Patricia Harrington

Task 4 – Consolidation
On January 1, 2011, Parflex Corporation exchanged $344,000 cash for 90% of
Eagle Corporation’s outstanding voting stock. Eagle’s acquisition date balance
sheet follows:
Cash and $15,000 Liabilities $76,000
receivables
Inventory 35,000 Common Stock 150,000
Property and
equipment (net) 350,000 Retained earnings 174,000
$400,000 $400,000

On January 1, 2011, Parflex prepared the following fair-value allocation schedule:

Consideration transferred by Fair value of Eagle Parflex $344,000

10% noncontrolling interest fair value 36,000

Fair value of Eagle 380,000
Book value of Eagle 324,000
Excess fair over book value 56,000
To equipment (undervalued, remaining life of 9 years) 18,000
To goodwill (indefinite life) $38,000

The companies’ financial statements for the year ending December 31, 2013,
follow:
Parflex Eagle
Sales $(862,000) $(366,000)
Cost of goods sold 515,000 209,000
Depreciation expense 191,200 67,000
Equity in Eagle’s earnings (79,200) 0.00
Separate company net
income ($235,000) ($90,000]

Retained earnings 1/1 Parflex Eagle

Net Income $(500,000) $(306,000)
Dividend (235,000) 90,000
Retained earnings 12/31 130,000 27,000
Patricia Harrington

Cash and receivables $135,000 $82,000

Inventory in Eagle 255,000 136,000
Investment in Eagle 488,900 0.00
Property and equipment (net) 964,000 328,000
Total assets $1,842.900 $546,000

Liabilities $(722,900) (55,000)

Common stock – Parflex (515,000) 0.00

Common Stock-Eagle 0.00 (150,000)
Retained earnings 12/31 (605,000) (341,000)
Total liabilities and owners’
equity $(1,842,900) $(546,000)

a. Compute the goodwill allocation to the controlling and noncontrolling interest.

($15,000 + $ $35,000 + $350,000 - $76,000 = $324,000)
($324,000 + $18,000 X 0.90 = $307,800)
($344,000 - $307,800 = $36,200) The amount of Goodwill from Company P’s
purchase
= $36,200

The noncontrolling interest purchased as the book value of Company E plus excess
fair value over book value for equipment times percent purchased.

($324,000 + $18,000) X 0.10 = $34,200)

Calculate the difference in the consideration transferred by the noncontrolling

interest and the cost of the interest purchased.

The amount of Goodwill allocated from to noncontrolling interest and the cost of
the interest purchased. = ($36,000 - $34,200 = $1,800)
b. Show how Parflex determined its “Investment in Eagle” account balance.
Patricia Harrington

Annual amortization as the excess fair value of equipment $18,000/9 = $2,000

Net income minus amortization times percent 0.90% owned:
(90,000 - $2.000) X 0.90 = $79,200
Company P’s increase to equity from retained earnings as the difference retained
earnings – (1/1/13) and retained earnings – 1/1/11 times the percent owned:
($278,000-$174.000) x 0.90 = $93.600.
Company P’s decrease to equity from dividend as dividend ninety percent owned:
($27,000 x 0.90 = $24,300)
(2011 & 2012) two amortizations paid by Company P = ($2,000 x 2 x 0.90 = $3,600)
Company P’s investment balance as the sum of the initial investment value and the
increases to equity minus the decrease to equity.
($344,000 + $79,200 + $93,600 - $24,300 - $3,600 = $488,900)
c. Determine the amounts that should appear on Parflex’s December 31, 2013,
consolidated statement of financial position and its 2013 consolidated income
statement? SEE EXCEL WORKSHEET
The consolidated income statement for Company P and E will have the consolidated
amounts for both companies.
d. What are the total credits/debits associated with the consolidating journal
entries for the controlling entry? SEE EXCEL WORKSHEET
e. Based on your knowledge of consolidations, what are some accounting issues
associated with Eagle’s acquisition? Explain your journal entries
First, the entire balance sheet has negative cash flow balances, which is a sign that
both companies have serious debt issues.
Company [E] financial statements shows that equipment has excess fair value. In
addition, the book value and excess fair value over book for equipment is the total
cost of the company. Company [P] is only purchasing 90% of the company and will
only have the amount deducted from their consideration transferred. The cost of
interest purchased by Company [P] as the book value [E] plus fair value for
equipment times percent purchased.
Patricia Harrington

Task 5 - Foreign Currency

Sendelbach Corporation is a U.S.–based organization with operations
throughout the world. One of its subsidiaries is headquartered in Toronto.
Although this wholly owned company operates primarily in Canada, it engages
in some transactions through a branch in Mexico.
Therefore, the subsidiary maintains a ledger denominated in Mexican pesos
(Ps) and a general ledger in Canadian dollars (C$). As of December 31, 2013, the
subsidiary is preparing financial statements in anticipation of consolidation with
the U.S. parent corporation. Both ledgers for the subsidiary are as follows:
Main Operation--Canada
Debit Credit
Accounts payable C$ 35,000
Accumulated depreciation 27,000
Building and equipment C$ 167,000
Cash 26,000
Common stock 50,000
Cost of goods sold 203,000
Depreciation expense 8,000
Dividends paid, 4/1/13 28,000
Gain on sale of 5,000
equipment, 6/1/13
Inventory 98,000
Notes payable-due in 5,000
2016
Receivables 68,000
Retained earnings, 1/1/13 135,530
Salary expense 26,000
Sales 312,000
Utility Expense 9,000
Branch Operation 7,530
Totals C$640,530 C$640,530
Branch Operation-Mexico
Debit Credit
Accounts payable PS 49,000
Patricia Harrington

Accumulated depreciation 19,000

Building and equipment PS 49,000
Cash 59,000
Depreciation expense 2,000

Inventory (beginning –income Statement) 23,000

Inventory (ending –income statement) 28,000
Inventory (ending –balance sheet) 28,0000
Purchases 68,000
Receivables 21,000
Salary Expense 9,000
Sales 124,000
Main office 30,000
Totals Ps 250,000 Ps 250,000
Additional Information
 The Canadian subsidiary’s functional currency is the Canadian dollar, and
Sendelbach’s reporting currency is the U.S. dollar. The Canadian and Mexican
operations are not viewed as separate accounting entities.
 The building and equipment used in the Mexican operation were acquired in
2005 when the currency exchange rate was C$0.25 5 Ps 1.
 Purchases should be assumed as having been made evenly throughout the
fiscal year. 
 Beginning inventory was acquired evenly throughout 2012; ending inventory
was acquired evenly throughout 2013.
 The Main Office account on the Mexican records should be considered an equity
account. This balance was remeasured into C$7,530 on December 31, 2013. 
 Currency exchange rates for 1 Ps applicable to the Mexican operation follow:

Weighted average 2012 C$ 0.30

January 1, 2013 0.32
Weighted average rate for 2013 0.34
December 31, 2013 0.35

 The December 31, 2012, consolidated balance sheet reported a cumulative

translation adjustment with a $36,950 credit (positive) balance.
Patricia Harrington

 The subsidiary’s common stock was issued in 2004 when the exchange rate
was $0.45 5 C$1.

 The subsidiary’s December 31, 2012, Retained Earnings balance was

C$135,530, a figure that has been translated into US$70,421.

 The applicable currency exchange rates for 1 C$ for translation purposes are
as follows:

January 1, 2013 US$0.70

April 1, 2013 0.69
June 1,2013 0.68
Weighted average rate for 2013 0.67
December 31, 2013 0.65

a. Remeasure the Mexican operation’s figures into Canadian dollars. (Hint: Back into
the beginning net monetary asset or liability position.)
Pesos Debit Credit
Accounts payable 49,000 x .35 C 17,150
Accumulated depreciation 19,000 c .25 H 4,750
Building and Equipment 40,000 x 25 H 10,000
Cash 59,000 x .35 C 20,650
Depreciation expense 2,000 x .25 H 500
Inventory - (Beginning-Income statement) 6,900
23,000 x .30 A (’12)
Inventory- (Ending-income statement) 28,000 x .34 A (’13) 9,520
Inventory- (Ending-balances sheet) 28,000 x .34 A (’13) 9,520
Purchases 68,000 x .34 A (’13) 23,120
Receivables 21,000 x .35 C 7,350

Salary expense 9,000 x .34 A 3,060

Sales 124,000 x 34 A 42,160
Main office 30,000 given 7,530
Remeasurement loss Schedule One
Total 81,100 81,110
Schedule One – Remeasurement Loss Pesos Canadian Dollars
Net monetary liabilities, 1/1/13* (16,000) X .32 (5,120)
Increases in net monetary assets
Patricia Harrington

Sales 124,000 X .34 42,160

Decreases in net monetary assets
Purchases (68,000) X .34 (23,120)
Salary Expense (9,000) X .34 (3,060)
Net monetary assets, 12/31/13** 31,000 10,860
Net monetary assets, 12/31/13 at
Current exchange rate 31,000 X .35 10,850
Remeasurement loss 10

Net monetary liabilities, 1/1/13, can be determined by first determining the net
monetary assets at 12/31/13 and then backing out the changes in monetary assets
and liabilities during 2013-sales, purchases and salary expense.
Net monetary assets, 12/31/13: Cash + Receivables * Accounts Payable

b. Prepare financial statements (income statement, statement of retained earnings,

and balance sheet) for the Canadian subsidiary in its functional currency.

The following C$ financial statements are produced by combing the figures from
the main operation with the remeasured figures from the branch operation. The
Branch Operation and Main Office accounts offset each other. COGS for the
Mexican branch is determined by combining beginning inventory, purchases, and
ending inventory as remeasured in C$.

c. Translate the Canadian dollar functional currency financial statements into U.S.
dollars so that Sendelbach can prepare consolidated financial statements.

For the Year Ended December 31, 2013 Current Rate Method
Sales C$ 354,160 x .67 A = $ 237,287.20
Cost of goods sold (223,500) x .67 A = (149,745.00)
Gross profit 130,660 87,542.20
Depreciation expense (8,500) x .67 A = (5,695.00)
Salary expense (29,060) x .67 A = (19,470.20)
Utility expense (9,000) x .67 A = (6,030.00)
Gain on sale of equipment 5,000 x .68 H = 3,400.00
Remeasurement loss (10) x .67 A = (6.70)
Net income C$ 89,090 $59,740.30
Statement of Retained Earnings
For the Year Ended December 31, 2013
Patricia Harrington

c.
Retained earnings, 1/11/13 C$ 135,530 Given $70,421.00
Net income (above) 89,090 Above 59,740.30
Dividends paid (28,000) x .69 H = (19,320.00)

Retained earnings, C$ 196,620 110,841.30

12/31/13

c. Balance Sheet
December 31, 2013

Cash C$ 46.650 x .65 C = $ 30,322.50

Receivables 75,350 x .65 C= 48,977.50
Inventory 107,520 x .65 C= 69,888.00
Building and equipment 177,000 x .65 C= 115,050.00
Accumulated depreciation (31,750) x .65 C = (20,637.50)
Total C$ 374,770 $243,600.50

Accounts payable C$ 52,150 x .65 C = $33,897.50

Notes payable 76,000 x .65 C = 49,400.00
Common stock 50,000 x .45 H = 22,500.00
Retained earnings 196,620 Above 110,841.30
Cumulative translation adjustment Schedule Two 26,961.70
Total C$ 374,770 $243,600.50

Schedule Two-Translation Adjustment

Net assets, 1/1/13 C$ 185,530 x.70 = $129,871.00
Change in net assets
Net income 89,090 Above 59,740.30
Dividends (28,000) X .69 = (19,320.00)
Net assets, 12/31/13 C$ 246,620 $170,291.30
Net assets 12/31/13 at current exchange rate C$ 246,620 X .65 = 160,303.00
Translation adjustment, 2013 (negative) $9,988.30
Cumulative translation adj. 1/1/13 positive (36,950.00)
Cumulative translation adj. 12/31/11 (positive) $(26,961.70
Patricia Harrington