Question

Michigan-based Leo Corporation acquired 100 percent of the common stock of a British company on January 1, 20X8, for $1,100,000. The British subsidiary's net assets amounted to 500,000 pounds on the date of acquisition. On January 1, 20X8, the book values of its identifiable assets and liabilities approximated their fair values. As a result of an analysis of functional currency indicators, Leo determined that the British pound was the functional currency. On December 31, 20X8, the British subsidiary's adjusted trial balance, translated into U.S. dollars, contained $17,000 more debits than credits. The British subsidiary reported income of 33,000 pounds for 20X8 and paid a cash dividend of 8,000 pounds on October 25, 20X8. Included on the British subsidiary's income statement was depreciation expense of 3,500 pounds. Leo uses the fully adjusted equity method of accounting for its investment in the British subsidiary and determined that goodwill in the first year had an impairment loss of 25 percent of its initial amount. Exchange rates at various dates during 20X8 follow:

January 1                    1£ = $2.10

October 25                  1£ =   2.25

December 31               1£ =   2.20

Average for 20X8       1£ =   2.21

1. Based on the preceding information, what amount should Leo record as “income from subsidiary” based on the British subsidiary's reported net income?
A. $72,930
B. $52,500
C. $72,600
D. $69,300

2. Based on the preceding information, the receipt of the dividend will result in a credit to the investment account for:

A. $16,800
B. $17,680
C. $18,000
D. $17,600

3. Based on the preceding information, on Leo's consolidated balance sheet at December 31, 20X8, what amount should be reported for the goodwill acquired on January 1, 20X8?

A. $36,845
B. $39,286
C. $36,905
D. $36,607

4. Based on the preceding information, in the stockholders' equity section of Leo's consolidated balance sheet at December 31, 20X8, Leo should report the translation adjustment as a component of other comprehensive income of:

A. $19,440
B. $17,000
C. $18,786
D. $19,380

Please provide calculations!!! Thank you!

Answer 1

Answer:-

1. Based on the preceding information, what amount should Leo record as “income from subsidiary” based on the British subsidiary's reported net income?

Option A $ 72,930

Income of Subsidiary = 33,000 Pounds converted using Average rate = 33000 * 2.21 = $ 72,930.

2. Based on the preceding information, the receipt of the dividend will result in a credit to the investment account for:

Answer:-

Option C $ 18,000

Octorber 25 Rate 1 pound = 2.25 dollars

8000 dividend distributed = 8000 * 2.25 = $ 18,000 Answer.

3. Based on the preceding information, on Leo's consolidated balance sheet at December 31, 20X8, what amount should be reported for the goodwill acquired on January 1, 20X8?

Answer:-

Option B $ 39,286

Value of Consideration paid to them in pounds =

on Jannuary rate= 1 pound = 2.1 Dollars

so 1,100,000 / 2.1 = Pounds 523,809.5

Value of goodwill = 523809.5 - 500000 = 23,809.5 pounds

25 % Impairment in goodwill value = 23809.5 * 25/100 = 17,857.14 pounds

Converting such value to dollars = 17,857.14 * 2.2 ( December rate ) = $39,286

4. Based on the preceding information, in the stockholders' equity section of Leo's consolidated balance sheet at December 31, 20X8, Leo should report the translation adjustment as a component of other comprehensive income of:

Answer:-

Option A $ 19,440