Question

Shames Company is located in London, England. The local currency is the British pound (£). On January 1, 20X8, Pit Company purchased an 80 percent interest in Shames for $420,000, which resulted in an excess of cost-over-book value of $16,000 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 $6,700. Shames’s net income translated into U.S. dollars is $71,000. It declared and paid a £25,000 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:
a. Record the dividend received by Pit from Shames. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

b. Prepare the entries to record Pit’s equity in the net income of Shames and the parent’s share of the translation adjustment. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

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.)

d. Record the amortization of the trademark on Pit’s books. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

e. Calculate the amount of the translation adjustment reported on the statement of comprehensive income as an element of other comprehensive income.

Answer 1

Answer :-

A and B :-

S. No.	Particulars	Debit	Credit
a.	Cash	32,800
	Investment in Shames company		32,800
	( Received Dividend = $25,000*1.64*0.80)
b. (1)	Investment in Shames Company	56,800
	Income from Subsidiary		56,800
	(To record net income equity = 71,000*.80 )
	Other comprehensive income :-
(2)	Translation adjustment	5,360
	Investment in Shames company		5,360
	( Parent's share of subsidiary translation adjustment = 6,400*0.80)

C :- Calculation of the differential reported on the consolidated balance sheet of December 31, 20X8, and the translation adjustment from differential :-

	Brirish ( Pounds)	Exchange Rate	U.S. (Dollars)
Income Statement :-
Differential Jan, 1,20X8	£10,000	1.60	$16,000
(10-year life )
Amortization for 20X8	(1,000)	1.63	6,300
Remaining Balance	£9,000		$9,700
Balance Sheet :
Remaining balance on Dec 31
Translated at year-end rate	£9,000	1.65	14,850
Difference to translation adjustment			$5,150

The amount of the differential necessary for the balance sheet is $14,850 , while the amount , without adjustment would be $9,700. Therefore, the differential portion of the pit company's investment must be increased by $5,150 through a debit to the Investment in Shames.

Journal Entry	Debit	Credit
Investment in Shame Company	$5,150
Translation Adjustment		$5,150

D:-  The amortization of the trademark on Pit’s books :-

S .No.	Journal Entry	Debit	Credit
	Income from subsidiary	6,300
	Investment in Shame Company		6,300
	(To record amortization for 20X8) (£1,000*1.63)

E :- The amount of the translation adjustment reported on the statement of comprehensive income as an element of other comprehensive income. For 20x8, This would be the sum of a debit of 5,360 which is the pit company's portion of the translation adjustment resulting from translating the subsidiary's trial balance, less the $5,150 translation adjustment that is made only by the pit company due to the adjustment of the differential. Therefore, Other comprehensive income would report $5,360 - $5150 = 210.