Week 8
knohe_
11.8.docxProblem 11-8 (LO 3, 5) Translate a trial balance and prepare a consolidation worksheet. Useful comparison with Problem 11-9.
Balfour Corporation acquired 100% of Tobac, Inc., a foreign corporation, for 33,000,000 FC. The acquisition, which was accounted for as a purchase, occurred on July 1, 2015, when Tobac’s equity, in FC, was as follows:
Common stock
19,000,000 FC
Paid-in capital in excess of par
8,480,000
Retained earnings
2,520,000
Any excess of cost over book value is traceable to equipment which is to be depreciated over 10 years. Balfour uses the simple equity method to account for its investment in Tobac.
On April 1, 2017, Tobac acquired additional equipment costing 4,000,000 FC. Equipment is depreciated by the straight-line method over 10 years. No other equipment had been acquired or disposed of since 2014. Tobac employs the LIFO inventory method. Ending inventory on December 31, 2017, consists of the following:
Acquired in the first quarter of 2014
1,000,000 FC
Acquired in the first quarter of 2015
500,000
Acquired in the first quarter of 2017
6,500,000
The cost of sales is traceable to goods purchased during 2017 as follows:
Acquired uniformly over the last 9 months
23,400,000 FC
Acquired in the first quarter
4,200,000
Other expenses were incurred evenly over the year.
On April 1, 2017, Tobac borrowed $1,280,000 from the parent company in order to help finance the purchase of equipment. The note is due in one year and bears interest at a rate of 8%. Principal and interest amounts are due to the parent in dollars.
Various spot rates are as follows:
1 FC=
1 FC=
First quarter, 2014 average
$0.46
December 31, 2016
$0.60
2014 Average
0.49
First quarter, 2017 average
0.62
January 1, 2015
0.51
April 1, 2017
0.64
First quarter, 2015 average
0.53
2017 Average
0.67
July 1, 2015
0.55
Last 9 months, 2017 average
0.66
December 31, 2015
0.58
December 31, 2017
0.65
Last 6 months, 2015 average
0.57
2016 Average
0.58
The December 31, 2017, trial balances for Tobac and Balfour are as follows:
Balfour Corporation
Tobac, Inc.
Cash
$ 4,463,200
3,087,385 FC
Net Accounts Receivable
15,350,000
12,000,000
Inventory
16,300,000
8,000,000
Due from Tobac
1,356,800
Investment in Tobac—See Note A
23,712,363
Depreciable Assets
68,000,000
34,000,000
Accumulated Depreciation
(42,000,000)
(12,300,000)
Due to Balfour
(2,087,385)
Other Liabilities
(27,000,000)
(3,700,000)
Common Stock
(35,000,000)
(19,000,000)
Paid-In Capital in Excess of Par Value
(2,000,000)
(8,480,000)
Retained Earnings, January 1, 2017
(4,500,000)
(7,520,000)
Sales
(98,000,000)
(40,000,000)
Cost of Sales
64,000,000
27,600,000
Depreciation Expense
8,076,800
3,300,000
Interest Expense on Balfour Loan (accrued on December 31, 2017)—See Note B
118,154
Exchange Gain on Balfour Loan—See Note B
(30,769)
Other Expenses
10,000,000
5,012,615
Interest Income
(76,800)
Subsidiary Income
(2,682,363)
Totals
$ 0
0 FC
Note A—Balfour’s investment in Tobac consists of the following:
Initial investment (33,000,000 FC × $0.55)
$18,150,000
Last 6 months, 2015 income (2,000,000 FC × $0.57)
1,140,000
2016 Income (3,000,000 FC × $0.58)
1,740,000
2017 Income
2,682,363
Balance
$23,712,363
Note B—The original loan from Balfour was 2,000,000 FC, or $1,280,000 (2,000,000 FC × $0.64). On December 31, 2017, it would require 1,969,231 FC ($1,280,000 ÷ $0.65) to settle the loan. This represents an exchange gain of 30,769 FC (2,000,000 FC − 1,969,231 FC).
The year-end balance due to Balfour is determined as follows:
Principal balance
1,969,231 FC
Accrued interest ($1,280,000 × 8% × 9/12 ÷ $0.65)
118,154
Balance
2,087,385 FC
The interest is accrued at year-end; therefore, interest expense should be translated at the year-end rate.
Required
