Solution Manual and Test Bank Advanced Accounting by Guerrero & Peralta CHAPTER 20

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(1)CHAPTER 20 MULTIPLE CHOICE 20-1: b Bad debt expense (S$ 6,000 x P28.20) P169,200 Amortization of patents (S$ 4,000 x P28.20) 112,800 Rent expense (S$ 10,000 x P28.20) 282,000 Total P564,000 Average rate (P28.20) is used to translate all expenses since this is a reasonable estimation. 20-2: b Machinery [(24,000 Ringgit ÷ 10) x P10.42] Equipment [(12,000 Ringgit ÷ 10) x P10.42] Total depreciation 20-3: d Accounts receivable Prepaid expenses Property and equipment (net) Total 20-4: P 25,008 12,504 P 37,512 P120,000 55,000 275,000 P450,000 a Depreciation expense (H$ 12,000 x P5.80) Bad debts (H$ 8,000 x P5.80) Rent (H$ 20,000 x P5.80) Total P 69,600 46,400 116,000 P232,000 Average rate for the year is used in translating depreciation expense because this is more reasonable estimation than the rate when the related asset was acquired (P4.80). 20-5: d [25,000 LCU x (1 ÷ 2)] 20-6: 20-7: d Long-term receivable: [1,500,000 LCU x (1 ÷ 1.5 LCU)] P1,000,000 Long-term debt: [2,400,000 LCU x (1 ÷ 1.5 LCU)] P1,600,000 b (NT Dollar 10,000 x P1.70) 131

(2) 20-8: 20-9: b Beginning inventory Purchases Goods available for sale Ending inventory Cost of goods sold 40,000 Rupee 300,000 340,000 30,000 310,000 Rupee Translated cost of goods sold (310,000 Rupee x P.5745) P178,095 c NZ Dollar 20,000 Net assets, 1/1/05 Increase in net assets: Net income, 2005 (30,000 – 20,000) 10,000 Net assets 12/31/05 30,000 Net assets at current rate 30,000 Translation adjustment, 2005 (positive) Rate P15 Phil Peso P300,000 P19 190,000 P490,000 630,000 P140,000 P21 20-10: b Equipment [800,000 x (1 ÷ 50)] P16,000 Accumulated depreciation [560,000 x (1 ÷ 50)] P11,200 Depreciation [80,000 x (1÷ 50)] P 1,600 20-11: a (25,000 Rupee x P1.24) 20-12: d (5,000 Rupee x P1.30) 20-13: c Investment cost, Jan. 1, 2005 Less: Book and fair value of net assets acquired (300,000 Rp x P1.20) Goodwill Goodwill Impairment Balance Pesos P42,000 4,340 (3,500 Rp x P1.24) P37,660 Translated balance (31,500 Rp x P1.32) Less: umimpaired goodwill Translation adjustment P402,000 360,000 P 42,000 Rupee 35.000 (P42,000 / P1.20) 3,500 31,500 P41,580 37,660 P 3,920 132

(3) 20-14: b Translation adjustment from translating the trial balance Translation adjustment from translating goodwill (per 20-13) Total translation adjustment P12,000 Cr 3,920 Cr P15,920 20-15: b Investment in Subsidiary account, Jan. 1, 2005 Share in subsidiary net income [(800,000 yen x 70%) x P.57] Translation adjustment (P25,000 x 70%) Share of subsidiary dividends [(50,000 yen x 70%) x P.59] Investment in Subsidiary account, December 31, 2005 P1,600,000 319,200 17,500 ( 20,650) P1,916,050 20-16: d 20-17: a Initial inventory transfer date: Selling price Cost Profit Balance sheet date (75,000 x 1.70) 20-18: a Phil Peso Thailand Baht P120,000÷1.60 (80,000) 40,000 75,000 B 127,500 75,000 B (P127,500 – 40,000) 20-19: a Net asset beginning Net income Net asset translated at rate: During the year At end of year Yen 200,000 200,000 400,000 400,000 Exchange Rate .44 .46 .48 Translation adjustment (credit) 20-20: a Phil Peso 88,000 92,000 180,000 192,000 (12,000) (70,000 rupee x P1.50) 20-21: c Investment cost Book value of interest acquired (1,100,000 x 1.10) x .80 Goodwill P1,210,000 968,000 242,000 133

(4) PROBLEMS Problem 20-1 a. Pilipino Company Translation Working Paper December 31, 2005 Cash Accounts receivable Inventory Plant and equipment Cost of sales Operating expenses Depreciation expenses Total Accumulated Other Comprehensive Income Translation Adjustment Total debits Accumulated depreciation Accounts payable Common stock Retained earnings, Jan. 1 Sales Total credits Yen 40,000 120,000 100,000 700,000 360,000 140,000 60,000 1,520,000 Exchange Rate .40 CR .40 CR .40 CR .40 CR .425 AR .425 AR .425 AR Phil. Pesos 16,000 48,000 40,000 280,000 153,000 59,500 25,500 622,000 25,000 647,000 240,000 80,000 200,000 400,000 600,000 1,5200,000 .40 .40 .44 .44 .425 CR CR HR HR AR P96,000 32,000 88,000 176,000 255,000 647,000 CR – Current Rate AR – Average Rate HR – Historical Rate b. Proof of Translation Adjustment Net assets at beginning of year Adjustment for changes in net assets Position during year Net income for the year Net assets translated at rates in effect For those items Net assets at end of year Change in translation adjustment during year (to OCI) – net decrease (debit) Yen 600,000 Translation Rate .44 Phil. Pesos 264,000 40,000 .425 17,000 640,000 .40 281,000 256,000 25,000 Accumulated OCI – translation adjustment,1/1 -0- Accumulated OCI – translation adjustment, Dec. 31 (debit) 25,000 134

(5) Problem 20-2 (1) Trial Balance Translation Thailand Baht 7,000 20,000 5,000 25,000 100,000 70,000 10,000 30,000 15,000 282,000 Cash Accounts receivable (net) Receivable from Davao Inventory Plant and equipment Cost of goods sold Depreciation expense Operating expenses Dividends paid Total debits Accumulated depreciation Accounts payable Bonds payable Common stock Sales Total Accumulated other comprehensive Income – Translation adj. (credit) Total credits Translation Rate 1.60 CR 1.60 CR 1.60 CR 1.60 CR 1.60 CR 1.50 AR 1.50 AR 1.50 AR 1.54 HR 10,000 12,000 50,000 60,000 150,000 282,.000 1.60 1.60 1.80 1.46 1.50 Philippine Pesos 11,200 32,000 8,000 40,000 160,000 105,000 15,000 45,000 23,000 439,300 CR CR CR HR AR 16,000 19,200 80,000 87,600 225,000 427,800 11,500 439,300 CR – Current Rate AR – Average Rate HR – Historical Rate (2) Proof of Translation Adjustment Net assets at beginning of year Adjustments for changes in net asset position during year: Net income for year (sch. 1) Dividends paid Net assets translated at: Rates during year Rates at end of year Change in OCI – translation adj. during year – Net increase Accumulated OCI – translation adjustment – Jan. 1 Change in OCI – translation adjustment, Dec. 31 (credit) Thailand Baht 60,000 Translation Rate 1.46 Philippine Pesos 87,600 40,000 (15,000) 1.50 1.54 60,000 (23,100) 85,000 1.60 124,500 136,000 11,500 -011,500 135

(6) Schedule 1: Sales Cost of goods sold Depreciation expense Operating expenses Net income 150,000 Thailand Baht ( 70,000) ( 10,000) ( 30,000) 40,000 Thailand Baht (b) The change in the translation adjustment of P11,500 is included as a credit in the other comprehensive income on the Statement of Comprehensive Income. The other comprehensive income is then accumulated and reported in the stockholders’ equity section of the consolidated balance sheet as presented below: Net assets P136,000 Common stock Retained earnings, Dec. 31 Accumulated Other Comprehensive Income Total P 87,600 36,900 11,500 P136,000 Problem 20-3 a. Translation Work paper Cash Accounts receivable Inventory Plant and equipment Cost of sales Operating expenses Depreciation expense Dividends Total debits Accumulated depreciation Accounts payable Common stock Retained earnings, Jan. 1 Sales Total Accumulated OCI – Translation Adjustment Total credits Brunei $ 1.600 2,500 4,000 35,000 17,000 7,000 3,000 1,500 71,600 9,000 2,600 20,000 10,000 30,000 71,600 Exchange Rate 33 CR 33 CR 33 CR 33 CR 31 AR 31 AR 31 AR 32 HR Philippine Pesos 52,800 82,500 132,500 1,155,000 527,000 217,000 93,000 48,000 2,307,300 31 33 30 30 31 297,000 85,800 600,000 300,000 930,000 2,212,800 AR CR HR HR AR 94,500 2,307,300 136

(7) Proof of Translation Adjustment (not required) Net assets at beginning of year Adjustment for net assets position during the year: Net income Dividends paid Net assets translated at rates in effect for those items Net assets at end of year Change in translation adjustment during Year to OCI – net increase (credit) Accumulated OCI – translation adj. 1/1 Accumulated OCI – translation Adjustment – 12/31 (credit) b. Brunei $ 30,000 Translation rate Philippine Pesos 30 900,000 3,000 (1,500) 31 32 93,000 (48,000) 31,500 33 945,000 1,039,500 94,500 -094,500 Parent Company entries affecting Investment in Moslem Co. (equity method) Jan. 2: Oct. 15: Investment in Moslem Co. Cash To record investment cost. Cash 900,000 900,000 48,000 Investment in Moslem Co. To record dividends received Dec. 31: 48,000 Investment in Moslem Co. Investment income To record equity in income of Moslem 93,000 Investment in Moslem Co. Other Comprehensive Income – Translation adjustment To record parent’s share of change in translation Adjustment 94,500 93,000 94,500 137

(8) Problem 20-4 UK Company Translation Working Paper Year Ended December 31, 2005 In Pounds Income Statement Sales Cost of sales Depreciation expense Other expenses Net income carried forward Retained Earnings Statement Balance, 1/1 Net income from above Balance, 12/31 Balance Sheet Cash Accounts receivable Inventories, at cost Prepaid expenses Property, plant and equipment (net) Total assets Accounts payable Current portion of long-term debt Long-term debt Capital stock Retained earnings from above Total Cumulative translation adjustment: Balance, 1/1 Current translation adjustment Balance, 12/31 Total liabilities and stockholders’ equity 90,000 (80,000) (1,500) (5,750) 2,750 Exchange Rate P67.50 67.50 67.50 67.50 2,500 2,750 5,250 In Phil. Pesos (A) (A) (A) (A) 6,075,000 (5,400,000) (101,250) (388,125) 185,625 B F 119,500 185,625 305,125 2,500 4,000 5,500 750 9,000 21,750 67.60 67.60 67.60 67.60 67.60 (C) (C) (C) (C) (C) 169,000 270,400 371,800 50,700 608,400 1,470,300 3,500 500 7,500 5,000 5,250 67.60 67.60 67.60 67.20 (C) (C) (C) (H) 236,600 33,800 507,000 336,000 1,418,525 G 21,750 50,000 1,775 51,775 1,470,300 Translation Code: C = Current rate H = Historical rate A = Average rate B = Balance in Philippine pesos at the beginning of the year. F = Per Income Statement 138

(9) Problem 20-5 Goodluck Corporation Foreign Exchange Translation Worksheet Year Ended December 31, 2005 Cash Marketable securities Accounts receivable Inventories Property, plant and equip-net Cost of goods sold Depreciation expense Other expenses Totals Trial Balance (In Pounds) 15,000 25,000 60,000 80,000 420,000 150,000 40,000 10,000 800,000 Accounts payable Current portion of LT debt Long-term debt Sales Other revenues Capital stock Retained earnings, 1/1 FC translation adjustment Balance, 1/1 Current year Net income 50,000 40,000 120,000 200,000 50,000 250,000 90,000 Totals 800,000 Exchange Rate 0.95 C 0.95 C 0.95 C 0.95 C 0.95 C 0.90 A 0.90 A 0.90 A 0.95 0.95 0.95 0.90 0.90 0,87 G C C C A A H G B B Trial Balance (In Pesos) 14,250 23,750 57,000 76,000 399,000 135,000 36,000 9,000 750,000 Income Statement (In Pesos) 47,500 38,000 114,000 180,000 45,000 217,500 70,000 135,000 36,000 9,000 180,000 570,000 47,500 38,000 114,000 180,000 45,000 217,500 70,000 1,500 36,500 750,000 Balance Sheet (In Pesos) 14,250 23,750 57,000 76,000 399,000 (45,000) 1,500 36,500 45,000 180,000 570,000 Translation Code: A = Average rate B = Current rate H = Historical rate G = Given B = Balancing amount Problem 20-6 a. Direct and indirect exchange rates January 1, 2007 December 31, 2007 December 31, 2008 Direct A$ P.03333=1 P.02857=1 P .025=1 Indirect A$30=P1 A$35=P1 A$40=P1 The peso strengthened during 2007 because the number of A$ one Phil. Peso could acquire at the end of the year (35) is greater than the number of A$ that could be acquired at the 139

(10) beginning of the year (30); therefore, the value of the peso has increased relative to the A$ during 2007. The peso continued to strengthen during 2008. b. Translated December 31, 2007, balance sheet: Subsidiary’s Trial Balance _ (in A$)__ A$ 100,000 400,000 680,000 1,000,000 R 2,230,000 Cash Receivables Inventory Fixed assets Total Accumulated other comprehensive income – translated adjustment (debit) Total debits Current payables Long-term debt Common stock Retained earnings Total credits A$ 260,000 1,250,000 500,000 220,000 A$2,230,000 Direct Exchange Rate P.02857 P.02857 P.02857 P.02857 Translated Trial Balance ( in $)___ P 2,857 12,857 19,428 28,570 P 63,712 2,903 P 66,615 P.02857 P.02857 P.03333 P.03333 P 7,428 35,713 16,665 6,809 P 66,615 P.03333= average of beginning and ending exchange rates, rounded to 4 decimal points: P.030945= [(P.03333 + P.02856) /2] (Not required: Proof of translation adjustment (debit) of P 2,903) ___A$___ A$ 500,000 Net assets, 1/1/07 Adjustment for changes in net assets during year: Net income 220,000 Net assets translated at: Rates during year Rates at end of year A$ 720,000 Change in translation Adjustment during year (debit) Translation _ Rate_ P.03333 P.03095 P.02857 _Dollars_ P 16,665 6,809 P 23,474 (20,570) P 2,904* *Difference of P1 (P 2,904 – P 2,903) due to rounding of exchange rates. 140

(11) c. Translated December 31, 2008, balance sheet: Cash Receivables Inventory Fixed assets Accumulated other comprehensive incometranslation adjustment (debit) Total debits Subsidiary’s Trial Balance (in A$) A$ 80,000 550,000 720,000 900,000 A$ 2,250,000 Direct Exchange __Rate P.025 P.025 P.025 P.025 Translated Trial Balance (in P)__ P 2,000 13,750 18,000 22,500__ P56,250 5,635___ P61,885 (a)The retained earnings in pesos would begin with the December 31, 2007, peso balance (P6,809) that would be carried forward. To this would be added 2008’s net income of A$90,000, which is the change in retained earnings in A$ multiplied by the 2008 exchange rate of P.02679 [(P.02857 + P.025/2)] which equals P2, 411. Therefore, translated retained earnings on December 31, 2008, is P9, 220 (P9, 220= P6, 809 + P2, 411) (Not required: Proof of translation adjustment (debit) of P5, 635) Australian Dollar A$ 720,000 Net assets, 1/1/08 Adjustment for changes in net assets during year: Net income 90,000 Net assets translated at: rates during year Other comprehensive incomerate at end of year A$ 810,000 Change in other comprehensive income- translation adjustment during year (debit) Accumulated other comprehensive income- translation adjustment, 1/1/08 Accumulated other comprehensive income- translation adjustment, 12/31/08 (debit) d. Translation _ Rate P.02857 P.02679 Pesos___ P20, 570 2,411___ P22, 981 P.025 (20,250)__ P2, 731 2,904___ P5, 635 The P2, 731 change in the accumulated other comprehensive income- translation adjustment during 2008 would be reported as a component of other comprehensive income on 2008 statement of other comprehensive income. 141

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