Question

On January 1, 20X5, Pirate Company acquired all of the outstanding stock of Ship Inc., a Norwegian company, at a cost of $169,200. Ship's net assets on the date of acquisition were 700,000 kroner (NKr). On January 1, 20X5, the book and fair values of the Norwegian subsidiary's identifiable assets and liabilities approximated their fair values except for property, plant, and equipment and patents acquired. The fair value of Ship's property, plant, and equipment exceeded its book value by $18,000. The remaining useful life of Ship's equipment at January 1, 20X5, was 10 years. The remainder of the differential was attributable to a patent having an estimated useful life of 5 years. Ship's trial balance on December 31, 20X5, in kroner, follows:

	Debits			Credits
Cash	NKr	162,000
Accounts Receivable (net)		218,000
Inventory		281,000
Property, Plant & Equipment		621,000
Accumulated Depreciation				NKr	166,000
Accounts Payable					103,000
Notes Payable					194,000
Common Stock					420,000
Retained Earnings					280,000
Sales					759,000
Cost of Goods Sold		411,000
Operating Expenses		121,000
Depreciation Expense		55,000
Dividends Paid		53,000
Total	NKr	1,922,000		NKr	1,922,000

Additional Information:

1. Ship uses the FIFO method for its inventory. The beginning inventory was acquired on December 31, 20X4, and ending inventory was acquired on December 15, 20X5. Purchases of NKr430,000 were made evenly throughout 20X5.
2. Ship acquired all of its property, plant, and equipment on July 1, 20X3, and uses straight-line depreciation.
3. Ship’s sales were made evenly throughout 20X5, and its operating expenses were incurred evenly throughout 20X5.
4. The dividends were declared and paid on July 1, 20X5.
5. Pirate's income from its own operations was $231,000 for 20X5, and its total stockholders' equity on January 1, 20X5, was $3,600,000. Pirate declared $140,000 of dividends during 20X5.
6. Exchange rates were as follows:

	NKr		$
July 1, 20X3	1	=	0.15
December 30, 20X4	1	=	0.18
January 1, 20X5	1	=	0.18
July 1, 20X5	1	=	0.19
December 15, 20X5	1	=	0.205
December 31, 20X5	1	=	0.21
Average for 20X5	1	=	0.20

Assume the U.S. dollar is the functional currency, not the krone.

a. Prepare a schedule remeasuring the trial balance from Norwegian kroner into U.S. dollars.

b. Assume that Pirate uses the fully adjusted equity method. Record all journal entries that relate to its investment in the Norwegian subsidiary during 20X5. Provide the necessary documentation and support for the amounts in the journal entries.

c. Prepare a schedule that determines Pirate's consolidated net income for 20X5

d. Compute Pirate's total consolidated stockholders' equity at December 31, 20X5

Answer 1

Part a                                                          

                                                                      

Account Nkr Rate Remarks $

Cash 162000 0.21 Closing Rate for Assets and Liabilities                  $   34020

Accounts Receivable 218,000.00    0.21 Closing Rate for Assets and Liabilities $  45780

Inventory 281,000.00 0.21 Closing Rate for Assets and Liabilities $ 59010

PPE 621000.00 0.21 Closing Rate for Assets and Liabilities $ 130,410

Cost of Goods Sold 411,000.00 0.20 Average rate for income and expense since question $82200

incurred evenly throught the year

Operating Expenses 121,000.00 0.20 Average rate for income and expense since    $24200

   question says it is incurred evenly throught the year

Depreciation Expense 55,000.00    0.20 Average rate for income and expense $11000

since question says it is incurred evenly throught the year

Dividends Paid 53,000.00 0.19 Dividend declared on 1st July so rate of that date taken $10070

Total Debits   1,922,000.00    $ 396690

Accumulated Depreciation 166,000.00 0.21 Closing Rate for Assets and Liabilities $   34,860

Accounts Payable 103,000.00    0.21 Closing Rate for Assets and Liabilities            $   21,630

Notes Payable 194,000.00 0.21 Closing Rate for Assets and Liabilities               $   40740

Common Stock 420,000.00    0.18 Beginning Rate confirmed $ 75600

Retained Earnings 280,000.00 0.18 Beginning Rate confirmed $ 50400

Sales 759,000.00 0.20 Average rate for income and expense since    $ 151,800

Total 1,922,000.00 $ 375030

Accumulated Other Comprehensive                                                              

Income — Translation Adjustment    $   21,660

                                                                      

Total Credits    $ 396690

2.

Date         Account Debit       Credit                

                                                                   

January 1                Investment in Ship Co   $ 169000

                      Cash                    $ 169000

                 (purchase of ship)                                                  

                                                                   

Jul 1         Cash                 $              10,260                   

                      Investment in Ship Co $                                                                                10,260

(being dividend received)

Dec 31 Investment in Ship Co $              37,400

     Income from subsidiary $                                                                                37,400

(being equity income received)

Sale-COGS-Dep-Ope Exp from part-1

Dec 31 Investment in Ship Co $              21,660

     Other Comprehensive Income-Translation $ 21660

(being translation adj done)

Dec 31 Income from Subsidiary $                4,800

     Investment in Ship Co $                                                                                  4,800

(Amortization of differntial) schedule-2

(2000+2800)

Dec 31 Income from Subsidiary $                4,860

     Other Comprehensive Income-Translation $                                                                                  4,860

(translation adjustments) schedule-2

(2900+1960)

Schedule-1                                                                   

Investment cost at Jan 1 2015 $169000

Less: Book Value of net asset                 700000*0.18 $ -126,000                   

Differential 43000   

Allocated to:                                                            

Property, Plant and Equipment $ 18,000

Patent 30600-18000 $ 12,600

Schedule-2                                                               

                 NKr         Translation Rate         US Dollars            

Property, Plant and Equipment:                                                                   

Income Statement                                                                 

Different at beginning of the year                 $ 100,000                                      0.18                 $ 18,000                

Amortization 10 Year                 $ -10,000                      0.20 $ -2,000

Remaining Balance $ 90,000 $ 16,000