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