On December 31 Year 1 Precision Manufacturing Inc PMI of
On December 31, Year 1, Precision Manufacturing Inc. (PMI) of Edmonton purchased 100% of the outstanding ordinary shares of Sandora Corp. of Flint, Michigan. Sandora's comparative statement of financial position and Year 2 income statement are as follows:
Additional Information
• Exchange rates
Dec. 31, Year 1 ...... US$1 = CDN$1.10
Sep. 30, Year 2 ...... US$1 = CDN$1.07
Dec. 31, Year 2 ...... US$1 = CDN$1.05
Average for Year 2 ... US$1 = CDN$1.08
• Sandora declared and paid dividends on September 30, Year 2.
• The inventories on hand on December 31, Year 2, were purchased when the exchange rate was US$1 = CDN$1.06.
Required:
(a) Assume that Sandora's functional currency is the Canadian dollar:
(i) Calculate the Year 2 exchange gain (loss) that would result from the translation of Sandora's financial statements.
(ii) Translate the Year 2 financial statements into Canadian dollars.
(b) Assume that Sandora's functional currency is the U.S. dollar:
(i) Calculate the Year 2 exchange gain (loss) that would result from the translation of Sandora's financial statements and would be reported in other comprehensive income.
(ii) Translate the Year 2 financial statements into Canadian dollars.
(c) Which functional currency would Sandora prefer to use if it wants to show the following:
(i) The strongest solvency position for the company
(ii) The best return on shareholders’ equity
Briefly explain your answers.
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