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The year 1 financial statements of the brazilian subsidiary of

The Year 1 financial statements of the Brazilian subsidiary of Artemis Corporation

(a Canadian company) revealed the following:

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Brazilian Reals (BRL)

Beginning inventory . . . . . . . . . . . . . . . . . . . . . . . . . 100,000

Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000

Ending inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000

Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . 450,000

Canadian dollar (C$) exchange rates for 1 BRL as follows:

January 1, Year 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C$0.45

Average, Year 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.42

December 31, Year 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.38

The beginning inventory was acquired in the last quarter of the previous year

when the exchange rate was C$0.50 = BRL 1; ending inventory was acquired in

the last quarter of the current year when the exchange rate was C$0.40 = BRL 1.

Required:

a. Assuming that the current rate method is the appropriate method of translation,

determine the amounts at which the Brazilian subsidiary’s ending

inventory and cost of goods sold should be included in Artemis’s Year 1

consolidated financial statements.

b. Assuming that the temporal method is the appropriate method of translation,

determine the amounts at which the Brazilian subsidiary’s ending

inventory and cost of goods sold should be included in Artemis’s Year 1

consolidated financial statements.

 

 

 

question 2

6. Sandestino Company contributes cash of $170,000 and Costa Grande Company

contributes net assets of $170,000 to create Grand Sand Company on

January 1, Year 1. Sandestino and Costa Grande each receive a 50 percent

equity interest in Grand Sand. Grand Sand’s financial statements for its first

year of operations are as follows:

SANDESTINO COMPANY

Income Statement

Year 1

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $800,000

Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450,000

Income before tax . . . . . . . . . . . . . . . . . . . . . . . . . 350,000

Tax expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $250,000

GRAND SAND COMPANY

Income Statement

Year 1

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . $80,000

Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000

Income before tax . . . . . . . . . . . . . . . . . . . 30,000

Tax expense. . . . . . . . . . . . . . . . . . . . . . . . 10,000

Net income . . . . . . . . . . . . . . . . . . . . . . . . $20,000

GRAND SAND COMPANY

Balance Sheet

December 31, Year 1

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,000 Liabilities . . . . . . . . . . . $ 60,000

Inventory . . . . . . . . . . . . . . . . . . . . . . . . 60,000 Common stock . . . . . . 340,000

Property, plant, and equipment (net) . . . 320,000 Retained earnings . . . . 20,000

Total . . . . . . . . . . . . . . . . . . . . . . . . . $420,000 Total . . . . . . . . . . . . $420,000

SANDESTINO COMPANY

Balance Sheet

December 31, Year 1

Cash . . . . . . . . . . . . . . . . . . . . . . . . $ 130,000 Liabilities . . . . . . . . . . $ 250,000

Inventory . . . . . . . . . . . . . . . . . . . . . 200,000 Common stock . . . . . 600,000

Property, plant, and equipment (net) 650,000 Retained earnings . . . 300,000

Investment in Grand Sand (at cost). . 170,000

Total . . . . . . . . . . . . . . . . . . . . . . $1,150,000 Total . . . . . . . . . . . $1,150,000

Additional Financial Reporting Issues 489

Summary of business segment and general corporate activity for Year 1:

Required:

a. Restate Sandestino’s Year 1 financial statements to properly account for its

investment in Grand Sand Company under (1) the proportionate consolidation

method, and (2) the equity method.

b. Calculate and compare the following ratios for Sandestino Company under

the two different methods of accounting for its investment in Grand Sand

Company: (1) profit margin (net income/revenues), and (2) debt to equity

(total liabilities/total stockholders’ equity).

 

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