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On January 1, 20X8, Transport Corporation acquired 75 percent interest in Steamship Company for $300,000. Steamship...

On January 1, 20X8, Transport Corporation acquired 75 percent interest in Steamship Company for $300,000. Steamship is a Norwegian company. The local currency is the Norwegian kroner (NKr). The acquisition resulted in an excess of cost-over-book value of $25,000 due solely to a patent having a remaining life of 5 years. Transport uses the fully adjusted equity method to account for its investment. Steamship's December 31, 20X8, trial balance has been translated into U.S. dollars, requiring a translation adjustment debit of $8,000. Steamship's net income translated into U.S. dollars is $35,000. It declared and paid an NKr 20,000 dividend on June 1, 20X8. Relevant exchange rates are as follows:

January 1, 20X8

NKrl = $0.20

June 1, 20X8

NKrl = $0.23

December 31, 20X8

NKrl = $0.24

Average for 20X8

NKrl = $0.22


Assume the kroner is the functional currency.

1. Based on the preceding information, in the journal entry to record the receipt of dividend from Steamship,

A. Investment in Steamship Company will be credited for $3,450.
B. Cash will be debited for $3,300.
C. Investment in Steamship Company will be credited for $4,000.
D. Cash will be debited for $3,600.

2. Based on the preceding information, in the journal entry to record parent's share of subsidiary's translation adjustment:

A. Other Comprehensive Income — Translation Adjustment will be debited for $8,000.
B. Other Comprehensive Income — Translation Adjustment will be credited for $6,000.
C. Investment in Steamship Company will be credited for $6,000.
D. Investment in Steamship Company will be debited for $8,000.

3. Based on the preceding information, what amount of translation adjustment is required for increase in differential?

A. $3,000
B. $5,500
C. $4,500
D. $5,000

4. Based on the preceding information, in the journal entry to record the amortization of the patent for 20X8 on the parent's books, Investment in Steamship Company will be debited for:

A. $5,000
B. $5,500
C. $4,500
D. $3,000

Please provide calculations! Thank you!

Solutions

Expert Solution

1. Correct option is A

Transport corporation's interest in Steamship company is 75%. so, when Steamship company declared and paid dividend of Nkr 20,000, 75% of 20,000 that is Nkr 15,000 (0.75*20,000) is paid to Transport Corporation. Converting Nkr 15,000 to USD as per exchange rate as on the date of declaration of dividend that is June 1, 20X8, we get $3,450 (Nkr 15,000*$0.23).

Transport corporation debits cash account and credits investment in steamship company.

2. Correct option is C

Parent's share that is Transport corporation's share in Steamship company's translation adjustment is 75% of $8,000 (total translation adjustment), which come out to be $6,000 (0.75*8,000). Journal entry to record the same by parent company is other comprehensive income debit to investment in Steamship company by $6,000. So investment in Steamship company is credited by $6,000.

3. Correct option is C

Amount of translation adjustment required for increase in differential is computed below:

Cost over book value as a result of acquisition is $25,000 divided by $0.2 (1st Jan 20X8)per Nkr is Nkr 125,0000.

Exchange rate to compute amortization in USD is average rate for 20X8 that is 0.22.

Therefore, amount of translation adjustment required for increase in differential is $4,500.

4. Correct option is B

To record amortization in the books of Transport company, investment in Steamship company is debited for $5,500 (25,000*0.22). Amortization amount of Nkr 25,000 is multiplied by average exchange rate of $0.22 to arrive at amortization amount of $5,500.

ekkarill92 answered 1 year ago
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