Solution Manual Advanced Accounting 4e Jeter Ch13 PDF

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To download more slides, ebook, solutions and test bank, visit CHAPTER 13 Note: The letter A or B indicated for a question, exercise, or problem means that the question, exercise, or problem relates to a chapter appendix. ANSWERS TO QUESTIONS 1. (1) The parent company must control more than 50 perce...

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CHAPTER 13 Note: The letter A or B indicated for a question, exercise, or problem means that the question, exercise, or problem relates to a chapter appendix. ANSWERS TO QUESTIONS 1.

(1) The parent company must control more than 50 percent of the voting stock of the subsidiary. (2) The intent of control should be permanent. (3) The control should rest with the majority owners.

2.

The functional currency of an entity is the currency of the primary economic environment in which the entity operates. The FASB provided the following six economic indicators: a. The impact on the parent’s cash flow; b. The short-term responsiveness of the sales price to changes in the exchange rate; c. The sales market for the firm’s products; d. The currency in which labor, materials, and other factor inputs are primarily obtained; e. The currency in which debt is denominated and the ability of the foreign entity’s operations to generate amounts of that currency sufficient to service the debt; f. The volume of transactions between the foreign entity and its parent.

3.

Local currency, current rate

4.

U.S. dollar, temporal

5.

The temporal method is used when a foreign subsidiary operates in a highly inflationary economy.

6.

Remeasurement is the process of translating the accounts of a foreign entity into its functional currency when they are stated in another currency.

7.

All assets and liabilities are translated using the current rate at the balance sheet date when the current rate method of translation is used.

8. Assets and liabilities are translated at the rate in effect at the balance sheet date. Common stock is translated at the historical rate when the stock was issued. Retained earnings consists of various period’s net income (translated at the yearly average rates) less dividends converted at the historical rates on the declaration dates. The cumulative translation adjustment is a balancing amount in equity, which results in total equity (including the cumulative adjustment) being driven back to the rate in effect at the balance sheet date. Thus, the ratios will not change from their calculations using the local currency.

9.

Application of the temporal method produces translated amounts that reflect transactions as if they had been measured in dollars originally rather than in the local currency.

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10. Revenues and expenses are translated using the exchange rate in effect when they were recognized during the period except for expenses associated with nonmonetary items which are translated using historical rates. Because it is impractical to translate numerous transactions, the use of an appropriate average is permitted. 11. The translation adjustment is reported as a separate component of stockholders’ equity when the current rate method is used to translate the accounts. Business Ethics Solutions Business ethics solutions are merely suggestions of points to address. The objective is to raise the students' awareness of the topics, and to invite discussion. In most cases, there is clear room for disagreement or conflicting viewpoints. 1. Spring-loading is a contentious issue, and the following points are among those that may be considered in a discussion or debate of whether it should be allowed or not: Though granting options is intended to motivate and incentivize the employees to generate more profits, granting an award that is already known (or strongly suspected) before-the-fact to be in the money very soon seems counter to this intent. Companies engaged in spring-loading mislead investors by not disclosing that options are awarded with foreknowledge of the impending good news. Spring-loading is legal as long as the compensation committee awarding the options knows the same information as the recipient, and the company informs shareholders that it does not withhold granting options when undisclosed, positive company information is pending. Companies suspected of spring-loading cannot be said to have advantage of prior market reactions that have not actually taken place, and executives can argue, truthfully, that there is no way to know for certain how the market will react to impending news. Option manipulation is generally more likely to occur in circumstances in which the company executives like CEOs have greater influence on the company’s pay-setting and governance processes, which suggests a lack of board oversight. 2. Spring-loaded grants might violate insider-trading rules, particularly if managers with knowledge of the information gives options to themselves, or if executives conceal good news from directors while urging them to grant options. Also, see the following links: http://www.cfo.com/article.cfm/7880157/1/c_2984338 http://blog.issproxy.com/files/OptionsBackdating7806.pdf http://www.aflcio.org/corporatewatch/paywatch/stockoptions.cfm

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ANSWERS TO EXERCISES

Exercise 13-1 Cash Accounts receivable Inventory carried at cost Inventory carried at market Prepaid rent Property, plant, and equipment Goodwill Accounts payable Bonds payable Unamortized premium on bonds payable Preferred stock carried at issuance price Common stock Sales Cost of goods sold Depreciation expense

Functional Currency U.S. Dollar Local Currency C C C C H C C C H C H C H C C C C C C C H H H H A A H A H A

Exercise 13-2 1. c 2. b 3. d 4. d 5. c

Exercise 13-3 1. a 2. c 3. c 4. b 5. b

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Swiss Francs

Exercise 13-4 Part A Consolidated Income and Retained Earnings Statement Revenues Operating Expenses Net Income Retained Earnings - 1/1 Dividends Retained Earnings - 12/31 Balance Sheet Cash and Receivables Net Property, Plant, and Equipment Total Accounts and Notes Payable Common Stock Retained Earnings

Translation Rate

75,000 $.5654 (30,000) .5654 45,000 10,000 .5987 55,000 (15,000) .5810 40,000

42,405 (16,962) 25,443 5,987 31,430 (8,715) 22,715

55,000 .5321 37,000 .5321 92,000

29,266 19,688 48,954

32,000 .5321 20,000 .5987 40,000 92,000 --Balancing amt. 92,000

Cumulative Translation Adjustment (debit) Total

Part B Exposed net asset position - 1/1 Adjustment for changes in the net asset position during the year: Net income Dividends Net asset position translated using rate in effect at date of transactions Exposed net asset position - 12/31 Cumulative translation adjustment (debit)

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$

Swiss Translation Francs Rate 30,000$.5987 45,000 .5654 (15,000).5810 --60,000 .5321

17,027 11,974 22,715 51,716 (2,762) 48,954

$ 17,961 25,443 (8,715) 34,689 31,927 (2,762)

Swiss Francs

Exercise 13-5 Part A Balance Sheet Cash and Receivables Net Property, Plant, and Equipment Total Accounts and Notes Payable Common Stock Retained Earnings Total Consolidated Income Statement and Retained Earnings Statement Revenue Operating Expenses: depreciation other Translation Loss Net Income Retained Earnings - 1/1 Dividends Retained Earnings - 12/31

Net monetary liability position - 1/1 ($20,000 - $30,000) Adjustment for changes in net monetary position during the year: Add: Increase in cash and receivables from sales Less: Decrease in net asset position: Other operating expenses Dividends Net asset position translated using rate in effect at date of transaction Net monetary asset position-12/31 ($32,000 - $55,000) Translation gain (loss)

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$

55,000 $.5321 37,000 .5987 92,000

29,266 22,152 51,418

32,000 .5321 20,000 .5987 40,000 Balancing amt. 92,000

17,027 11,974 22,417 51,418

75,000 .5654 (3,000) .5987 (27,000) .5654 --Balancing amt. 45,000 10,000 .5987 55,000 (15,000) .5810 40,000 Swiss Francs

Part B

Translation Rate

Translation Rate

42,405 (1,796) (15,266) (198) 25,145 5,987 31,132 (8,715) 22,417

$

(10,000)$.5987

(5,987)

75,000 .5654

42,405

(27,000) .5654 (15,000) .5810 --23,000 .5321

(15,266) (8,715) 12,437 12,238 (199)

Exercise 13-6 Swiss Franc Consolidated Income and Retained Earnings Statement Revenues Operating Expenses Depreciation Other Translation Loss Net Income Retained Earnings - 1/1 Dividends Retained Earnings - 12/31 Balance Sheet Cash and Receivables Net Property, Plant, and Equipment Total Accounts and Notes Payable Common Stock Retained Earnings Translation Adjustment (loss) Total

75,000

Part A Translation Rate 1.3445

(3,000) 1.3940 (27,000) 1.3445 --Balancing amount 45,000 10,000 1.3940 55,000 (15,000) 1.2438 40,000 55,000 37,000 92,000

1.2899 1.3940

32,000 1.2899 20,000 1.3940 40,000Balancing amount 92,000 -92,000

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Brazilian Real

Part B Translation Rate

$

100,838

$.4751

47,908

(4,182) (36,302) (2,271) 58,083 13,940 72,023 (18,657) 53,366

.4751 .4751 .4751

(1,987) (17,247) (1,079) 27,595 6,818 34,413 (8,843) 25,570

70,945 51,578 122,523

.4630 .4630

32,847 23,880 56,727

41,277 27,880 53,366 122,523 --122,523

.4630 .4891

19,111 13,636 25,570 58,317 (1,590) 56,727

.4891 .4740

Adjusted Trial Balance (£)

Exercise 13-7 Consolidated Income and Retained Earnings Statement Sales Cost of Goods Sold Depreciation Expense Other Expenses Net Income Beginning Retained Earnings

Translation Rate

2,900,000 1,400,000 300,000 400,000 800,000 900,000 1,700,000 325,000 1,375,000

Less: Dividends Ending Retained Earnings Balance Sheet Cash and Receivables Merchandise Inventory Property, Plant, and Equipment

$1.4788 1.4788 1.4788 1.4788 Given 1.4730

1,275,000 1.4730 490,000 1.4730 3,450,000 1.4730 5,215,000

Current Liabilities Long-term Notes Payable Capital Stock Retained Earnings Cumulative Translation Adjustment Total

640,000 1.4730 1,200,000 1.4730 2,000,000 1.8365 1,375,000 --Balancing amount 5,215,000

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Adjusted Trial Balance ($) 4,288,520 2,070,320 443,640 591,520 1,183,040 1,593,408 2,776,448 478,725 2,297,723 1,878,075 721,770 5,081,850 7,681,695 942,720 1,767,600 3,673,000 2,297,723 (999,348) 7,681,695

Adjusted Trial Balance (£)

Exercise 13-8 Balance Sheet Cash and Receivables Merchandise Inventory Property, Plant, and Equipment

Translation Rate

Adjusted Trial Balance ($)

1,275,000 $1.4730 490,000 1.4950 3,450,000 1.8365 5,215,000

Current Liabilities Long-term Notes Payable Capital Stock Retained Earnings Cumulative Translation Adjustment

640,000 1.4730 1,200,000 1.4730 2,000,000 1.8365 1,375,000Balancing amount --5,215,000

Consolidated Income and Retained Earnings Statement Sales Cost of Goods Sold Depreciation Expense Other Expenses Translation Gain Net Income Beginning Retained Earnings

2,900,000 (1,400,000) (300,000) (400,000) --800,000 900,000 1,700,000 325,000 1,375,000

Less: Dividends Ending Retained Earnings Schedule A - Translation of cost of goods sold Beginning Inventory Purchases (1,400,000 + 490,000 + 420,000)

420,000 1,470,000 1,890,000 490,000 1,400,000

Ending Inventory Cost of Goods Sold

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$1.4788 Schedule A 1.8365 1.4788

Given 1.4730

1.5300 1.4788 1.4950

1,878,075 732,550 6,335,925 8,946,550 942,720 1,767,600 3,673,000 2,563,230 8,946,550

4,288,520 (2,083,886) (550,950) (591,520) 188,467 1,250,631 1,791,324 3,041,955 478,725 2,563,230 642,600 2,173,836 2,816,436 732,550 2,083,886

Exercise 13-9 Part A Exposed net asset position - 1/1 Adjustment for changes in the net asset position during the year Add: Revenues Less: Operating expenses Dividends Net asset position translated using rate in effect at date of transactions Exposed net asset position - 12/31 Cumulative translation adjustment - gain

Part B Exposed net monetary liability position - 1/1 (15,500 + 25,000 – 32,000) Adjustment for changes in net monetary position during the year Less: Increase in cash and receivables - revenues Add: Decrease in monetary assets or increase in monetary liabilities Operating expenses - less depreciation and office supplies used Dividends Net monetary asset position translated using rate in effect at date of transactions Exposed net monetary asset position-12/31 (35,000 - 6,900 – 15,000) Translation gain

(£) 63,000

Translation Rate $1.5403

40,000 (20,000) (4,000)

1.5532 1.5532 1.5961

79,000

1.5961

($) 97,039 62,128 (31,064) (6,384) 121,719 126,092 4,373

8,500

$1.5403

13,093

(40,000)

1.5532

(62,128)

14,400 4,000 --13,100

1.5532 1.5961

22,366 6,384 20,285 20,909 624

1.5961

Part C An entity’s accounting exposure to changes in the exchange rate is related to the set of accounts translated at the current rate. Under the current rate method, all assets and liabilities are translated at the current rate. Thus, under this method, only the net asset position will result in a translation adjustment. Under the current rate method, a gain results from a net asset position and an increase in the exchange rate. In contrast, monetary assets and liabilities are translated at the current rate when using the temporal method. In this exercise, the company went from a net monetary liability position to a net monetary asset position during the year. A translation gain results from an increase in the exchange rate.

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Exercise 13-10A $30,000 = 57,781 50% = 28,891 $.4994 = $14,428 $.5192 $30,000 Accounts Payable = 60,072 $.4994 = $30,000 .4994

Part A 1. Inventory

2. Measurement of accounts payable $30,000 Year-end .4994 $30,000 Date of transaction .5192 Transaction loss

60,072 57,781 2,291

3. The transaction loss is reported in determining net income for the current period since the transaction is not of a long-term investment nature.

Part B Unrealized profit in ending inventory - $6,000

50% = $3,000

Part C 1. Measurement of accounts receivable Year-end 50,204 $.4994 = Transaction date 50,204 $.5192 = Transaction loss

$25,878 26,066 $188

2. The transaction loss is reported in determining net income for the current period. 3. A transaction loss (or gain) related to a loan of a long-term investment nature is deferred and reported in a separate component of stockholders’ equity.

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ANSWERS TO PROBLEMS New Zealand $

Problem 13-1 Part A Consolidated Income and Retained Earnings Statement Revenues Cost of Goods Sold Depreciation Expense Other Expenses Net Income Retained Earnings - 1/1 Less: Dividends Declared - 7/1 12/31 Retained earnings - 12/31 Balance Sheet Cash and Receivables Inventories Land Building (net) Equipment (net): Purchased before 1/1 Purchased 7/1 Totals

Translation Rate

3,225,000$.7480 2,200,000 .7480 140,000 .7480 540,000 .7480 345,000 720,000 .7924 1,065,000 (50,000) .7412 (50,000) .7298 965,000

2,412,300 1,645,600 104,720 403,920 258,060 570,528 828,588 (37,060) (36,490) 755,038

880,000 500,000 400,000 605,000

642,224 364,900 291,920 441,529

.7298 .7298 .7298 .7298

380,000 .7298 90,000 .7298 2,855,000

Short-Term Accounts and Notes Long-Term Notes Common Stock Additional Paid-in Capital Retained Earnings Totals Translation Adjustment Totals

210,000 .7298 680,000 .7298 800,000 .7924 200,000 .7924 965,000 2,855,000 --Balancing amt. 2,855,000

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U.S. $

277,324 65,682 2,083,579 153,258 496,264 633,920 158,480 755,038 2,196,960 (113,381) 2,083,579

New Zealand $

Problem 13-1 (continued) Part B Exposed net asset position - 1/1 Adjustments for changes in net asset position during the year: Net income Dividends declared - 7/1 12/31 Net asset position translated using rate in effect at date of transaction Exposed net asset position - 12/31 Cumulative translation adjustment (debit)

Part A Balance Sheet Cash and Receivables Inventories Land Buildings (net) Equipment (net): Purchased before 1/1 Purchased 7/1 Totals

345,000 (50,000) (50,000)

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.7480 .7412 .7298

1,965,000 .7298

880,000 500,000 400,000 605,000

Short-Term Payables Long-Term Notes Common Stock Additional Paid-in Capital Retained Earnings Totals

U.S. $

1,720,000$.7924

New Zealand $

Problem 13-2

Translation Rate

Translation Rate $.7298 .7476 .7924 .7924

1,362,928 258,060 (37,060) (36,490) 1,547,438 1,434,057 (113,381) U.S. $ 642,224 373,800 316,960 479,402

380,000 .7924 90,000 .7412 2,855,000

301,112 66,708 2,180,206

210,000 .7298 680,000 .7298 800,000 .7924 200,000 .7924 965,000 Balancing amt. 2,855,000

153,258 496,264 633,920 158,480 738,284 2,180,206

Problem 13-2 (continued) Consolidated Statement of Income and Retained Earnings Revenues Cost of Goods Sold Depreciation Expense Other Expenses Translation Loss (Gain) Net Income Retained Earnings - 1/1 Less: Dividends Declared - 7/1 12/31 Retained Earnings - 12/31 Schedule 1 - Translation of cost of goods sold

3,225,000 .7480 2,200,000 Schedule 1 140,000 Schedule 2 540,000 .7480 --Balancing amt. 345,000 720,000 .7924 1,065,000 (50,000) .7412 (50,000) .7298 965,000 New Translation Zealand $ Rate 600,000 .7924* 2,100,000 .7480 2,700,000

Beginning Inventory Purchase Less: Ending Inventory Cost of Goods Sold

2,412,300 1,672,440 110,424 403,920 (15,790) 241,306 570,528 811,834 (37,060) (36,490) 738,284 U.S. $ 475,440 1,570,800 2,046,240

500,000 .7476 2,200,000

373,800 1,672,440

45,000 85,000 10,000 140,000

35,658 67,354 7,412 110,424

Schedule 2 - Translation of Depreciation Expense Buildings Equipment on hand - 1/1 Equipment purchased - 7/1 Total

.7924 .7924 .7412

* Translation rate is the January 1, 2008 rate, the date the equity interest was acquired, rather than the $.7480 rate in effect when the inventory was purchased.

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New Translation Zealand $ Rate 395,000 $.7924 (3,225,000).7480

Problem 13-2 (continued)

Part B Exposed net monetary liability position - 1/1 (295,000 + 600,000 – 500,000) Less: Increase in cash and receivables from sales Add: Decrease in monetary assets or increase in monetary liabilities: Purchases Other expenses Dividends - 7/1 12/31 Purchase of equipment - 7/1 Net monetary liability position translation using rates in effect at date of each transaction Exposed net monetary liability position - 12/31 (210,000 + 680,000 – 880,000) Translation gain (reported on the Income Statement)

2,100,000 .7480 540,000 .7480 50,000 .7412 50,000 .7298 100,000 .7412 10,000

Problem 13-3 Francs Part A Consolidated Statement of Income and Retained Earnings Sales Cost of Goods Sold Depreciation Expense Other Expense Income Tax Expense Net Income Retained Earnings - 1/1 Less: Dividends Declared Retained Earnings - 12/31

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.7298

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