Reference no: EM132218483
Question: Petra Corporation, a U.S. firm, acquired all the outstanding capital stock of Sitra Corporation, a British firm, on January 1, 2016 for $800,000 when the exchange rate for the British pounds was $1.50 and Sitra's stockholders' equity consisted of £400,000 capital stock and £100,000 retained earnings. Sitra's functional currency is the British pound.
The balance sheet accounts for Sitra at January 1, 2016 in British pounds and U.S. dollars are summarized as follows
|
British
Pounds
|
Exchange
Rate
|
U.S.
Dollars
|
|
Cash
|
50,000
|
1.50
|
75,000
|
|
Accounts Receivable - net
|
60,000
|
1.50
|
90,000
|
|
Inventories
|
40,000
|
1.50
|
60,000
|
|
Equipment
|
750,000
|
1.50
|
1,125,000
|
|
Total Assets
|
900,000
|
|
1,350,000
|
|
Accumulated depreciation
|
250,000
|
1.50
|
375,000
|
|
Accounts payable
|
150,000
|
1.50
|
225,000
|
|
Capital stock
|
400,000
|
1.50
|
600,000
|
|
Retained earnings
|
100,000
|
1.50
|
150,000
|
|
Total liabilities and Equity
|
900,000
|
|
1,350,000
|
Exchange rates for 2016 are as follows:
Current exchange rate, January 1, 2016 $1.50
Average exchange rate for 2016 $1.53
Rate for cash dividends $1.62
Current exchange rate, Dec. 31, 2016 $1.55
Sitra adjusted trial balance in British pounds at December 31, 2016 is as follows:
Debits
cash £20,000
Accounts receivable â€" net 70,000
Inventories 50,000
Equipment 800,000
Cost of sales 350,000
Depreciation expense 80,000
Operating expenses 100,000
Dividends 30,000
Total Debits 1,500,000
Credits
Accumulated depreciation £330,000
Accounts payable 70,000
Capital stock 400,000
Retained earnings 100,000
Sales 600,000
Total Credits 1,500,000
Required: 1. Prepare a translation worksheet to convert Sitra's 30 Dec. 31, 2016 adjusted trial balance into U.S. dollar
2. Prepare Journal entries on Petra's books to account for the investment in Sitra for 2016
3. Directly compute the translation gain or loss