A summary of Soakes equity is shown below for the first year that Puddle had

A summary of soakes equity is shown below for the

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currency, pounds. A summary of Soake's equity is shown below for the first year that Puddle had ownership interest.In PoundsExchange RatesIn DollarsStockholders' Equity - 12/31/131,200,000 $1.60H$1,920,000 Net Income400,000 $1.62A648,000 Dividends - 11/1/14 (200,000)$1.64H(328,000)Translation Adjustment       70,000 Stockholders' Equity - 12/31/141,400,000 $1.65C$2,310,000 RequiredDetermine Puddle's income from Soake for 2014, and the balance of Puddle's Investment in Soake account at December 31, 2014. Soake's books are kept in pounds, which is the functional currency.Answer:  Puddle's income from Soake for 2014Investment cost of 80% interest in Soake$1,560,000Less: Book value acquired ($1,920,000 × 80%)(1,536,000)Patent in dollars at acquisition$ 24,000Patent in pounds at acquisition$24,000/$1.60 exchange rate =15,000 poundsEquity in Soake's income ($648,000 × 80%)$ 518,400Patent amortization for 201415,000 pounds/5 years × $1.62 average rate( 4,860)Income from Soake for 2014$ 513,540Investment in Soake at December 31, 2014Investment cost$1,560,000Add: Income from Soake513,540Less: Dividends ($328,000 × 80%)(262,400)Add: Equity adjustment from translation($70,000 × 80%)56,000Add: Equity adj. from patent:Beginning balance$ 24,000Less: Patent amortization4,860Less: Unamortized patent at year end(15,000 - 3,000 = 12,000 pounds) × $1.6519,800660Investment in Soake December 31, 2014$1,867,800
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Proof of investment balanceNet assets at December 31, 2014 of $2,310,000 × 80%$1,848,000Add: Unamortized patent (12,000 pounds × $1.65)19,800Investment balance$1,867,800Objective:  LO7Difficulty:  Moderate12) Pew Corporation (a U.S. corporation) acquired all of the stock of Skunk Company (a Brazilian company) on January 1, 2014 for $9,300,000 when Skunk had 10,000,000 Brazilian real (BR) capital stock and 5,000,000 BR retained earnings. The book value of Skunk's net assets equaled the fair value on this date, and any cost/book value differential is due to a patent with a 5-year remaining useful life. Skunk's functional currency is the BR. Skunk's books are maintained in the functional currency. The exchange rates for BR's for 2014 are shown below:January 1, 2014$0.60Average for 2014$0.64December 31, 2014$0.68Required:1. Calculate the patent value from the business combination on January 1, 2014 in U.S. dollars.2. Calculate the patent amortization in U.S. dollars for 2014.3. Prepare the journal entry (in U.S. dollars) required on Pew's books to record the patent amortization for 2014, assuming that Pew accounts for Skunk using the equity method.Answer:  1. Patent at acquisition of SkunkCost of Skunk$9,300,000Book value acquired: (15,000,000 BR × $.60)(9,000,000)Patent in dollars$300,000Patent in BR's ($300,000/$.60)500,000BR2. Patent amortization in dollarsPatent amortization in BR's (500,000/5 years)  = 100,000 BR'sPatent amortization in $ (100,000 BR's × $.64 average rate)$64,0003. Entry to record patent amortizationIncome from Skunk$64,000
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  • Spring '14
  • Functional Currency, U.S. dollars, equity adjustment

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