Part 1”: This is a currency related exercise. Information you need is provided below.
• Tab 3 “Part 2”: This is a consolidation exercise. Additional information you need is provided below. Note that Parts 1 and 2 are independent of each other. Do not try to make connections between the two, there are none.
Information for Part 1
A statement of financial position and a statement of income are provided for Euro Subsidiary. The amounts shown are presented in Euros (€). You learn the following about Euro Subsidiary:
• The company’s functional currency is the Euro.
• The parent company’s reporting currency is the US dollar.
• Euro Subsidiary began business January 2015.
• Exchange rates are as follows (assume these are correct, don’t look them up!). The chart shows the number of US dollars one Euro is worth, January each year 2015-2020, and June and December 31 (assumed) for 2020. So, on January 1, 2015, 1 Euro is worth $1.20. Do not look for more information on exchange rates, use only the ones provided in the table.
• Assume all of the common stock was issued/sold at the start of business in 2015. Assume all property, plant, and equipment, and the patents were purchased at the start of business 2015, too. • You can reasonably assume that revenues and expenses occurred evenly throughout the year 2020.
• You can also assume that retained earnings from earlier years was earned evenly over the years 2015-2019.
Jan-15 1.20 Jan-16 1.08 Jan-17 1.05 Jan-18 1.21 Jan-19 1.15 Jan-20 1.12 Jun-20 1.14 Dec-20 1.22
Required for Part 1
A. Determine appropriate exchange rates to translate/remeasure (which is it?) from Euros to dollars. You will need to make some assumptions in doing this and I expect there will be different answers.
B. Translate/remeasure (which is it?) Euro Subsidiary’s statement of financial position and statement of income to U.S. dollars. I don’t include a statement of comprehensive income, if you need to reflect something in that statement, just make a note of it. (There’s another hint!)
C. The end result should be a US dollar statement of financial position and statement of income, just those two (no cash flow, no statement of stockholders’ equity).
D. You must show me the rates you used, and if a calculation was involved, I must be able to review that calculation (calculating an average rate, for example, yet another hint). Using a formula in Excel is sufficient, as I can review the formula. I would prefer that you use formulas, by the way. And just to emphasize, this part is completely separate from Part 2. And to be honest, these instructions make the problem sound much more complex than it is! Exhibit 10.1 in the textbook is a great reference.
Keep reading for Part 2
Information for Part 2
In this part, you are consolidating BigUSA and Small Sub. And again, this part is not connected in any way to Part 1.
Information for Part 2
• BigUSA owns 100% of the outstanding common stock of Small Sub.
• Small Sub was acquired by BigUSA a few years ago (hint: this is not an acquisition accounting exercise). Inventory Transactions
• During the year the two companies sold inventory to each other as follows: BigUSA sold products to Small Sub in the amount of $125,000,000. BigUSA’s gross profit on those sales was $38,000,000. We’ll refer to this as “Big to Small inventory.” Small Sub sold products to BigUSA in the amount of $39,000,000. Small Sub’s gross profit on those sales was $12,000,000. We’ll refer to this as “Small to Big inventory.” As of December 31, 2020, all of the Big to Small inventory had been sold to outside customers. At that date, $17,000,000 of Small to Big inventory was still in BigUSA’s inventory. Asset Transactions
• At the beginning of 2020, Small Sub sold a machine to BigUSA. The selling price (which was paid) was $5,500,000 (which approximated market value at the time). Small Sub book value of the machine was $12,000,000 cost and $8,000,000 accumulated depreciation. Small Sub recognized a gain on the difference, including it in “Other Income.” Small Sub was depreciating the machine over 6 years, using straight-line depreciation with no salvage value. BigUSA is depreciating the machine over 3 years (straight-line, no salvage value). Other Transactions.
• BigUSA charges Small Sub a management fee (for various services) in the amount of $1,500,000 for the year 2020. BigUSA includes the fee income in “Other Income.” Small Sub includes the expense in “Administrative” expenses.
Required for Part 2
A. Prepare a consolidated statement of financial position and a consolidated statement of income for BigUSA and Small Sub. Use the spreadsheet format, you do not need to create financial statements other than in a worksheet format.
B. I suggest you use the format in the spreadsheet, but if you wish to do something different, you may. But the end result must be consolidated financial statements.
C. Your consolidation must factor in the information provided above. Hint/Tip: Don’t try to use all of the tools you’ve developed this semester. This is not an acquisition accounting problem. Part 2 is not a currency problem (that’s in Part 1). I say this because I’ve seen students make that mistake … don’t!