On January 1, 2014, Psalm Corporation purchased all the stock of Solomon Corporation for $481,400 when Solomon had capital stock of 180,000 pounds (£) and retained earnings of 90,000£

The book value of Solomon's assets and liabilities represented the fair value, except for equipment with a 5-year life that was undervalued by 15,000£. Any remaining excess is due to a patent with a useful life of 6 years. Solomon's functional currency is the pound. Solomon's books are kept in pounds. Relevant exchange rates for a pound follow:

January 1, 2014 $1.66
Average for 2014 1.65
December 31, 2014 1.64

Required:
1. Determine the equity adjustment on translation of the excess differential assigned to equipment at December 31, 2014.
2. Determine the equity adjustment on translation of the excess differential assigned to patent at December 31, 2014.
What will be an ideal response?

Preliminary computations Pounds
Cost of investment in Solomon ($481,400/$1.66) 290,000
Book value acquired (270,000)
Excess in pounds 20,000

Excess allocated to equipment 15,000
Excess allocated to patent 5,000
Excess allocated in pounds 20,000

Requirement 1
Equity adjustment from excess allocated to equipment on December 31, 2014:

Depreciation of excess based on £ (15,000/5 years) 3,000 £

Undepreciated excess balance at year-end based on £
(12,000 £ × $1.64 current rate) $ 19,680
Add: Depreciation on excess based on £—2014
3,000 £ × $1.65 average rate 4,950
24,630
Less: Beginning excess based on U.S. dollars 24,900

Equity adjustment from translation of excess allocated
to equipment (loss) ($ 270)

Requirement 2
Equity adjustment from excess allocated to patent on December 31, 2014:

Patent (must be carried in £) $8,300/$1.66 = 5,000 £
Patent amortization is 5,000 £ / 6 years = 833 £

Unamortized excess balance at year-end based on £
(4,167 £ × $1.64 current rate) $6,834
Add: Amortization of patent based on £
(833 £ × $1.65 average rate) 1,374
$8,208
Less: Beginning patent based on U.S. dollars $8,300
Equity adjustment from translation of patent (loss) ($ 92)