PROBLEM 1

On November 1, 2013, Stateside Company (a U.S. manufacturer) sold an airplane for 1 million
New Zealand dollars (NZ$) to New Zealand company Aukland Corporation. Stateside will
receive payment on January 30, 2014 in New Zealand dollars. In order to hedge the accounts
receivable position, Stateside entered into a 90-day forward contract to sell 1 million New
Zealand dollars on January 30, 2014. On November 1, 2013, the 90-day forward rate is
US$0.73 per New Zealand dollar. The forward contract will be settled net. Account for the hedge
as a fair value hedge. Ignore the time value of money.

The relevant exchange rates per New Zealand dollar:

Spot Rate Forward Rate to 1/30/14

Nov. 1, 2013 US$0.73 US$0.73
Dec. 31, 2013 US$0.75 US$0.76
Jan. 30, 2014 US$0.79 US$0.79

Required:
Record the journal entries that Stateside would need to prepare at November 1, 2013,
December 31, 2013 and January 30, 2014. December 31, 2013 is the fiscal year end.

Stateside's General Journal

11/1/13 Accounts receivable (NZ$) 730,000

Sales 730,000
12/31/13 Accounts Receivable (NZ$) 20,000

Exchange gain 20,000

Loss on forward contract 30,000

Forward contract 30,000

(($.76 - $.73) 1,000,000 = $30,000)
01/30/14 Accounts Receivable (NZ$) 40,000

Exchange gain 40,000

Loss on forward contract 30,000

Forward contract 30,000

(($.79 - $.76) 1,000,000 = $30,000)
Cash 790,000

Accounts receivable 790,000

Forward contract 60,000

Cash 60,000
PROBLEM 2
Pan Corporation, a U.S. company, formed a British subsidiary on January 1, 2014 by investing
450,000 British pounds () in exchange for all of the subsidiary's no-par common stock. The
British subsidiary, Skillet Corporation, purchased real property on April 1, 2014 at a cost of
500,000, with 100,000 allocated to land and 400,000 allocated to a building. The building is
depreciated over a 40-year estimated useful life on a straight-line basis with no salvage value.
The British pound is Skillet's functional currency and its reporting currency. The British economy
does not have high rates of inflation. Exchange rates for the pound on various dates were:

January 01, 2014 = 1 = $1.60

April 01, 2014 = 1 = $1.61
December 31, 2014 = 1 = $1.68
2014 average rate = 1 = $1.66

Skillet's adjusted trial balance is presented below for the year ended December 31, 2014.

In Pounds
Debits:
Cash 220,000
Accounts receivable 52,000
Inventory 59,000
Building 400,000
Land 100,000
Depreciation expense 7,500
Other expenses 110,000
Cost of goods sold 220,000
Total debits 1,168,500
Credits

Accumulated depreciation 7,500

Accounts payable 111,000
Common stock 450,000
Retained earnings 0
Equity adjustment 0
Sales revenue 600,000
Total credits 1,168,500

Required: Prepare Skillet's:

1. Translation working papers;
2. Translated income statement; and
3. Translated balance sheet.
Requirement 1
Skillet Corporation
Translation Working Papers
Debits
Cash 220,000 $1.68 =$369,600
Accounts receivable 52,000 $1.68 = 87,360
Inventory 59,000 $1.68 = 99,120
Building 400,000 $1.68 = 672,000
Land 100,000 $1.68 = 168,000
Depreciation expense 7,500 $1.66 = 12,450
Other expenses 110,000 $1.66 = 182,600
Cost of goods sold 220,000 $1.66 = 365,200
_________
Total debits $1,956,330
Credits

Accumulated depreciation 7,500 $1.68 = $12,600

Accounts payable 111,000 $1.68 = 186,480
Common stock 450,000 $1.60 = 720,000
Sales revenue 600,000 $1.66 = 996,000
Retained earnings 0
Total credits $1,915,080
Credit differential $41,250

Requirement 2
Skillet Corporation
Translated Income Statement
For the Year Ended December 31, 2014
Sales revenue $996,000
Expenses:

Cost of goods sold (365,200)

Depreciation expense (12,450)
Other expenses (182,600)
________
Net income $435,750
Retained earnings, January 1, 2014 0
Retained earnings, December 31, 2014 $435,750
Requirement 3
Skillet Corporation
Translated Balance Sheet
December 31, 2014

Cash $369,600
Accounts receivable 87,360
Inventory 99,120
Building-net 659,400
Land 168,000
Total assets $1,383,480
Accounts payable $186,480

Common stock 720,000

Retained earnings 435,750
Accumulated other comprehensive income 41,250
Total liabilities & equities $1,383,480
PROBLEM 3
The Polka Corporation, a U.S. corporation, formed a British subsidiary on January 1, 2014 by
investing 550,000 British pounds () in exchange for all of the subsidiary's no-par common
stock. The British subsidiary, Stripe Corporation, purchased real property on April 1, 2014 at a
cost of 500,000, with 100,000 allocated to land and 400,000 allocated to the building. The
building is depreciated over a 40-year estimated useful life on a straight-line basis with no
salvage value. The U.S. dollar is Stripe's functional currency, but it keeps its records in pounds.
The British economy does not experience high rates of inflation. Exchange rates for the pound
on various dates are:

January 01, 2014 = 1 = $1.60

April 01, 2014 = 1 = $1.62
December 31, 2014 = 1 = $1.65
2014 average rate = 1 = $1.64

Stripe's adjusted trial balance is presented below for the year ended December 31, 2014.

In Pounds
Debits:
Cash 200,000
Accounts receivable 72,000
Notes receivable 99,000
Building 400,000
Land 100,000
Depreciation expense 7,500
Other expenses 115,000
Salary expense 208,000
Total debits 1,201,500
Credits

Accumulated depreciation 7,500

Accounts payable 100,000
Common stock 550,000
Retained earnings 0
Equity adjustment 0
Sales revenue 544,000
Total credits 1,201,500

Required: Prepare Stripe's:

1. Remeasurement working papers;
2. Remeasured income statement; and
3. Remeasured balance sheet.
Requirement 1
Stripe Corporation
Remeasurement Working Papers

Debits
Cash 200,000 $1.65 =$330,000
Accounts receivable 72,000 $1.65 = 118,800
Notes receivable 99,000 $1.65 = 163,350
Building 400,000 $1.62 = 648,000
Land 100,000 $1.62 = 162,000
Depreciation expense 7,500 $1.62 = 12,150
Other expenses 115,000 $1.64 = 188,600
Salary expense 208,000 $1.64 = 341,120
_________
Total debits $1,964,020
Credits

Accumulated depreciation 7,500 $1.62 = $12,150

Accounts payable 100,000 $1.65 = 165,000
Common stock 550,000 $1.60 = 880,000
Sales revenue 544,000 $1.64 = 892,160
Retained earnings 0 0
Total credits $1,949,310
Credit differential $14,710
Requirement 2
Stripe Corporation
Remeasured Income Statement
For the Year Ended December 31, 2014

Sales revenue $892,160

Expenses:

Salary expense (341,120)

Depreciation expense (12,150)
Other expenses (188,600)
Income before exchange gains or losses $350,290
Exchange gains 14,710
Net income $365,000
Retained earnings, January 1, 2014 0
Retained earnings, December 31, 2014 $365,000

Requirement 3
Stripe Corporation
Remeasured Balance Sheet
December 31, 2014
Cash $330,000

Accounts receivable 118,800

Notes receivable 163,350
Building-net 635,850
Land 162,000
Total assets $1,410,000
Accounts payable $165,000

Common stock 880,000

Retained earnings 365,000
Total liabilities & equities $1,410,000
PROBLEM 4
Puddle Incorporated purchased an 80% interest in Soake Company, located in England. Puddle
paid $1,560,000 on January 1, 2014, at a time when the book values of Soake equaled the fair
values. Any excess cost/book value differential was attributed to a patent with a five-year
remaining useful life. Soake's books are kept in the functional currency, pounds. A summary of
Soake's equity is shown below for the first year that Puddle had ownership interest.

Exchange
In Pounds Rates In Dollars
Stockholders' Equity - 12/31/13 1,200,000 $1.60H $1,920,000
Net Income 400,000 $1.62A 648,000
Dividends - 11/1/14 (200,000) $1.64H (328,000)
Translation Adjustment 70,000
Stockholders' Equity - 12/31/14 1,400,000 $1.65C $2,310,000

Required:
Determine Puddle's income from Soake for 2014, and the balance of Puddle's Investment in
Soake account at December 31, 2014. Soake's books are kept in pounds, which is the
functional currency.

Puddle's income from Soake for 2014

Investment cost of 80% interest in Soake $1,560,000

Less: Book value acquired ($1,920,000 80%) (1,536,000)

Patent in dollars at acquisition $ 24,000
Patent in pounds at acquisition

$24,000/$1.60 exchange rate = 15,000 pounds

Equity in Soake's income ($648,000 80%) $ 518,400

Patent amortization for 2014

15,000 pounds/5 years $1.62 average rate ( 4,860)
Income from Soake for 2014 $ 513,540

Investment in Soake at December 31, 2014

Investment cost $1,560,000

Add: Income from Soake 513,540

Less: Dividends ($328,000 80%) (262,400)
Add: Equity adjustment from translation
($70,000 80%) 56,000
Add: Equity adj. from patent:
Beginning patent $ 24,000
Less: Patent amortization 4,860
$ 19,140
Ending patent
(15,000 - 3,000 = 12,000 pounds) $1.65 19,800 660
Investment in Soake December 31, 2014 $1,867,800

Proof of investment balance

Net assets at December 31, 2014 of $2,310,000 80% $1,848,000
Add: Unamortized patent (12,000 pounds $1.65) 19,800
Investment balance $1,867,800