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 million, was financed by a five-year bond (€9 million), which is repayable in euros, and an initial equity injection by Investco of €3 million. These transactions took place on January 1, 2013, 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 that is using the land as a parking lot.
The 2013 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.)
Income Statement
For the year ended December 31, 2013
(in €)
Rental revenue ..... 1,000,000
Interest expense ... 990,000
Other expenses .... 10,000
Net income ..... -0- -
Balance Sheet
As at December 31, 2013
(in €)
Land ................. 12,000,000
Bond (due December 31, 2017) ....... 9,000,000
Common stock .............. 3,000,000
Assume the following exchange rates:
January 1, 2013 ............. €1 = C$0.45
December 31, 2013 ............ €1 = C$0.60
Average, 2013 .............. €1 = C$0.53
(a) Prepare the translated Canadian-dollar 2013 income statements and balance sheets following Part I of the CICA Handbook and assuming:
1. The German subsidiary's functional currency is the Canadian dollar; and
2. The German subsidiary's functional currency is the euro.
(b) Which translation method better reflects Investco's economic exposure to exchange rate movements? Explain.
(c) Which translation method would Investco be required to use? Explain.

  • CreatedJune 09, 2015
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