Panda Company, a U.S. multinational enterprise, has a subsidiary in Belgium. On April 1, 2016, Panda acquired
Question:
Panda Company, a U.S. multinational enterprise, has a subsidiary in Belgium. On April 1, 2016, Panda acquired for $550,000 a draft for €500,000 and remitted it to the Belgian subsidiary as a long-term, non-interest-bearing advance. The advance was to be repaid ultimately in U.S. dollars. The euro (€) is the functional currency of the subsidiary.
You were engaged as independent auditor for the audit of the March 31, 2017, consolidated financial statements of Panda Company and subsidiaries (including the Belgian subsidiary). On March 31, 2017, the selling spot rate for the euro was €1 = $ 1.05. Panda’s controller translated the Payable to Panda Company liability in the Belgian subsidiary’s balance sheet from €500,000 to $525,000 (€500,000 x $1.05 = $525,000). Because the $525,000 translated balance of the subsidiary’s Payable to Panda Company liability did not offset the $550,000 balance of Panda’s Receivable from Belgian Subsidiary ledger account on March 31, 2017, Panda’s controller prepared the following elimination (in journal entry format) on March 31, 2017:
Dr. Foreign Currency Translation Adjustments – Belgian Subsidiary25,000
Cr. Receivable from Belgian Subsidiary – Panda25,000
To record translation adjustment resulting from decline in exchange rate for the euro €1 = $1.05 on March 31, 2017, from €1 = $1.10 on April 1, 2016
Required
Evaluate the accounting treatment described above.
Accounting
ISBN: 978-1285743615
26th edition
Authors: Carl S. Warren, James M. Reeve, Jonathan Duchac