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Question 21.21. On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock...

Question 21.21. On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth Company for $3,100,000. Any excess cost over book value is attributable to a patent with a 10-year remaining life. At the date of acquisition, Perth's balance sheet contained the following information(in Foreign Currency Units, FCU):

Cash 40,000
Receivables 150,000
Inventories 500,000
Equipment 1,500,000

Payables 200,000
Capital stock 600,000
Retained earnings 1,390,000


Perth's income statement for 20X8 is as follows(in Foreign Currency Units, FCU):

Sales revenue 1,010,000
Cost of goods sold 590,000
Operating expenses 120,000
Depreciation expense 200,000
Income tax expense 40,000


The balance sheet of Perth at December 31, 20X8, is as follows(in Foreign Currency Units, FCU):

Cash 180,000
Receivables 210,000
Inventories 520,000
Equipment 1,300,000

Payables 180,000
Capital stock 600,000
Retained earnings 1,430,000


Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8.

Spot rates at various dates for 20X8 follow:
January 2: 1 FCU = $1.50
October 1: 1 FCU = $1.60
December 31: 1 FCU = $1.70
Weighted average: 1 FCU = $1.55

Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income taxes were incurred evenly throughout 20X8.

Refer to the above information. Assuming Perth's local currency is the functional currency, what is the amount of the adjustment that results from converting Perth's trial balance into U.S. dollars at December 31, 20X8? (Points : 4)

       $405,000 translation debit
       $405,000 remeasurement credit
       $405,000 translation credit
       $405,000 remeasurement debit

Solutions

Expert Solution

Option C: Translation Credit

Workings Amount in FCU Exchange Rate Amount in $
Cash             180,000.00 1.7         306,000.00
Receivables             210,000.00 1.7         357,000.00
Inventories             520,000.00 1.7         884,000.00
Equipment          1,300,000.00 1.7      2,210,000.00
         2,210,000.00      3,757,000.00
Payables             180,000.00 1.7         306,000.00
Capital stock             600,000.00 1.5         900,000.00
Retained earnings - Beginning          1,390,000.00 1.5      2,085,000.00
Profit Curerent Year                40,000.00 1.55            62,000.00
         2,210,000.00      3,353,000.00
Currency translation difference       (404,000.00)
Amount in FCU Exchange Rate Amount in $
Sales revenue       (1,010,000.00) 1.55 (1,565,500.00)
Cost of goods sold             590,000.00 1.55         914,500.00
Operating expenses             120,000.00 1.55         186,000.00
Depreciation expense             200,000.00 1.55         310,000.00
Income tax expense                40,000.00 1.55            62,000.00
Dividend                20,000.00 1.55            31,000.00
            (40,000.00)         (62,000.00)


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