Question

Petie Products Company was incorporated in Wisconsin in 20X0 as a manufacturer of dairy supplies and equipment. Since incorporating, Petie has doubled in size about every three years and is now considered one of the leading dairy supply companies in the country.
During January 20X4, Petie established a subsidiary, Cream Ltd., in the emerging nation of Kolay. Petie owns 90 percent of Cream’s outstanding capital stock; Kolay citizens hold the remaining 10 percent of Cream’s outstanding capital stock as Kolay law requires. The investment in Cream, accounted for by Petie using the equity method, represents about 18 percent of Petie’s total assets at December 31, 20X7, the close of the accounting period for both companies.

Required
a. What criteria should Petie use in determining whether it would be appropriate to prepare consolidated financial statements with Cream Ltd. for the year ended December 31, 20X7?

Explain.
b. Independent of your answer to part a, assume it has been appropriate for Petie and Cream to prepare consolidated financial statements for each year, 20X4 through 20X7. Before they can be prepared, the individual account balances in Cream’s December 31, 20X7, adjusted trial balance must be translated into dollars. The kola (K) is the subsidiary’s functional currency. For each of the following 10 accounts taken from Cream’s adjusted trial balance, specify what exchange rate (e.g., average exchange rate for 20X7, current exchange rate on December 31, 20X7) should be used to translate the account balance into dollars and explain why that rate is appropriate. Number your answers to correspond with these accounts.
(1) Cash in Kolay National Bank.
(2) Trade Accounts Receivable (all from 20X7 revenue).
(3) Supplies Inventory (all purchased during the last quarter of 20X7).
(4) Land purchased in 20X4.
(5) Short-term note payable to Kolay National Bank.
(6) Capital Stock (no par or stated value and all issued in January 20X4).
(7) Retained Earnings, January 1, 20X7.
(8) Sales Revenue.
(9) Depreciation Expense (on buildings).
(10) Salaries Expense.



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  • CreatedMay 23, 2014
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