On January 2,2008,Johnson Company acquired a 100% interest in the capital stock of Perth Company for $3,100,000.Any excess cost over book value is attributable to a patent with a 10-year remaining life.At the date of acquisition,Perth's balance sheet contained the following information:
Perth's income statement for 2008 is as follows:
The balance sheet of Perth at December 31,2008,is as follows:
Perth declared and paid a dividend of 20,000 FCU on October 1,2008.Spot rates at various dates for 2008 follow:
Assume Perth's revenues,purchases,operating expenses,depreciation expense,and income taxes were incurred evenly throughout 2008.

-Refer to the above information.Assuming Perth's local currency is the functional currency,what is the amount of translation adjustment that appears on Johnson's consolidated financial statements at December 31,2008?
A)$419,184 credit
B)$416,884 credit
C)$405,884 debit
D)$398,500 credit

Question

On January 2,2008,Johnson Company acquired a 100% interest in the capital stock of Perth Company for $3,100,000.Any excess cost over book value is attributable to a patent with a 10-year remaining life.At the date of acquisition,Perth's balance sheet contained the following information:
Perth's income statement for 2008 is as follows:
   The balance sheet of Perth at December 31,2008,is as follows:
Perth declared and paid a dividend of 20,000 FCU on October 1,2008.Spot rates at various dates for 2008 follow:
Assume Perth's revenues,purchases,operating expenses,depreciation expense,and income taxes were incurred evenly throughout 2008.
  
-Refer to the above information.Assuming Perth's local currency is the functional currency,what is the amount of translation adjustment that appears on Johnson's consolidated financial statements at December 31,2008?
A)$419,184 credit 
B)$416,884 credit 
C)$405,884 debit 
D)$398,500 credit

Quizplus · Accepted Answer

To determine the translation adjustment, we need to follow the steps below:
1. Translate the balance sheet items using the spot rate on December 31, 2008: 
- Cash and receivables = 320,000 FCU x 1.20 = $384,000 
- Inventory = 720,000 FCU x 1.25 = $900,000 
- Property, plant, and equipment = 1,200,000 FCU (book value) x 1.30 = $1,560,000 
- Patent = 400,000 FCU (book value) x 1.35 = $540,000 
- Goodwill = 660,000 FCU x 1.40 = $924,000 
- Total assets = $4,308,000

- Accounts payable and accrued liabilities = 480,000 FCU x 1.18 = $566,400 
- Long-term debt = 900,000 FCU x 1.22 = $1,098,000 
- Common stock and retained earnings = 2,100,000 FCU (book value) x 1.15 = $2,415,000 
- Total liabilities and equity = $4,079,400

2. Calculate the translation gain/loss: 
- Original cost of investment = $3,100,000 
- Equity in earnings = $320,000 - $290,000 - $40,000 - 20,000 FCU dividends = $95,000 
- Translation gain/loss = $4,308,000 - $4,079,400 - $3,100,000 + $95,000 = $223,600

3. Determine the sign of the translation gain/loss: 
- Because the functional currency is the local currency, a net asset position (total assets > total liabilities) indicates a translation gain, which is a credit.

Therefore, the answer is A) $419,184 credit.
The translation adjustment is a credit of $419,184, which represents the increase in Johnson's equity due to the translation of Perth's financial statements from the functional currency to the reporting currency.

On January 2,2008,Johnson Company Acquired a 100% Interest in the Capital