Lee Corporation, a U.S. company, began operations on January 1, 2004. During its first 3 years of operations, Lee reported net income and declared dividends as follows:
Year Net Income Dividends Declared
2004 $40,000 $0
2005 125,000 50,000
2006 160,000 50,000
The following information relates to 2007:
* Income before income tax: $240,000
* Prior period adjustment: understatement of 2005 depreciation expense (before taxes): $ 25,000
* Cumulative decrease in income from change in inventory methods (before taxes): $35,000
* Dividends declared: $100,000 ($75,000 paid in 2007, $25,000 to be paid in 2008)
* Effective tax rate: 40%
Additional information:
Common stock issued (par) $16,250
Additional paid-in capital $146,250
Treasury stock $70,000
Shares issued 32,500
Lee acquired a Canadian subsidiary whose sole asset is a piece of land. Lee acquired the subsidiary on 12/31/04 for the exact value of the land, CA$100,000. Lee owns 100% of the subsidiary.
Deliverables:
In the attached Excel worksheet complete the following:
Section 1 – FOREIGN CURRENCY TRANSLATION:
1. Go to www.x-rates.com and use the historic lookup feature to determine exchange rates on 12/31/04, 12/31/05, 12/31/06 and 12/31/07.
2. Enter the exchange rate factors in the “Factor” column of the Foreign Currency Translation table
3. Apply the factors using the appropriate formulate to convert investment from CAD to USD
4. Calculate the annual and cumulative adjustments
Section 2 – STATEMENT OF CHANGES IN OWNERS’ EQUITY
1. 2(a) Prepare the entries to:
a. Correct the understatement of depreciation expense
b. Record the cumulative effect of change in inventory methods
c. Record the dividends declared
2. 2(b) Complete the statement of changes in owners’ equity
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