Shreky Enterprises is a private Canadian company located in Ottawa, Ontario. It was incorporated nine years ago to manufacture and distribute products to be sold to hardware stores in Canada. All its inventory purchases are made and paid in Canadian dollars. Shreky Enterprises has grown at a steady pace and the company is looking to start the process of going public next year, as they would like to have additional sources of financing to continue growing the company. You are the vice president of finance at Shreky Enterprises, a position you have held since the company's inception.
The owner, Mr. Fenster, has always looked to you for accounting and financial advice and guidance. It's first thing Monday morning, your first day back after a nice vacation. All of a sudden, Mr. Fenster calls you into his office. He is very excited as he has just created a new division, Bailey Limited, which will be located in Toronto, Ontario. The division was created as a way to continue the growth and expansion of Shreky Enterprises. It was created immediately with a U.S. $1 million cash infusion from Shreky Enterprises. Shreky obtained this financing by securing a bank loan from a U.S. bank designed to encourage investment. The loan is repayable in five years in U.S. dollars. Interest expense is 5% to be paid annually on December 31.
This division will purchase some of its inventory in the United States and pay in U.S. dollars. It will also sell its products all over the world and allow the customers to pay in their local currency. Mr. Fenster is particularly concerned with the accounting implications of this type of transaction since has not encountered it before. He has also heard that there might be ways to protect the company from fluctuations in foreign currencies.
Mr. Fenster asks you to prepare a report to him that addresses the accounting implications of this transaction as he has heard that there might be some foreign currency repercussions but is not sure what that means. He reminds you that next year the company will begin the process of taking Shreky Enterprises public and he would like you to keep that in mind when preparing your report.
Prepare the requested report.