Parent Co, a U.S. firm, paid $525,000 cash to acquire all of the stock of the...

  

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Parent Co, a U.S. firm, paid $525,000 cash to acquire all of the stock of the British Tırm sub Co when the book value of Sub's net assets was equal to fair value. This business combination occurred on December 31, 2020, when the exchange rate for British pounds was $1.50. During 2021 the British pound weakened against the U.S. dollar, resulting in a year- end current exchange rate of $1.40. Average exchange rates for 2021 were $1.45. Sub Co paid a £30,000 dividend to Parent Co on December 1, 2021 when the exchange rate was $1.42 per British pound. The only intercompany transaction between the firms was an $84,000 (£56,000) noninterest-bearing advance by Sub Co to Parent Co that occurred on January 4, 2021 when the exchange rate was still $1.50. The advance is denominated in U.S. dollars. Sub Co's functional currency is British pounds, so the advance to Parent Co is a foreign currency transaction from Sub Co's perspective, but not to Parent Co because it is denominated in U.S. dollars. Sub Co's assets, liabilities and stockholder's equity at acquisition (i.e., December 31, 2020) were as follows: Assets Cash Accounts receivable Inventory Plant assets Less: Accumulated depreciation Total assets Liabilities & Stockholder's Equity Accounts payable Bonds payable Common stock Retained earnings Total liabilities & stockholder's equity British Exchange Pounds Rate £140,000 $1.50 40,000 1.50 120,000 1.50 100,000 1.50 (20,000) 1.50 £380,000 £30,000 100,000 200,000 50,000 £380,000 $1.50 1.50 1.50 1.50 Advance to parent Exchange gain To adjust receivable denominated in U.S. dollars (($84,000/ $1.40) - £56,000) U.S. Dollars DR £4,000 $210,000 60,000 180,000 150,000 (30,000) $570,000 Sub Co adjusted its advance to Parent Co at year-end 2021 to reflect the $1.40 current exchange rate. Sub Co recorded an exchange gain because there is no evidence that the advance is of a long-term investment nature. The entry recorded on Sub Co's books was: $45,000 150,000 300,000 75,000 $570,000 CR £4,000 Required: In the Excel file "Case 1 - Advanced accounting topics" and the worksheet "Foreign Currency" you will find Sub Co's adjusted trial balance at December 31, 2021 in British pounds. Please prepare the following: ▪ Convert Sub Co's accounts to U.S. dollars showing the exchange rate and U.S. dollar amount for each account. ■ ■ Prepare Sub Co's December 31, 2021 financial statements in U.S. dollars: Balance Sheet (in classified format), Income Statement (in multiple-step format) and Statement of Retained Earnings. Prepare Sub Co's December 31, 2021 Statement of Cash Flows, assuming the following: - No plant assets were purchased or sold during 2021 No bonds payable were issued (i.e., borrowed) or paid during 2021 No common stock was issued during 2021 No common stock was purchased from stockholders (i.e., treasury stock) - Any effects of foreign exchange rate changes are classified on the Statement of Cash Flows as "Effects of foreign exchange rate changes" (see the Discussion Case - FSA (Data) Excel file for an example of the format). - - 1 Foreign Currency Accounting 2 3 4 5 6 Accounts receivable 7 Inventory 8 Plant assets 9 Advance to parent 10 Cost of sales Sub Co Trial Balance in British Pounds Debits Cash 11 Depreciation expense 12 Wages and salaries expense 13 Other expenses 14 Dividends declared 15 16 61 Credits 17 Accumulated depreciation, plant assets 18 Accounts payable 19 Bonds payable 20 Common stock 21 Retained earnings 22 Sales 23 Exchange gain (on the advance to parent) 24 25 26 B ELI £ £ 110,000 $ 80,000 120,000 100,000 £ с £ Trial Balance 60,000 270,000 10,000 120,000 60,000 30,000 960,000 D 30,000 36,000 100,000 200,000 50,000 540,000 4,000 960,000 E Exchange Rate TI F G Trial Balance F Parent Co, a U.S. firm, paid $525,000 cash to acquire all of the stock of the British Tırm sub Co when the book value of Sub's net assets was equal to fair value. This business combination occurred on December 31, 2020, when the exchange rate for British pounds was $1.50. During 2021 the British pound weakened against the U.S. dollar, resulting in a year- end current exchange rate of $1.40. Average exchange rates for 2021 were $1.45. Sub Co paid a £30,000 dividend to Parent Co on December 1, 2021 when the exchange rate was $1.42 per British pound. The only intercompany transaction between the firms was an $84,000 (£56,000) noninterest-bearing advance by Sub Co to Parent Co that occurred on January 4, 2021 when the exchange rate was still $1.50. The advance is denominated in U.S. dollars. Sub Co's functional currency is British pounds, so the advance to Parent Co is a foreign currency transaction from Sub Co's perspective, but not to Parent Co because it is denominated in U.S. dollars. Sub Co's assets, liabilities and stockholder's equity at acquisition (i.e., December 31, 2020) were as follows: Assets Cash Accounts receivable Inventory Plant assets Less: Accumulated depreciation Total assets Liabilities & Stockholder's Equity Accounts payable Bonds payable Common stock Retained earnings Total liabilities & stockholder's equity British Exchange Pounds Rate £140,000 $1.50 40,000 1.50 120,000 1.50 100,000 1.50 (20,000) 1.50 £380,000 £30,000 100,000 200,000 50,000 £380,000 $1.50 1.50 1.50 1.50 Advance to parent Exchange gain To adjust receivable denominated in U.S. dollars (($84,000/ $1.40) - £56,000) U.S. Dollars DR £4,000 $210,000 60,000 180,000 150,000 (30,000) $570,000 Sub Co adjusted its advance to Parent Co at year-end 2021 to reflect the $1.40 current exchange rate. Sub Co recorded an exchange gain because there is no evidence that the advance is of a long-term investment nature. The entry recorded on Sub Co's books was: $45,000 150,000 300,000 75,000 $570,000 CR £4,000 Required: In the Excel file "Case 1 - Advanced accounting topics" and the worksheet "Foreign Currency" you will find Sub Co's adjusted trial balance at December 31, 2021 in British pounds. Please prepare the following: ▪ Convert Sub Co's accounts to U.S. dollars showing the exchange rate and U.S. dollar amount for each account. ■ ■ Prepare Sub Co's December 31, 2021 financial statements in U.S. dollars: Balance Sheet (in classified format), Income Statement (in multiple-step format) and Statement of Retained Earnings. Prepare Sub Co's December 31, 2021 Statement of Cash Flows, assuming the following: - No plant assets were purchased or sold during 2021 No bonds payable were issued (i.e., borrowed) or paid during 2021 No common stock was issued during 2021 No common stock was purchased from stockholders (i.e., treasury stock) - Any effects of foreign exchange rate changes are classified on the Statement of Cash Flows as "Effects of foreign exchange rate changes" (see the Discussion Case - FSA (Data) Excel file for an example of the format). - - 1 Foreign Currency Accounting 2 3 4 5 6 Accounts receivable 7 Inventory 8 Plant assets 9 Advance to parent 10 Cost of sales Sub Co Trial Balance in British Pounds Debits Cash 11 Depreciation expense 12 Wages and salaries expense 13 Other expenses 14 Dividends declared 15 16 61 Credits 17 Accumulated depreciation, plant assets 18 Accounts payable 19 Bonds payable 20 Common stock 21 Retained earnings 22 Sales 23 Exchange gain (on the advance to parent) 24 25 26 B ELI £ £ 110,000 $ 80,000 120,000 100,000 £ с £ Trial Balance 60,000 270,000 10,000 120,000 60,000 30,000 960,000 D 30,000 36,000 100,000 200,000 50,000 540,000 4,000 960,000 E Exchange Rate TI F G Trial Balance F

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Converting Sub Cos Accounts to US Dollars Heres the conversion of Sub Cos trial balance accounts to US dollars using the given exchange rates Account ... View the full answer