Question

On January 1, 20X5, Pirate Company acquired all of the outstanding stock of Ship Inc., a Norwegian company, at a cost of $153,000. 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	155,000
Accounts Receivable (net)		226,000
Inventory		291,000
Property, Plant & Equipment		610,000
Accumulated Depreciation				NKr	151,000
Accounts Payable					94,000
Notes Payable					198,000
Common Stock					450,000
Retained Earnings					250,000
Sales					779,000
Cost of Goods Sold		412,000
Operating Expenses		118,000
Depreciation Expense		65,000
Dividends Paid		45,000
Total	NKr	1,922,000		NKr	1,922,000

Additional Information:

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.

Ship acquired all of its property, plant, and equipment on July 1, 20X3, and uses straight-line depreciation.

Ship’s sales were made evenly throughout 20X5, and its operating expenses were incurred evenly throughout 20X5.

The dividends were declared and paid on July 1, 20X5.

Pirate's income from its own operations was $247,000 for 20X5, and its total stockholders' equity on January 1, 20X5, was $3,500,000. Pirate declared $180,000 of dividends during 20X5.

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.

Required:
a. Prepare a schedule remeasuring the trial balance from Norwegian kroner into U.S. dollars. (If no adjustment is needed, select 'no entry necessary'.)

	US Dollars
cash
Account Receivable (net)
Inventory
Property, plant, and equipment
Cost of goods sold
operating expenses
depreciation expense
dividends paid
total
Total Debits
Accumulated depreciation
accounts payable
notes payable
common stock
retained earnings
sales
total
total credits

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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

1. Record the purchase of ship inc.

2. record the dividend received from the foreign subsidiary

3. record the equity in the net income of the foreign subsidiary

4. record the amortization of the differential

c. Prepare a schedule that determines Pirate's consolidated net income for 20X5..(Amounts to be deducted should be indicated with a minus sign.)

Income from pirate's operation for 20x5, exclusive of income from the Norwegian subsidiary
consolidated net income for 20x5

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

total consolidated stockholders' equity

Answer 1

a)		NKr	Exchange Rate	In $
	Cash	155000	0.21	32550
	Accounts Receivable(Net)	226000	0.21	47460
	Inventory	291000	0.21	61110
	Property, plant and equipment	610000	0.21	128100
	Cost of goods sold	412000	0.20	82400
	Operating expenses	118000	0.20	23600
	Depreciation expense	65000	0.20	13000
	Dividends paid	45000	0.19	8550
	Total	1922000		396770
	Total Debits
	Accumulated depreciation	151000	0.21	31710
	Accounts payable	94000	0.21	19740
	Notes payable	198000	0.21	41580
	common stock	450000	0.18	81000
	Retained earnings	250000	0.18	45000
	Sales	779000	0.2	155800
	Total	1922000		374830
	Accumulated other comprehensive Income- Translation adjustment			21940
	Total Credits			396770
b)
1	Record the purchase of Ship Inc		Debit	Credit
	Investment in Ship Inc		$153,000
	To Cash			$153,000
2	Record the dividend received from the foreign subsidiary
	Cash		8550
	To Investment in Ship Inc			8550
3	Record the equity in the net income of the foreign subsidiary
	Investment in Ship Inc common income from subsidiary		50190
	To Equity in net income of foreign subsidiary			50190
	155800-82400-23600-13000-8550+21940
Schedule 1	Determining the differential for 2015
	Investment cost at 01st Jan 2015		153000
	Less: Book value of net assets acquired on 01st Jan 2015		126000
	(700000*0.18)		27000
	Differential allocated to
	Property,plant and equipment		$18,000
	Patent	27000-18000	9000
			$27,000
Schedule 2	Determining the differential amortization for 2015
		NKr	Exchange Rate	$
	Property, plant and equipment:
	Income statement:
	Difference at beginning of year	100000	0.18	18000
	Amortization for 2015	-10000	0.2	-2000
	(100000/10)
	Remaining Balances	90000		16000
	Balance Sheet
	Remaining Balances to be transalated at yr end exchange rate	90000	0.21	18900
	Difference to other comprehensive income- translation adjustment			-2900
	Patent
	Difference at beginning of year	50000	0.18	9000
	Amortization for 2015	-10000	0.2	-2000
	(50000/5)
	Remaining Balances	40000		7000
	Balance Sheet
	Remaining Balances to be transalated at yr end exchange rate	40000	0.21	8400
	Difference to other comprehensive income- translation adjustment			-1400
	Income from subsidiary		4000
	To Investment in Ship Inc			4000
	(2000+5200)
	Investment in Ship Inc		4300
	To other comprehensive income-translation adjustment			4300
c	Pirate's consolidated net income for 2015
	Income from Pirate's income		247000
	Add: Income from the Ship Inc		50190
	Less:Amortization of differential		-4000
	Add: Translation adjustment(6540)		4300
	Pirate's consolidated net income for 2015		297490
d	Pirate's consolidated stockholder's equity at Dec 2015
	Pirate's shareholders equity		3500000
	Add: Net Income		297490
	Less: dividends declared		-180000
	Shareholder's equity		3617490