Question: In Year 1 Victoria Textiles Limited decided that its Asian

In Year 1, Victoria Textiles Limited decided that its Asian operations had expanded such that an Asian office should be established. The office would be involved in selling Victoria’s current product lines; it was also expected to establish supplier contacts. In the Asian market, there were a number of small manufacturers of top quality fabrics, particularly silk and lace, but from Victoria’s home office in Ontario it was difficult to find and maintain these suppliers. To assist in doing so, a wholly owned company, Victoria Textiles (India) Limited, was created, and a facility was established in India in January Year 2. The new company, VTIL, was given the man date from head office to buy and sell with other Victoria divisions and offices across Canada, as if it were an autonomous, independent unit. To establish the company, an investment of 10,000,000 Indian rupees (IR) was made on January 1, Year 2.
VTIL proved to be quite successful, as shown in the following financial statements at December 31, Year 4. After one year of operations, VTIL had borrowed funds and expanded facilities substantially, as the initial market estimates had turned out to be quite conservative. However, during this time the rupee had fallen in value relative to the Canadian dollar. As a result, Victoria’s management was somewhat confused about how to evaluate VTIL’s success, given the changing currency values.
Additional Information
• The exchange rate at January 1, Year 2, when VTIL was originally established, was $0.075 per rupee.
• Of the original investment of IR10 million, IR4 million was used to acquire plant and equipment, which is being depreciated on a straight-line basis over 10 years.
• At June 30, Year 3, an expansion was completed at a cost of IR6 million, which was financed entirely by a six-year note obtained from an Indian bank. Interest is to be paid semiannually. The exchange rate at July 1, Year 3, was $0.062 per rupee. The new expansion is also to be depreciated on a straight-line basis over 10 years. (A half-year 9’s depreciation was recorded in Year 3.) Depreciation expense of IR 1,000 in Year 4 and IR700 in Year 3 is included in operating expenses.
• Inventory is accounted for on the FIFO basis. The inventory at the end of Year 3 and Year 4 was acquired when the exchange rates were $0.045 and $0.027 per rupee, respectively.
• Sales, purchases, and operating expenses were incurred evenly throughout the year, and the average exchange rate for the year was $0.031.
• The prepaid expenses and unearned revenue at December 31, Year 4, arose when the exchange rates were $0.03 and $0.028 per rupee, respectively.
• Income taxes were paid in equal monthly installments throughout the year.
• Dividends of 3,500 in Year 4 and 500 in Year 3 were declared and paid each year on December 31.
• The foreign exchange rates per rupee at each of the following dates were as follows:
Dec. 31, Year 3 ..... $0.041
June 30, Year 4 ..... $0.036
Dec. 31, Year 4 ..... $0.025
(a) Prepare a Canadian-dollar balance sheet at December 31, Year 4, and an income statement for the year then ended, assuming that VTIL’s functional currency is as follows:
(i) The Canadian dollar
(ii) The Indian rupee
(b) Which method should Victoria Textiles Limited apply to its investment in this subsidiary? Explain.

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