CHAPTER 12

TRANSLATION OF FOREIGN CURRENCY FINANCIAL

STATEMENTS

The title of each problem is followed by the estimated time in minutes required for completion and by a
difficulty rating. The time estimates are applicable for students using the partially filled-in working papers.

Pr. 12–1 Transcontinent Company (20 minutes, easy)

Remeasurement of foreign branch’s trial balance to U.S. dollars functional currency from local
currency.
Pr. 12–2 Sarasota Company (20 minutes, easy)
Remeasurement of trial balance of foreign branch to U.S. dollars. Computation of foreign
currency transaction gain or loss resulting from remeasurement.
Pr. 12–3 Pan-Europe Corporation (20 minutes, medium)
Remeasurement of selected items from foreign subsidiary’s balance sheet to U.S. dollars,
including computation of exchange rates in terms of one unit of foreign currency.
Pr. 12–4 Westpac Corporation (30 minutes, medium)
Journal entries, in dollars and in foreign currency, for transactions of home office and foreign
branch of a U.S. multinational enterprise.
Pr. 12–5 Portero Corporation (50 minutes, medium)
Remeasurement of foreign subsidiary’s trial balance to U.S. dollars from foreign local
currency. Computation of foreign currency transaction gain or loss resulting from
remeasurement.
Pr. 12–6 Hightower Company (60 minutes, strong)
Preparation of working paper for combined income statement and balance sheet of U.S.
multinational enterprise home office and foreign branch with U.S. dollar functional currency.
Adjustments of ledger account balances of both home office and branch prior to combination.
Pr. 12–7 Eagle Corporation (60 minutes, strong)
Translation of foreign currency financial statements from functional currency to U.S. dollar;
equity-method journal entry for parent company; working paper for consolidated financial
statements and related working paper elimination (in journal entry format).
Pr. 12–8 Panamer Corporation (90 minutes, strong)
Translation of financial statements of foreign subsidiary of U.S. multinational enterprise.
Adjustment of ledger account balances of parent company and domestic subsidiary.
Preparation of working paper for consolidated financial statements and working paper
eliminations for U.S. multinational enterprise and its domestic and foreign subsidiaries.

ANSWERS TO REVIEW QUESTIONS

1. The functional currency of a foreign entity is the currency of the primary economic environment in
which the entity operates; normally, that is the currency of the environment in which the entity
primarily generates and expends cash.
2. The current/noncurrent method of translating foreign currencies involves the following exchange
rates for translation:
(1) Current rate for current assets and current liabilities
(2) Historical rate for all other assets and liabilities, elements of owners’ equity, depreciation
expense, and amortization expense

The McGraw-Hill Companies, Inc., 2006

Solutions Manual, Chapter 12 109
 (3) Average rate for revenue and expenses other than depreciation expense and amortization
expense
The current rate method of translating foreign currencies requires translation of all balance sheet
items other than owners’ equity at the current exchange rate. Owners’ equity amounts are
translated at historical rates. All revenue and expenses are translated at an average rate.
3. No exchange rate is used to remeasure the balance of the Intercompany Accounts Payable ledger
account of a foreign subsidiary. Instead, the account is remeasured at the balance in U.S. dollars of
the reciprocal Intercompany Accounts Receivable account in the U.S. parent company’s accounting
records.
4. Remeasurement to functional currency is required for the accounts of a foreign branch,
subsidiary, or investee whose accounting records are not maintained in the functional currency.
Remeasurement is accomplished by the monetary/nonmonetary method. Foreign currency
translation is the restatement of the financial statements of a foreign branch, subsidiary, or
investee from its functional currency to the reporting currency (the U.S. dollar for a U.S.
enterprise). Translation is accomplished by the current rate method. If the functional currency of a
foreign entity is the U.S. dollar, remeasurement makes translation unnecessary.
5. Foreign currency transaction gains and losses result from the following:
(1) Changes in the exchange rate for a foreign currency between the date of initiation and the date
of settlement of a business transaction denominated in the foreign currency
(2) Remeasurement of the trial balance of a foreign branch, subsidiary, or investee to the
functional currency from a local currency
Foreign currency translation adjustments result from the translation of financial statements of a
foreign subsidiary, branch, or investee to the reporting currency (the U.S. dollar for a U.S.
enterprise) from the functional currency of the foreign entity.
6. Foreign currency transaction gains and losses from the following are excluded from the
measurement of net income and are accounted for in the same manner as translation adjustments:
(1) Foreign currency transactions designated as, and effective as, economic hedges of a net
investment in a foreign entity
(2) Intercompany foreign currency transactions that are of a long-term investment nature
7. The functional currency of a foreign investee in a highly inflationary economy is identified as the
reporting currency of the parent company, home office, or investor enterprise.
8. Required disclosures relating to foreign currency matters in the financial statements or in a note to
the financial statements of U.S. multinational enterprises include the following:
(1) Aggregate foreign currency transaction gain or loss, including gains and losses not deferred on
forward contracts, included in the measurement of net income for the accounting period
(2) Changes in foreign currency translation adjustments during the accounting period, in a
separate financial statement, in a note to the financial statements, or in the statement of
comprehensive income.
9. Two criticisms of FASB Statement No. 52, “Foreign Currency Translation,” are the following:
(1) It established an indefensible distinction between foreign currency transaction gains and losses
and translation adjustments.
(2) It abandons historical-cost concepts by sanctioning use of the current rate method for
translation of foreign currency financial statements.

The McGraw-Hill Companies, Inc., 2006

110 Modern Advanced Accounting, 10/e
SOLUTIONS TO EXERCISES
Ex. 12–1 1. c 7. a
2. c 8. b
3. d 9. b
4. a 10. a
5. a 11. c
6. b
Ex. 12–2 Journal entries for home office of Logan Company:
2006
Apr. 1 Investment in Foreign Branch (LCU10,000 x $0.24) 2,400
Cash 2,400
To record dispatch of draft to branch.
16 Equipment: Foreign Branch (LCU50,000 x $0.22) 11,000
Investment in Foreign Branch 11,000
To record acquisition of equipment by branch.
30 Cash (LCU4,000 x $0.22) 880
Investment in Foreign Branch 880
To record receipt of draft from branch.
Ex. 12–3 Computation of amounts to be included in remeasured income statement of Multiverse
Company’s subsidiary for year ended Nov. 30, 2006:
Amount
Amount Exchange (U.S.
(LCUs) rates dollars)
Doubtful accounts expense LCU 60,000 $0.20 $12,000
Patent amortization expense 40,000 0.25 10,000
Rent expense 100,000 0.22 22,000
Totals LCU200,000 $44,000
Ex. 12–4 Computation of 2006 depreciation expense for foreign subsidiary of Paloma Company:
Remeasurement of:
2004 plant asset acquisitions: LCU2,400,000 x $0.625 $1,500,000
2005 plant asset acquisitions: 667,20
LCU1,200,000 x $0.556 0
Totals LCU3,600,000 $2,167,200
Depreciation rate (straight-line method) 0.10
Depreciation expense for 2006 ($2,167,200 x 0.10) $ 216,720

The McGraw-Hill Companies, Inc., 2006

Solutions Manual, Chapter 12 111
Ex. 12–5 USA CORPORATION
Remeasurement of French Branch Trial Balance to U.S. Dollars
June 30, 2005
Balance
Balance (euros) Exchange (U.S. dollars)
dr (cr) rates dr (cr)
Cash C 15,000 $1.04 $ 15,600
Trade accounts receivable 250,000 1.04 260,000
Inventories 115,000 1.05 120,750
Home office (360,000) (365,000)
Sales (450,000) 1.045 (470,250)
Cost of goods sold 340,000 1.05 357,000
Operating expenses 90,000 1.045 94,050
Subtotals C -0- $ 12,150
Foreign currency transaction gain -0- (12,150)
Totals C -0- $ -0-
Ex. 12–6 GLOBAL COMPANY
Remeasurement of German Branch Trial Balance to U.S. Dollars
April 30, 2005
Balance
Balance (euros) Exchange (U.S. dollars)
dr (cr) rates dr (cr)
Cash C 15,000 $1.06 $ 15,900
Trade accounts receivable 260,000 1.06 275,600
Inventories 120,000 1.04 124,800
Home office (280,000) (298,000)
Sales (550,000) 1.05 (577,500)
Cost of goods sold 340,000 1.04 353,600
Operating expenses 95,000 1.05 99,750
Subtotals C -0- $ (5,850)
Foreign currency transaction loss -0- 5,850
Totals C -0- $ -0-
Ex. 12–7 SPANISH COMPANY
Balance Sheet
November 30, 2006
Assets
Current assets $180,000
Plant assets (net) 260,000
Other assets 60,000
Total assets $500,000
Liabilities & Stockholder’s Equity
Current liabilities $ 80,000
Long-term debt 120,000
Total liabilities $200,000
Common stock $ 50,000
Additional paid-in capital 100,000
Retained earnings 120,000
Foreign currency translation adjustments 30,000
Total stockholder’s equity $300,000
Total liabilities & stockholder’s equity $500,000
Ex. 12–8 Computation of foreign currency translation adjustments of Overseas Company, Dec. 31,
2005:

The McGraw-Hill Companies, Inc., 2006

112 Modern Advanced Accounting, 10/e
 Total assets (LCU900,000 x $0.48) $432,000
Less: Total liabilities (LCU500,000 x $0.48) $240,000
Common stock (LCU200,000 x $0.44) 88,000
Retained earnings (same as net income) (LCU200,000 x
$0.46) 92,000 420,000
Foreign currency translation adjustments (credit balance) $ 12,000
Ex. 12–9 Journal entry for Investor Corporation, Dec. 31, 2007:
Foreign Currency Transaction Loss 9,300
Loan Payable to Bank 9,300
To recognize transaction loss on loan obtained to hedge investment in
Foreign Investee Company as follows:
Liability recorded on Jan. 2, 2007 (LCU300,000 x
$0.20) $ 60,000
Less: Liability translated at Dec. 31, 2007 spot rate
LCU1 = $0.24 (LCU300,000 x $0.24) 72,000
Difference $(12,000)
Less: Increase in cumulative translation
adjustments of investee ($50,300–
$47,600) 2,700
Foreign currency transaction loss recognized $ 9,300

CASES
Case 12–1 Although the accounting treatment accorded to the translation adjustment of Ostmark’s
Austrian subsidiary was incorrect, the net translation adjustments in Ostmark’s consolidated
balance sheet would be correct. The controller of Ostmark incorrectly used a working paper
elimination to record a foreign currency translation adjustment. The controller should have
included the $25,000 difference between the translated amount of the Austrian subsidiary’s
intercompany payable amount and Ostmark’s intercompany receivable amount in the foreign
currency translation adjustments amount in the Austrian subsidiary’s translated balance sheet.
This treatment is required by FASB Statement No. 52, “Foreign Currency Translation,” for
intercompany foreign currency transactions that are of a long-term investment nature.
Case 12–2 Arguments supporting the affirmative position include:
(1) A single translation technique should be used for restating foreign currency financial
statements of all foreign entities.
(2) Allowing management of a parent or investor enterprise to determine the functional
currency of a foreign entity might encourage improper designation of the entity’s local
currency as the functional currency, in order to avoid recognition of foreign currency
transaction gains and losses resulting from remeasurement.
(3) The foreign currency translation adjustments resulting from translation of a foreign entity’s
financial statements from the functional currency to the reporting currency defy a logical
explanation in accounting theory. As a “plug” amount, carried perhaps indefinitely in the
foreign entity’s translated financial statements, they are nebulous at best and possibly
misleading, given their impact on measures such as debt-to-equity ratio, at worst.

The McGraw-Hill Companies, Inc., 2006

Solutions Manual, Chapter 12 113
 Arguments supporting the negative position include:
(1) It is factual that the local currency of some countries is undesirable as a medium of
exchange and that many significant business transactions in those countries use another
(functional) currency. The functional currency concept recognizes this fact and avoids
misstatements of a foreign entity’s operating results that arise from use of a currency in
which transactions were not completed.
(2) Use of the foreign currency translation adjustments “plug” in the stockholders’ equity
section of the foreign entity’s translated financial statements avoids recognizing an
uncontrollable gain or loss resulting from changes in exchange rates rather than from
business transactions or events.
Case 12–3 There appears to be an incentive for management of a U.S. multinational enterprise to avoid
remeasurement of a foreign entity’s accounts to a functional currency different from its local
currency. Any time generally accepted accounting principles permit enterprise management to
make a decision that impacts the “bottom line” of the enterprise’s income statement, the
decision likely will be one that enhances net income or reduces net loss. Further, the reliability
qualitative characteristic of accounting information is difficult to comply with when objective
evidence to support the selection of a foreign entity’s functional currency is difficult to obtain,
as it is in most situations other than a highly inflationary economy.

The McGraw-Hill Companies, Inc., 2006

114 Modern Advanced Accounting, 10/e
20 Minutes, Easy
Transcontinent Company Pr. 12–1
Transcontinent Company
Remeasurement of Mideastia Branch Trial Balance
March 31, 2005
Balance
Balance (LCUs) Exchange (U.S. dollars)
dr (cr) rates dr (cr)
Cash LCU 2 0 0 0 $ 0 . 6 4
(1) $ 1 2 8 0
Trade accounts receivable 5 8 0 0 0 0 . 6 4
(1) 3 7 1 2 0
Allowance for doubtful accounts ( 1 0 0 0 ) 0 6 4
(1) ( 6 4 0 )
Inventories 1 2 6 0 0 0 0 . 6 0
(2) 7 5 6 0 0
Home office ( 2 2 0 0 0 0 ) (3) ( 1 3 2 0 0 0 )
Sales ( 1 8 4 0 0 0 ) 0 . 6 2 (4) ( 1 1 4 0 8 0 )
Cost of goods sold 1 6 0 0 0 0 0 . 6 0 (2) 9 6 0 0 0
Operating expenses 5 9 0 0 0 0 . 6 2 (4) 3 6 5 8 0
Subtotals LCU - 0 - $ ( 1 4 0 )
Foreign currency transaction loss - 0 - 1 4 0
Totals LCU - 0 - $ - 0 -

(1) Current rate (Mar. 31, 2005).

(2) Historical rate (when goods were shipped to branch by home office).
(3) Balance of Investment in Mideastia Branch ledger account in home office accounting records.
(4) Average of exchange rates for the month of March, 2005.

20 Minutes, Easy
Sarasota Company Pr. 12–2

The McGraw-Hill Companies, Inc., 2006

Solutions Manual, Chapter 12 115
 Sarasota Company
Remeasurement of Foreign Branch Trial Balance
April 30, 2005
Balance Balance
(LCUs) Exchange (U.S. dollars)
dr (cr) rates dr (cr)
Cash LCU 1 0 0 0 0 $ 1 . 0 5 $ 1 0 5 0 0

Trade accounts receivable 5 0 0 0 0 $ 1 . 0 5 5 2 5 0 0

Inventories 1 2 4 3 7 5 ( 1 ) 1 3 1 1 0 0
Reciprocal
Home office ( 1 0 4 5 6 5 ) account ( 1 1 9 7 0 0 )
balance
Sales ( 2 7 9 3 0 0 ) $ 1 . 0 9 (2) ( 3 0 4 4 3 7 )

Cost of goods sold 1 5 2 2 8 9 ( 3 ) 1 6 9 1 0 9

Operating expenses 4 7 2 0 1 $ 1 . 0 9 (2) 5 1 4 4 9
Subtotals - 0 - $ ( 9 4 7 9 )
Foreign currency transaction loss - 0 - 9 4 7 9
Totals LCU - 0 - $ - 0 -

(1) LCU117,150 x $1.05 = $123,008

7,225 x 1.12 = 8,092
LCU124,375 $131,100

(2) ($1.10 x 6/30) + ($1.12 x 12/30) + ($1.05 x 12/30) = $1.09

(3) LCU 72,730 x $1.10 = $ 80,003

79,559x 1.12 = 89,106
LCU152,289 $169,109

The McGraw-Hill Companies, Inc., 2006

116 Modern Advanced Accounting, 10/e
20 Minutes, Medium
Pan-Europe Corporation Pr. 12–3
Pan-Europe Corporation
Remeasurement of Amounts in Foreign Subsidiary’s Trial Balances
November 30, 2007 and 2006
Nov. 30, 2007 Nov. 30, 2006
Exchange Exchange
LCUs rates U.S. dollars LCUs rates U.S. dollars
Trade accounts receivable (net) LCU 4 0 0 0 0 $ 0 . 6 7 $ 2 6 8 0 0 LCU 3 5 0 0 0 $ 0 . 5 9 $ 2 0 6 5 0

Allowance for doubtful accounts 2 2 0 0 0 . 6 7 1 4 7 4 2 0 0 0 0 . 5 9 1 1 8 0

Inventories 8 0 0 0 0 0 . 5 9 4 7 2 0 0 7 5 0 0 0 0 . 5 0 3 7 5 0 0

Plant assets (net):

Dec. 1, 2005 acquisition 1 3 6 0 0 0 0 . 5 0 $ 6 8 0 0 0 1 5 0 0 0 0 0 . 5 0 $ 7 5 0 0 0
June 4, 2007 acquisition 2 7 0 0 0 0 . 6 7 1 8 0 9 0
Total plant assets (net) LCU 1 6 3 0 0 0 $ 8 6 0 9 0 LCU 1 5 0 0 0 0 $ 7 5 0 0 0

Accumulated depreciation:
Dec. 1, 2005 acquisition (164,000) LCU 2 8 0 0 0 0 . 5 0 $ 1 4 0 0 0 LCU 1 4 0 0 0 0 . 5 0 $ 7 0 0 0
June 4, 2007 acquisition (30,000) 3 0 0 0 0 . 6 7 2 0 1 0
Total accumulated depreciation LCU 3 1 0 0 0 $ 1 6 0 1 0 LCU 1 4 0 0 0 $ 7 0 0 0

Long-term debt LCU 1 0 0 0 0 0 0 . 6 7 $ 6 7 0 0 0 LCU 1 2 0 0 0 0 0 . 5 9 $ 7 0 8 0 0

Common stock LCU 5 0 0 0 0 0 . 5 0 2 5 0 0 0 LCU 5 0 0 0 0 0 . 5 0 2 5 0 0 0

The McGraw-Hill Companies, Inc., 2006

Solutions Manual, Chapter 12 117
30 Minutes, Medium
Westpac Corporation Pr. 12–4
Westpac Corporation
Journal Entries
August, 2005
Home Office Accounting Records ($) Branch Accounting Records (S$)
(1) Investment in Singapore Cash 1 1 1 1 1 1
Branch 5 0 0 0 0 Home office 1 1 1 1 1 1
Cash 5 0 0 0 0

(2) Investment in Singapore Inventories 2 2 2 2 2 2

Branch 1 0 0 0 0 0 Home office 2 2 2 2 2 2
Inventories 7 5 0 0 0
Allowance for
Overvaluation of
Inventories:
Singapore Branch 2 5 0 0 0

(3) Rent Expense 1 0 0 0

Cash 1 0 0 0

(4) Equipment: Singapore Home Office 5 0 0 0

Branch 2 2 5 0 Cash 5 0 0 0
Investment in Singapore
Branch 2 2 5 0

(5) Trade Accounts

Receivable 2 5 0 0 0
Sales 2 5 0 0 0

Cost of Goods Sold 1 5 0 0 0

Inventories 1 5 0 0 0

(6) Cash 2 0 0 0 0
Trade Accounts
Receivable 2 0 0 0 0

(7) Operating Expenses 5 0 0 0

Cash 5 0 0 0

(8) Cash 4 4 0 0 Home Office 1 0 0 0 0

Investment in Singapore Cash 1 0 0 0 0
Branch 4 4 0 0

(9) Investment in Singapore 2 0 0 0 Operating Expenses 4 4 9 4

Branch Operating Expenses 2 0 0 0 Home Office 4 4 9 4

(10) Operating Expenses 1 0 0 0

Trade Accounts
Receivable 1 0 0 0

The McGraw-Hill Companies, Inc., 2006

118 Modern Advanced Accounting, 10/e
50 Minutes, Medium
Portero Corporation Pr. 12–5
Sudamerica Corporation
Remeasurement of Trial Balance
December 31, 2006
Nicaduran
pesos Exchange U.S. dollars
dr (cr) rates dr (cr)
Cash $N 2 5 0 0 0 $ 2 . 4 0 $ 6 0 0 0 0
Trade accounts receivable 2 0 0 0 0 2 . 4 0 4 8 0 0 0
Allowance for doubtful accounts ( 5 0 0 ) 2 . 4 0 ( 1 2 0 0 )
Receivable from Portero Corporation 3 3 0 0 0 (Balance of reciprocal account) 7 0 5 0 0
Inventories 1 1 0 0 0 0 2 . 3 0 (1) 2 5 3 0 0 0
Plant assets 2 1 0 0 0 0 2 . 0 0 4 2 0 0 0 0
Accumulated depreciation of plant assets ( 7 9 9 0 0 ) 2 . 0 0 ( 1 5 9 8 0 0 )
Notes payable ( 6 0 0 0 0 ) 2 . 4 0 ( 1 4 4 0 0 0 )
Trade accounts payable ( 2 2 0 0 0 ) 2 . 4 0 ( 5 2 8 0 0 )
Income taxes payable ( 4 0 0 0 0 ) 2 . 4 0 ( 9 6 0 0 0 )
Common stock ( 5 0 0 0 0 ) 2 . 0 0 ( 1 0 0 0 0 0 )
Retained earnings ( 1 0 0 6 0 0 ) 2 . 0 0 ( 2 0 1 2 0 0 )
Sales—local ( 1 7 0 0 0 0 ) 2 . 3 0 ( 3 9 1 0 0 0 )
Sales—foreign ( 2 0 0 0 0 0 ) 2 . 3 0 ( 4 6 0 0 0 0 )
Cost of goods sold 2 0 7 6 0 0 2 . 3 0 (1) 4 7 7 4 8 0
Depreciation expense 2 2 4 0 0 2 . 0 0 4 4 8 0 0
Other operating expenses 6 0 0 0 0 2 . 3 0 1 3 8 0 0 0
Income taxes expense 4 0 0 0 0 2 . 3 0 9 2 0 0 0
Gain on disposal of plant assets ( 5 0 0 0 ) 2 . 3 0 ( 1 1 5 0 0 )
Subtotals $N - 0 - $ ( 1 3 7 2 0 )
Foreign currency transaction loss 1 3 7 2 0
Totals $N - 0 - $ - 0 -

(1) Absent detailed historical cost data, use Year

2006 average.

The McGraw-Hill Companies, Inc., 2006

Solutions Manual, Chapter 12 119
60 Minutes, Strong
Hightower Company Pr. 12–6
a. (1) Hightower Company Home Office
Journal Entry (U.S. dollars)
December 31, 2005
Investment in Brazentina Branch 3 0 0 0
Branch Market Research 3 0 0 0
To record amortization of market research fee for
2005, which is chargeable to branch.

(2) Hightower Company Branch

Journal Entries (Brazentina pesos)
December 31, 2005
Purchases 2 0 0 0 0
Home Office 2 0 0 0 0
To record shipment in transit from home office
($4,000 ÷ $0.20 = BP20,000).

Other Operating Expenses 1 5 0 0 0

Home Office 1 5 0 0 0
To record charge from home office for 2005
amortization of market research fee ($3,000 ÷ $0.20 =
BP15,000).

Franchise Fee Expense 1 9 5 0 0

Current Liabilities 1 9 5 0 0
To record Brazentina franchise fee for 2005 as follows:
Sales BP1,680,000
Less: Cost of goods sold (BP80,000 +
BP1,200,000 – BP100,000) BP1,180,000
Depreciation expense 100,000
Other operating
expenses 205,000 1,485,000
Income before franchise fee BP 195,000
Franchise fee (BP195,000 x 0.10) BP 19,500

The McGraw-Hill Companies, Inc., 2006

120 Modern Advanced Accounting, 10/e
Hightower Company (continued) Pr. 12–6
b. Hightower Company
Working Paper for Combined Financial Statements of Home Office and Branch
For Year Ended December 31, 2005
Home office
adjusted Branch adjusted trial balance Home office
trial balance In Brazentina Eliminations and branch
(U.S. dollars) pesos Exchange rates In U.S. dollars (U.S. dollars) combined
dr (cr) dr (cr) (remeasurement) dr (cr) dr (cr) dr (cr)
Income Statement:
Sales (4 0 3 5 0 0 0 ) (1 6 8 0 0 0 0 ) $ 0 . 2 2 5 ( 3 7 8 0 0 0 ) (c) 1 4 0 0 0 0 (4 2 7 3 0 0 0 )
Intracompany sales ( 1 6 0 0 0 0 ) (a) 1 6 0 0 0 0
Inventories, beginning of year 5 1 0 0 0 0 8 0 0 0 0 0 . 2 5 2 0 0 0 0 (a) ( 2 5 0 0 ) 5 2 7 5 0 0
Purchases 3,140,000 3 0 1 0 0 0 0 1 2 0 0 0 0 0 0 . 2 2 5 (1) 2 7 0 0 0 0 (a)( 1 6 0 0 0 0 ) 3 1 2 0 0 0 0
Intracompany purchases 1 4 0 0 0 0 (c)( 1 4 0 0 0 0 )
Inventories, end of year ( 5 2 0 0 0 0 ) ( 1 0 0 0 0 0 ) 0 . 2 0 (2) ( 2 0 0 0 0 ) (b) 3 0 0 0 ( 5 3 7 0 0 0 )
Depreciation expense 5 0 0 0 0 1 0 0 0 0 0 0 . 2 5 2 5 0 0 0 7 5 0 0 0
Franchise fee expense 1 9 5 0 0 0 . 2 2 5 4 3 8 8 4 3 8 8
Other operating expenses and income
taxes expense 6 8 0 0 0 0 2 0 5 0 0 0 0 . 2 2 5 4 6 1 2 5 7 2 6 1 2 5
Foreign currency transaction gain ( 2 0 1 1 3 )(3) ( 2 0 1 1 3 )
Net income ( 3 2 5 0 0 0 ) ( 1 7 5 5 0 0 ) ( 5 2 6 0 0 )(3) 5 0 0 ( 3 7 7 1 0 0 )

Statement of Retained Earnings:

Retained earnings, beginning of year ( 1 4 5 0 0 0 ) (a) 2 5 0 0 ( 1 4 2 5 0 0 )
Net income ( 3 2 5 0 0 0 ) ( 1 7 5 5 0 0 ) ( 5 2 6 0 0 )(3) 5 0 0 ( 3 7 7 1 0 0 )
Retained earnings, end of year ( 5 1 9 6 0 0 )

(Continued on page 378.)

The McGraw-Hill Companies, Inc., 2006

Solutions Manual, Chapter 12 121
Hightower Company (continued) Pr. 12–6
b. Hightower Company
Working Paper for Combined Financial Statements of Home Office and Branch (concluded)
For Year Ended December 31, 2005
Home office
adjusted Branch adjusted trial balance Home office
trial balance In Brazentina Eliminations and branch
(U.S. dollars) pesos Exchange rates In U.S. dollars (U.S. dollars) combined
dr (cr) dr (cr) (remeasurement) dr (cr) dr (cr) dr (cr)
Balance Sheet:
Cash 9 0 0 0 0 1 1 0 0 0 0 0 . 2 0 2 2 0 0 0 1 1 2 0 0 0
Trade accounts receivable (net) 1 6 0 0 0 0 1 5 0 0 0 0 0 . 2 0 3 0 0 0 0 1 9 0 0 0 0
Inventories, end of year 5 2 0 0 0 0 1 0 0 0 0 0 0 . 2 0 (2) 2 0 0 0 0 (b) ( 3 0 0 0 ) 5 3 7 0 0 0
Short-term prepayments 1 8 0 0 0 1 8 0 0 0
Investment in Brazentina Branch 1 3 0 0 0 (d) ( 1 3 0 0 0 )
Branch market research 9 0 0 0 9 0 0 0
Plant assets 7 5 0 0 0 0 1 0 0 0 0 0 0 0 . 2 5 2 5 0 0 0 0 1 0 0 0 0 0 0
Accumulated depreciation of plant assets ( 3 5 0 0 0 0 ) ( 6 5 0 0 0 0 ) 0 . 2 5 ( 1 6 2 5 0 0 ) ( 5 1 2 5 0 0 )
Current liabilities ( 2 4 0 0 0 0 ) ( 2 3 9 5 0 0 ) 0 . 2 0 ( 4 7 9 0 0 ) ( 2 8 7 9 0 0 )
Long-term debt ( 2 0 0 0 0 0 ) ( 2 3 0 0 0 0 ) 0 . 2 0 ( 4 6 0 0 0 ) ( 2 4 6 0 0 0 )
Home office ( 6 5 0 0 0 ) reciprocal account balance ( 1 3 0 0 0 ) (d) 1 3 0 0 0
Common stock ( 3 0 0 0 0 0 ) ( 3 0 0 0 0 0 )
Retained earnings, end of year ( 5 1 9 6 0 0 )
Totals - 0 - - 0 - - 0 - - 0 - - 0 -

(1) Average rate used for purchases occurring uniformly throughout year. Eliminations:
(2) Inventory turnover is more than 13 times [BP1,180,000 ÷ (BP180,000 ÷ 2) = 13.1 times]. (a) Intracompany sales and intracompany profits in beginning
Therefore Dec. 31, 2005, exchange rate is applicable for first-in, first-out cost. inventories—home office shipments to branch (page 379)
(3) $20,113 foreign currency transaction gain was derived from $52,600 remeasured net income (b) Intracompany profits in branch’s ending inventories
required in statement of retained earnings. (c) Intracompany sales—branch to home office
(d) Reciprocal accounts

The McGraw-Hill Companies, Inc., 2006

122 Modern Advanced Accounting, 10/e
Hightower Company (concluded) Pr. 12–6
Hightower Company
Analysis of Intracompany Sales, Cost of Goods Sold, and Unrealized Profit in Inventories
Home Office to Branch
For Year Ended December 31, 2005
Selling Price Cost Markup
Brazentina pesos U.S. dollars U.S. dollars U.S. dollars
Beginning inventories B P 4 0 0 0 0 * $ 1 0 0 0 0 $ 7 5 0 0 $ 2 5 0 0

Add: Shipments 1 6 0 0 0 0 1 2 0 0 0 0 4 0 0 0 0

Subtotals $ 1 7 0 0 0 0 $ 1 2 7 5 0 0 $ 4 2 5 0 0

Less: Ending inventories B P 6 0 0 0 0 † 1 2 0 0 0 9 0 0 0 3 0 0 0

Cost of goods sold $ 1 5 8 0 0 0 $ 1 1 8 5 0 0 $ 3 9 5 0 0

* BP80,000 x ½; translated at BP1 = $0.25

† (BP80,000 x ½) + BP20,000; translated at BP1 = $0.20

The McGraw-Hill Companies, Inc., 2006

Solutions Manual, Chapter 12 123
60 Minutes, Strong
Eagle Corporation Pr. 12–7
a. Mapleleaf Company
Translation of Financial Statements
For Year Ended December 31, 2005
Canadian Exchange
dollars rates U.S. dollars
Income Statement
Total revenue $C 8 0 0 0 0 0 $ 0 . 7 9 $ 6 3 2 0 0 0
Total costs and expenses 7 0 0 0 0 0 0 . 7 9 5 5 3 0 0 0
Net income $C 1 0 0 0 0 0 $ 7 9 0 0 0

Statement of Retained Earnings

Retained earnings, beginning of year
Net income $C 1 0 0 0 0 0 $ 7 9 0 0 0
Subtotal $C 1 0 0 0 0 0 $ 7 9 0 0 0
Dividends declared
Retained earnings, end of year $C 1 0 0 0 0 0 $ 7 9 0 0 0

Balance Sheet
Assets
Current assets $C 4 0 0 0 0 0 0 . 7 8 $ 3 1 2 0 0 0
Plant assets (net) 5 0 0 0 0 0 0 . 7 8 3 9 0 0 0 0
Total assets $C 9 0 0 0 0 0 $ 7 0 2 0 0 0

Liabilities & Stockholder’s Equity

Current liabilities $C 2 0 0 0 0 0 0 . 7 8 $ 1 5 6 0 0 0
Long-term debt 4 0 0 0 0 0 0 . 7 8 3 1 2 0 0 0
Common stock 2 0 0 0 0 0 0 . 8 0 1 6 0 0 0 0
Retained earnings 1 0 0 0 0 0 7 9 0 0 0
Foreign currency translation adjustments ( 5 0 0 0 )
Total liabilities & stockholder’s equity $C 9 0 0 0 0 0 $ 7 0 2 0 0 0

b. Eagle Corporation
Journal Entries
December 31, 2005
Investment in Mapleleaf Company Common
Stock 7 9 0 0 0
Intercompany Investment Income 7 9 0 0 0
To record 100% of net income of Mapleleaf
Company. (Income tax effects are disregarded.)

Foreign Currency Translation Adjustments 5 0 0 0

Investment in Mapleleaf Company Common
Stock 5 0 0 0
To record 100% of other comprehensive income
component of Mapleleaf Company’s stockholder’s
equity. (Income tax effects are disregarded.)

Eagle Corporation (concluded) Pr. 12–7

c. Eagle Corporation and Subsidiary
The McGraw-Hill Companies, Inc., 2006
124 Modern Advanced Accounting, 10/e
 Working Paper for Consolidated Financial Statements
For Year Ended December 31, 2005
Eliminations
Eagle Mapleleaf increase
Corporation Company (decrease) Consolidated
Income Statements
Total revenue 1 2 0 0 0 0 0 6 3 2 0 0 0 1 8 3 2 0 0 0
Intercompany investment
income 7 9 0 0 0 (a) ( 7 9 0 0 0 )
Total revenue and income 1 2 7 9 0 0 0 6 3 2 0 0 0 ( 7 9 0 0 0 ) 1 8 3 2 0 0 0
Total costs and expenses 9 0 0 0 0 0 5 5 3 0 0 0 1 4 5 3 0 0 0
Net income 3 7 9 0 0 0 7 9 0 0 0 ( 7 9 0 0 0 ) 3 7 9 0 0 0

Statements of Retained Earnings

Retained earnings, beginning
of year 5 0 0 0 0 0 5 0 0 0 0 0
Net income 3 7 9 0 0 0 7 9 0 0 0 ( 7 9 0 0 0 ) 3 7 9 0 0 0
Subtotal 8 7 9 0 0 0 7 9 0 0 0 ( 7 9 0 0 0 ) 8 7 9 0 0 0
Dividends declared 2 0 0 0 0 0 2 0 0 0 0 0
Retained earnings, end of year 6 7 9 0 0 0 7 9 0 0 0 ( 7 9 0 0 0 ) 6 7 9 0 0 0

Balance Sheet
Assets
Current assets 7 0 0 0 0 0 3 1 2 0 0 0 1 0 1 2 0 0 0
Investment in Mapleleaf
Company common stock 2 3 4 0 0 0 (a)( 2 3 4 0 0 0 )
Plant assets (net) 1 6 0 0 0 0 0 3 9 0 0 0 0 1 9 9 0 0 0 0
Intangible assets (net) 2 4 0 0 0 0 2 4 0 0 0 0
Total assets 2 7 7 4 0 0 0 7 0 2 0 0 0 ( 2 3 4 0 0 0 ) 3 2 4 2 0 0 0

Liabilities & Stockholders’ Equity

Current liabilities 4 0 0 0 0 0 1 5 6 0 0 0 5 5 6 0 0 0
Long-term debt 5 0 0 0 0 0 3 1 2 0 0 0 8 1 2 0 0 0
Common stock 1 2 0 0 0 0 0 1 6 0 0 0 0 (a)( 1 6 0 0 0 0 ) 1 2 0 0 0 0 0
Retained earnings 6 7 9 0 0 0 7 9 0 0 0 ( 7 9 0 0 0 ) 6 7 9 0 0 0
Foreign currency translation
adjustments ( 5 0 0 0 ) ( 5 0 0 0 ) (a) ( 5 0 0 0 )* ( 5 0 0 0 )
Total liabilities & stockholders’
equity 2 7 7 4 0 0 0 7 0 2 0 0 0 ( 2 3 4 0 0 0 ) 3 2 4 2 0 0 0
* A decrease in foreign currency translation adjustments and an increase in equity.

Eagle Corporation and Subsidiary

Working Paper Elimination
December 31, 2005
(a) Common Stock—Mapleleaf 1 6 0 0 0 0
Intercompany Investment Income—Eagle 7 9 0 0 0
Investment in Mapleleaf Company Common
Stock—Eagle 2 3 4 0 0 0
Foreign Currency Translation Adjustments—
Eagle 5 0 0 0
To eliminate intercompany investment and equity
accounts of subsidiary. (Income tax effects are
disregarded.)

90 Minutes, Strong
Panamer Corporation Pr. 12–8
a. Itican Subsidiary

The McGraw-Hill Companies, Inc., 2006

Solutions Manual, Chapter 12 125
 Translation of Financial Statements
For Year Ended December 31, 2006
Itican Exchange
pesos rates U.S. dollars
Income Statement
Sales IN 3 8 1 0 0 0 $ 0 . 0 9 * $ 3 4 2 9 0
Costs and expenses:
Cost of goods sold IN 3 0 0 0 0 0 0 . 0 9 $ 2 7 0 0 0
Depreciation expense 1 7 5 0 0 0 . 0 9 1 5 7 5
Selling expenses 1 6 5 0 0 0 . 0 9 1 4 8 5
Other operating expenses 2 3 6 6 7 0 . 0 9 2 1 3 0
Income taxes expense 9 3 3 3 0 . 0 9 8 4 0
Total costs and expenses IN 3 6 7 0 0 0 $ 3 3 0 3 0
Net income IN 1 4 0 0 0 $ 1 2 6 0

Statement of Retained Earnings

Retained earnings, beginning of year IN 7 0 0 0 0 . 1 2 $ 8 4 0
Net income 1 4 0 0 0 1 2 6 0
Retained earnings, end of year IN 2 1 0 0 0 $ 2 1 0 0

Balance Sheet
Assets
Cash IN 1 0 0 0 0 0 . 0 8 $ 8 0 0
Trade accounts receivable (net) 3 5 0 0 0 0 . 0 8 2 8 0 0
Inventories 8 3 0 0 0 0 . 0 8 6 6 4 0
Plant assets 1 7 5 0 0 0 0 . 0 8 1 4 0 0 0
Accumulated depreciation of plant assets ( 7 5 0 0 0 ) 0 . 0 8 ( 6 0 0 0 )
Total assets IN 2 2 8 0 0 0 $ 1 8 2 4 0

Liabilities & Stockholder’s Equity

Trade accounts payable IN 7 0 0 0 0 . 0 8 $ 5 6 0
Long-term debt 1 0 0 0 0 0 0 . 0 8 8 0 0 0
Common stock, 1,000 shares 1 0 0 0 0 0 0 . 1 2 1 2 0 0 0
Retained earnings 2 1 0 0 0 2 1 0 0
Foreign currency translation adjustments ( 4 4 2 0 )†
Total liabilities & stockholder’s equity IN 2 2 8 0 0 0 $ 1 8 2 4 0

* Weighted average, computed as follows: [($0.12 x 3) + ($0.08 x 9)] ÷ 12 = $0.09

† Derived amount, computed by determining amount necessary to balance the balance sheet.

The McGraw-Hill Companies, Inc., 2006

126 Modern Advanced Accounting, 10/e
Panamer Corporation (continued) Pr. 12–8
b. Panamer Corporation
Adjusting Entries
December 31, 2006
(1) Investment in U.S. Subsidiary Common Stock 9 0 0
Intercompany Investment Income 9 0 0
To record share of net income of U.S. Subsidiary
under equity method of accounting ($1,000 x 0.90 =
$900). (Income tax effects are disregarded.)

(2) Intercompany Receivables 9 0 0

Investment in U.S. Subsidiary Common Stock 9 0 0
To accrue receivable for dividend declared Dec. 18,
2006, by U.S. Subsidiary (900 x $1 = $900).

(3) Investment in U.S. Subsidiary Common Stock 1 8 0

Intercompany Investment Income 1 8 0
To record share of amortization of bargain-purchase
excess arising from acquisition of U.S. Subsidiary,
computed as follows:
Share of current fair value of business combination
assets on date of business combination
($12,000 x 0.90) $10,800
Less: Cost of investment 9,000
Excess allocable to subsidiary’s plant assets $ 1,800
Amortization for 2006 ($1,800 x 0.10) $ 180

(4) Investment in Itican Subsidiary Common Stock 1 2 6 0

Intercompany Investment Income 1 2 6 0
To record 100% share of translated net income of
Itican Subsidiary under equity method of accounting.
(Income tax effects are disregarded.)

(5) Investment in Itican Subsidiary Common Stock 8 4

Intercompany Investment Income 8 4
To record amortization of bargain-purchase excess
arising from acquisition of Itican Subsidiary, computed
as follows:
Current fair value of subsidiary’s net assets
on date of business combination
(IN107,000 x $0.12) $12,840
Less: Cost of net assets 12,000
Excess allocable to subsidiary’s plant assets $ 840
Amortization for 2006 ($840 x 0.10) $ 84

(6) Foreign Currency Translation Adjustments 4 4 2 0

Investment in Itican Subsidiary Common
Stock 4 4 2 0
To record 100% share of other comprehensive income
component of Itican Subsidiary stockholder’s equity.
(Income tax effects are disregarded.)

The McGraw-Hill Companies, Inc., 2006

Solutions Manual, Chapter 12 127
Panamer Corporation (continued) Pr. 12–8
U.S. Subsidiary
Adjusting Entry
December 31, 2006
Inventories 4 0 0 0
Intercompany Payables 4 0 0 0
To record merchandise in transit from parent company.

The McGraw-Hill Companies, Inc., 2006

128 Modern Advanced Accounting, 10/e
Panamer Corporation (continued) Pr. 12–8
c. Panamer Corporation and Subsidiaries
Working Paper for Consolidated Financial Statements
For Year Ended December 31, 2006
Eliminations
Panamer U.S. Itican increase
Corporation Subsidiary Subsidiary (decrease) Consolidated
Income Statements
Revenue:
Sales 4 0 0 0 0 0 2 1 0 0 0 3 4 2 9 0 4 5 5 2 9 0
Intercompany sales 1 0 0 0 0 (c) ( 1 0 0 0 0 )
Intercompany investment income 2 4 2 4 (1) (a) ( 1 0 8 0 )
(b) ( 1 3 4 4 )
Total revenue 4 1 2 4 2 4 2 1 0 0 0 3 4 2 9 0 ( 1 2 4 2 4 ) 4 5 5 2 9 0
Costs and expenses and minority interest
Cost of goods sold 3 0 0 0 0 0 1 5 0 0 0 2 7 0 0 0 (c) ( 1 5 0 0 ) 3 4 0 5 0 0
Intercompany cost of goods sold 7 5 0 0 (c) ( 7 5 0 0 )
Depreciation expense 3 0 0 0 5 5 0 1 5 7 5 (a) ( 1 8 0 ) 4 8 6 1
(b) ( 8 4 )
Selling expenses 3 4 5 0 0 2 4 0 0 1 4 8 5 3 8 3 8 5
Other operating expenses 4 0 0 0 0 1 3 8 3 2 1 3 0 4 3 5 1 3
Income taxes expenses 1 0 0 0 0 6 6 7 8 4 0 1 1 5 0 7
Minority interest in net income of subsidiary (d) 1 1 8 1 1 8
Total cost and expenses and minority interest 3 9 5 0 0 0 2 0 0 0 0 3 3 0 3 0 ( 9 1 4 6 )* 4 3 8 8 8 4
Net income 1 7 4 2 4 1 0 0 0 1 2 6 0 ( 3 2 7 8 ) 1 6 4 0 6

Statements of Retained Earnings

Retained earnings, beginning of year 2 5 0 0 0 2 0 0 0 8 4 0 (a) ( 2 0 0 0 ) 2 5 0 0 0
(b) ( 8 4 0 )
Net income 1 7 4 2 4 1 0 0 0 1 2 6 0 ( 3 2 7 8 ) 1 6 4 0 6
Subtotal 4 2 4 2 4 3 0 0 0 2 1 0 0 ( 6 1 1 8 ) 4 1 4 0 6
Dividends declared 1 0 0 0 (a) ( 1 0 0 0 )†
Retained earnings, end of year 4 2 4 2 4 2 0 0 0 2 1 0 0 ( 5 1 1 8 ) 4 1 4 0 6
(1) $900 + $180 + $1,260 + $84 = $2,424 (see b)
* A decrease in costs and expenses and an increase in net income.
† A decrease in dividends and an increase in retained earnings. (Continued on page 386.)

The McGraw-Hill Companies, Inc., 2006

Solutions Manual, Chapter 12 129
Panamer Corporation (continued) Pr. 12–8
Panamer Corporation and Subsidiaries
Working Paper for Consolidated Financial Statements (concluded)
For Year Ended December 31, 2006
Eliminations
Panamer U.S. Itican increase
Corporation Subsidiary Subsidiary (decrease) Consolidated
Balance Sheet
Assets
Cash 1 0 0 0 0 1 5 0 0 8 0 0 1 2 3 0 0
Trade accounts receivable (net) 3 0 0 0 0 8 0 0 0 2 8 0 0 4 0 8 0 0
Intercompany receivables (payables) 4 9 0 0 ( 4 9 0 0 )
Inventories 2 0 0 0 0 4 0 0 0 6 6 4 0 (c) ( 1 0 0 0 ) 2 9 6 4 0
Investment in U.S. Subsidiary common stock 9 1 8 0 (a) ( 9 1 8 0 )
Investment in Itican Subsidiary common stock 8 9 2 4 (b) ( 8 9 2 4 )
Plant assets 4 5 0 0 0 5 5 0 0 1 4 0 0 0 (a) ( 1 8 0 0 ) 6 1 8 6 0
(b) ( 8 4 0 )
Accumulated depreciation ( 1 5 0 0 0 ) ( 2 0 0 0 ) ( 6 0 0 0 ) (a) ( 1 8 0 )* ( 2 2 7 3 6 )
(b) ( 8 4 )
Total assets 1 1 3 0 0 4 1 2 1 0 0 1 8 2 4 0 ( 2 1 4 8 0 ) 1 2 1 8 6 4

Liabilities & Stockholders’ Equity

Trade accounts payable 2 5 0 0 0 5 6 0 2 5 5 6 0
Dividends payable 1 0 0 1 0 0
Long-term debt 8 0 0 0 8 0 0 0
Common stock 5 0 0 0 0 1 0 0 0 0 1 2 0 0 0 (a) ( 1 0 0 0 0 ) 5 0 0 0 0
(b) ( 1 2 0 0 0 )
Minority interest in net assets of subsidiary (a) 1 1 0 0 1 2 1 8
(d) 1 1 8
Retained earnings 4 2 4 2 4 2 0 0 0 2 1 0 0 ( 5 1 1 8 ) 4 1 4 0 6
Foreign currency translation adjustments ( 4 4 2 0 ) ( 4 4 2 0 ) (b) ( 4 4 2 0 )† ( 4 4 2 0 )
Total liabilities & stockholders’ equity 1 1 3 0 0 4 1 2 1 0 0 1 8 2 4 0 ( 2 1 4 8 0 ) 1 2 1 8 6 4

* Decreases in accumulated depreciation and increases in total assets.

† A decrease in foreign currency translation adjustments and an increase in equity.

The McGraw-Hill Companies, Inc., 2006

130 Modern Advanced Accounting, 10/e
Panamer Corporation (continued) Pr. 12–8
Panamer Corporation and Subsidiaries
Working Paper Eliminations
December 31,2006
(a) Common Stock—U.S. Subsidiary 1 0 0 0 0
Retained Earnings—U.S. Subsidiary 2 0 0 0
Accumulated Depreciation—U.S. Subsidiary 1 8 0
Intercompany Investment Income—Panamer 1 0 8 0
Investment in U.S. Subsidiary Common
Stock—Panamer 9 1 8 0
Plant Assets—U.S. Subsidiary 1 8 0 0
Depreciation Expense—U.S. Subsidiary 1 8 0
Dividends Declared—U.S. Subsidiary 1 0 0 0
Minority Interest in Net Assets of Subsidiary
($1,200 – $100) 1 1 0 0
To eliminate intercompany investment and related
equity accounts of U.S. Subsidiary at beginning of
year; to eliminate intercompany investment income
and subsidiary’s dividends; to offset bargain-purchase
excess against subsidiary’s plant assets; to reduce
subsidiary’s depreciation for pro rata portion of bargain-
purchase excess; and to provide for minority interest in
net assets of U.S. Subsidiary at beginning of year
($12,000 x 0.10 = $1,200), less minority’s share of
subsidiary’s dividends ($1,000 x 0.10 = $100.) (Income
tax effects are disregarded.)

(b) Common Stock—Itican Subsidiary 1 2 0 0 0

Retained Earnings—Itican Subsidiary 8 4 0
Accumulated Depreciation –Itican Subsidiary 8 4
Intercompany Investment Income—Panamer 1 3 4 4
Investment in Itican Subsidiary Common
Stock—Panamer 8 9 2 4
Foreign Currency, Translation Adjustment—
Panamer 4 4 2 0
Plant Assets—Itican Subsidiary 8 4 0
Depreciation Expense—Itican Subsidiary 8 4
To eliminate intercompany investment and related
equity accounts of Itican Subsidiary (retained
earnings at beginning of year); to eliminate
intercompany investment income; to offset bargain-
purchase excess against subsidiary’s plant assets;
and to reduce subsidiary’s depreciation for pro rata
portion of bargain-purchase excess. (Income tax
effects are disregarded.)

(Continued on page 388.)

The McGraw-Hill Companies, Inc., 2006

Solutions Manual, Chapter 12 131
Panamer Corporation (concluded) Pr. 12–8
Panamer Corporation and Subsidiaries
Working Paper Eliminations (concluded)
December 31, 2006
(c) Intercompany Sales—Panamer 1 0 0 0 0
Intercompany Cost of Goods Sold—Panamer 7 5 0 0
Cost of Goods Sold—U.S. Subsidiary
($6,000 x 0.25) 1 5 0 0
Inventories—U.S. Subsidiary ($4,000 x 0.25) 1 0 0 0
To eliminate intercompany sales, cost of goods sold,
and unrealized profit in inventories. (Income tax effects
are disregarded.)

(d) Minority Interest in Net Income of Subsidiary 1 1 8

Minority Interest in Net Assets of Subsidiary 1 1 8
To provide for minority interest in adjusted net income:
Net income of U.S. Subsidiary $1,000
Add: Adjustment per elimination (a) 180
Adjusted net income of U.S.
Subsidiary $1,180
Minority interest share ($1,180 x 0.10) $ 118

The McGraw-Hill Companies, Inc., 2006

132 Modern Advanced Accounting, 10/e