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:
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).
