On January 1, 20X5, Pirate Company acquired all of the outstanding stock of Ship

Question

On January 1, 20X5, Pirate Company acquired all of the outstanding stock of Ship Inc., a Norwegian company, at a cost of $153,000. Ship's net assets on the date of acquisition were 700,000 kroner (NKr). On January 1, 20X5, the book and fair values of the Norwegian subsidiary's identifiable assets and liabilities approximated their fair values except for property, plant, and equipment and patents acquired. The fair value of Ship's property, plant, and equipment exceeded its book value by $18,000. The remaining useful life of Ship's equipment at January 1, 20X5, was 10 years. The remainder of the differential was attributable to a patent having an estimated useful life of 5 years. Ship's trial balance on December 31, 20X5, in kroner, follows:

Additional Information:

Ship uses the FIFO method for its inventory. The beginning inventory was acquired on December 31, 20X4, and ending inventory was acquired on December 15, 20X5. Purchases of NKr430,000 were made evenly throughout 20X5.

Ship acquired all of its property, plant, and equipment on July 1, 20X3, and uses straight-line depreciation.

Ship’s sales were made evenly throughout 20X5, and its operating expenses were incurred evenly throughout 20X5.

The dividends were declared and paid on July 1, 20X5.

Pirate's income from its own operations was $247,000 for 20X5, and its total stockholders' equity on January 1, 20X5, was $3,500,000. Pirate declared $180,000 of dividends during 20X5.

Exchange rates were as follows:

Assume the U.S. dollar is the functional currency, not the krone.

Required:
a. Prepare a schedule remeasuring the trial balance from Norwegian kroner into U.S. dollars. (If no adjustment is needed, select 'no entry necessary'.)

b. Assume that Pirate uses the fully adjusted equity method. Record all journal entries that relate to its investment in the Norwegian subsidiary during 20X5. Provide the necessary documentation and support for the amounts in the journal entries. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

1. Record the purchase of ship inc.

2. record the dividend received from the foreign subsidiary

3. record the equity in the net income of the foreign subsidiary

4. record the amortization of the differential

c. Prepare a schedule that determines Pirate's consolidated net income for 20X5..(Amounts to be deducted should be indicated with a minus sign.)

d. Compute Pirate's total consolidated stockholders' equity at December 31, 20X5.

Debits Credits Cash NKr 155,000 Accounts Receivable (net) 226,000 Inventory 291,000 Property, Plant & Equipment 610,000 Accumulated Depreciation NKr 151,000 Accounts Payable 94,000 Notes Payable 198,000 Common Stock 450,000 Retained Earnings 250,000 Sales 779,000 Cost of Goods Sold 412,000 Operating Expenses 118,000 Depreciation Expense 65,000 Dividends Paid 45,000 Total NKr 1,922,000 NKr 1,922,000

Explanation / Answer

a) NKr Exchange Rate In $ Cash 155000 0.21 32550 Accounts Receivable(Net) 226000 0.21 47460 Inventory 291000 0.21 61110 Property, plant and equipment 610000 0.21 128100 Cost of goods sold 412000 0.20 82400 Operating expenses 118000 0.20 23600 Depreciation expense 65000 0.20 13000 Dividends paid 45000 0.19 8550 Total 1922000 396770 Total Debits Accumulated depreciation 151000 0.21 31710 Accounts payable 94000 0.21 19740 Notes payable 198000 0.21 41580 common stock 450000 0.18 81000 Retained earnings 250000 0.18 45000 Sales 779000 0.2 155800 Total 1922000 374830 Accumulated other comprehensive Income- Translation adjustment 21940 Total Credits 396770 b) 1 Record the purchase of Ship Inc Debit Credit Investment in Ship Inc $153,000 To Cash $153,000 2 Record the dividend received from the foreign subsidiary Cash 8550 To Investment in Ship Inc 8550 3 Record the equity in the net income of the foreign subsidiary Investment in Ship Inc common income from subsidiary 50190 To Equity in net income of foreign subsidiary 50190 155800-82400-23600-13000-8550+21940 Schedule 1 Determining the differential for 2015 Investment cost at 01st Jan 2015 153000 Less: Book value of net assets acquired on 01st Jan 2015 126000 (700000*0.18) 27000 Differential allocated to Property,plant and equipment $18,000 Patent 27000-18000 9000 $27,000 Schedule 2 Determining the differential amortization for 2015 NKr Exchange Rate $ Property, plant and equipment: Income statement: Difference at beginning of year 100000 0.18 18000 Amortization for 2015 -10000 0.2 -2000 (100000/10) Remaining Balances 90000 16000 Balance Sheet Remaining Balances to be transalated at yr end exchange rate 90000 0.21 18900 Difference to other comprehensive income- translation adjustment -2900 Patent Difference at beginning of year 50000 0.18 9000 Amortization for 2015 -10000 0.2 -2000 (50000/5) Remaining Balances 40000 7000 Balance Sheet Remaining Balances to be transalated at yr end exchange rate 40000 0.21 8400 Difference to other comprehensive income- translation adjustment -1400 Income from subsidiary 4000 To Investment in Ship Inc 4000 (2000+5200) Investment in Ship Inc 4300 To other comprehensive income-translation adjustment 4300 c Pirate's consolidated net income for 2015 Income from Pirate's income 247000 Add: Income from the Ship Inc 50190 Less:Amortization of differential -4000 Add: Translation adjustment(6540) 4300 Pirate's consolidated net income for 2015 297490 d Pirate's consolidated stockholder's equity at Dec 2015 Pirate's shareholders equity 3500000 Add: Net Income 297490 Less: dividends declared -180000 Shareholder's equity 3617490

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