CHAPTER 9:
23. (10 minutes) (Foreign currency payable -- import purchase)
a. The decrease in the dollar value of the LCU payable from November 1 (60,000 x .345 = $20,700) to December 31 (60,000 x .333 = $19,980) is recorded as a $720 foreign exchange gain in 2013.
b. The increase in the dollar value of the LCU payable from December 31 ($19,980) to January 15 (60,000 x .359 = $21,540) is recorded as a $1,560 foreign exchange loss in 2014.
24. (10 minutes) (Foreign currency receivable – export sale)
a. The ostra receivable decreases in dollar value from (50,000 x $1.05) $52,500 at December 20 to $51,000 (50,000 x $1.02) at December 31, resulting in a foreign exchange loss of $1,500 in 2013.
b. The further decrease in dollar value of the ostra receivable from $51,000 at December 31 to $49,000 (50,000 x $.98) at January 10 results in an additional $2,000 foreign exchange loss in 2014.
32. (40 minutes) (Forward contract hedge of foreign currency payable)
a. Cash Flow Hedge
12/1/13 Parts Inventory (COGS) $40,000
Accounts Payable (K) $40,000
[20,000 x $2.00]
No entry for the forward contract.
12/31/13 Foreign Exchange Loss $2,000
Accounts Payable (K) $2,000
[20,000 x ($2.10 – $2.00)]
Forward Contract $2,450.75
AOCI $2,450.75
[20,000 x ($2.075 – $2.20) = $2,500 x .9803 = $2,450.75]
AOCI $2,000
Gain on Forward Contract $2,000
Premium Expense $500
AOCI $500
[20,000 x ($2.075 – $2.00) = $1,500 x 1/3 = $500]
Impact on 2013 income:
Parts inventory (COGS) $(40,000)
Foreign Exchange Loss (2,000)
Gain on Forward Contract 2,000
Premium Expense (500)
Total $(40,500)
32. (continued)
3/1/14 Foreign Exchange Loss $3,000
Accounts Payable (K) $3,000
[20,000 x ($2.25 – $2.10)]
Forward Contract $1,049.25
AOCI $1,049.25
[20,000 x ($2.25 – $2.075) = $3,500 – 2,450.75 = $1,049.25]
AOCI $3,000
Gain on Forward Contract $3,000
Premium Expense $1,000
AOCI $1,000
[$1,500 x 2/3 = $1,000]
Foreign Currency (K) [20,000 x $2.25] $45,000
Cash $41,500
Forward Contract 3,500
Accounts Payable (K) $45,000
Foreign Currency (K) $45,000
Impact on 2014 income:
Foreign Exchange Loss $(3,000)
Loss on Forward Contract 3,000
Premium revenue (1,000)
Total $(1,000)
Impact on net income over both periods: $(40,500) + $(1,000) = $(41,500); equal to cash outflow.
32. (continued)
b. Fair Value Hedge
12/1/13 Parts inventory (COGS) $40,000
Accounts Payable (K) $40,000
[20,000 x $2.00]
No entry for the forward contract.
12/31/13 Foreign Exchange Loss $2,000
Accounts Payable (K) $2,000
[20,000 x ($2.10 – $2.00)]
Forward Contract $2,450.75
Gain on Forward Contract $2,450.75
[20,000 x ($2.075 – $2.20) = $2,500 x .9803 = $2,450.75]
Impact on 2013 income:
Parts inventory (COGS) $(40,000.00)
Foreign Exchange Loss (2,000.00)
Gain on Forward Contract 2,450.75
Total $(39,549.25)
3/1/14 Foreign Exchange Loss $3,000
Accounts Payable (K) $3,000
[20,000 x ($2.25 – $2.10)]
Forward Contract $1,049.25
Gain on Forward Contract $1,049.25
[20,000 x ($2.25 – $2.075) = $3,500 – 2,450.75 = $1,049.25]
Foreign Currency (K) [20,000 x $2.25] $45,000
Cash $41,500
Forward Contract 3,500
Accounts Payable (K) $45,000
Foreign Currency (K) $45,000
32. (continued)
Impact on 2014 income:
Foreign Exchange Loss $(3,000.00)
Gain on Forward Contract 1,049.25
Total $(1,950.75)
Impact on net income over both periods: $(39,549.25) + $(1,950.75) = $(41,500.00); equal to cash outflow.
CHAPTER 10:
27. (25 minutes) (Compute translation adjustment and remeasurement gain/loss)
a. Translation—only changes in net assets have an impact on the computation of the translation adjustment.
Net asset balance 1/1 KM30,000 x $.32 = $ 9,600
Increases in net assets (income):
Sold inventory at a profit 5/1 5,000 x $.34 = 1,700
Sold land at a gain 6/1 1,000 x $.35 = 350
Decreases in net assets:
Paid a dividend 12/1 (3,000) x $.41 = (1,230)
Depreciation recorded (2,000) x $.37 = ( 740)
Net asset balance 12/31 KM31,000 $ 9,680
Net asset balance 12/31
at current exchange rate KM31,000 x $.42 = (13,020)
Translation adjustment—positive $(3,340)
b. Remeasurement—only changes in net monetary assets and liabilities have an impact on the computation of the remeasurement gain.
Beginning net monetary
liability position KM (3,000) x $.32 = $ ( 960)
Increases in monetary assets:
Sold inventory 5/1 15,000 x $.34 = 5,100
Sold land 6/1 5,000 x $.35 = 1,750
Decreases in monetary assets:
Bought inventory 10/1 (12,000) x $.39 = (4,680)
Bought land 11/1 (4,000) x $.40 = (1,600)
Paid a dividend 12/1 (3,000) x $.41 = (1,230)
Ending net monetary liability
position KM(2,000) $(1,620)
Ending net monetary liability position
at current exchange rate KM(2,000) x $.42 = (840)
Remeasurement gain $ (780)
Note: The purchase of land on account did not result in a decrease in monetary assets, rather an increase in monetary liabilities. Payment on the note payable and collection of accounts receivable do not affect the net monetary liability position.
24. (20 minutes) (Calculate translation adjustment and remeasurement gain/loss and explain their economic relevance)
The translation adjustment and remeasurement gain/loss can be determined as the plug figure that keeps the dollar balance sheet in balance:
Translation Remeasurement
CHF Rate US$ Rate US$
Cash 500,000 $.75 C 375,000 $.75 C 375,000
Inventory 1,000,000 $.75 C 750,000 $.70 H 700,000
Fixed assets 3,000,000 $.75 C 2,250,000 $.70 H 2,100,000
Total assets 4,500,000 3,375,000 3,175,000
Notes payable 800,000 $.75 C 600,000 $.75 C 600,000
Owners equity 3,700,000 $.70 H 2,590,000 $.70 H 2,590,000
Translation adjustment 185,000
Retained earnings
(remeasurement loss) (15,000)
Total 4,500,000 3,375,000 3,175,000
Alternatively, the translation adjustment and remeasurement loss can be calculated by analyzing the subsidiary’s balance sheet exposure:
Translation
Beginning net assets, 12/1 CHF3,700,000 x $.70 = $2,590,000
Ending net assets, 12/31 at
current exchange rate CHF3,700,000 x $.75 = (2,775,000)
Translation adjustment (positive) $( 185,000)
Remeasurement
Beginning net monetary
liability position, 12/1 CHF(300,000) x $.70 = $(210,000)
Ending net monetary liability
position, 12/31 at current
exchange rate CHF(300,000) x $.75 = (225,000)
Remeasurement loss $ 15,000
Economic Relevance of Translation Adjustment
The translation adjustment increases stockholders’ equity by $185,000. The positive translation adjustment arises because the Swiss subsidiary has a net asset position of CHF3,700,000 and the Swiss franc appreciates by $.05 [CHF3,700,000 x $.05 = $185,000]. The positive translation adjustment is not realized in terms of dollar cash flow. It would be a realized gain only if Stephanie sold this operation on December 31 for exactly CHF3,700,000 and converted the sales proceeds into dollars at the current exchange rate of $.75 per Swiss franc.
Economic Relevance of Remeasurement Loss
The remeasurement loss arises because the Swiss subsidiary has a net monetary liability position of CHF300,000 (Cash of CHF500,000 less Notes payable of CHF800,000) and the Swiss franc has appreciated by $.05 [CHF300,000 x $.05 = $15,000]. The loss is unrealized. It would be realized only if the Swiss subsidiary converted its Swiss franc cash into dollars at December 31, thereby realizing a transaction gain of $25,000 [CHF500,000 x ($.75-$.70)], and the parent paid off the Swiss franc note payable using U.S. dollars, thereby realizing a transaction loss of $40,000 [CHF800,000 x ($.75-$.70)]. (The note could have been paid at December 1 for $560,000 [CHF800,000 x $.70]. At December 31, it takes $600,000 to pay off the note [CHF800,000 x $.75].)
CHAPTER 13 : Problem 42, 43 see next page
42. (25 Minutes) (Prepare a statement of realization and liquidation)
a. LITZ CORPORATION
Statement of Realization and Liquidation
Stock-
Liabilities Fully Partially Unsecured holders'
Noncash with Secured Secured Nonpriority Equity
Cash Assets Priority Creditors Creditors Liabilities (Deficits)
Balances, 8/8/13 $ 16,000 $763,000 0 $259,000 $132,000 $150,000 $238,000
Investments sold 39,000 (32,000) 7,000
Inventory sold 48,000 (69,000) (21,000)
Payment is made on note from
proceeds of auction (48,000) (48,000)
Remaining debt is reclassified (84,000) 84,000
Administrative expenses incurred $15,000 (15,000)
Land and buildings all sold 315,000 (370,000) (55,000)
Payment is made on note from
proceeds of sale (259,000) (259,000)
Reclassify liabilities with priority 34,000 (34,000)
Equipment sold 84,000 (210,000) (126,000)
Receivables collected 34,000 (82,000) (48,000)
Administrative expenses paid (15,000) (15,000)
Final balances remaining for
unsecured creditors $214,000 0 $34,000 0 0 $200,000 $(20,000)
b. Total amount available to pay
liabilities with priority and
unsecured creditors (see part a) $214,000
Less: liabilities with priority (34,000)
Available for unsecured creditors $180,000
Percentage of claim to be received
by each unsecured creditor
($180,000/$200,000) 90%
43. (40 Minutes) (Prepare journal entries for company emerging from bankruptcy using fresh start accounting)
Becket Corp. must use fresh start accounting because the reorganization value of $650,000 is less than the company's allowed debts and the original owners hold less than 50 percent of the voting stock after the reorganization.
BOOK VALUES AFTER EMERGING FROM REORGANIZATION
— Total assets = $637,000 (reorganization value of $650,000 plus proceeds from sale of stock of $77,000 less $90,000 value of land and investments used to settle two debts)
— Total liabilities = $350,000 ($130,000 + $40,000 + $180,000)
— Total common stock = $160,000 (10,000 additional shares are issued with a $10 per share par value so that total outstanding shares = 16,000)
— Deficit = 0 (eliminated by the reorganization)
— Additional paidin capital = $127,000 (figure needed to balance above accounts after reorganization)
— Because the company has a reorganization value of $650,000 but the assets have a market value of only $623,000, Goodwill must be established for $27,000.
JOURNAL ENTRIES
—Investments 14,000
Land 23,000
Buildings 52,000
Goodwill 27,000
Accounts Receivable 20,000
Inventory 16,000
Equipment 31,000
Additional PaidIn Capital (to balance) 49,000
To adjust accounts to market value as part of fresh
start accounting.
—Cash 77,000
Common Stock ($10 par value) 70,000
Additional PaidIn Capital 7,000
To record shares sold to new investor.
—Cash 40,000
Investments 40,000
Investments sold.
43. (continued)
—Notes Payable—Current 220,000
Cash 40,000
Notes Payable (due in 2017) 130,000
Gain on Discharge of Debt 50,000
To record settlement of current notes.
—Accounts Payable 129,000
Notes Payable (due in 2014) 40,000
Gain on Discharge of Debt 89,000
To record settlement of accounts payable.
—Notes Payable (due in 2016) 325,000
Land 50,000
Notes Payable (due in 2020) 180,000
Common Stock ($10 par value) 30,000
Additional PaidIn Capital
(3/16 of total APIC requirement computed above) 23,813
Gain on Discharge of Debt 41,187
To record settlement of longterm debt.
—Gain on Debt Discharge 180,187
Additional PaidIn Capital ($127,000 – $79,813) 47,187
Retained Earnings (deficit) 133,000
To adjust additional paidin capital to appropriate balance, close out gain, and eliminate deficit balance as part of fresh start accounting.
CHAPTER 14
28. (55 Minutes) (Allocation of income to the partners and determination of capital balances)
ALLOCATION OF INCOME—2011
Boswell Johnson Total
Salary (8 months) $8,000 $0 $ 8,000
Remaining $3,000 1,200 (40%) 1,800 (60%) 3,000
Totals $9,200 $1,800 $11,000
STATEMENT OF PARTNERS' CAPITAL—DECEMBER 31, 2011
Boswell Johnson Total
Beginning Balances ($114,000
Invested capital split evenly—
market value used for assets) $57,000 $57,000 $114,000
Income allocation (above) 9,200 1,800 11,000
Drawings 0 0 0
Ending balances $66,200 $58,800 $125,000
WALPOLE INVESTMENT JANUARY 1, 2012
Walpole's $54,000 investment increases total capital to $179,000. Walpole is credited with a 40% interest or $71,600. According to the problem, the excess $17,600 is a bonus from the original partners. Of this amount, $10,560 is allocated from Johnson (60%) and $7,040 from Boswell (40%).
ALLOCATION OF INCOME—2012
Boswell Johnson Walpole Total
Salary $12,000 $0 $24,000 $36,000
Remaining $8,000 loss ($28,000 –
$36,000) (960) (3,840) (3,200) (8,000)
Totals $11,040 $(3,840) $20,800 $28,000
STATEMENT OF PARTNERS' CAPITAL—DECEMBER 31, 2012
Boswell Johnson Walpole Total
Beginning balances $66,200 $58,800 $ 0 $125,000
Walpole's contribution (7,040) (10,560) 71,600 54,000
Income allocation (above) 11,040 (3,840) 20,800 28,000
Drawings (5,000) (5,000) (10,000) (20,000)
Ending balances $65,200 $39,400 $82,400 $187,000
28. (continued)
ADMISSION OF POPE—JANUARY 1, 2013
Pope's payment was made directly to the partners. Therefore, neither goodwill nor a bonus need be recognized. Instead, 10% of each capital balance shown above will be reclassified to Pope. The journal entry would be as follows:
Boswell, capital 6,520
Johnson, capital 3,940
Walpole, capital. 8,240
Pope, capital 18,700
ALLOCATION OF INCOME—2013
Boswell Johnson Walpole Pope Total
Salary $12,000 $0 $24,000 $9,600 $45,600
Remaining $400 income 54 162 144 40 400
Totals $12,054 $162 $24,144 $9,640 $46,000
STATEMENT OF PARTNERSHIP CAPITAL—DECEMBER 31, 2013
Boswell Johnson Walpole Pope Total
Beginning balances $65,200 $39,400 $82,400 $0 $187,000
Admission of Pope (6,520) (3,940) (8,240) 18,700 0
Allocation of income
(above) 12,054 162 24,144 9,640 46,000
Drawings (5,000) (5,000) (10,000) (4,000) (24,000)
Ending balances $65,734 $30,622 $88,304 $24,340 $209,000