Financial Statement Translation and Long-Term Contract Accounting

The assignment content includes several financial transactions and accounting problems. First, Pattern paid $360,000 for an 80% interest in Stock Company, which involves goodwill. Then, a US parent company purchased a 100% interest in a German subsidiary using the purchase method of accounting. The assignment also presents a problem on translating year-end financial statements of the foreign subsidiary using the temporal method. Additionally, it includes a case study on Crane Corporation's transactions involving forward contracts to hedge against exchange rate fluctuations. Lastly, Frye Construction Company is considering two methods of accounting for long-term contracts: the completed-contract method and the percentage-of-completion method.

MARMARA UNIVERSITY
INSTITUTE OF SOCIAL SCIENCES
ADVANCED ACCOUNTING
FINAL EXAM
1. The NOP Partnership is being liquidated. A balance sheet prepared prior to liquidation is presented
below:
Cash $ 85,000 Liabilities $ 55,000
Other Assets 95,000 Pratt, Loan 20,000
Nye, Capital 60,000
Ott, Capital 20,000
Pratt, Capital 25,000
Total Assets $180,000 Total Equities $180,000
Nye, Ott, and Pratt share profits and losses in a 40:40:20 ratio. All partners are personally insolvent.
Required:
A. Prepare the journal entries necessary to record the distribution of the available cash.
B. Prepare the journal entries necessary to record the completion of the liquidation process,
assuming the other assets are sold for $30,000.
2. On November 1, 2003, Dexter Company sold inventory to a company in England. The sale was for
300,000 British pounds and payment will be received on February 1, 2004. On November 1, Dexter
entered into a forward contract to sell 300,000 British pounds on February 1 at the forward rate of
$1.55. Spot rates for the British pound are as follows:
November 1 $1.51
December 31 1.57
February 1 1.52
Dexter has a December 31 fiscal year-end.
Required:
Compute each of the following:
1. The dollars to be received on February 1, 2004, from selling the 300,000 pounds to the exchange
dealer.
2. The dollars that would have been received from the account receivable if Dexter had not hedged
the sale contract with the forward contract.
3. The discount or premium on the forward contract.
4. The transaction gain or loss on the exposed asset related to the sale in 2003 and 2004.
5. The transaction gain or loss on the forward contract in 2003 and 2004.
6. The amount of the discount or premium on the forward contract amortized in 2003 and 2004.

3. Pattern Company purchased 100% of Stock Company on January 2, 2004, for $450,000. At the time,
Stock's capital stock was $300,000, and its retained earnings was $150,000. At the time, Pattern and
Stock had no intercompany transactions. Any excess of cost over book value is attributable to land.
A. Prepare the journal entry to record Pattern's investment in Stock.
B. Prepare the entry to eliminate Pattern's investment in Stock.
C. Complete the workpaper below.
Pattern Company and Subsidiary Company Stock
Workpaper
January 2, 2004
Pattern
Company
Stock
Company
Eliminations Cons.
Bal. Sheet
Debit Credit
Assets
Cash $ 200,000 $ 50,000
Accts receivable 75,000 25,000
Inventory 80,000 50,000
Investment in S 450,000
Plant & equip. (net) 500,000 350,000
Land 100,000 50,000
Total Assets $1,450,000 $525,000
Liabilities &
Equity
Accounts payable $ 150,000 $ 75,000
Capital stock 1,000,000 300,000
Retained earnings 255,000 150,000
Total Liab. &
Eq.
$1,450,000 $525,000
D. Assume that Pattern paid $360,000 for an 80% interest in Stock Company. Any difference
between cost and book value is attributed to goodwill. Prepare the entry to eliminate P's investment
in S

4. On January 2, 2004, a U.S. parent company purchased a 100% interest in a subdivision located in West
Germany. The purchase method of accounting was used to account for the acquisition. The subsidiary's
financial statements for 2004 in marks were as follows:
Comparative Balance Sheets
Jan. 2 Dec. 31
Cash 10,000 22,000
Accounts receivable 30,000 33,000
Plant and equipment (net) (purchased 6/30/01) 50,000 45,000
Land (purchased 6/30/01) 30,000 30,000
Total 120,000 130,000
Accounts payable 9,000 12,000
Long-term notes payable (issued 6/30/01) 21,000 18,000
Common stock (issued 6/30/01) 60,000 60,000
Retained earnings 30,000 30,000
Total 120,000 130,000
Income Statement
Revenues 120,000
Operating expenses including depreciation of 5,000 marks 90,000
Net income 30,000
Beginning retained earnings 30,000
60,000
Dividends declared and paid 20,000
Ending retained earnings 40,000
Sales were earned and operating expenses were incurred evenly during the year.
Exchange rates for the mark at various dates are:
January 2, 2004 .5100
December 31, 2004 .5330
Average for 2004 .5215
December 10, 2004, dividend payment date .5310
June 30, 2001 .4816
Use the above information to answer the following question:
Translate the year-end financial statements of the foreign subsidiary using the temporal method.
Round numbers to the nearest dollar.

5. On December 1, 2003, Crane Corporation agreed to purchase a machine to be manufactured by a
company in Germany. The purchase price was 800,000 German marks. To hedge against
fluctuations in the exchange rate, Crane entered into a forward contract on December 1 to buy
800,000 marks on April 1, the agreed date of machine delivery, for $.475 per mark. The following
exchange rates were quoted:
Forward Rate
Date Spot Rate (Delivery on 4/1)
December 1 .490 .475
December 31 .470 .473
April 1 .485 -----
Required:
Prepare the journal entries necessary for Crane during 2003 and 2004 to account for the transactions
described above.
6. The board of directors of Frye Construction Company is meeting to
choose between the completed-contract method and the percentage-
of-completion method of accounting for long-term contracts in the
company's financial statements. You have been engaged to assist
Frye's controller in the preparation of a presentation to be given
at the board meeting. The controller provides you with the
following information:
1. Frye commenced doing business on January 1, 2004.
2. Construction activities for the year ended December 31, 2004,
were as follows:
Total Contract Billings Through Cash Collections
Project Price 12/31/04 Through 12/31/04
——————— —————————————— ———————————————— ————————————————
A $ 520,000 $ 350,000 $ 310,000
B 690,000 210,000 210,000
C 475,000 475,000 395,000
D 200,000 90,000 60,000
E 475,000 400,000 400,000
—————————— —————————— ———————————
$2,360,000 $1,525,000 $1,375,000
Contract Costs Estimated
Incurred Through Additional Costs
Project 12/31/04 to Complete Contracts
——————— ———————————————— —————————————————————
A $ 424,000 $116,000
B 224,000 416,000
C 350,000 -0-
D 118,000 97,000
E 320,000 80,000
—————————— ————————
$1,436,000 $709,000
3. Each contract is with a different customer.
4. Any work remaining to be done on the contracts is expected to be
completed in 2005.

INSTRUCTIONS
(a) Prepare a schedule by project, computing the amount of income
(or loss) before selling, general, and administrative expenses
for the year ended December 31, 2004, which would be reported
under:
(1) The completed-contract method.
(2) The percentage-of-completion method (based on estimated
costs).
(b) Prepare the general journal entry(ies) to record revenue and
gross profit on project B (second project) for 2004, assuming
that the percentage-of-completion method is used.
(c) Indicate the balances that would appear in the balance sheet at
December 31, 2004 for the following accounts for Project D
(fourth project), assuming that the percentage-of-completion
method is used.
Accounts Receivable
Billings on Construction in Process
Construction in Process
(d) How would the balances in the accounts discussed in part (c)
change (if at all) for Project D (fourth project), if the
completed-contract method is used?