On January 1, 2020, AutoCare Corp. (a Canadian company) purchased 80% of Vintage Cars Inc, an American
Question:
On January 1, 2020, AutoCare Corp. (a Canadian company) purchased 80% of Vintage Cars Inc, an American company, for $50,000 U.S.
Vintage Cars’s book values approximated its fair values on that date except for plant and equipment, which had a fair market value of $30,000 U.S. with a remaining life expectancy of 5 years. A goodwill impairment loss of $1,000 U.S. occurred during 2020.
Vintage Cars’s January 1, 2020 Balance Sheet is shown below (in U.S. dollars):
Current Monetary Assets $50,000
Inventory $40,000
Plant and Equipment $25,000
Total Assets $115,000
Current Liabilities $45,000
Bonds Payable (maturity: January 1, 2025) $20,000
Common Stock $30,000
Retained Earnings $20,000
Total Liabilities and Equity $115,000
The following exchange rates were in effect during 2020:
January 1, 2020: $1U.S. = $1.3250 CDN
Average for 2020: $1U.S. = $1.3350 CDN
Date when Inventory Purchased: $1U.S. = $1.34 CDN
December 31, 2020: $1U.S. = $1.35 CDN
Dividends declared and paid December 31, 2020
The financial statements of AutoCare (in Canadian dollars) and Vintage Cars (in U.S. dollars) are shown below:
Balance Sheets AutoCare Vintage Cars
Current Monetary Assets $42,050 $65,000
Inventory $60,000 $50,000
Plant and Equipment $23,500 $20,000
Investment in Vintage Cars (at Cost) $66,250
Assets $191,800 $135,000
Current Liabilities $50,000 $48,000
Bonds Payable (maturity: January 1, 2025) $35,000 $20,000
Common Stock $60,000 $30,000
Retained Earnings $30,000 $20,000
Net Income $28,800 $27,000
Dividends ($12,000) ($10,000)
Liabilities and Equity $191,800 $135,000
Income Statements AutoCare Vintage Cars
Sales $80,000 $50,000
Dividend Income $10,800
Cost of Sales ($40,000) ($15,000)
Depreciation ($10,000) ($5,000)
Other expenses ($12,000) ($3,000)
Net Income $28,800 $27,000
Other Information:
- Beginning inventory was purchased was the exchange rate was $1US = $1.33 CDN
- The bonds were issued on January 1, 2000 when the exchange rate was $1US = $1.25 CDN
- Property plant and equipment was originally purchased on July 1, 2015 when $1US = $1.28 CDN
Required:
- Assume that Vintage Cars’ functional currency is the Canadian dollar. Translate the financial statements into Canadian dollars.
- Assume that Vintage Cars’ functional currency is the $US. Translate the balance sheet only into Canadian dollars.
- Explain whether the current rate method produces results that are consistent with the normal measurement and valuation of assets and liabilities for domestic transactions and operations.
Expert Answer:
Here we have explained the Concept of Foreign currency exchanage rates As per the Foreign E... View the full answer
