ACC – Balfour Corporation

| September 29, 2018

Balfour Corporation acquired 100% of Tobac Inc., a foreign corporation, for 33,000,000 FC. The acquisition, which was accounted for as a purchase, occurred on July 1, 20X5, when Tobac’s equity, in FC, was as follows:Common stock. .. …. .. .. . . . .. . . . . .. . …. .. 19,000,000 FCPaid-in capital in excess of par . . . .. . . . . … .. .. 8,480,000Retained earnings …. .. .. . . . .. . . . . .. . …. .. 2,520,000Any excess of cost over book value is traceable to equipment which is to be depreciated over10 years. Balfour uses the simple equity method to account for its investment in Tobac.On April 1, 20X7, Tobac acquired additional equipment costing 4,000,000 FC. Equipmentis depreciated by the straight-line method over 10 years. No other equipment had been acquiredor disposed of since 20X4. Tobac employs the LIFO inventory method. Ending inventory onDecember 31, 20X7, consists of the following:Acquired in the 1stquarter of20X4 . . . . . .. .. .. .. . . . 1,000,000 FCAcquired in the 1stquarter of20X5 . . . . . .. .. .. .. . . . 500,000Acquired in the 1stquarter of20X7 . . . . . .. .. .. .. . . . 6,500,000The cost of sales is traceable to goods purchased during 20X7 as follows:Acquired uniformly over the last nine months .. . . . . .. . . 23,400,000 FCAcquired in the 1st quarter … .. .. .. .. .. . . . .. . . .. . . 4,200,000Other expenses were incurred evenly over the year.On April 1, 20X7, Tobac borrowed $1,280,000 from the parent company in order to help?nance the purchase of equipment. The note is due in one year and bears interest at the rate of8%. Principal and interest amounts are due to the parent in dollars.Various spot rates are as follows:1 FC = 1 FC=1st Quarter, 20X4 Average.. …. .$0.46 December 31, 20X6 . . . . .. . . . . … . $0.6020X4Average. . . . . … .. .. …. .. 0.49 1st Quarter, 20X7Average. . . . . … . 0.62January 1,20X5 . . . … .. .. …. .. 0.51 April 1,20X7 .. . .. . . . . .. . . . . … . 0.641st Quarter, 20X5 Average.. …. . 0.53 20X7 Average.. . .. . . . . .. . . . . … . 0.67July 1,20X5 .. . . . . … .. .. …. .. 0.55 Last nine months, 20X7 Average. … . 0.66December 31,20X5 … .. .. …. .. 0.58 December 31, 20X7 . . . . .. . . . . … . 0.65Last six months,20X5Average … .. 0.5720X6Average. . . . . … .. .. …. .. 0.58The December 31, 20X7, trial balances for Tobac and Balfour are as follows:Balfour Corporation Tobac,Inc.Cash .. …. .. . . . . … .. .. …. .. . .. . . . . .. .. . .. . . . . .. .. $ 4,463,200 3,087,385 FCNet Accounts Receivable.. .. …. .. . .. . . . . .. .. . .. . . . . .. .. 15,350,000 12,000,000Inventory … .. . . . . … .. .. …. .. . .. . . . . .. .. . .. . . . . .. .. 16,300,000 8,000,000Due from Tobac. . . . … .. .. …. .. . .. . . . . .. .. . .. . . . . .. .. 1,356,800Investment in Tobac —See Note A. .. . .. . . . . .. .. . .. . . . . .23,712,363Depreciable Assets . … .. .. …. .. . .. . . . . .. .. . .. . . . . .. .. 68,000,000 34,000,000Accumulated Depreciation .. …. .. . .. . . . . .. .. . .. . . . . .. .. (42,000,000) (12,300,000)Due to Balfour . . . . . … .. .. …. .. . .. . . . . .. .. . .. . . . . .. .. (2,087,385)Other Liabilities . . . . … .. .. …. .. . .. . . . . .. .. . .. . . . . .. .. (27,000,000) (3,700,000)Common Stock . . . . … .. .. …. .. . .. . . . . .. .. . .. . . . . .. .. (35,000,000) (19,000,000)Paid-In Capital in Excess of Par … .. . .. . . . . .. .. . .. . . . . .. .. (2,000,000) (8,480,000)Retained Earnings, January 1, 20X7. . .. . . . . .. .. . .. . . . . .. .. (4,500,000) (7,520,000)Sales .. …. .. . . . . … .. .. …. .. . .. . . . . .. .. . .. . . . . .. .. (98,000,000) (40,000,000)Cost of Sales .. . . . . … .. .. …. .. . .. . . . . .. .. . .. . . . . .. .. 64,000,000 27,600,000Depreciation Expense .. .. .. …. .. . .. . . . . .. .. . .. . . . . .. .. 8,076,800 3,300,000Interest Expense on Balfour(Loan (accrued on December 31, 20X7) —See Note B. . . . .. .. 118,154Exchange Gain on Balfour Loan—See Note B .. .. . .. . . . . .. .. (30,769)Other Expenses . . . . … .. .. …. .. . .. . . . . .. .. . .. . . . . .. .. 10,000,000 5,012,615Interest Income. . . . . … .. .. …. .. . .. . . . . .. .. . .. . . . . .. .. (76,800)Subsidiary Income. . … .. .. …. .. . .. . . . . .. .. . .. . . . . .. .. (2,682,363)Total. …. .. . . . . … .. .. …. .. . .. . . . . .. .. . .. . . . . .. .. $ 0 0 FCNote A —Balfour’s investment in Tobac consists of the following:Initial investment (33,000,000 FC x $0.55) . .. …. .. . .. .. . . $18,150,000Last six months, 20X5 income (2,000,000 FC x $0.57) . .. .. . . 1,140,00020X6 income (3,000,000 FC x $0.58). …. .. …. .. . .. .. . . 1,740,00020X7 income.. …. .. . .. . . . . .. . . . . … .. .. …. .. . .. . . . . 2,682,363Balance .. .. …. .. . .. . . . . .. . . . . … .. .. …. .. . .. . . . . $23,712,363Note B —The original loan from Balfour was 2,000,000 FC, or $1,280,000 (2,000,000 FC x $0.64). On December31, 20X7, it would require 1,969,231 FC ($1,280,000/$0.65) to settle the loan. This represents anexchange gain of 30,769 FC (2,000,000 FC – 1,969,231 FC).The year-end balance due to Balfour is determined as follows:Principal balance. . . . .. .. …. .. . .. …. .. .. . . . . . . . .. . . . . . 1,969,231 FCAccrued interest ($1,280,000 x 8% x 9/12 / $0.65). . .. .. . . . 118,154Balance .. …. . . . .. .. …. .. . .. …. .. .. . . . . . . . .. . . . . . 2,087,385 FCThe interest is accrued at year-end; therefore, interest expense should be translated at theyear-end rate.Assuming the FC is Tobac’s functional currency, translate Tobac’s trial balance, and preparea consolidating worksheet (template attached).

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