ACF2100 Lecture Notes - Lecture 6: Financial Statement, Retained Earnings
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Sendelbach Corporation is a U.S.-based organization with operations throughout the world. One of its subsidiaries is headquartered in Toronto. Although this wholly owned company operates primarily in Canada, it engages in some transactions through a branch in Mexico. Therefore, the subsidiary maintains a ledger denominated in Mexican pesos (Ps) and a general ledger in Canadian dollars (C$). As of December 31, 2017, the subsidiary is preparing financial statements in anticipation of consolidation with the U.S. parent corporation. Both ledgers for the subsidiary are as follows:
| Main Operation—Canada | |||||
| Debit | Credit | ||||
| Accounts payable | C$ | 41,555 | |||
| Accumulated depreciation | 42,000 | ||||
| Buildings and equipment | C$ | 182,000 | |||
| Cash | 41,000 | ||||
| Common stock | 65,000 | ||||
| Cost of goods sold | 218,000 | ||||
| Depreciation expense | 8,400 | ||||
| Dividends, 4/1/17 | 34,000 | ||||
| Gain on sale of equipment, 6/1/17 | 6,500 | ||||
| Inventory | 94,000 | ||||
| Notes payable—due in 2020 | 84,000 | ||||
| Receivables | 83,000 | ||||
| Retained earnings, 1/1/17 | 150,590 | ||||
| Salary expense | 38,000 | ||||
| Sales | 327,000 | ||||
| Utility expense | 10,500 | ||||
| Branch operation | 7,745 | ||||
| Totals | C$ | 716,645 | C$ | 716,645 | |
| Branch Operation—Mexico | |||||
| Debit | Credit | ||||
| Accounts payable | Ps | 67,500 | |||
| Accumulated depreciation | 40,000 | ||||
| Building and equipment | Ps | 55,000 | |||
| Cash | 66,500 | ||||
| Depreciation expense | 3,500 | ||||
| Inventory (beginning—income statement) | 38,000 | ||||
| Inventory (ending—income statement) | 35,500 | ||||
| Inventory (ending—balance sheet) | 35,500 | ||||
| Purchases | 72,000 | ||||
| Receivables | 36,000 | ||||
| Salary expense | 10,500 | ||||
| Sales | 139,000 | ||||
| Main office | 35,000 | ||||
| Totals | Ps | 317,000 | Ps | 317,000 | |
Additional Information
The Canadian subsidiary’s functional currency is the Canadian dollar, and Sendelbach’s reporting currency is the U.S. dollar. The Canadian and Mexican operations are not viewed as separate accounting entities.
The building and equipment used in the Mexican operation were acquired in 2007 when the currency exchange rate was C$0.21 = Ps 1.
Purchases of inventory were made evenly throughout the fiscal year.
Beginning inventory was acquired evenly throughout 2016; ending inventory was acquired evenly throughout 2017.
The Main Office account on the Mexican records should be considered an equity account. This balance was remeasured into C$7,745 on December 31, 2017.
Currency exchange rates for 1 Ps applicable to the Mexican operation follow:
| Weighted average, 2016 | C$ | 0.26 |
| January 1, 2017 | 0.28 | |
| Weighted average rate for 2017 | 0.30 | |
| December 31, 2017 | 0.31 | |
The December 31, 2016, consolidated balance sheet reported a cumulative translation adjustment with a $51,950 credit (positive) balance.
The subsidiary’s common stock was issued in 2004 when the exchange rate was $0.44 = C$1.
The subsidiary’s December 31, 2016, retained earnings balance was C$150,590, an amount that has been translated into U.S.$70,363.
The applicable currency exchange rates for 1 C$ for translation purposes are as follows:
| January 1, 2017 | US$ | 0.70 |
| April 1, 2017 | 0.69 | |
| June 1, 2017 | 0.68 | |
| Weighted average rate for 2017 | 0.67 | |
| December 31, 2017 | 0.65 | |
Remeasure the Mexican operation’s account balances into Canadian dollars. (Note: Back into the beginning net monetary asset or liability position.)
Prepare financial statements (income statement, statement of retained earnings, and balance sheet) for the Canadian subsidiary in its functional currency, Canadian dollars.
Translate the Canadian dollar functional currency financial statements into U.S. dollars so that Sendelbach can prepare consolidated financial statements.
Complete this question by entering your answers in the tabs below.
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Req A
Remeasure the Mexican operation’s account balances into Canadian dollars. (Note: Back into the beginning net monetary asset or liability position.) (Input all amounts as positive values.)
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b. Prepare financial statements (income statement, statement of retained earnings, and balance sheet) for the Canadian subsidiary in its functional currency, Canadian dollars.
c. Translate the Canadian dollar functional currency financial statements into U.S. dollars so that Sendelbach can prepare consolidated financial statements.
(Round U.S. Dollar values to 2 decimal places. Amounts to be deducted and losses should be indicated with a minus sign.)
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| Sendelbach Corporation is a U.S.–based organization with operations throughout the world. One of its subsidiaries is headquartered in Toronto. Although this wholly owned company operates primarily in Canada, it engages in some transactions through a branch in Mexico. Therefore, the subsidiary maintains a ledger denominated in Mexican pesos (Ps) and a general ledger in Canadian dollars (C$). As of December 31, 2015, the subsidiary is preparing financial statements in anticipation of consolidation with the U.S. parent corporation. Both ledgers for the subsidiary are as follows: |
| Main Operation—Canada | ||
| Debit | Credit | |
| Accounts payable | C$ 39,605 | |
| Accumulated depreciation | 41,000 | |
| Buildings and equipment | C$ 181,000 | |
| Cash | 40,000 | |
| Common stock | 64,000 | |
| Cost of goods sold | 217,000 | |
| Depreciation expense | 8,300 | |
| Dividends, 4/1/15 | 33,000 | |
| Gain on sale of equipment, 6/1/15 | 6,400 | |
| Inventory | 93,000 | |
| Notes payable—due in 2018 | 83,000 | |
| Receivables | 82,000 | |
| Retained earnings, 1/1/15 | 149,590 | |
| Salary expense | 37,000 | |
| Sales | 326,000 | |
| Utility expense | 10,400 | |
| Branch operation | 7,895 | |
| Totals | C$ 709,595 | C$ 709,595 |
| Branch Operation—Mexico | ||
| Debit | Credit | |
| Accounts payable | Ps 64,900 | |
| Accumulated depreciation | 39,900 | |
| Building and equipment | Ps 54,000 | |
| Cash | 66,000 | |
| Depreciation expense | 3,400 | |
| Inventory (beginning—income statement) | 37,000 | |
| Inventory (ending—income statement) | 35,000 | |
| Inventory (ending—balance sheet) | 35,000 | |
| Purchases | 71,000 | |
| Receivables | 35,000 | |
| Salary expense | 10,400 | |
| Sales | 138,000 | |
| Main office | 34,000 | |
| Totals | Ps 311,800 | Ps 311,800 |
| Additional Information |
| • | The Canadian subsidiary’s functional currency is the Canadian dollar, and Sendelbach’s reporting currency is the U.S. dollar. The Canadian and Mexican operations are not viewed as separate accounting entities. |
| • | The building and equipment used in the Mexican operation were acquired in 2005 when the currency exchange rate was C$0.22 = Ps 1. |
| • | Purchases should be assumed as having been made evenly throughout the fiscal year. |
| • | Beginning inventory was acquired evenly throughout 2014; ending inventory was acquired evenly throughout 2015. |
| • | The Main Office account on the Mexican records should be considered an equity account. This balance was remeasured into C$7,895 on December 31, 2015. |
| • | Currency exchange rates for 1 Ps applicable to the Mexican operation follow: |
| Weighted average, 2014 | C$ | 0.27 |
| January 1, 2015 | 0.29 | |
| Weighted average rate for 2015 | 0.31 | |
| December 31, 2015 | 0.32 | |
| • | The December 31, 2014, consolidated balance sheet reported a cumulative translation adjustment with a $50,950 credit (positive) balance. |
| • | The subsidiary’s common stock was issued in 2004 when the exchange rate was $0.43 = C$1. |
| • | The subsidiary’s December 31, 2014, Retained Earnings balance was C$149,590.00, a figure that has been translated into US$71,043. |
| • | The applicable currency exchange rates for 1 C$ for translation purposes are as follows: |
| January 1, 2015 | US$ | 0.70 |
| April 1, 2015 | 0.69 | |
| June 1, 2015 | 0.68 | |
| Weighted average rate for 2015 | 0.67 | |
| December 31, 2015 | 0.65 | |
| a. | Remeasure the Mexican operation’s figures into Canadian dollars. (Hint: Back into the beginning net monetary asset or liability position.) (Input all amounts as positive values.)
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Allison Corporation acquired all of the outstanding voting stockof Mathias, Inc., on January 1, 2017, in exchange for $6,162,000 incash. Allison intends to maintain Mathias as a wholly ownedsubsidiary. Both companies have December 31 fiscal year-ends. Atthe acquisition date, Mathias’s stockholders’ equity was $2,070,000including retained earnings of $1,570,000.
At the acquisition date, Allison prepared the following fairvalue allocation schedule for its newly acquired subsidiary:
| Consideration transferred | $ | 6,162,000 | |||||
| Mathias stockholders'equity | 2,070,000 | ||||||
| Excess fair over bookvalue | $ | 4,092,000 | |||||
| to unpatented technology(8-year remaining life) | $ | 912,000 | |||||
| to patents (10-year remaininglife) | 2,640,000 | ||||||
| to increase long-term debt(undervalued, 5-year remaining life) | (170,000 | ) | 3,382,000 | ||||
| Goodwill | $ | 710,000 | |||||
Post-acquisition, Allison employs the equity method to accountfor its investment in Mathias. During the two years following thebusiness combination, Mathias reports the following income anddividends:
| Income | Dividends | |||
| 2017 | $ | 453,750 | $ | 25,000 |
| 2018 | 907,500 | 50,000 | ||
No asset impairments have occurred since the acquisitiondate.
Individual financial statements for each company as of December31, 2018, appear below. Parentheses indicate credit balances.Dividends declared were paid in the same period.
| Allison | Mathias | ||||||
| IncomeStatement | |||||||
| Sales | $ | (6,680,000 | ) | $ | (3,970,000 | ) | |
| Cost of goods sold | 4,696,000 | 2,545,500 | |||||
| Depreciation expense | 945,000 | 319,000 | |||||
| Amortization expense | 465,000 | 124,000 | |||||
| Interest expense | 83,000 | 74,000 | |||||
| Equity earnings in Mathias | (563,500 | ) | 0 | ||||
| Net income | $ | (1,054,500 | ) | $ | (907,500 | ) | |
| Statement of RetainedEarnings | |||||||
| Retained earnings 1/1 | $ | (5,480,000 | ) | $ | (1,998,750 | ) | |
| Net income (above) | (1,054,500 | ) | (907,500 | ) | |||
| Dividends declared | 560,000 | 50,000 | |||||
| Retained earnings 12/31 | $ | (5,974,500 | ) | $ | (2,856,250 | ) | |
| BalanceSheet | |||||||
| Cash | $ | 96,000 | $ | 164,000 | |||
| Accounts receivable | 1,020,000 | 260,000 | |||||
| Inventory | 1,840,000 | 855,000 | |||||
| Investment in Mathias | 6,760,250 | 0 | |||||
| Equipment (net) | 3,840,000 | 2,101,000 | |||||
| Patents | 130,000 | 0 | |||||
| Unpatented technology | 2,195,000 | 1,520,000 | |||||
| Goodwill | 474,000 | 0 | |||||
| Total assets | $ | 16,355,250 | $ | 4,900,000 | |||
| Accounts payable | $ | (1,180,750 | ) | $ | (343,750 | ) | |
| Long-term debt | $ | (1,000,000 | ) | $ | (1,200,000 | ) | |
| Common stock | (8,200,000 | ) | (500,000 | ) | |||
| Retained earnings 12/31 | (5,974,500 | ) | (2,856,250 | ) | |||
| Total liabilities andequity | $ | (16,355,250 | ) | $ | (4,900,000 | ) | |
Required:
Determine Allison's December 31, 2018, Investment inMathias balance.
Prepare a worksheet to determine the consolidated valuesto be reported on Allison’s financial statements.
Prepare a worksheet to determine the consolidated values to bereported on Allison’s financial statements. (For accounts wheremultiple consolidation entries are required, combine all debitentries into one amount and enter this amount in the debit columnof the worksheet. Similarly, combine all credit entries into oneamount and enter this amount in the credit column of the worksheet.Amounts in the Debit and Credit columns should be entered aspositive. Negative amounts for the Consolidated Totals columnshould be entered with a minus sign.)
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