Question

In: Accounting

On January 1, 20X5, Pirate Company acquired all of the outstanding stock of Ship Inc., a...

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

Solutions

Expert Solution

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

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