’s equity in the net income and parents share in translation adjustment

Shames net income is $71,000

Translation adjustment is $ 6,500

Pit company share in shame Company is 70% , so income and translation adjustment share is also 70%.

Journals

                                       

Date           Account Name Debit Credit

  (Amount $)           (Amount $)

Dec. 31,           Investments in Shames Company Dr. 49,700                      

20X8                Income from Subsidiary Cr. 49,700

                        (Being 70% share in net income of $71,000

received by Pit company from shames company)

Dec. 31,           Other comprehensive income-

20X8 Translation adjustment Dr. 4,550                       

Investments in Shames Company Cr. 4,550

                        (Being 70% share in translation adjustment of

                        $6,500 recorded by Pit company from shames company)

(C)

	British Pounds (£)	Exchange Rate	U.S. Dollars ($)
Income Statement :
Differential jan. 1, 20X8 Trademark (10-Years Life)	£        50,000	1.60	$        80,000
Amortization for 20X8 (Avg. Rate)	- £         5,000	1.63	- $        8,150
Remaining Balance	£        45,000		$        71,850
Balance Sheet :
Remaining Balance on Dec. 31 translated at year end rate	£        45,000	1.65	$        74,250
Difference to translation adjustment			$          2,400

(D)

Since the value as at year end is $74,250 and value without any adjustment is $71,850. Therefore, the differential portion of the parents company’s investment must be increased by $2,400.

Journals

  

Date           Account Name Debit Credit

(Amount $) (Amount $)

Dec. 31,           Investments in Shames Company                       Dr.     2,400                       

20X8                Other comprehensive income-

Translation adjustment                                       Cr. 2,400

                        (Being difference in translation adjustment

                            recorded)

(E)        Record of amortize entry of trademark       

Journals

                                       

Date           Account Name Debit Credit

  (Amount $)    (Amount $)

Dec. 31,           Income from Subsidiary                                      Dr. 8,150                       

20X8                Investments in Shames Company                       Cr. 8,150

                        (Being amortization of trademark is recorded)

(F)           Translation adjustment reported on the statement of comprehensive income:

           

Other Comprehensive income reports the periodic change in the translation adjustment.

Other Comprehensive Income
	Amount ($)
70% share of translation adjustment from trial balance	4,550
Difference to translation adjustment Income (increase)	-2,400
Net change in Other Comprehensive income	2,150

Therefore, Net $2,150 is a dedit balance due to foreign translations.