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, 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, but the financial information has already been converted into the US dollar. 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.
Directions
You will submit two products: an Excel financial workbook containing journal entries and consolidated financial statements, and a Word document synopsis of concepts related to foreign currency and exchange risk.
Specifically, you must address the following rubric criteria:
Part One
Create journal entries identifying consolidations and investments. Consider the following:
The various related costs involved in a business combination
How goodwill is recorded in journal entries
Prepare consolidated financial statements when goodwill is present.
Account for forward contracts and options used as hedges of forecasted foreign currency transactions.
Part Two
Explain concepts related to foreign currency, exchange rates, and exchange risk. Consider the following:
On January 1, 20X4, Acme Corporation acquired 100% of the outstanding common stock of Coyote
the owners of Coyote $200,000 in long-term liabilities and 20,000 shares of common stock having a
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 would
report in its consolidated balance sheet following the acquisition of
Coyote. Include in Acme’s retained earnings any adjustments to income
accounts from Part 1.
% of the outstanding common stock of Coyote, a foreign company (amounts translated to USD). To acquire th
s and 20,000 shares of common stock having a par value of $1 per share but a fair value of $20 per share. Ac
he acquisition and another $12,000 in connection with stock issuance costs.
e 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
ated to USD). To acquire these shares, Acme issued to
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
On January 1, 20X4, Acme Corporation acquired 100% of the outstanding common stock of Coyote
the owners of Coyote $200,000 in long-term liabilities and 20,000 shares of common stock having a
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:
Acme’s appraisal of Coyote’s fair values deemed three accounts to be undervalued: Inventory by $5,000, Land by
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
Prepare consolidated financial statements when goodwill is present.
ACME CORPORATIO
Worksheet to prepare a Consolidated Balance Sheet
Goodwill
Total assets
Accounts payable
Long‑term liabilities
Common stock
Additional paid ‑ in capital
Retained earnings, 1/1/X4
Total liab. and owners’ equity
This is a continuation of the prior tab (Investments with Goodwill). Information is rep
ired 100% of the outstanding common stock of Coyote, a foreign company (amounts translated to USD). To a
liabilities and 20,000 shares of common stock having a par value of $1 per share but a fair value of $20 per s
ance in the acquisition and another $12,000 in connection with stock issuance costs.
ets for the two companies were as follows:
Acme Corporation
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
$ 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)
Note: Parentheses indicate a credit balance.
hree accounts to be undervalued: Inventory by $5,000, Land by $20,000, and Buildings by $30,000. Acme plans to maintain Co
e’s column of accounts for the journal entries in Part 1 and then prepare a worksheet to consolidate the balance sheets of the
oodwill is present.
ACME CORPORATION AND CONSOLIDATED SUBSIDIARY COYOTE
1/1/20X4
Accounts
Cash
Receivables
Inventory
Land
Buildings (net)
Equipment (net)
Investment in Coyote
Acme Corporation
Coyote
Goodwill
Total assets
0
0
Accounts payable
Long‑term liabilities
Common stock
Additional paid ‑ in capital
Retained earnings, 1/1/X4
Total liab. and owners’ equity
0
0
). Information is repeated below.
ranslated to USD). To acquire these shares, Acme issued to
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)
-0-0(340,000)
Acme plans to maintain Coyote’s separate legal identity and to
e the balance sheets of these two companies at the acquisition date.
Y COYOTE
Consolidation Debit
Entries
Consolidated Totals
0
0
0
0
Complete foreign financial statement conversions.
Acme Corporation, a U.S.-based importer of beer and wine, purchased 1,000
purchasing the company. Relevant US dollar exchange rates for the euro are
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
commitment. The fair value of the firm commitment is measured by referring
from the assessment of hedge effectiveness, and the change in time value is
entries to account for the foreign currency option, foreign currency firm com
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
option on 50,000 euros. The company designated the option as a cash value
the option is excluded from the assessment of hedge effectiveness, and the c
option. Prepare journal entries to account for the foreign currency option an
Journal Entries (Forecasted)
August 15
September 30
October 15
Date of
Sale
wine, purchased 1,000 cases of Oktoberfest-style beer from Coyote for 50,000 euros
e 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
rter financial statements on September 30.
e company made payment on October 15. There was no attempt to hedge the expos
unt for this import purchase.
Debit
Credit
e company made payment on October 15. On August 15, the company entered into
e company designated the forward contract as a cash flow hedge of a foreign curren
dge effectiveness and amortized to net income using a straight line method on a mon
rt purchase and foreign currency forward contract.
Debit
Credit
gust 15. The beer arrived and the company paid for it on October 15. On August 15, t
to purchase 50,000 euros. The company designated the forward contract as a fair va
r value of the firm commitment is measured by referring to changes in the forward r
ffectiveness. Prepare journal entries to account for the foreign currency forward con
ase.
Debit
Credit
gust 15. The beer arrived and the company paid for it on October 15. On August 15, t
00 euros. The company designated the option as a fair value hedge of a foreign curre
s measured by referring to changes in the spot rate. The time value of the option is e
change in time value is recognized in net income over the life of the option. Prepare
eign currency firm commitment, and import purchase.
Debit
Credit
d the purchase of beer on October 15. On August 15, the company acquired a two-m
option as a cash value hedge of a forecasted foreign currency transaction. The time
effectiveness, and the change in time value is recognized in net income over the life
eign currency option and import purchase.
Debit
Credit
e for 50,000 euros before
o hedge the exposure to
pany entered into a twoof a foreign currency
method on a monthly
5. On August 15, the
ontract as a fair value
es in the forward rate.
rency forward contract,
15. On August 15, the
e of a foreign currency firm
e of the option is excluded
e option. Prepare journal
acquired a two-month call
saction. The time value of
ome over the life of the
- Compile calculated translation adjustment amounts.
On January I, 20X3, before acquiring Coyote, Acme Corporation acquired 100
headquartered in Fairfield, New Jersey, and Simbel is in Cairo, Egypt. Acme a
over book value is attributable to undervalued land on Simbel’s books. Simbe
operations. Information for Acme and for Simbel is in U.S. dollars ($) and Egy
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
dividend on June 1.
On December 9, 20X4, 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
Net income
Dividends
Translation Worksheet
Egyptian Pounds
0
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 12/3
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 consolidated. Necessary consolidati
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
Inventory
Prepaid rent
Investment
Property, plant, & equipment
Acme Dollars
Total
Accounts payable
Notes payable
Common stock
Additional PIC
Ret earn, 12/31/X3
Subtotal
Cumulative translation adjustment
Total
on acquired 100% of Simbel Company for consideration transferred with a fair value o
Egypt. Acme accounts for its investment in Simbel under the initial value method. An
s books. Simbel had no retained earnings at the date of acquisition. The following ar
ars ($) and Egyptian pounds (£E), respectively.
Acme Corporation
$
$
$
$
$
$
of £E 163,000 earned evenly throughout the year. Simbel declared a dividend of £E 30,000 to A
rent expense, although this payment related to prepayment of rent for the first few months of
January 1, 20X3
June 1, 20X3
Weighted average rate for 20X3
December 31, 20X3
June 1, 202X
October 1, 20X4
Weighted average rate for 20X4
December 31, 20X4
er reclassification of the £E 10,000-pound expenditure for rent from rent expense to prepaid r
et
Exchange Rate
U.S. Dollars
0
U.S. Dollars
ustment at 12/31/X3
U.S. Dollars
sary consolidation entries are made in the consolidation worksheet.
eet
Simbel Dollars
Consolidation
Entries
Debit
Credit
deration transferred with a fair value of $126,000. Acme is a U.S.-based company
bel under the initial value method. Any excess of fair value of consideration transferr
e date of acquisition. The following are the 20X4 financial statements for the two
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
mbel declared a dividend of £E 30,000 to Acme on June 1 of that year. Simbel also declared the 2
ayment 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, 202X
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
re for rent from rent expense to prepaid rent. Credit balances are in parentheses.
ation worksheet.
Consolidated Balances
Dollars
d company
ration transferred
or the two
so declared the 20X4
ses.
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