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Chapter 16 - Solution Manual

Remeasurement is significantly different from

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Remeasurement is significantly different from translation and is the process of measuring transactions originally denominated in a different unit of currency (e.g., purchases of a German subsidiary of a U.S. company payable in French francs). Remeasurement is required when: 1. A foreign entity operates in a highly inflationary economy. 2. The accounts of an entity are maintained in a currency other than its functional currency.
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344 3. A foreign entity is a party to a transaction that produces a monetary asset or liability denominated in a currency other than its functional currency. Remeasurement is virtually the same process as described earlier under the temporal method. That is, the financial-statement elements are restated according to their original measurement bases. It assumes that an exchange of currencies will occur at the exchange rate prevailing on the date of remeasurement. This produces a foreign exchange gain or loss if the exchange rate fluctuates between the date of the original transaction and the date of the assumed exchange. Therefore, any exchange gain or loss is included in the period in which it occurs. Case 16-8 a. Entity theory views the assets and liabilities of the consolidated entity as belonging to the entity, not to its owners. Thus, the entity theory acquisition value for goodwill would be based on acquiring 100% of the subsidiary’s goodwill, no matter what the percentage ownership interest the parent company acquires. The typical entity theorist would infer the 100% value of goodwill from the amount pays by the parent company for its interest in the subsidiary. If, for example, the parent company pays $108,000 for a 90% interest in the subsidiary, and the fair value of the subsidiary’s net assets is $100,000. The parent is presumed to have purchased 90% x $100,000 = $90,000 of the identifiable net assets of the subsidiary. The other $18,000 ($108,000 - $90,000) is considered payment for 90% of the subsidiary’s goodwill. If $18,000 = 90% x goodwill, then the value of goodwill is presumed to be $18,000 / 90% = $20,000. b. Because entity theory views the assets and liabilities of the consolidated entity as belonging to the entity, not to its owners, when a parent company acquires less than a 100% ownership interest in a subsidiary, the assets and liabilities are valued at 100% of their respective fair values, including goodwill. Thus, the noncontrolling interest must be valued at their percentage ownership in the subsidiary multiplied times the fair value of those net assets. The typical entity theorist would infer the value of the total subsidiary from the purchase price the parent company pays for the ownership interest the parent company purchases. For example, if the parent company pays $108,000 for a 90% interest in the subsidiary, the fair value of the net assets of the subsidiary (including goodwill) are presumed to be $108,000 / 90% = $120,000.
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