Problem 7-8 (LO 3, 5) Translate a trial balance

| June 2, 2016

Question
Problem 7-8 (LO 3, 5) Translate a trial balance and prepare a consolidation work-sheet. 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 FC

Paid-in capital in excess of par . . . .. . . . . … .. .. 8,480,000

Retained earnings …. .. .. . . . .. . . . . .. . …. .. 2,520,000

Any excess of cost over book value is traceable to equipment which is to be depreciated over

10 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. Equipment

is depreciated by the straight-line method over 10 years. No other equipment had been acquired

or disposed of since 20X4. Tobac employs the LIFO inventory method. Ending inventory on

December 31, 20X7, consists of the following:

Acquired in the 1stquarter of20X4 . . . . . .. .. .. .. . . . 1,000,000 FC

Acquired in the 1stquarter of20X5 . . . . . .. .. .. .. . . . 500,000

Acquired in the 1stquarter of20X7 . . . . . .. .. .. .. . . . 6,500,000

The cost of sales is traceable to goods purchased during 20X7 as follows:

Acquired uniformly over the last nine months .. . . . . .. . . 23,400,000 FC

Acquired in the 1st quarter … .. .. .. .. .. . . . .. . . .. . . 4,200,000

Other expenses were incurred evenly over the year.

On April 1, 20X7, Tobac borrowed $1,280,000 from the parent company in order to help

finance the purchase of equipment. The note is due in one year and bears interest at the rate of

8%. 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 . . . . .. . . . . … . $0.60

20X4Average. . . . . … .. .. …. .. 0.49 1st Quarter, 20X7Average. . . . . … . 0.62

January 1,20X5 . . . … .. .. …. .. 0.51 April 1,20X7 .. . .. . . . . .. . . . . … . 0.64

1st Quarter, 20X5 Average.. …. .. 0.53 20X7 Average.. . .. . . . . .. . . . . … . 0.67

July 1,20X5 .. . . . . … .. .. …. .. 0.55 Last nine months, 20X7 Average. … . 0.66

December 31,20X5 … .. .. …. .. 0.58 December 31, 20X7 . . . . .. . . . . … . 0.65

Last six months,20X5 Average … .. 0.57

20X6Average. . . . . … .. .. …. .. 0.58

The December 31, 20X7, trial balances for Tobac and Balfour are as follows:

Balfour Corporation Tobac, Inc.

Cash .. …. .. . . . . … .. .. …. .. . .. . . . . .. .. . .. . . . . .. .. $ 4,463,200 3,087,385 FC

Net Accounts Receivable.. .. …. .. . .. . . . . .. .. . .. . . . . .. .. 15,350,000 12,000,000

Inventory … .. . . . . … .. .. …. .. . .. . . . . .. .. . .. . . . . .. .. 16,300,000 8,000,000

Due from Tobac. . . . … .. .. …. .. . .. . . . . .. .. . .. . . . . .. .. 1,356,800

Investment inTobac —See Note A. .. . .. . . . . .. .. . .. . . . . .. 23,712,363

Depreciable Assets . … .. .. …. .. . .. . . . . .. .. . .. . . . . .. .. 68,000,000 34,000,000

Accumulated 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 27,600,000

Depreciation Expense .. .. .. …. .. . .. . . . . .. .. . .. . . . . .. .. 8,076,800 3,300,000

Interest Expense on Balfour

Loan (accrued on December 31, 20X7) —See Note B. . . . .. .. 118,154

Exchange Gain on Balfour Loan—See Note B .. .. . .. . . . . .. .. (30,769)

Other Expenses . . . . … .. .. …. .. . .. . . . . .. .. . .. . . . . .. .. 10,000,000 5,012,615

Interest Income. . . . . … .. .. …. .. . .. . . . . .. .. . .. . . . . .. .. (76,800)

Subsidiary Income. . … .. .. …. .. . .. . . . . .. .. . .. . . . . .. .. (2,682,363)

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

Note A —Balfour’s investment in Tobac consists of the following:

Initial investment (33,000,000 FC x $0.55) . .. …. .. . .. .. . . $18,150,000

Last six months, 20X5income (2,000,000 FC x $0.57) . .. .. . . 1,140,000

20X6 income (3,000,000 FC x $0.58). …. .. …. .. . .. .. . . 1,740,000

20X7 income.. …. .. . .. . . . . .. . . . . … .. .. …. .. . .. . . . . 2,682,363

Balance .. .. …. .. . .. . . . . .. . . . . … .. .. …. .. . .. . . . . $23,712,363

Note B —The original loan from Balfour was 2,000,000 FC, or $1,280,000 (2,000,000 FC x $0.64). On December

31, 20X7, it would require 1,969,231 FC ($1,280,000 / $0.65) to settle the loan. This represents an

exchange 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 FC

Accrued interest ($1,280,000 x 8% x 9/12 / $0.65). . .. .. . . . 118,154

Balance .. …. . . . .. .. …. .. . .. …. .. .. . . . . . . . .. . . . . . 2,087,385 FC

The interest is accrued at year-end; therefore, interest expense should be translated at the

year-end rate.

Assuming the FC is Tobac’s functional currency, translate Tobac’s trial balance, and prepare

a consolidating worksheet.

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