Problem 1 Translate a trial balance and prepare a consolidation work-sheet. 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, 20X5, when Tobac's equity, in FC, was as follows:
Common stock. .. .... .. .. . . . .. . . . . .. . .... .. 19,000,000 FC
Paid-in capital inexcess ofpar . . . .. . . . . ... .. .. 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, 20X7, 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 20X4. Tobac employs the LIFO inventory method. Ending inventory on December 31, 20X7, consists of the following:
Acquired inthe 1stquarter of20X4 . . . . . .. .. .. .. . . . 1,000,000 FC
Acquired inthe 1stquarter of20X5 . . . . . .. .. .. .. . . . 500,000
Acquired inthe 1stquarter of20X7 . . . . . .. .. .. .. . . . 6,500,000
The cost of sales is traceable to goods purchased during 20X7 as follows:
Acquired uniformlyover thelast ninemonths .. . . . . .. . . 23,400,000 FC
Acquired inthe 1st quarter ... .. .. .. .. .. . . . .. . . .. . . 4,200,000
Other expenses were incurred evenly over the year.
On April 1, 20X7, 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 the rate of 8%. Principal and interest amounts are due to the parent in dollars.
Various spot rates are as follows:
1 FC = 1 FC =
1st Quarter, 20X4 Average.. .... .. $0.46 December 31, 20X6 . . . . .. . . . . ... . $0.60
20X4Average. . . . . ... .. .. .... .. 0.49 1st Quarter, 20X7Average. . . . . ... . 0.62
January 1,20X5 . . . ... .. .. .... .. 0.51 April 1,20X7 .. . .. . . . . .. . . . . ... . 0.64
1st Quarter, 20X5 Average.. .... .. 0.53 20X7 Average.. . .. . . . . .. . . . . ... .0.67
July 1,20X5 .. . . . . ... .. .. .... .. 0.55 Last nine months, 20X7 Average. ... . 0.66
December 31,20X5 ... .. .. .... .. 0.58 December 31, 20X7 . . . . .. . . . . ... . 0.65
Last six months,20X5Average ... .. 0.57
20X6Average. . . . . ... .. .. .... .. 0.58
The December 31, 20X7, 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
Duefrom Tobac. . . . ... .. .. .... .. . .. . . . . .. .. . .. . . . . .. .. 1,356,800
Investment inTobac -See Note A. .. . .. . . . . .. .. . .. . . . . .. 23,712,363
Depreciable Assets . ... .. .. .... .. . .. . . . . .. .. . .. . . . . .. .. 68,000,000 34,000,000
Accumulated Depreciation .. .... .. . .. . . . . .. .. . .. . . . . .. .. (42,000,000) (12,300,000)
Dueto Balfour . . . . . ... .. .. .... .. . .. . . . . .. .. . .. . . . . .. .. (2,087,385)
Other Liabilities . . . . ... .. .. .... .. . .. . . . . .. .. . .. . . . . .. .. (27,000,000) (3,700,000)
Common Stock . . . . ... .. .. .... .. . .. . . . . .. .. . .. . . . . .. .. (35,000,000) (19,000,000)
Paid-In Capital in Excessof Par ... .. . .. . . . . .. .. . .. . . . . .. ..(2,000,000) (8,480,000)
RetainedEarnings, January 1, 20X7. . .. . . . . .. .. . .. . . . . .. ..(4,500,000) (7,520,000)
Sales .. .... .. . . . . ... .. .. .... .. . .. . . . . .. .. . .. . . . . .. .. (98,000,000) (40,000,000)
Cost ofSales .. . . . . ... .. .. .... .. . .. . . . . .. .. . .. . . . . .. .. 64,000,000 27,600,000
Depreciation Expense .. .. .. .... .. . .. . . . . .. .. . .. . . . . .. .. 8,076,800 3,300,000
Interest Expenseon Balfour
Loan (accrued onDecember 31, 20X7) -See Note B. . . . .. .. 118,154
Exchange GainonBalfour Loan-See Note B .. .. . .. . . . . .. .. (30,769)
Other Expenses . . . . ... .. .. .... .. . .. . . . . .. .. . .. . . . . .. .. 10,000,000 5,012,615
Interest Income. . . . . ... .. .. .... .. . .. . . . . .. .. . .. . . . . .. .. (76,800)
Subsidiary Income. . ... .. .. .... .. . .. . . . . .. .. . .. . . . . .. .. (2,682,363)
Total. .... .. . . . . ... .. .. .... .. . .. . . . . .. .. . .. . . . . .. .. $ 0 0 FC
Note A -Balfour's investment in Tobac consists of the following:
Initialinvestment (33,000,000 FC x $0.55) . .. .... .. . .. .. . . $18,150,000
Last six months, 20X5income (2,000,000 FC x $0.57) . .. .. . . 1,140,000
20X6 income (3,000,000 FC x $0.58). .... .. .... .. . .. .. . . 1,740,000
20X7 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 x $0.64). On December
31, 20X7, 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:
Principalbalance. . . . .. .. .... .. . .. .... .. .. . . . . . . . .. . . . . . 1,969,231 FC
Accrued interest ($1,280,000 x 8% x 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.
Assuming the FC is Tobac's functional currency, translate Tobac's trial balance, and prepare a consolidating worksheet.
Attachment:- Problems_Template.xls