Question

On January 1, 2016, Parker, Inc., a U.S.-based firm, acquired 100 percent of Suffolk PLC located in Great Britain for consideration paid of 52,000,000 British pounds (£), which was equal to fair value. The excess of fair value over book value is attributable to land (part of property, plant, and equipment) and is not subject to depreciation. Parker accounts for its investment in Suffolk at cost. On January 1, 2016, Suffolk reported the following balance sheet:

Cash	$ 2,000,000	Accounts payable	$ 1,000,000
Accounts receivable	3,000,000	Long-term debt	8,000,000
Inventory	14,000,000	Common stock	44,000,000
Property, plant, and equipment (net)	40,000,000	Retained earnings	6,000,000
	$59,000,000		$59,000,000

1. Suffolk’s 2016 income was recorded at £2,000,000. It declared and paid no dividends in 2016.

   On December 31, 2017, two years after the date of acquisition, Suffolk submitted the following trial balance to Parker for consolidation:

Cash	$ 1,500,000
Accounts Receivable	5,200,000
Inventory	18,000,000
Property, Plant, and Equipment (net)	36,000,000
Accounts Payable	(1,450,000)
Long-Term Debt	(5,000,000)
Common Stock	(44,000,000)
Retained Earnings, 1/1/17	(8,000,000)
Sales	(28,000,000)
Cost of Goods Sold	16,000,000
Depreciation	2,000,000
Other Expenses	6,000,000
Dividends (1/30/17)	1,750,000
	–0–

1. Page 530Other than paying dividends, no intra-entity transactions occurred between the two companies. Relevant exchange rates for the British pound follow:

	January 1	January 30	Average	December 31
2016	$1.60	$1.61	$1.62	$1.64
2017	1.64	1.65	1.66	1.68

1. The December 31, 2017, financial statements (before consolidation with Suffolk) follow. Dividend income is the U.S. dollar amount of dividends received from Suffolk translated at the $1.65/$ exchange rate at January 30, 2017. The amounts listed for dividend income and all affected accounts (i.e., net income, December 31 retained earnings, and cash) reflect the $1.65/$ exchange rate at January 30, 2017. Credit balances are in parentheses.

Parker
Sales	$ (70,000,000)
Cost of goods sold	34,000,000
Depreciation	20,000,000
Other expenses	6,000,000
Dividend income	(2,887,500)
Net income	$ (12,887,500)
Retained earnings, 1/1/17	$ (48,000,000)
Net income, 2017	(12,887,500)
Dividends, 1/30/17	4,500,000
Retained earnings, 12/31/17	$ (56,387,500)
Cash	$  3,687,500
Accounts receivable	10,000,000
Inventory	30,000,000
Investment in Suffolk	83,200,000
Plant and equipment (net)	105,000,000
Accounts payable	(25,500,000)
Long-term debt	(50,000,000)
Common stock	(100,000,000)
Retained earnings, 12/31/17	(56,387,500)
	–0–

1. Parker’s chief financial officer (CFO) wishes to determine the effect that a change in the value of the British pound would have on consolidated net income and consolidated stockholders’ equity. To help assess the foreign currency exposure associated with the investment in Suffolk, the CFO requests assistance in comparing consolidated results under actual exchange rate fluctuations with results that would have occurred had the dollar value of the pound remained constant or declined during the first two years of Parker’s ownership.

   Required

   Use an electronic spreadsheet to complete the following four parts:

   Part I. Given the relevant exchange rates presented,

   1. Translate Suffolk’s December 31, 2017, trial balance from British pounds to U.S. dollars. The British pound is Suffolk’s functional currency.

   2. Prepare a schedule that details the change in Suffolk’s cumulative translation adjustment (beginning net assets, income, dividends, etc.) for 2016 and 2017.

   3. Prepare the December 31, 2017, consolidation worksheet for Parker and Suffolk.

   4. Prepare the 2017 consolidated income statement and the December 31, 2017, consolidated balance sheet.

   Note:Worksheets should possess the following qualities:

   • Each spreadsheet should be programmed so that all relevant amounts adjust appropriately when different values of exchange rates (subsequent to January 1, 2016) are entered into it.

   • Be sure to program Parker’s dividend income, cash, and retained earnings to reflect the dollar value of alternative January 30, 2017, exchange rates.

Answer 1

a	Suffolk PLC
	Trial balance
	31, December 2017
	Exchange
		Pounds	Rate	Dollars
	Cash	1500000	$1.68	$2,520,000.00
	Accounts receivable	5200000	$1.68	$8,736,000.00
	Inventory	18000000	$1.68	$30,240,000.00
	Property plant and equipment (net)	36000000	$1.68	$60,480,000.00
	Account payable	-1450000	$1.68	($2,436,000.00)
	Long term debt	-5000000	$1.68	($8,400,000.00)
	Common stock	-44000000	$1.60	($70,400,000.00)
	Retained earnings, 1 jan 2017	-8000000	Schedule A	($12,840,000.00)
	Sales	-28000000	$1.66	($46,480,000.00)
	cost of good sold	16000000	$1.66	$26,560,000.00
	Depreciation	2000000	$1.66	$3,320,000.00
	Other expenses	6000000	$1.66	$9,960,000.00
	Dividend paid(30 jan 2017)	1750000	$1.65	$2,887,500.00
	Cumulative transaction positive
	adjustment (credit balance)			($4,147,500)
	Schedule A	Pounds	Rate	Dollars
	Retained earnings, 1 jan 2016	-6000000	$1.60	($9,600,000.00)
	Net income	-2000000	$1.62	($3,240,000.00)
	Retained earnings, 31 dec 2016	-8000000		($12,840,000.00)

b	Prepare a schedule that details in cumulative Translation adjustment
			Exchange rate
		Pound	Rate	Rate	Dollars
	Net assets, 1/1/2016	50000000	$1.64	$1.60	$2,000,000
	Net income, 2016	2000000	$1.64	$1.62	$40,000
	Translation adjustment(positive)	52000000				$2,040,000
	Net assets, 1/1/2017	4000000	$1.68	$1.64	$2,080,000
	Net income, 2017	-1750000	$1.68	$1.66	$80,000
	Dividends, 2017	54250000	$1.68	$1.65	$52,500
	Translation adjustment(positive)					$2,107,500
	Net assets, 31/12/2017	54250000
	cumulative Translation adjustment 31/12/2017					$4,147,500
	(positive)
	Cost allocation schedule	Pounds		Rate		Dollars
	cost	52000000		$1.60		$83,200,000.00
	book value	50000000		$1.60		$80,000,000.00
	Excess of cost over book value	2000000				$3,200,000.00
	Translation adjustment related to excess		Exchange
	of cost over book value	Pounds	Rate	Dollars
	Excess of cost over book value	2000000
	U.S Dollar value at 31/12/2017		$1.68	$3,360,000
	U.S Dollar value at 1/1/2017		$1.60	$3,200,000
	Translation adjustment related to excess,
	31/12/2017 (positive)			$160,000

c		Parker	Suffolk	Adjustment & Elimination		Consolidated
	Sales	($70,000,000)	($46,480,000)			($116,480,000)
	Cost of good sold	$34,000,000	$2,656,000			$36,656,000
	Depreciation	$20,000,000	$3,320,000			$23,320,000
	Other expenses	$6,000,000	$9,960,000			$15,960,000
	Dividend Income	($2,887,500)		$2,887,500		-
	Net income	($12,887,500)	($6,640,000)			($16,640,000)
	Retained Earnings, 1/1/2017	($48,000,000)	($12,840,000)	$12,840,000	$3,240,000	($51,240,000)
	Net income	($12,887,500)	($6,640,000)			($16,640,000)
	Dividends	$4,500,000	$2,887,500		$2,887,500	$4,500,000
	Retained Earnings, 31/12/2017	($56,387,500)	($16,592,500)			($63,380,000)
	Cash	$3,687,500	$2,520,000
	Accounts receivable	$10,000,000	$8,736,000
	Inventory	$30,000,000	$30,240,000
	Investment in Suffolk	$83,200,000		$3,240,000	$83,240,000
					$3,200,000
	Property, plant and Equipment (net)	$105,000,000	$60,480,000	$3,200,000		$168,840,000
				$160,000
	Accounts payable	($25,500,000)	($2,436,000)			($27,936,000)
	Long tersm debt	($50,000,000)	($8,400,000)			($58,400,000)
	Common stock	($100,000,000)	($70,400,000)	$70,400,000		($100,000,000)
	Retained Earnings, 31/12/2017	($56,387,500)	($16,592,500)			($63,380,000)
	Cumulative translation adjustment		($4,147,500)		$160,000	($4,307,500)
		-	-	$92,727,500	$92,727,500	-

d	Parker Inc,
	Consolidated income statement
	For the year ended 31 December, 2017
	Sales	$116,480,000
	Cost of good sold	($60,560,000)
	Depreciation	($23,320,000)
	Other expenses	($15,960,000)
	Net income	$16,640,000
	Parker Inc,
	Consolidated Balance sheet
	For the year ended 31 December, 2017
	Assets
	Cash	$6,207,500
	Account receivable	$18,736,000
	Inventory	$60,240,000
	Property Plant and equipment (net)	$168,840,000
	Total	$254,023,500
	Liabilities and shareholders' s equity
	Account payable	$27,936,000
	Long term debt	$58,400,000
	Common stock	$100,000,000
	retained earnings	$63,380,000
	accumulated other comprehensive income	$4,307,500
	Total	$254,023,500