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 cu
ency 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 cu
ency 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 cu
ency 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
cu
ency/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
ecorded 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 cu
ency 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
ight 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 cu
ency 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 cu
ent 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
e 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
eported 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 co
ect itself on the related sheet when you co
ect the
original.
4. The first problem on the template is the hardest to complete, so don’t get discouraged!
TanCorp F.S. (Yuan)
TanCorp TanCorp TanCorp
Income Statement (Yuan) Statement of Retained Earnings (Yuan) Balance Sheet (Yuan)
For the year ended December 31, Y1 For the year ended December 31, Y1 December 31, Y1
Sales ¥127,854,000 Beginning retained earnings, 1/1/Y1 ¥2,843,395 Assets Liabilities
COGS ¥88,237,140 Net income, Y1 ¥38,192,010 Cash ¥17,537,190 Accounts payable ¥15,923,050
Gross profit ¥39,616,860 Less: dividends declared, Y1 ¥12,000,000 Accounts receivable ¥23,540,065 Unearned revenue ¥12,293,040
Selling expenses ¥12,675 Ending retained earnings, 12/31/Y1 ¥29,035,405 Inventory ¥25,482,150 Total cu
ent liabilities ¥28,216,090
General & administrative expenses ¥25,480 Total cu
ent assets ¥66,559,405 Notes payable ¥25,402,930
R&D expense ¥12,850 PP&E, net ¥127,852,040 Total long-term liabilities ¥25,402,930
Operating income ¥39,565,855 Patent ¥986,290
Other income/(loss) ¥11,820 Other intangible assets ¥350,400 Total liabilities ¥53,619,020
Net income before taxes ¥39,577,675 Total long-term assets ¥129,188,730
Income taxes ¥1,385,665 Stockholders' Equity
Net income ¥38,192,010 Total Assets ¥195,748,135 Common 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)
TechSmart TechSmart TechSmart
Parent-Only Income Statement (USD) Parent-Only Statement of Retained Earnings (USD) Parent-Only Balance Sheet (USD)
For the year ended December 31, Y1 For the year ended December 31, Y1 December 31, Y1
Sales $56,728,540 Beginning retained earnings, 1/1/Y1 $81,142,725 Assets Liabilities
COGS $22,817,290 Net income, Y1 $11,099,900 Cash $14,520,325 Accounts payable $18,293,020
Gross profit $33,911,250 Less: dividends declared, Y1 $0 Accounts receivable $21,320,520 Unearned revenue $5,329,500
Selling expenses $8,548,230 Ending retained earnings, 12/31/Y1 $92,242,625 Inventory $32,850,230 Total cu
ent liabilities $23,622,520
General & administrative expenses $6,738,020 Total cu
ent assets $68,691,075 Bonds payable $120,829,030
Operating income $18,625,000 PP&E, net $132,859,300 Total long-term liabilities $120,829,030
Other income/(loss) ($1,548,230) Investments* $56,923,950
Net income before taxes $17,076,770 Other assets $53,903,190 Total liabilities $144,451,550
Income taxes $5,976,870 Total long-term assets $243,686,440
Net income $11,099,900 Stockholders' Equity
Total Assets $312,377,515 Common 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
Date Spot Rate (USD/Yuan) Forward Rate, 1/10/Y2 (USD/Yuan)
1/1/Y0 $ XXXXXXXXXX $ XXXXXXXXXX
1/1/Y1 $ XXXXXXXXXX $ XXXXXXXXXX
10/31/Y1 $ XXXXXXXXXX $ XXXXXXXXXX
11/10/Y1 $ XXXXXXXXXX $ XXXXXXXXXX
12/31/Y1 $ XXXXXXXXXX $ XXXXXXXXXX
Average, Y1 $ XXXXXXXXXX $ XXXXXXXXXX
1/10/Y2 $ XXXXXXXXXX $ XXXXXXXXXX
*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 cu
ency 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 cu
ency hedging (particularly the example video) to help you solve this problem.
TechSmart Journal Entries:
Date Account name* Debit Credit Notes
11/10/Y1 Sales $1,771,960 To record the sale (ignore the related COGS)
Accounts receivable - Yuan $1,771,960
11/10/Y1 No Journal Entry needed To record the hedge
12/31/Y1 Accounts receivable - Yuan $8,680 To record the asset at FV at year end*
Foreign exchange gain/loss - NI $8,680
12/31/Y1 Forward contract asset/liability $6,200 To 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
Sales Updated value of A/R, 12/31/Y1: 1780640
Foreign exchange gain/loss - NI Change: $8,680
Forward contract asset/liability **Record forward contract at market value 6200
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).
TechSmart TechSmart
Parent-Only Income Statement (USD) Parent-Only Statement of Retained Earnings (USD)
For the year ended December 31, Y1 For the year ended December 31, Y1
Previous Changes Updated Beginning retained earnings, 1/1/Y1 $81,142,725
Sales $56,728,540 $1,774,440 $58,502,980 Net income, Y1 $12,874,340
COGS $22,817,290 $0 $22,817,290 Less: dividends declared,