Accounting Question

Competencies

In this project, you will demonstrate your mastery of the following competencies:

Analyze the impact of investments and goodwill on financial statements

Evaluate foreign currency financial statements for impact on an organization’s financial performance

Scenario

You are a senior accountant for Acme Corporation in the United States. At the start of the fiscal year, your company (parent) invested in a new company (subsidiary), called Coyote (which owns 20% of Acme outstanding stock), and obtained 100% control of the foreign-based company. Goodwill was recorded as part of the transaction. The subsidiary uses the euro as its functional currency, and Acme Corporation has a controlling financial interest. The subsidiary continued to operate on its own, as it bought and sold equipment, merchandise, and land during the year. You are consolidating the financial statements of both companies and filling out the consolidation workbook. The company also bought and sold merchandise from its acquired company, called Simbel. You must translate euro financial statements into U.S. dollars. The international exchange rates and financial statements of the foreign subsidiary are provided.

Directions

For this project, you will submit two products: an Excel financial workbook and a Word executive summary report. Each of these consists of two parts that align with this project’s competencies.

Specifically, you must address the following rubric criteria:

Section I: Translation of Currencies and Consolidation Workbook

After reviewing the Scenario and What to Submit sections of this document, you will create a translation of currencies and consolidation workbook from the Project One Template that (1) shows the impact of investments and goodwill on financial statements and (2) evaluates foreign currency financial statements for their impact on an organization’s financial performance.

Part One: Investments and Goodwill

Create journal entries identifying consolidations and investments. Consider the following:

Record the various related costs involved in a business combination.

Record a business combination when the acquired firm retains its separate existence.

Record the journal entries when goodwill is present.

Prepare consolidated financial statements when mutual ownership is present. Include the following:

Account for the process when indirect control is present in a parent-child ownership configuration.

Account for when corporate ownership structure is characterized by a connecting affiliation.

Part Two: Foreign Currency

Complete foreign financial statement conversions. Consider the following:

Account for foreign currency transactions using the two-transactions perspective, accrual approach.

Account for forward contracts and options used as hedges of foreign currency.

Account for forward contracts and options used as hedges of foreign currency firm commitments.

Account for forward contracts and options used as hedges of forecasted foreign currency transactions.

Compile calculated translation adjustment amounts.

Section II: Executive Summary Report

After you finish the translation of currencies and consolidation workbook, you will then create a 2- to 3-page executive summary report in a Word document that explains the findings from the workbook.

Part One: Investments and Goodwill

Select various methods to account for equity investments. Consider the following:

Identify the sole criterion for applying the equity method of accounting.

Identify the cost of an equity method investment.

Identify the implications and benefits of various levels of ownership control. Consider the following:

Describe the motivations for a corporation to gain significant influence over another corporation.

Explain why organizations invest in the equity shares of other organizations.

Part Two: Foreign Currency

Explain the concepts related to foreign currency, exchange rates, and exchange risk.

Consider the following: Consider foreign currency borrowings.

Identify the basic concepts of hedge accounting.

Integrate derivative contracts for an organization’s international transitions. Consider the following:

Rationalize hedging balance sheet exposure to foreign exchange risk.

Describe the treatment of gains and losses on hedges.

Outline the limitations of the current and temporal methods. Consider the following:

Explain the theoretical underpinnings of the current rate and temporal methods.

On January 1, 20X4, Acme Corporation acquired 100% of the outstanding common stock of Coyote
to the owners of Coyote $200,000 in long-term liabilities and 20,000 shares of common stock havin
accountants, lawyers, and brokers for assistance in the acquisition and another $12,000 in connect
Prior to these transactions, the balance sheets for the two companies were as follows:
Create journal entries identifying consolidations and investments
Acme’s appraisal of Coyote’s fair values deemed three
accounts to be undervalued: Inventory by $5,000, Land by
$20,000, and Buildings by $30,000. Acme plans to maintain
Coyote’s separate legal identity and to operate Coyote as a
wholly owned subsidiary.
1. Prepare Acme’s journal entries to record its acquisition of
Coyote, related professional fees paid, and stock acquisition
costs.
2. Separately determine each individual amount that Acme
d 100% of the outstanding common stock of Coyote, a foreign company (amounts translated to USE). To acq
m liabilities and 20,000 shares of common stock having a par value of $1 per share but a fair value of $20 per s
ce in the acquisition and another $12,000 in connection with stock issuance costs.
for the two companies were as follows:
Cash
Receivables
Inventory
Land
Buildings (net)
Equipment (net)
Accounts payable
Long-term liabilities
Common stock – $1 par value
Common stock – $20 fair value
Additional paid – in capital
Retained earnings, 1/1/X4
Acme Corporation
$60,000
270,000
360,000
200,000
420,000
160,000
(150,000)
(430,000)
(110,000)
-0-
Coyote
(360,000)
(420,000)
Note: Parentheses indicate a credit balance.
Journal entry for investment in Coyote
Debit
Journal entry for payment of professional
fees
Debit
Journal entry to record payment of stock
issuance costs
Account
Cash
Receivables
Inventory
Land
Buildings
Equipment
Goodwill
Total assets
Accounts payable
Long-term liabilities
Common stock
Additional paid – in capital
Retained earnings
Total liabilities and equity
Debit
Amount
translated to USE). To acquire these shares, Acme issued
ut a fair value of $20 per share. Acme paid $30,000 to
Coyote
$20,000
90,000
140,000
180,000
220,000
50,000
(40,000)
(200,000)
-0(120,000)
-0(340,000)
Credit
Credit
Credit
This is a continuation of the prior tab (Investments with G
On January 1, 20X4, Acme Corporation acquired 100% of the outstanding common stock of Coyote
shares, Acme issued to the owners of Coyote $200,000 in long-term liabilities and 20,000 shares of
$20 per share. Acme paid $30,000 to accountants, lawyers, and brokers for assistance in the acquis
Prior to these transactions, the balance sheets for the two companies were as follows:
Cash
Receivables
Inventory
Land
Buildings (net)
Equipment (net)
Accounts payable
Long-term liabilities
Common stock-$1 par value
Common stock-$20 par value
Additional paid-in capital
Additional paid-in capital
Retained earnings, 1/1/X4
Note: Parentheses indicate a credit balance.
Acme’s appraisal of Coyote’s fair values deemed three accounts to be undervalued: Inventory by $5,000, Land by
legal identity and to operate Coyote as a wholly owned subsidiary.
3. To verify the answers found in Part 2, adjust Acme’s column of accounts for the journal entries in Part 1 and then
companies at the acquisition date.
Prepare consolidated financial statements when mutual ownership is present
ACME CORPORATION AND CON
Worksheet to prepare a Consolidated Balance Sheet
1/1/20X4
Accounts
Cash
Receivables
Inventory
Land
Buildings (net)
Equipment (net)
Investment in Coyote
Goodwill
Total assets
Accounts payable
Long‑term liabilities
Common stock
Additional paid‑in capital
Retained earnings, 1/1/X4
Total liab. and owners’ equity
tab (Investments with Goodwill). Information repeated below.
ng common stock of Coyote, a foreign company (amounts translated to USD). To acquire these
bilities and 20,000 shares of common stock having a par value of $1 per share but a fair value of
for assistance in the acquisition and another $12,000 in connection with stock issuance costs.
were as follows:
Acme Corporation
Coyote
$60,000
270,000
360,000
200,000
420,000
160,000
(150,000)
(430,000)
(110,000)
-0(360,000)
(360,000)
(420,000)
$20,000
90,000
140,000
180,000
220,000
50,000
(40,000)
(200,000)
-0(120,000)
-0-0(340,000)
d: Inventory by $5,000, Land by $20,000, and Buildings by $30,000. Acme plans to maintain Coyote’s separate
ournal entries in Part 1 and then prepare a worksheet to consolidate the balance sheets of these two
ACME CORPORATION AND CONSOLIDATED SUBSIDIARY COYOTE
Acme Corporation
Coyote Compny
Consolidation Debit
Entries
0
0
0
0
0
Consolidated Totals
0
0
0
Complete foreign financial statement conversions
Acme Corporation, a U.S.-based importer of beer and wine, purchased 1,000
company) for 50,000 euros. Relevant U.S. dollar exchange rates for the euro
Date
August 15
September 30
October 15
The company closes its books and prepares third-quarter financial statement
1. Assume that the beer arrived on August 15, and the company made payme
foreign exchange risk. Prepare journal entries to account for this import purc
Journal entries (Unhedged)
August 15
September 30
October 15
Date of
Sale
2. Assume that the beer arrived on August 15, and the company made payme
month forward contract to purchase 50,000 euros. The company designated
payable. Forward points are excluded in assessing hedge effectiveness and a
basis. Prepare journal entries to account for the import purchase and foreign
Journal entries (Forward Contract)
August 15
September 30
October 15
Date of
Sale
3. Assume that the company ordered the beer on August 15. The beer arrive
company entered into a two-month forward contract to purchase 50,000 eur
hedge of a foreign currency firm commitment. The fair value of the firm com
Forward points are not excluded in assessing hedge effectiveness. Prepare jo
foreign currency firm commitment, and import purchase.
Journal entries (FV)
August 15
September 30
October 15
Date of
Sale
4. Assume that the company ordered the beer on August 15. The beer arrive
company purchased a two-month call option on 50,000 euros. The company
firm commitment. The fair value of the firm commitment is measured by refe
excluded from the assessment of hedge effectiveness, and the change in tim
Prepare journal entries to account for the foreign currency option, foreign cu
Journal entries (Option FV Hedge)
August 15
September 30
October 15
Date of
Sale
5. Assume that on August 15, the company forecasted the purchase of beer o
call option on 50,000 euros. The company designated the option as a cash va
value of the option is excluded from the assessment of hedge effectiveness,
life of the option. Prepare journal entries to account for the foreign currency
Journal entries (Forecasted)
August 15
September 30
October 15
Date of
Sale
d wine, purchased 1,000 cases of Oktoberfest-style beer from Coyote (before purcha
hange rates for the euro are as follows:
Spot Rate
$1.10
1.15
1.18
Forward Rate
to October 15
$1.16
1.19
1.18 (spot)
Call Option Premium for
October 15
(strike price $1.10)
$0.05
0.06
N/A
arter financial statements on September 30.
he company made payment on October 15. There was no attempt to hedge the expo
ount for this import purchase.
Debit
Credit
he company made payment on October 15. On August 15, the company entered into
The company designated the forward contract as a cash flow hedge of a foreign curre
edge effectiveness and amortized to net income using a straight line method on a mo
ort purchase and foreign currency forward contract.
Debit
Credit
ugust 15. The beer arrived and the company paid for it on October 15. On August 15,
ct to purchase 50,000 euros. The company designated the forward contract as a fair v
air value of the firm commitment is measured by referring to changes in the forward
effectiveness. Prepare journal entries to account for the foreign currency forward co
hase.
Debit
Credit
ugust 15. The beer arrived and the company paid for it on October 15. On August 15
000 euros. The company designated the option as a fair value hedge of a foreign cur
ment is measured by referring to changes in the spot rate. The time value of the opti
ss, and the change in time value is recognized in net income over the life of the optio
urrency option, foreign currency firm commitment, and import purchase.
Debit
Credit
ed the purchase of beer on October 15. On August 15, the company acquired a twod the option as a cash value hedge of a forecasted foreign currency transaction. The
of hedge effectiveness, and the change in time value is recognized in net income ov
for the foreign currency option and import purchase.
Debit
Credit
yote (before purchasing the
t to hedge the exposure to
mpany entered into a twoge of a foreign currency
ne method on a monthly
r 15. On August 15, the
d contract as a fair value
nges in the forward rate.
urrency forward contract,
er 15. On August 15, the
dge of a foreign currency
me value of the option is
the life of the option.
rchase.
any acquired a two-month
cy transaction. The time
ed in net income over the
Compile calculated translation adjustment amounts
In January I, 20X3 (before acquiring Coyote), Acme Corporation acquired 100
headquartered in Fairfield, New Jersey, and Simbel is in Cairo, Egypt. Acme a
transferred over book value is attributable to undervalued land on Simbel’s b
for the two operations. Information for Acme and for Simbel is in U.S. dollars
Sales
Cost of goods sold
Salary expense
Rent expense
Other expenses
Dividend income – from Simbel
Gain on sale of building, 10/1/X3
Net income
Retained earnings, 1/1/X3
Net income
Dividends
Retained earnings, 12/31/X3
Cash and receivables
Inventory
Prepaid expenses
Investment in Simbel (initial value)
Property, plant, and equipment (net)
Total assets
Accounts payable
Notes payable – due in 20X7
Common stock
Additional paid – in capital
Retained earnings, 12/31/X4
Total liabilities and equities
Additional Information
During 20X3, the first year of joint operation, Simbel reported income of £E 163,000 ea
the 20X4 dividend on June 1.
On December 9, 202X, Simbel classified a £E 10,000 expenditure as a rent expense, al
The exchange rates for 1 £E are as follows:
Step One
Simbel’s financial statements are first translated into U.S. dollars after reclassificatio
Account
Sales
Cost of goods sold
Salary expense
Rent expense (adjusted)
Other expenses
Gain on sale of building, 10/1/X3
Net income
R/E, 1/1/X3
Translation Worksheet
Egyptian Pounds
0
Net income
Dividends
R/E, 12/31/X3
Cash and receivables
Inventory
Prepaid rent (adjusted)
Property, plant, & equipment
Total
Accounts payable
Notes payable
Common stock
Add’l paid-in capital
Retained earnings, 12/31/X3
Subtotal
Cumulative translation
adjustment (negative)
Total
Egyptian Pounds
Retained earnings, 1/1/X3
Net income, 20X3
Dividends, 6/1/X3
Retained earnings, 1/1/X4
Calculation of Cumulative Translation Adjustment at 12/31/X3
Egyptian Pounds
Net assets, 1/1/X3
Net income, 20X3
Dividends, 6/1/X3
Net assets, 12/31/X3
Net assets, 12/31/X3 at current exchange
rate
Translation adjustment, 20X3 (negative)
Net assets, 1/1/X3
Net income, 20X3
Dividends, 6/1/X3
Net assets, 12/31/X3
Net assets, 12/31/X3 at current exchange
rate
Translation adjustment, 20X4 (negative)
Cumulative translation adjustment,
12/31/X3 (negative)
Step Two
Acme and Simbel’s U.S. dollar accounts are then consolid
entries are made in the consolidation
Consolidation Worksheet
Account
Sales
Cost of goods sold
Salary expense
Rent expense
Other expenses
Dividend income
Gain, 10/1/X3
Net income
Ret earn, 1/1/X3
Net income
Dividends
Ret earn, 12/31/X3
Cash and receivables
Acme Dollars
Inventory
Prepaid rent
Investment
Property, plant, & equipment
Total
Accounts payable
Notes payable
Common stock
Additional PIC
Ret earn, 12/31/X3
Subtotal
Cumulative translation adjustment
Total
orporation acquired 100% of Simbel Company for consideration transferred with a fa
in Cairo, Egypt. Acme accounts for its investment in Simbel under the initial value m
alued land on Simbel’s books. Simbel had no retained earnings at the date of acquisit
r Simbel is in U.S. dollars ($) and Egyptian pounds (£E), respectively.
Acme Corporation
$
$
$
$1
$
$
ed income of £E 163,000 earned evenly throughout the year. Simbel declared a dividend of £E 3
diture as a rent expense, although this payment related to prepayment of rent for the first few
January 1, 20X3
June 1, 20X3
Weighted average rate for 20X3
December 31, 20X3
June 1, 20X4
October 1, 20X4
Weighted average rate for 20X4
December 31, 20X4
dollars after reclassification of the 10,000-pound expenditure for rent from rent expense to pr
ksheet
Exchange Rate
U.S. Dollars
0
U.S. Dollars
n Adjustment at 12/31/X3
U.S. Dollars
accounts are then consolidated. Necessary consolidation
made in the consolidation worksheet.
Simbel Dollars
Consolidation
Entries
Debit
Credit
for consideration transferred with a fair value of $126,000. Acme is a U.S.-based com
ent in Simbel under the initial value method. Any excess of fair value of consideration
tained earnings at the date of acquisition. The following are the 20X4 financial statem
ds (£E), respectively.
Acme Corporation
Simbel Company
$200,000
(93,800)
(19,000)
(7,000)
(21,000)
13,750
-0-
£E 800,000
(420,000)
(74,000)
(46,000)
(59,000)
-030,000
$72,950
$ 318,000
72,950
(24,000)
$366,950
$110,750
98,000
30,000
126,000
398,000
£E 231,000
£E 133,000
231,000
(50,000)
£E 314,000
£E 146,000
297,000
-0-0455,000
$762,750
$60,800
132,000
120,000
83,000
366,950
$762,750
£E 898,000
£E 54,000
140,000
240,000
150,000
314,000
£E 898,000
he year. Simbel declared a dividend of £E 30,000 to Acme on June 1 of that year. Simbel also dec
ed to prepayment of rent for the first few months of 20X5.
nuary 1, 20X3
ne 1, 20X3
eighted average rate for 20X3
ecember 31, 20X3
ne 1, 20X4
ctober 1, 20X4
eighted average rate for 20X4
ecember 31, 20X4
$0.30
0.290
0.288
0.280
0.275
0.273
0.274
0.270
penditure for rent from rent expense to prepaid rent. Credit balances are in parentheses.
ation
Consolidated Balances
Dollars
U.S.-based company
f consideration
financial statements
. Simbel also declared
arentheses.