Straw Hat Enterprises is a private company located in Toronto, Ontario created 12 years ago to import and distribute products from all over the world to be sold to dollar stores in Canada and denominated in Canadian dollars. All of its inventory purchases are made and paid in Canadian dollars. You, CA, have been the financial controller there for five years. It has grown at a steady pace for the past 12 years. Next year, Straw Hat is looking to start the process of going public, as it would like to have additional sources of financing to continue growing the company.
The owner of Straw Hat Enterprises calls you into his office. He is very excited as he has just purchased a new company located in Mexico called Piñata Limited. The sales of Piñata Limited take place in Mexico and are denominated in Mexican Pesos. All of its purchases of goods to be sold are also locally sourced in Mexico. Piñata Limited has recently signed an exclusivity agreement with a large local department store.
The acquisition closed immediately when the payment of 1 million Mexican Pesos was made. This was financed by obtaining a bank loan from a Mexican bank to encourage foreign investment in Mexico. This loan is repayable in 5 years in Mexican pesos. The foreign exchange rate at the time of the acquisition of Piñata Limited and when the bank loan was obtained was 0.07. Interest expense is 5% to be paid annually on December 31. The net assets at the time of acquisition had a fair market value of Mex $600,000. The acquisition was made as it was felt that Piñata Limited would be a good way to expand and grow the business of Straw Hat Enterprises.
This is the first time Straw Hat has purchased another company. The owner asks you to prepare a report to him that addresses the accounting implications of this transaction as this is a particular area of concern for him. He has heard that there might be some foreign currency repercussions but is unsure of the details. He reminds you that next year they will begin the process of taking Straw Hat Enterprises public and would like you to keep that in mind when preparing your report.
Required
Prepare the report requested by the owner.