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c. Consolidation worksheet at December 31, 2018:
Consolidation Worksheet at December 31, 2018
(amounts in millions)
Prestige
Resorts
Booking,
Inc.
Eliminations
Consolidated
Goodwill C 37.5 37.5
Total assets $ 4,728 $ 2,160 $ 5,887.5
Revenues, gains, and net income are in parentheses to indicate that their signs are
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8.24 Calculating the Translation Adjustment under the All-Current Method and the
Monetary/Nonmonetary Method.
a. Net assets, January 1 ……………… FC 900 $10:1FC $ 9,000
The $4,480 translation adjustment decreases shareholders’ equity. The U.S. dol-
b. Net Monetary asset (liability)
position, January 1 ……………… FC 50 $10:1FC $ 500
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8.25 Translating the Financial Statements of a Foreign Subsidiary; Comparison of
Translation Methods.
a. Translation of the Accounts of Canadian Subsidiary
for Year 1 (All-Current Translation Method)
Canadian Exchange U.S.
Dollars Rate Dollars
Liabilities and Equity
Income Statement:
Rent revenue ………………….. C$ 125,000 0.85 US$ 106,250
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Computation of Translation Adjustment for Year 1
Canadian Exchange U.S.
Dollars Rate Dollars
Net asset position,
b. Translation of the Accounts of Canadian Subsidiary
for Year 1 (Monetary/Nonmonetary Translation Method)
Canadian Exchange U.S.
Dollars Rate Dollars
Balance Sheet:
Assets
Liabilities and Equity
Income Statement:
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Retained Earnings Statement:
Balance, January 1, Year 1 . CS$ — US$ —
Net income …………………….. 72,000 See above 49,544
Dividends ………………………. (60,000) 0.80 (48,000)
Balance, December 31,
Year 1 ………………………. C$ 12,000 US$ 1,544
Computation of Translation Loss for Year 1
Canadian Exchange U.S.
Dollars Rate Dollars
from rents ……………….. 125,000 0.85 106,250
Less:
Cash disbursed for
c. The all-current translation method assumes that the subsidiary’s net asset posi-
tion (assets minus liabilities) is at risk to exchange rate changes. The Canadian
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d. Management would likely prefer the all-current method. This method provides
larger earnings for two reasons: (1) depreciation expense translates at the aver-
8.26 Translating the Financial Statements of a Foreign Subsidiary; Second Year of
Operations.
a. Translation of the Accounts of Canadian Subsidiary
for Year 2 (All-Current Translation Method)
Canadian Exchange U.S.
Dollars Rate Dollars
Balance Sheet:
Assets
C$ 596,555 US$ 501,106
Liabilities and Equity
Income Statement:
Retained Earnings Statement:
Balance, January 1, Year 2 . C$ 12,000 See Prob. 8.25 US$ 13,200
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Computation of Translation Adjustment for Year 2
Canadian Exchange U.S.
Dollars Rate Dollars
Net asset position,
Change in Translation Adjustment during Year 2
b. Translation of the Accounts of Canadian Subsidiary
for Year 2 (Monetary/Nonmonetary Translation Method)
Canadian Exchange U.S.
Dollars Rate Dollars
Balance Sheet:
Assets
C$ 596,555 US$ 528,106
Liabilities and Equity
Income Statement:
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Retained Earnings Statement:
Computation of Translation Gain for Year 2
Canadian Exchange U.S.
Dollars Rate Dollars
Net monetary asset
position, January 1,
liabilities assumed
for operating
expenses ………………….. (34,000) 0.82 (27,880)
c. The net asset position in Canada coupled with an increase in the value of the
Canadian dollar gives rise to a positive exchange adjustment for Year 2. Note
d. The monetary/nonmonetary translation method results in larger earnings than
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8.27 Identifying the Functional Currency. The following discussion applies the five
criteria in determining the functional currency for ACS.
Cash Flows of Foreign Entity. The use of forward exchange contracts suggests
Sales Prices. ACS sets transfer prices to mirror free market prices. Given the sig-
Cost Factors. The significant assets in Europe and the manufacturing plants
Financing. Computer firms experience significant technological risks (short
Relations between Parent and Foreign Unit. The segment data indicate a high
volume of intercompany operations, particularly from the United States. Although
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Integrative Case 8.1: Walmart
a. Average total estimated useful life = Average depreciable assets acquisition cost ÷
Depreciation expense =
The largest property and equipment categories are Buildings and improvements
b. Analysts can track this number over time to see if companies are changing esti-
c. Because the amount of accumulated depreciation depends on the number of years
for which depreciation has been taken, the average age of depreciable assets
The proportion of depreciable assets consumed equals total accumulated
depreciation (and accumulated amortization on capital leases) divided by acquisi-
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The remaining useful life can be obtained by dividing net depreciable PP&E and
capital leases by annual depreciation and amortization expense, as follows:
Forecasting future financial statements requires expectations of future tangible
asset acquisitions for replacement of existing production or service capacity and
d. In Note 1 on page 33, Walmart discloses that (1) it did have impairments of
e. The primary difference in U.S. GAAP is that the tests to consider whether PP&E
f. Noncontrolling interest in net income equals the portion of the net income of a
partially owned subsidiary that is not owned by the parent. In a consolidation,
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The two concepts are related as follows:
g. Based on the formula in Part f above and the condition that firms typically
h. The loss on currency translation for 2016 is $5,220 million, an amount that is
primarily responsible for turning a $14,694 million net income into a $10,265
i. Walmart’s investments in foreign operations are net asset positions. The loss indi-
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Case 8.2: Disney Acquisition of Marvel Entertainment
a. A September 1, 2009, article in The Wall Street Journal by Ethan Smith and
b. Fair value of acquisition ………………………………………………….. $ 4,000,000,000
c. All else held equal, goodwill is larger for a higher acquisition fair value. There-
d. If Marvel is dissolved (a merger), Disney will record goodwill and Marvel’s
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e. Most current assets and liabilities have book values that do not materially differ
from fair values. An exception is the nonmonetary asset “Inventories,” which is