Question
On January 1, 2016, Cayce Corporation acquired 100 percent of Simbel Company for consideration transferred with...
On January 1, 2016, Cayce Corporation acquired 100 percent of Simbel Company for consideration transferred with a fair value of $147,600. Cayce is a U.S.-based company headquartered in Buffalo, New York, and Simbel is in Cairo, Egypt. Cayce accounts for its investment in Simbel under the initial value method. Any excess of fair value of consideration transferred over book value is attributable to undervalued land on Simbel’s books. Simbel had no retained earnings at the date of acquisition. Following are the 2017 financial statements for the two operations. Information for Cayce and for Simbel is in U.S. dollars ($) and Egyptian pounds (£E), respectively.
| Cayce Corporation | Simbel Company | ||||||
| Sales | $ | 240,000 | £E | 915,100 | |||
| Cost of goods sold | (113,800 | ) | (480,100 | ) | |||
| Salary expense | (24,000 | ) | (84,000 | ) | |||
| Rent expense | (9,500 | ) | (51,000 | ) | |||
| Other expenses | (28,500 | ) | (66,500 | ) | |||
| Dividend income—from Simbel | 20,625 | 0 | |||||
| Gain on sale of building, 10/1/17 | 0 | 55,000 | |||||
| Net income | $ | 84,825 | £E | 288,500 | |||
| Retained earnings, 1/1/17 | $ | 343,000 | £E | 153,000 | |||
| Net income | 84,825 | 288,500 | |||||
| Dividends | (49,000 | ) | (75,000 | ) | |||
| Retained earnings, 12/31/17 | $ | 378,825 | £E | 366,500 | |||
| Cash and receivables | $ | 113,300 | £E | 173,500 | |||
| Inventory | 100,500 | 352,000 | |||||
| Prepaid expenses | 30,000 | 0 | |||||
| Investment in Simbel (initial value) | 147,600 | 0 | |||||
| Property, plant & equipment (net) | 478,000 | 480,000 | |||||
| Total assets | $ | 869,400 | £E | 1,005,500 | |||
| Accounts payable | $ | 70,800 | £E | 61,500 | |||
| Notes payable—due in 2020 | 174,275 | 147,500 | |||||
| Common stock | 145,000 | 265,000 | |||||
| Additional paid-in capital | 100,500 | 165,000 | |||||
| Retained earnings, 12/31/17 | 378,825 | 366,500 | |||||
| Total liabilities and equities | $ | 869,400 | £E | 1,005,500 | |||
Additional Information
-
During 2016, the first year of joint operation, Simbel reported income of £E 188,000 earned evenly throughout the year. Simbel declared a dividend of £E 35,000 to Cayce on June 1 of that year. Simbel also declared the 2017 dividend on June 1.
-
On December 9, 2017, Simbel classified a £E 12,500 expenditure as a rent expense, although this payment related to prepayment of rent for the first few months of 2018.
-
The exchange rates for 1 £E are as follows:
| January 1, 2016 | $ | 0.300 |
| June 1, 2016 | 0.290 | |
| Weighted average rate for 2016 | 0.288 | |
| December 31, 2016 | 0.280 | |
| June 1, 2017 | 0.275 | |
| October 1, 2017 | 0.273 | |
| Weighted average rate for 2017 | 0.274 | |
| December 31, 2017 | 0.270 | |
Translate Simbel’s 2017 financial statements into U.S. dollars and prepare a consolidation worksheet for Cayce and its Egyptian subsidiary. Assume that the Egyptian pound is the subsidiary’s functional currency.
Answers
Part 1
Sales
(915100)
0.274
(250737)
Cost of goods sold
480100
0.274
131547
Salary expense
84000
0.274
23016
Rent expense (adjusted) (51000-12500)
38500
0.274
10549
Other expenses
66500
0.274
18221
Gain on sale of fixed asset, 10/1/17
(55000)
0.273
(15015)
Net income
(301000 )
(82419)
Retained earnings, 1/1/17
(153000)
(43994)
Net income
(301000 )
(82419)
Dividends
75000
0.275
20625
Retained earnings, 12/31/17
(379000 )
(105788)
Cash and receivables
173500
0.270
46845
Inventory
352000
0.270
95040
Prepaid rent (adjusted)
12500
0.270
3375
Property, plant & equipment
480000
0.270
129600
Total assets
1018000
274860
Accounts payable
(61500)
0.270
(16605)
Notes payable
(147500)
0.270
(39825)
Common stock
(265000)
0.300
(79500)
Additional paid-in capital
(165000)
0.300
(49500)
Retained earnings, 12/31/17
(379000 )
(105788)
Subtotal
(291218)
Cumulative translation adjustment (negative)
16358
Total liabilities and equities
(1018000)
(274860)
Pounds
Dollars
Retained earnings, 1/1/16
0
0
Net income 2016
(188000)
0.288
(54144)
Dividends 6/1/16
35000
0.290
10150
Retained earnings, 12/31/16
(153000)
(439944)
Calculation of Translation Adjustments at 12/31/17
Pounds
Dollars
Net assets 1/1/16 (265000+165000)
(430000)
0.300
(129000)
Net income 2016
(188000)
0.288
(54144)
Dividends 6/1/16
35000
0.290
10150
Net assets 12/31/16
(583000)
(172994)
Net assets 12/31/16 at current exchange rate
(583000)
0.280
(163240)
Translation adjustment, 2016 (negative)
(9754)
Net assets 1/1/17
(583000)
0.280
(163240)
Net income 2017
(301000 )
(82419)
Dividends 6/1/17
75000
0.275
20625
Net assets 12/31/17
(809000)
(225034)
Net assets 12/31/17 at current exchange rate
(809000)
0.270
(218430)
Translation adjustment, 2017 (negative)
(6604)
Cumulative translation adjustment, 12/31/17 (negative)
(16358)
Part 2
CAYCE CORPORATION
Consolidation worksheet
Adjustments and elimination
Consolidated balances
Account
Cayce
Simbel
Dr.
Cr.
Sales
(240000)
(250737)
(490737)
Cost of goods sold
113800
131547
245347
Salary expense
24000
23016
47016
Rent expense (adjusted)
9500
10549
20049
Other expenses
28500
18221
46721
Divided income
(20625)
0
20625
0
Gain on sale of fixed asset, 10/1/17
0
(15015)
(15015)
Net income
(84825)
(82419)
(146619)
Retained earnings, 1/1/17
(343000)
(43994)
43994
(43994)
(386994)
Net income
(84825)
(82419)
(146619)
Dividends
49000
20625
(20625)
49000
Retained earnings, 12/31/17
(378825)
(105788)
(484613)
Cash and receivables
113300
46845
160145
Inventory
100500
95040
195540
Prepaid rent
30000
3375
33375
Investment
147600
43994
(191594)
0
Fixed assets
478000
129600
18600
(1860)
624340
Total assets
869400
274860
1013400
Accounts payable
(70800)
(16605)
(87405)
Notes payable
(174275)
(39825)
(214100)
Common stock
(145000)
(79500)
79500
(145000)
Additional paid-in capital
(100500)
(49500)
49500
(100500)
Retained earnings, 12/31/17
(378825)
(105788)
(484613)
Subtotal
(291218)
(1031618)
Cumulative translation adjustment (negative)
16358
1860
16496
Total liabilities and equities
(869400)
(255852)
(1013400)
The excess of cost over book value is calculated as follows:
Purchase price............................................................ $147600
Book value, 1/1/16....................................................
Common stock.......................................................... (79500)
Additional paid-in capital........................................ (49500)
Excess of purchase price over book value $ 18600
18600/0.3 = 62000
Revaluation = (62000*(0.27-0.30)) = -1860