Question

Investco Ltd. is a Canadian real estate and property developer that decided to hold a parcel of land in downtown Munich, Germany, for speculative purposes. The land, costing € 12,000,000 was financed by a five- year bond (€ 9,000,000), which is repayable in Euros, and an initial equity injection by Investco of € 3,000,000. These transactions took place on January 1, 20X5, at which time a German subsidiary company was created to hold the investment. Investco plans to sell the land at the end of five years and use the euro proceeds to pay off the bond. In the interim, rent is being collected from another company, which is using the land as a parking lot.
The 20X5 year-end draft financial statements of the German subsidiary company are shown below (assume that rental revenue is collected and interest and other expenses are paid at the end of each month).
German Subsidiary
Statement of Comprehensive Income
For the Year Ended December 31, 20X5
Rental revenue.......................... € 1,000,000
Interest expense..................... € 990,000
Other expenses......................... 10,000 1,000,000 Net income......................... 0
Statement of Financial Position
December 31, 20X5
Cash................................ —
Land.............................. € 12,000,000
................................ € 12,000,000
Bond (due December 31, 20X9)................... € 9,000,000
Common shares........................... 3,000,000
................................ € 12,000,000
Assume the following exchange rates:
January 1, 20X5........................... € 1 = $ 1.40
December 31, 20X5........................ € 1 = $ 1.85
Average, 20X5.......................... € 1 = $ 1.60

Required
1. Prepare the translated 20X5 SCI and SFP at December 31, 20X5, following GAAP and assuming the German subsidiary’s functional currency is the:
a) Canadian dollar.
b) Euro.
2. Which translation method better reflects Investco’s economic exposure to exchange rate movements? Explain.
3. Which translation method would Investco is required to use? Explain.



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  • CreatedMarch 13, 2015
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