Problem 7-1 (LO 2, 3) Adjust to U.S.

| June 13, 2016

Question
Problem 7-1 (LO 2, 3) Adjust to U.S. GAAP and translate trial balance. On January

1, 20X8, Richter Corporation acquired an 80% interest in Morgan Company, a foreign com-

pany, for 9,000,000 FC. On the date of acquisition, Morgan’s equity consisted of common

stock of 3,000,000 FC and retained earnings of 5,500,000 FC. Any excess of cost over book

value is attributable to additional depreciable assets, which have a useful life of 20 years. The

unadjusted trial balances for Richter and Morgan as of December 31, 20X9, are as follows:

Richter Corporation Morgan Company

Cash .. …. .. . . .. . .. …. .. .. .. . .. . . . . .. . . … .. …. .. 4,630,000 3,850,000 FC

Short-Term Investments .. . .. .. .. .. . . . . . .. . . .. . .. …. .. .. 1,250,000 1,100,000

Accounts Receivable . .. .. …. .. … . . .. . . . . .. . .. .. .. …. 3,790,000 4,620,000

Inventory … .. . . .. . .. …. .. .. .. . .. . . . . .. . . … .. …. .. 4,800,000 2,950,000

Investment inMorgan .. .. …. .. … . . .. . . . . .. . .. .. .. …. 6,930,000

Depreciable Assets . . .. .. …. .. … . . .. . . . . .. . .. .. .. …. 27,400,000 17,700,000

Accumulated Depreciation .. …. .. . .. . . .. . . . . . .. .. .. .. .. (12,120,000) (7,250,000)

Depreciable Assets —Leased. …. .. . .. . . .. . . . . . .. .. .. .. .. 4,540,000

Accumulated Depreciation—Leased Assets .. . . . . . .. . . . . .. .. (1,900,000)

Capitalized Research and Development. .. . . . . .. . .. . . .. …. 980,000

Accounts Payable .. . … . .. .. .. .. . . . . . .. . . .. . .. …. .. .. (2,860,000) (1,200,000)

Interest Payable.. .. . … . .. .. .. .. . . . . . .. . . .. . .. …. .. .. (150,000)

December 31,20X8 … .. .. …. .. . 0.80 August 1, 20X9. . .. .. …. .. . .. . . . 0.83

4th Quarter,20X8 Average . …. .. . . 0.78 November 15, 20X9.. …. .. . .. . . . 0.86

20X8Average. . . . . … .. .. …. .. . . 0.79 December 31,20X9 .. …. .. . .. . . . 0.89

January 1,20X9 . . . … .. .. …. .. . . 0.82 20X9Average. . . .. .. …. .. . .. . . . 0.88

Obligation Under Capital Lease . .. . . . …. .. .. …. … .. . . . (3,170,000)

Common Stock … .. .. . .. …. .. . . . …. .. .. …. … .. . . . (10,000,000) (3,000,000)

Retained Earnings,January 1,20X9. . . …. .. .. …. … .. . . . (18,460,000) (15,656,000)

Sales .. … .. . … .. .. . .. …. .. . . . …. .. .. …. … .. . . . (25,000,000) (18,000,000)

Cost of Goods Sold .. .. . .. …. .. . . . …. .. .. …. … .. . . . 16,500,000 11,600,000

Depreciation Expense .. . .. …. .. . . . …. .. .. …. … .. . . . 2,875,000 1,550,000

Interest Expense… .. .. . .. …. .. . . . …. .. .. …. … .. . . . 150,000

Research and Development Expense. . . …. .. .. …. … .. . . . 740,000

Rent Expense . . … .. .. . .. …. .. . . . …. .. .. …. … .. . . . 8,000

Other Expenses … .. .. . .. …. .. . . . …. .. .. …. … .. . . . 955,000 748,000

OCI —Unrealized Holding Gain—AFS. …. .. .. …. … .. . . . (900,000)

Total. … .. . … .. .. . .. …. .. . . . …. .. .. …. … .. . . . 0 0FC

Morgan’s trial balance is based, in part, on certain national accounting principles that are

accepted in the country in which Morgan operates. However, these principles do not conform

to U.S. GAAP. These differences include the following:

Short-Term Investments —All of these available-for-sale investments, acquired on January 1,

20X9, have been recorded at cost, without consideration of fair value. As of December 31,

20X9, fair value is 1,500,000 FC for these investments.

Research and Development —Research and development costs have been capitalized, although

GAAP require these costs to be expensed in the period incurred. Morgan has no prior R&D

costs. Therefore, all capitalized R&D costs were incurred uniformly during 20X9.

Leases —On January 1, 20X9, Morgan entered into a contract to lease machinery from an out-

side company. Morgan treated the lease as operating; however, GAAP require that it be capital-

ized. The lease contract requires an 8,000 FC payment at the start of each year for four years. At

the end of the lease term, title to the asset is transferred to Morgan. The machinery has a fair

value of 27,215 FC and is depreciated using the straight-line method over its remaining five-

year life. The implicit interest rate is 12%.

Morgan employs the FIFO inventory method. The most recent purchases of inventory

occurred on August 1, 20X9, and November 15, 20X9, in the amounts of 1,000,000 FC and

2,000,000 FC, respectively. Morgan acquired additional equipment costing 5,000,000 FC on

July 1, 20X9. Equipment is depreciated over 10 years, using the straight-line method. No other

equipment has been acquired or disposed of since January 1, 20X9.

The cost of sales is traceable to goods purchased during 20X9 as follows:

Acquired in the4thquarter of20X8 .. .. …. . . . .. .. . . . . .. . .. …. . 2,400,000 FC

Acquired uniformly over the first six months of20X9. .. . . . . .. . .. …. . 9,150,000 FC

Acquired August 1, 20X9 . .. … …. .. …. . . . .. .. . . . . .. . .. …. . 50,000 FC

No dividends are paid. Morgan’s 20X8 remeasured income (excluding any remeasurement

gain or loss) was $8,370,000.

Relevant exchange rates are as follows:

1FC ¼ 1FC ¼

January 1,20X7 .. .. .. . .. . . . . .. … $0.78 1st Quarter,20X9 Average.. . . . …. $0.81

20X7 Average. … .. .. . .. . . . . .. … 0.76 1st Six months, 20X9 Average . . …. 0.83

January 1,20X8 .. .. .. . .. . . . . .. … 0.77 July 1, 20X9 .. . .. .. . . . . .. . . . …. 0.84

December 31,20X8 … .. .. …. .. . . 0.80 August 1, 20X9. . .. .. …. .. . .. . . . 0.83

4th Quarter,20X8 Average . …. .. . . 0.78 November 15, 20X9.. …. .. . .. . . . 0.86

20X8Average. . . . . … .. .. …. .. . . 0.79 December 31,20X9 .. …. .. . .. . . . 0.89

January 1,20X9 . . . … .. .. …. .. . . 0.82 20X9Average. . . .. .. …. .. . .. . . . 0.88

1. Prepare all relevant journal entries to adjust Morgan’s trial balance to U.S. GAAP.

2. Assuming Morgan’s functional currency is the U.S. dollar, prepare a consolidated worksheet

through the ‘‘Eliminations and Adjustments’’ column.

Problem 7-3 (LO 3, 5) Translate a trial balance and prepare a consolidation work-

sheet with excess of cost over book value traceable to equipment. Due to

increasing pressures to expand globally, Pueblo Corporation acquired a 100% interest in

Sorenson Company, a foreign company, on January 1, 20X6. Pueblo paid 12,000,000 FC, and

Sorenson’s equity consisted of the following:

Common stock. .. …. .. .. . . . .. . . . . .. . …. .. 3,000,000 FC

Paid-in capital inexcess ofpar . . . .. . . . . … .. .. 2,000,000

Retained earnings …. .. .. . . . .. . . . . .. . …. .. 4,200,000

Total.. .. . .. .. .. …. .. . .. .. .. …. … .. . . 9,200,000 FC

On the date of acquisition, equipment which has a 10-year life was undervalued by 500,000

FC. Any remaining excess of cost over book value is attributable to additional equipment,

which has a 20-year life. The trial balances for Pueblo and Sorenson as of December 31, 20X8,

are as follows:

Pueblo Corporation Sorenson Company

Cash .. . . . .. . . .. .. .. . . . .. .. .. … …. .. .. .. . . . . . . . . 4,050,000 2,840,000 FC

Accounts Receivable . .. . . . . . .. …. . .. …. .. … . . .. . . . 5,270,000 3,990,000

Inventory . . .. . . .. .. .. . . . .. .. .. … …. .. .. .. . . . . . . . . 5,540,000 5,800,000

Investment in Sorenson . . . . . . .. …. . .. …. .. … . . .. . . . 20,969,000

Fixed Assets.. . … .. … . . .. …. .. . .. .. .. …. .. . . . . . . 21,000,000 15,000,000

Accumulated Depreciation . . . . . .. … .. .. …. .. . . . . . .. . (12,560,000) (6,800,000)

Accounts Payable . .. … . . . . .. .. .. . .. …. .. .. .. . .. . . . (3,450,000) (1,580,000)

Long-Term Debt … .. … . . .. …. .. . .. .. .. …. .. . . . . . . (10,000,000) (5,000,000)

Common Stock . .. .. … . . . . .. .. .. . .. …. .. .. .. . .. . . . (4,000,000) (3,000,000)

Paid-In Capital inExcess of Par . . .. … .. .. …. .. . . . . . .. . (6,500,000) (2,000,000)

Retained Earnings, January 1,20X8.. . .. .. .. …. .. . .. . . . (12,180,000) (7,950,000)

Sales .. . . . .. . . .. .. .. . . . .. .. .. … …. .. .. .. . . . . . . . . (26,000,000) (10,000,000)

Cost of Goods Sold .. … . . . . .. .. .. . .. …. .. .. .. . .. . . . 16,380,000 7,500,000

Operating Expenses . … . . . . .. .. .. . .. …. .. .. .. . .. . . . 3,210,000 1,200,000

Subsidiary Income. .. … . . . . .. .. .. . .. …. .. .. .. . .. . . . (1,729,000)

Total. . .. .. . . .. …. . .. .. .. .. … .. .. …. .. . . . . . .. . 0 0 FC

The investment in Sorenson consists of the following:

Initial investment (12,000,000 FC Â $1.20) .. .. . . . . . .. . . . . . $14,400,000

20X6 Income(1,750,000 FC Â $1.28).. …. .. . . . . . .. . . . . . 2,240,000

20X7 Income(2,000,000 FC Â $1.30).. …. .. . . . . . .. . . . . . 2,600,000

20X8 Income. .. .. .. . .. …. .. .. … .. . . . . .. . . . . . .. .. .. . 1,729,000

Total.. .. .. …. .. . .. .. .. …. . .. . . . . .. . . . . . .. …. .. . $20,969,000

Relevant exchange rates are as follows:

1FC ¼

January 1,20X6 …. . .. …. .. . . . . . . $1.20

20X6 Average.. …. . .. …. .. . . . . . . 1.28

January 1,20X7 …. . .. …. .. . . . . . . 1.25

20X7 Average.. …. . .. …. .. . . . . . . 1.30

December 31, 20X8 . … .. .. .. . . . . . . 1.31

20X8 Average.. …. . .. …. .. . . . . . . 1.33

Assuming the FC is Sorenson’s functional currency, prepare a consolidated worksheet.

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