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Question 5 (10 marks)
On January 1, 2019, Horizon Corporation, an UK based company acquired Spectacular Company as a subsidiary in Australia with an initial investment cost of 360,000 Australian dollars (AUD). Spectacular's December 31, 2019, trial balance in AUD is as follows:
| Debit (AUD) | Credit(AUD) | |
| Cash at bank | 42,000 | |
| Accounts Receivable | 120,000 | |
| Receivable from Horizon | 30,000 | |
| Inventory | 150,000 | |
| Machinery | 600,000 | |
| Accumulated Depreciation | 60,000 | |
| Accounts Payable | 72,000 | |
| Debenture liability | 300,000 | |
| Share Capital | 360,000 |
| Sales | 900,000 | |
| Cost of goods sold | 420,000 | |
| Depreciation Expense | 60,000 | |
| Operating Expense | 180,000 | |
| Dividend paid | 90,000 | |
| Total | 1,692,000 | 1,692,000 |
Other Information:
- The receivable from Horizon is denominated in AUD. Horizon's books show a AUD 24,000 payable to Spectacular.
- Purchases of inventory goods are made evenly during the year. Items in the ending inventory were purchased November 1.
- The Machinery is depreciated by the straight-line method with a 10-year life and no residual value. A full year's depreciation is taken in the year of acquisition. The equipment was acquired on March 1.
- The dividends were declared and paid on November 1.
- Exchange rates between AUD and Euro (€) were as follows:
| January 1 | AUD 1 = € 0.73 |
| March 1 | AUD 1 = € 0.74 |
| November 1 | AUD 1 = € 0.77 |
| December 31 | AUD 1 = € 0.80 |
| 2019 Average | AUD 1 = € 0.75 |
- AUD is the functional currency.
Required:
- Prepare a schedule translating the December 31, 2019, trial balance from AUD to €. (8 marks)
- Why is the translation adjustment reported on Horizon's other comprehensive income statement rather than on the Profit and Loss statement? (2 marks)
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