Description in pdf file, need to write in excel file provided. 1-4 are answered and are correct, need answers on 5, 6a, 6b
International Accounting Capstone Case Study ACCT 445 Summer 2022 – Cline CASE STUDY OBJECTIVE The purpose of this case study is to apply the accounting principles we discuss in class in one seamless, comprehensive case. To this end, you will: (A) Journalize transactions for a multinational corporation, (B) Convert financial statements from IFRS principles to U.S. GAAP principles; (C) Translate financial statements from foreign currency to USD; and (D) Consolidate subsidiary and parent financial statements into one set of financial statements. To achieve these objectives, please use the information in the Case Background section below and your knowledge of course concepts to complete the associated Excel template available in Canvas. Then, use this template to complete the questions in the assignment in Connect. You may use your notes and work with others as you complete this assignment; however, the work you submit for grading should be your own. CASE BACKGROUND About the companies: TanCorp is a Chinese subsidiary of TechSmart Inc., a U.S. technology manufacturer. TanCorp and TechSmart have a 12/31/Y1 year end. Foreign currency transaction: On November 10, Y1, TechSmart sells semiconductor devices to a Chinese customer (not TanCorp) at a price of 12,400,000 Yuan. This account was still unpaid by the customer on 12/31/Y1. The customer is expected to pay on January 10, Y2. To protect against foreign currency risk associated with this transaction, on November 10, Y1, TechSmart paid entered into a forward contract to sell 12,400,000 Yuan on January 10, Y2. TechSmart properly documented this transaction and designated the contract as a fair value hedge. Note: The financial statements provided in the Excel template DO NOT include the effects of the foreign currency/hedging transactions described above or the original journal entry to record the sale. You will need to update the TechSmart financials to include these transactions on the tab titled ‘2. Updated TS FS.’ Exchange rates: Relevant exchange rates are provided in the Excel template. Accounting policies: TechSmart uses LIFO for its consolidated financial statements. TanCorp cannot use LIFO for reporting purposes; thus; their subsidiary-only financial statements utilize FIFO. Ending inventory measured under LIFO would be 280,800 Yuan lower than when measured using FIFO; COGS would be 280,800 higher. TanCorp capitalized 350,400 Yuan in development costs on December 31, Y1 as part of their Other Intangible Asset balance. Because this expenditure was made on 12/31/Y1, no amortization was recorded during Y1. These changes affect TanCorp’s financial income but not their taxable income reported to the Chinese government. Thus, these changes will have no effect on TanCorp’s income tax expense. Financial statement translation: TanCorp’s 12/31/Y1 income statement and balance sheet are presented in Chinese Yuan (see Excel template, available in Canvas). TechSmart’s parent-only financial statements are also presented in the Excel template. TechSmart management has deemed that the Yuan is deemed to be the functional currency of TanCorp. All stock was issued at 1/1/Y0, when TanCorp was incorporated as a subsidiary. Financial statement consolidation: TechSmart owns 100% of TanCorp. TanCorp is TechSmart’s only majority-owned subsidiary. TanCorp declared and paid 12,000,000 Yuan in dividends on 10/31/Y1, all to TechSmart. At the time of acquisition on 1/1/Y0, TanCorp’s translated stockholders’ equity section was as follows: • Common stock: $7,163,573 • APIC – common stock: $8,861,806 • Retained earnings: $0 TanCorp is a wholly-owned subsidiary. When it was acquired, TechSmart paid consideration exactly equal to the book value of TanCorp. There were no intracompany transactions between the two companies during the year other than the dividend declared by TanCorp. TechSmart uses the initial value method to account for this investment during the year. Because TanCorp began operations on 1/1/Y0 and paid no dividends in Y0, the 1/1/Y1 balance of retained earnings is equal to TanCorp’s Y0 net income. CASE DELIVERABLES Use the Excel template to do the following: 1. Provide the journal entries related to the two sale transactions and any hedging transactions associated with these transactions. 2. Make any necessary changes to convert TanCorp’s financial statements to be compliant with U.S. GAAP. 3. Update the financial statements of TanCorp and TechSmart (parent) to reflect these transactions and conversions. 4. Translate TanCorp’s financial statements to USD. 5. Prepare TechSmart’s consolidated financial statements for Y1. Please complete your work in the template, then use your answers on the template to answer the questions on the Capstone Project assignment in Connect. Numbers required for Connect submission are highlighted in bright green on the template. Round all answers to the nearest dollar when entering answers into Connect. Do not round at all before that point. Additional deliverable for graduate students: If you are a student enrolled in a graduate (600 level) section of this course, please answer the following question in a Word document and submit in the separate Connect assignment designated for this purpose. In accounting for foreign currency hedging, financial statement translation, and consolidation, accountants have choices in terms of possible accounting treatments. Hedges can be accounted for as fair value hedges or cash flow hedges; financial statements can be translated using the current rate method or the temporal method; and in the consolidation process, investments can be accounted for using the equity method, the partial equity method, or the initial value method. Choose ONE of these topics (hedging, translation, or consolidation) and discuss (a) circumstances under each treatment is appropriate, (b) advantages and disadvantages of each treatment, and (c) the specific accounting procedures related to each possible accounting treatment. This writing portion will constitute 20% of your overall grade for the project. I expect your submission to be 2 or 3 paragraphs (about half a page to one full page, single-spaced). Helpful hints: 1. DO NOT PROCRASTINATE. This may take longer than you are expecting. Last year, students reported that it took between 4 and 14 hours to complete. 2. Complete one Excel sheet, then submit your answers into Connect. This way, you can check your work as you go along rather than getting to the end and realizing everything is wrong. 3. Use formulas rather than hard-coding to relate data between sheets. This way, if you mess something up on one sheet, it will correct itself on the related sheet when you correct the original. 4. The first problem on the template is the hardest to complete, so don’t get discouraged! TanCorp F.S. (Yuan) TanCorpTanCorpTanCorp Income Statement (Yuan)Statement of Retained Earnings (Yuan)Balance Sheet (Yuan) For the year ended December 31, Y1For the year ended December 31, Y1December 31, Y1 Sales¥127,854,000Beginning retained earnings, 1/1/Y1¥2,843,395AssetsLiabilities COGS¥88,237,140Net income, Y1¥38,192,010Cash¥17,537,190Accounts payable¥15,923,050 Gross profit¥39,616,860Less: dividends declared, Y1¥12,000,000Accounts receivable¥23,540,065Unearned revenue¥12,293,040 Selling expenses¥12,675Ending retained earnings, 12/31/Y1¥29,035,405Inventory¥25,482,150Total current liabilities¥28,216,090 General & administrative expenses¥25,480Total current assets¥66,559,405Notes payable¥25,402,930 R&D expense¥12,850PP&E, net¥127,852,040Total long-term liabilities¥25,402,930 Operating income¥39,565,855Patent¥986,290 Other income/(loss)¥11,820Other intangible assets¥350,400Total liabilities¥53,619,020 Net income before taxes¥39,577,675Total long-term assets¥129,188,730 Income taxes¥1,385,665Stockholders' Equity Net income¥38,192,010Total Assets¥195,748,135Common stock¥50,554,500 Additional paid-in-capital¥62,539,210 Retained earnings¥29,035,405 Total Liabilities & Stockholders' Equity¥195,748,135 TechSmart F.S. (USD) TechSmartTechSmartTechSmart Parent-Only Income Statement (USD)Parent-Only Statement of Retained Earnings (USD)Parent-Only Balance Sheet (USD) For the year ended December 31, Y1For the year ended December 31, Y1December 31, Y1 Sales$56,728,540Beginning retained earnings, 1/1/Y1$81,142,725AssetsLiabilities COGS$22,817,290Net income, Y1$11,099,900Cash$14,520,325Accounts payable$18,293,020 Gross profit$33,911,250Less: dividends declared, Y1$0Accounts receivable$21,320,520Unearned revenue$5,329,500 Selling expenses$8,548,230Ending retained earnings, 12/31/Y1$92,242,625Inventory$32,850,230Total current liabilities$23,622,520 General & administrative expenses$6,738,020Total current assets$68,691,075Bonds payable$120,829,030 Operating income$18,625,000PP&E, net$132,859,300Total long-term liabilities$120,829,030 Other income/(loss)($1,548,230)Investments*$56,923,950 Net income before taxes$17,076,770Other assets$53,903,190Total liabilities$144,451,550 Income taxes$5,976,870Total long-term assets$243,686,440 Net income$11,099,900Stockholders' Equity Total Assets$312,377,515Common stock$48,293,050 Additional paid-in-capital$27,390,290 Retained earnings$92,242,625 Total Liabilities & Stockholders' Equity$312,377,515 *Includes equity investment in TanCorp as well as other investments Exchange Rates DateSpot Rate (USD/Yuan)Forward Rate, 1/10/Y2 (USD/Yuan) 1/1/Y0$ 0.1417$ 0.1403 1/1/Y1$ 0.1406$ 0.1384 10/31/Y1$ 0.1421$ 0.1424 11/10/Y1$ 0.1429$ 0.1429 12/31/Y1$ 0.1436$ 0.1434 Average, Y1$ 0.1423$ 0.1418 1/10/Y2$ 0.1445$ 0.1445 *Composite rate used to calculate 12/31/Y0 RE:0.1387 1. Journal Entry Template Use this template to record journal entries to record the foreign currency intercompany transaction and related TechSmart hedging transaction. Remember, NONE of the entries have been recorded in the financial statements (not even the original sale entry). Refer to your slides and lectures related to foreign currency hedging (particularly the example video) to help you solve this problem. TechSmart Journal Entries: DateAccount name*DebitCreditNotes 11/10/Y1Sales$1,771,960To record the sale (ignore the related COGS) Accounts receivable - Yuan$1,771,960 11/10/Y1No Journal Entry neededTo record the hedge 12/31/Y1Accounts receivable - Yuan$8,680To record the asset at FV at year end* Foreign exchange gain/loss - NI$8,680 12/31/Y1Forward contract asset/liability$6,200To record the hedge instrument at FV at year end** Foreign exchange gain/loss - NI$6,200 *Suggested account names:Inputs needed for journal entry amounts: Accounts receivable - Yuan*Record change in market value of A/R SalesUpdated value of A/R, 12/31/Y1:1780640 Foreign exchange gain/loss - NIChange:$8,680 Forward contract asset/liability**Record forward contract at market value6200 Change in forward contract FV:$6,179.65 *Note that no amortization is required for this forward contract because the spot rate and exchange rates are the same on the date of contract issuance. 2. Updated TS FS Copy and paste the original Tech Smart parent-only financial statement accounts here, then populate the numbers by linking to the amounts in the original financial statements. Next, update amounts and accounts accordingly based on your journal entries (sheet 1). TechSmartTechSmart Parent-Only Income Statement (USD)Parent-Only Statement of Retained Earnings (USD) For the year ended December 31, Y1For the year ended December 31, Y1 PreviousChangesUpdatedBeginning retained earnings, 1/1/Y1$81,142,725 Sales$56,728,540$1,774,440$58,502,980Net income, Y1$12,874,340 COGS$22,817,290$0$22,817,290Less: dividends declared,