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
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) |
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- 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.