Refer to the information given in Problem P12-23 for Alamo and its subsidiary, Western Ranching. Assume that the Australian dollar (A$) is the functional currency and that Alamo uses the fully adjusted equity method for accounting for its investment in Western Ranching.

In P12-23

Additional Information

1. Western Ranching uses average cost for cost of goods sold. Inventory increased by A$20,000 during the year. Purchases were made uniformly during 20X3. The ending inventory was acquired at the average exchange rate for the year.

2. Plant and equipment were acquired as follows:

Date Cost

January 20X1 ........A$180,000

January 1, 20X3....... 60,000

3. Plant and equipment are depreciated using the straight-line method and a 10-year life with no residual value.

4. The payable to Alamo is in Australian dollars. Alamo’s books show a receivable from Western Ranching of $6,480.

5. The 10-year bonds were issued on July 1, 20X3, for A$106,000. The premium is amortized on a straight-line basis. The interest is paid on April 1 and October 1.

6. The dividends were declared and paid on April 1.

7. Exchange rates were as follows:

A$ $

January 20X1...... 1 = 0.93

August 20X1 .......1 = 0.88

January 1, 20X3 .....1 = 0.70

April 1, 20X3 .......1 = 0.67

July 1, 20X3 .........1 = 0.64

December 31, 20X3 ......1 = 0.60

20X3 average .......1 = 0.65

Required

a. Prepare the entries that Alamo would record in 20X3 for its investment in Western Ranching.

Your entries should include the following:

(1) Record the initial investment on January 1, 20X3.

(2) Record the dividend received by the parent company.

(3) Recognize the parent company’s share of the equity income of the subsidiary.

(4) Record the amortizations of the differential.

(5) Recognize the translation adjustment required by the parent from the adjustment of the differential.

(6) Recognize the parent company’s share of the translation adjustment resulting from the translation of the subsidiary’s accounts.

b. Provide the necessary documentation and support for the amounts recorded in the journal entries, including a schedule of the translation adjustment related to the differential.