ADVANCED FINANCIAL ACCOUNTING TUTORIAL

13rd SESSION
Multinational Accounting: Issues in Financial Reporting and
Translation of Foreign Entity Statements

PROBLEM 1 – Translation and Calculation of Translation Adjustment

On January 1, 20X4, Plum Corporation acquired Silva Company, a Brazilian
subsidiary, by purchasing all its common stock at book value. Silva’s trial
balances on January 1, 20X4, and December 31, 20X4, expressed in Brazilian
reals (BRL), follow:

Additional Information:
1. Silva uses FIFO inventory valuation. Purchases were made uniformly during
20X4. Ending inventory for 20X4 is composed of units purchased when the
exchange rate was $0.25.
2. The insurance premium for a two-year policy was paid on October 1, 20X3.
3. Plant and equipment were acquired as follows:

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4. Plant and equipment are depreciated using the straight-line method and a
10-year life, with no residual value. A full month’s depreciation is taken in the
month of acquisition.
5. The intangible assets are patents acquired on July 10, 20X2, at a cost of
BRL60,000. The estimated life is five years.
6. The common stock was issued on January 1, 20X1.
7. Dividends of BRL10,000 were declared and paid on April 7. On October 9,
BRL15,000 of dividends were declared and paid.
8. Exchange rates were as follows:

Required:
a. Prepare a schedule translating the December 31, 20X4, trial balance of
Silva from reals to dollars assuming the real is the functional currency.
b. Prepare a schedule calculating the translation adjustment as of the
end of 20X4. The net assets on January 1, 20X4, were BRL280,000.

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PROBLEM 2 – Translation
Palermo Inc. purchased 80 percent of the outstanding stock of Salina
Ranching Company, located in Australia, on January 1, 20X3. The purchase
price in Australian dollars (A$) was A$200,000, and A$40,000 of the differential
was allocated to plant and equipment, which is amortized over a 10-year
period. The remainder of the differential was attributable to a patent.
Palermo Inc. amortizes the patent over 10 years. Salina Ranching’s trial
balance on December 31, 20X3, in Australian dollars is as follows:

Additional Information
1. Salina Ranching uses average cost for cost of goods sold. Inventory
increased by A$20,000 during the year. Purchases were made uniformly
during 20X3. The ending inventory was acquired at the average exchange
rate for the year.

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 2. Plant and equipment were acquired as follows:

3. Plant and equipment are depreciated using the straight-line method and a
10-year life with no residual value.
4. The payable to Palermo is in Australian dollars. Palermo’s books show a
receivable from Salina Ranching of $6,480.
5. The 10-year bonds were issued on July 1, 20X3, for A$106,000. The
premium is amortized on a straight-line basis. The interest is paid on
April 1 and October 1.
6. The dividends were declared and paid on April 1.
7. Exchange rates were as follows:

Required
a. Prepare a schedule translating the December 31, 20X3, trial balance of
Salina Ranching from Australian dollars to U.S. dollars.
b. Prepare a schedule providing a proof of the translation adjustment.

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PROBLEM 3 – Parent Company Journal Entries and Translation (HOMEWORK)
Refer to the information given in PROBLEM 2 for Palermo and its subsidiary,
Salina Ranching. Assume that the Australian dollar (A$) is the functional
currency and that Palermo uses the fully adjusted equity method for
accounting for its investment in Salina Ranching.
Required:
a. Prepare the entries that Palermo would record in 20X3 for its investment
in Salina Ranching. Your entries should include the following:
1. Record the initial investment on January 1, 20X3.
2. Record the dividend received by the parent company.
3. Recognize the parent company’s share of the equity income of
the subsidiary.
4. Record the amortizations of the differential.
5. Recognize the translation adjustment required by the parent
from the adjustment of the differential.
6. Recognize the parent company’s share of the translation
adjustment resulting from the translation of the subsidiary’s
accounts.
b. Provide the necessary documentation and support for the amounts
recorded in the journal entries, including a schedule of the translation
adjustment related to the differential