Question

On January 1, 20X5, Pirate Company acquired all of the outstanding stock of Ship Inc., a Norwegian company, at a cost of $162,000. 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	157,000
Accounts Receivable (net)		202,000
Inventory		272,000
Property, Plant & Equipment		623,000
Accumulated Depreciation				NKr	166,000
Accounts Payable					98,000
Notes Payable					196,000
Common Stock					460,000
Retained Earnings					240,000
Sales					737,000
Cost of Goods Sold		419,000
Operating Expenses		112,000
Depreciation Expense		70,000
Dividends Paid		42,000
Total	NKr	1,897,000		NKr	1,897,000

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 $246,000 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

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

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, including a schedule of the translation adjustment related to the differential.?

c. Prepare a schedule that determines Pirate’s consolidated comprehensive income for 20X5.

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

Answer 1

a)		NKr	Exchange Rate	In $
	Cash	157000	0.21	32970
	Accounts Receivable(Net)	202000	0.21	42420
	Inventory	272000	0.21	57120
	Property, plant and equipment	623000	0.21	130830
	Cost of goods sold	419000	0.2	83800
	Operating expenses	112000	0.2	22400
	Depreciation expense	70000	0.2	14000
	Dividends paid	42000	0.19	7980
	Total	1897000		391520
	Total Debits
	Accumulated depreciation	166000	0.21	34860
	Accounts payable	98000	0.21	20580
	Notes payable	196000	0.21	41160
	common stock	460000	0.18	82800
	Retained earnings	240000	0.18	43200
	Sales	737000	0.2	147400
	Total	1897000		370000
	Accumulated other comprehensive Income- Translation adjustment			21520
	Total Credits			391520
b)
1	Record the purchase of Ship Inc		Debit	Credit
	Investment in Ship Inc		$162,000
	To Cash			$162,000
2	Record the dividend received from the foreign subsidiary
	Cash		7980
	To Investment in Ship Inc			7980
3	Record the equity in the net income of the foreign subsidiary
	Investment in Ship Inc common income from subsidiary		48720
	To Equity in net income of foreign subsidiary			48720
	147400-83800-22400-14000+21520
Schedule 1	Determining the differential for 2015
	Investment cost at 01st Jan 2015		162000
	Less: Book value of net assets acquired on 01st Jan 2015		126000
	(700000*0.18)		36000
	Differential allocated to
	Property,plant and equipment		$18,000
	Patent	36000-18000	$18,000
			36000
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	100000	0.18	18000
	Amortization for 2015	-20000	0.2	-4000
	(100000/5)
	Remaining Balances	80000		14000
	Balance Sheet
	Remaining Balances to be transalated at yr end exchange rate	80000	0.21	16800
	Difference to other comprehensive income- translation adjustment			-2800
	Income from subsidiary		6000
	To Investment in Ship Inc			6000
	(4000+2000)
	Investment in Ship Inc		5700
	To other comprehensive income-translation adjustment			5700
	(2900+2800)
c	Pirate's consolidated net income for 2015
	Income from Pirate's income		246000
	Add: Income from the Ship Inc		48720
	Less:Amortization of differential		-6000
	Add: Translation adjustment(6540)		5700
	Pirate's consolidated net income for 2015		294420
d	Pirate's consolidated stockholder's equity at Dec 2015
	Pirate's shareholders equity		3500000
	Add: Net Income		294420
	Less: dividends declared		-180000
	Shareholder's equity		3614420