b Assume that Pirate uses the fully adjusted equity method R

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.

On January 1, 20X5, Pirate Company acquired all of the outstanding stock of Ship Inc., a Norwegian company, at a cost of $169,200 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 Debits Credits NKr 163,000 223,000 291,000 603,000 Cash Accounts Receivable (net) Inventory Property, Plant & Equipment Accumulated Depreciation Accounts Payable Notes Pavable Common Stock Retained Earnings Sales Cost of Goods Sold Operating Expenses Depreciation Expense Dividends Paid Total NKr 151,000 92,000 192,000 440,000 260,000 801,000 421,000 121,000 66,000 48,000 NKr1,936,000 NKr1,936,000 Additional Information: 1. 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 NKr420,000 were made evenly throughout 20X5 2. Ship acquired all of its property, plant, and equipment on July 1, 20X3, and uses straight-line depreciation 3. Ship\'s sales were made evenly throughout 20X5, and its operating expenses were incurred evenly throughout 20X5 4. The dividends were declared and paid on July 1, 20X5 5. Pirate\'s income from its own operations was $227,000 for 20X5, and its total stockholders\' equity on January 1, 20X5, was $3,500,000. Pirate declared $120,000 of dividends during 20X5. 6. Exchange rates were as follows:

Solution

a.

Ship Inc.

Trial Balance Translation

December 31, 20X5

Balance    

Exchange

Balance  

                     Item                      

      Kroner     

   Rate    

  Dollars   

Cash

NKr   163,000

.21

$   34,230

Accounts Receivable (net)

223,000

.21

46,830

Inventory

291,000

.21

61,110

Property, Plant, and Equipment

603,000

.21

126,630

Cost of Goods Sold

421,000

.20

84,200

Operating Expenses

121,000

.20

24,200

Depreciation Expense

66,000

.20

13,200

Dividends Paid

            48,000

.19

      9,120

Total Debits

NKr 1,936,000

$399,520

Accumulated Depreciation

NKr   151,000

.21

$ 31,710

Accounts Payable

92,000

.21

19,320

Notes Payable

192,000

.21

40,320

Common Stock

440,000

.18

79,200

Retained Earnings

260,000

.18

46,800

Sales

          801,000

.20

  160,200

Total

NKr 1,936,000

$377,550

Accumulated Other Comprehensive

Income — Translation Adjustment

(credit)

    21,970

Total Credits

$399,520

b.

Entries for 20X5:

January 1

Investment in Ship Inc

169,200

                  Cash

169,200

Purchase of Ship Inc.

July 1

Cash

9,120

     Investment in Ship Inc

9,120

Dividend received from foreign subsidiary:

$9,120 = NKr48,000 x $.19

December 31

Investment in Ship Inc

45,400

     Income from Subsidiary

45,400

Equity in net income of foreign subsidiary:

$45,400 = Income of NKr 227,000 x $.20

Investment in Ship Inc

21,970

     Other Comprehensive Income —

      Translation Adjustment

21,970

Parent\'s share of translation adjustment

from translation of subsidiary\'s accounts:

$21,970 x 1.00

Income from Subsidiary

7,660

     Investment in Ship Inc

7,660

Amortization of differential:

Property, plant, and equipment

$1,940

Patent

  5,720

Total — see supporting schedule 2

$7,660

Investment in Ship Inc

6,877

     Other Comprehensive Income —

      Translation Adjustment

6,877

Translation adjustment applicable

to the differential:

Property, plant, and equipment

$2,833

Patent

  4,004

Total — see supporting schedule 2

$6,877

Schedule 1: Determining the differential for 20X5:

Investment cost at January 1, 20X5

$ 169,200

Less: Book value of net assets acquired on

             January 1, 20X5 (NKr700,000 x $.18)

(126,000)

Differential

$   43,200

Differential allocated to:

    Property, plant, and equipment

$   17,460

    Patent

      25,740

    Total

$   43,200

Schedule 2: Determining the differential amortization for 20X5:

Norwegian  

Translation

U.S.    

     Kroner     

     Rate     

Dollars

Property, plant, and equipment:

Income statement:

    Difference at beginning of year

NKr 97,000

.18

$17,460

    Amortization for 20X5

      (NKr97,000 / 10 years)

        (9,700)

.20

  (1,940)

    Remaining balances

NKr   87,300

$15,500

Balance sheet:

Remaining balance on

    December 31, 20X5, translated

    at year-end exchange rate

NKr   87,300

.21

  18,333

Difference to other comprehensive

    income — translation adjustment

$ 2,833

Patent:

Income statement:

    Difference at beginning of year

NKr   143,000

.18

$ 25,740

    Amortization for 20X5

    (NKr143,000 / 5 years)

        (28,600)

.20

  (5,720)

    Remaining balances

NKr 114,400

$ 20,020

Balance sheet:

Remaining balance on

December 31, 20X5, translated

at year-end exchange rate

NKr 114,400

.21

    24024

Difference to other comprehensive

income — translation adjustment

$ 4,004

Note that the property, plant, and equipment portion of the differential must be increased from $15,500 to $16833, requiring a debit of $2,833 to the investment account. The portion of the differential attributable to patent must be increased from $20,020 to $24,024, requiring a debit of $4,004 to the investment account. The corresponding credit is to the Other Comprehensive Income – Translation Adjustment account ($6,837 = $2,833 + $4,004).

c.

Pirate’s consolidated comprehensive income for 20X5:

1.

Income from Pirate’s operations for 20X5, exclusive

of income from the Norwegian subsidiary

$ 227,000

2.

Add: Income from the Norwegian subsidiary for 20X5

45,400

3.

Deduct: Amortization of differential for 20X5

        (6,877)

    Equals Net Income

$ 265,523

4.

Add: Translation Adjustment ($21,500 + $4,020)

       43,200

    Equals Consolidated Comprehensive Income

$   308,723

d.

Pirate’s consolidated stockholders’ equity at December 31, 20X5

1.

Pirate’s stockholders’ equity at Jan. 1, 20X5

$3,500,000

2.

Add: Net income for 20X5

265,523

3.

Deduct: Dividends declared by Pirate during 20X5

(120,000)

4.

Add: Accumulated other comprehensive income:

    Foreign currency translation adjustment

       43,200

Consolidated Stockholders’ Equity at Dec. 31, 20X5

$3,688,723

a.	Ship Inc. Trial Balance Translation December 31, 20X5
		Balance	Exchange	Balance
	Item	Kroner	Rate	Dollars
	Cash	NKr   163,000	.21	$   34,230
	Accounts Receivable (net)	223,000	.21	46,830
	Inventory	291,000	.21	61,110
	Property, Plant, and Equipment	603,000	.21	126,630
	Cost of Goods Sold	421,000	.20	84,200
	Operating Expenses	121,000	.20	24,200
	Depreciation Expense	66,000	.20	13,200
	Dividends Paid	48,000	.19	9,120
	Total Debits	NKr 1,936,000		$399,520
	Accumulated Depreciation	NKr   151,000	.21	$ 31,710
	Accounts Payable	92,000	.21	19,320
	Notes Payable	192,000	.21	40,320
	Common Stock	440,000	.18	79,200
	Retained Earnings	260,000	.18	46,800
	Sales	801,000	.20	160,200
	Total	NKr 1,936,000		$377,550
	Accumulated Other Comprehensive
	Income — Translation Adjustment
	(credit)			21,970
	Total Credits			$399,520