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Journal Entries and Currency Translation for Acquisition

Alamo Inc. purchased 80 percent of the outstanding stock of Western Ranching Company, located in Australia, on January 1, 20X3. The purchase price in Australian dollars (A$) was A$200,000, and A$40,000 of the differential was allocated to plant and equipment, which is amortized over a 10-year period. The remainder of the differential was attributable to a patent. Alamo, Inc., amortizes the patent over 10 years. Western Ranching's trial balance on December 31, 20X3, in Australian dollars is as follows:

Debits Credits
Cash A$ 44,100
Accounts Receivable (net) 72,000
Inventory 86,000
Plant and Equipment 240,000
Accumulated Depreciation A$ 60,000
Accounts Payable 53,800
Payable to Alamo, Inc. 10,800
Interest Payable 3,000
12% Bonds Payable 100,000
Premium on Bonds 5,700
Common Stock 90,000
Retained Earnings 40,000
Sales 579,000
Cost of Goods Sold 330,000
Depreciation Expense 24,000
Operating Expenses 131,500
Interest Expense 5,700
Dividends Paid 9,000
Total A$942,300 A$942,300

Additional Information

1. Western Ranching uses average cost for cost of goods sold. Inventory increased by A$20,000 during the year. Purchases were made uniformly during 20X3. The ending inventory was acquired at the average
exchange rate for the year.

2. Plant and equipment were acquired as follows:
Date Cost
January,20X1 A$180,000
January 1, 20X3 60,000

3. Plant and equipment are depreciated using the straight-line method, a 10-year life, and no residual value.

4. The payable to Alamo is in Australian dollars. Alamo's books show a receivable from Western Ranching of $6,480.

5. The 10-year bonds were issued on July 1, 20X3, for A$106,000. The premium is amortized on a straight-line basis. The interest is paid on April 1 and October 1.

6. The dividends were declared and paid on April 1.

7. Exchange rates were as follows:
January, 20X1 A$1  $.93
August, 20X1 A$1  $.88
January 1, 20X3 A$1  $.70
April 1, 20X3 A$1  $.67
July 1, 20X3 A$1  $.64
December 31, 20X3 A$1  $.60
20X3 average A$1  $.65

Required
a. Prepare a schedule translating the December 31, 20X3, trial balance of Western Ranching from Australian dollars to U.S. dollars.
b. Prepare a schedule providing a proof of the translation adjustment.

Part II

Parent Company Journal Entries and Translation

Refer to the information above for Alamo and its subsidiary, Western Ranching. Assume that the Australian dollar (A$) is the functional currency and that Alamo uses the basic equity method for accounting for its investment in Western Ranching.

Required
a. Prepare the entries that Alamo would record in 20X3 for its investment in Western Ranching. Your entries should include the following:

(1) Record the initial investment on January 1, 20X3.
(2) Record the dividend received by the parent company.
(3) Recognize the parent company's share of the equity income of the subsidiary.
(4) Record the amortizations of the differential.
(5) Recognize the translation adjustment required by the parent from the adjustment of the differential.
(6) Recognize the parent company's share of the translation adjustment resulting from the translation
of the subsidiary's accounts.

b. Provide the necessary documentation and support for the amounts recorded in the journal entries, including
a schedule of the translation adjustment related to the differential.

Solution Summary

This solution contains a schedule translation and records transactions made in 20X3 for investments in Western Ranching. It includes entries like dividends received, amortizations of differential, and translation adjustment.

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