On January 1, Year 1, Par Company purchased all the outstanding common shares of Bayshore Company, located in California, USA, for US$120,000. The carrying amount of Bayshore’s shareholders’ equity on January 1, Year 1, was US$90,000. The fair value of Bayshore’s plant and equipment was US$10,000 more than carrying amount, and the plant and equipment are being depreciated over 10 years, with no salvage value. The remainder of the acquisition differential is attributable to a trademark, which will be amortized over 10 years.
During Year 1, Bayshore earned US$20,000 in income and declared and paid US$8,000 in dividends on December 1, Year 1. Par uses the equity method to account for its investment in Bayshore’s Management has determined that the Canadian dollar is the recording functional and presentation currency for Par Company.
The exchange rates were as follows throughout the year:
Jan. 1, Year 1 ........ US$1 = CDN$0.99
Dec. 1, Year 1 ........ US$1 = CDN$0.96
Dec. 1, Year 1 ........ US$1 = CDN$0.95
Average for year ..... US$1 = CDN$0.97
Required:
(a) Assume that the Canadian dollar is the function currency for Bayshore Company.
(i) Prepare a schedule showing the differential allocation and amortization for Year 1. The schedule should present both Canadian dollars and U.S. dollars.
(ii) Prepare Par Company’s journal entry for adjustments pertaining to the amortization of the acquisition differential for Year 1.
(b) Assume that the U.S. dollar is the functional currency for Bayshore Company.
(i) Prepare a schedule showing the differential allocation and amortization for Year 1. The schedule should present both Canadian dollars and U.S. dollars.
(ii) Prepare Par Company’s journal entry for adjustments pertaining to the amortization of the acquisition differential for Year 1.