Care Inc. (CI), a national manufacturer and retailer of women’s shoes, purchased 100% of the common shares of ShoeCo, a footwear manufacturing company located in a foreign country. CI financed the purchase of ShoeCo’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. ShoeCo will continue to be managed and operated by locals and be responsible for obtaining operational loans.
ShoeCo sells most of its production to its domestic market. Previously a supplier of CI’s, ShoeCo will continue to supply about 10% of its production to CI. CI has established a contract with ShoeCo fixing the quantity and the price in Canadian dollars.
Required
(a) State whether the functional currency of ShoeCo is the local or the foreign currency, and explain how you reached your conclusion.
(b) Describe both the temporal and current rate translation methods. Which method would CI use?