Care Inc. (CI), a national manufacturer and retailer of women’s shoes, purchased 100% of the common shares of Shoe Co, a footwear manufacturing company located in a foreign country. CI financed the purchase of Shoe Co’s shares through a loan from a Canadian bank. To obtain this financing, CI had to offer one of its Canadian manufacturing plants as security. Shoe Co will continue to be managed and operated by locals and be responsible for obtaining operational loans.
Shoe Co sells most of its production to its domestic market. Previously a supplier of CI’s, Shoe Co will continue to supply about 10% of its production to CI. CI has established a con-tract with Shoe Co fixing the quantity and the price in Canadian dollars.
1. What is Shoe Co’s functional currency? Explain how you reached your conclusion.
2. Describe both the temporal and current- rate translation methods. Which method would CI use?