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Translation and remeasurement of financial statements of a foreign subsidiary.

Q1. The following information extracted from the parent company

a.Parent company loaned $1000 to Subsidiary with an interest rate of 5%.

b.Parent company made a sale to Subsidiary for $500 cash. The inventory had originally cost Parent company $200. Subsidiary then sold that same inventory to an outsider for $700.

c.Parent company made a sale to Sub for $800 cash. The inventory had originally cost Parent $300. Subsidiary has not yet sold that same inventory to an outsider.

Required:

Pass the elimination entries for the intercompany transactions.

Answer:

Q2. Explain the differences between translation and remeasurement of financial statements of a foreign subsidiary.

Answer:

Q3. The partnership of Ibrahim and Rawan has the following provisions:

Ibrahim and Rawan receive salary allowances of SAR 50,000 and SAR 15,000, respectively.

Interest is imputed at 5% on the average capital investment.

Any remaining profit or loss is shared between Ibrahim and Rawan in a 3:1 ratio, respectively.

Average Capital investments: Ibrahim, SAR 300,000; Rawan, SAR 150, 000

Net income SAR 300,000

Required:pass journal entry to allocate the profit between Ibrahim and Rawan

Sample Answer

A. Intercompany Elimination Entries

Here are the elimination entries for the intercompany transactions:

Transaction a: Loan

This transaction creates a receivable for the parent and a payable for the subsidiary. Since these internal balances offset each other, we eliminate them on consolidation.

Elimination Entry:

Debit: Subsidiary Loan Payable ($1,000)
Credit: Parent Company Loan Receivable ($1,000)

Full Answer Section

Remeasurement refers to the process of adjusting the financial statements of a foreign subsidiary to reflect the effects of changes in foreign currency exchange rates on the net investment in the subsidiary. This involves applying the historical exchange rate to all assets and liabilities of the subsidiary, resulting in a foreign currency translation adjustment (FCΤΑ) in the consolidated financial statements.

Here’s a table summarizing the key differences:

Feature	Translation	Remeasurement
Purpose	Convert foreign currency statements to presentation currency	Reflect changes in exchange rates on net investment
Exchange Rate Used	Current exchange rate	Historical exchange rate
Impact on Assets/Liabilities	Monetary assets & liabilities only	All assets & liabilities (except equity)
Impact on Income Statement	No direct impact	Foreign currency translation adjustment (FCΤΑ)

drive_spreadsheetExport to Sheets

Profit Allocation for Ibrahim and Rawan

Here’s the journal entry to allocate the profit between Ibrahim and Rawan:

Debit: Salary Expense (50,000 + 15,000) = 65,000 Credit: Ibrahim Capital 50,000 Credit: Rawan Capital 15,000

Calculation of Interest on Capital:

Ibrahim’s Interest = (300,000 SAR * 5%) = 15,000 SAR
Rawan’s Interest = (150,000 SAR * 5%) = 7,500 SAR

Debit: Interest Expense (15,000 + 7,500) = 22,500 Credit: Ibrahim Capital 15,000 Credit: Rawan Capital 7,500

Profit Sharing Ratio: Ibrahim (3) : Rawan (1) = 3:1

Remaining Profit to be Distributed: 300,000 (Net Income) – 65,000 (Salaries) – 22,500 (Interest) = 212,500

Ibrahim’s Share: (212,500 * 3/4) = 159,375 Rawan’s Share: (212,500 * 1/4) = 53,125

Distribution of Remaining Profit:

Debit: Income Summary** 212,500
Credit: Ibrahim Capital** 159,375
Credit: Rawan Capital** 53,125

This entry allocates salaries, interest on capital, and remaining profit based on the partnership agreement.

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Translation and remeasurement of financial statements of a foreign subsidiary.

Sample Answer

A. Intercompany Elimination Entries

Full Answer Section

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