(a) On December 31, 2019, P Ltd, a Canadian company, established a new subsidiary in the...

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(a) On December 31, 2019, P Ltd, a Canadian company, established a new subsidiary in the U.K., S Ltd Limited. P Ltd invested C$375,000 to acquire £150,000 in S Ltd common shares. At the time of the purchase, the British pound sterling (E) was worth C$2.50. The financial statements for the year ended December 31, 2021 are shown below: Cash Accounts receivable (net) Inventory Equipment (net) Total assets Accounts payable Long-term debt S Ltd Limited Balance Sheet December 31 2021 2020 Common shares Retained earnings Total liabilities and shareholder's equity Sales revenue Operating expenses: Cost of inventory sold General, selling and administrative expenses Amortization expense Net income £90,000 120,000 110.000 320,000 220,000 E 540.000 £ 100,000 200.000 300,000 150,000 90.000 240.000 £540.000 £50,000 100,000 90,000 240,000 250.000 £490,000 £80,000 200,000 280,000 150,000 60.000 210.000 £490.000 S Ltd Limited Income Statement Year ended December 31, 2021 £900.000 650,000 170,000 30.000 850.000 £50.000 S Ltd Limited Statement of Retained Earnings Year ended December 31, 2821 Retained earnings, December 31, 2020 Plus net income for 2021 Less dividends paid Retained earnings, December 31, 2021 Additional information: £60,000 50,000 (20.0800 £ 90.000 S Ltd's equipment was purchased when the British pound sterling (E) was worth C$2.48. No equipment had been added to the equipment account in 2021. b) The long-term debt was issued to a venture capital firm when the pound was worth C$2.45. c) 6603200 d) c) g) i) j) General, selling and administrative expenses were incurred evenly throughout 2021. S Lad's dividends were paid at the end of 2021. The year-end 2020 inventory had been acquired when £1.00-C$2.38. The year-end 2020 exchange rate was £1.00-C$2.30. Both sales and inventory purchases occurred evenly throughout 2021. The year-end 2021 inventory was acquired when £1.00-C$2.20. The average exchange rate throughout 2021 was £1.00-C$2.25. On December 30, 2021, the exchange rate was C$2.15. Assume that 2020 revenues and expenses had been translated at a variety of rates that averaged to $2.40 in the final retained earnings amount at December 31, 2020. Required: (6 marks) 1.Assume that S Ltd is a self-sustaining foreign operation. Compute the translation gain or loss for 2021. (6 marks) 2.Assume instead that S Ltd is an integrated foreign operation. Prepare a translated income statement. (6 marks) 3.Assume that S Ltd is an integrated foreign operation. Compute the translation gain or loss for 2021. 4. Calculate the net translation gain or loss on monetary items for 2021. (6 marks) (b) Explain the meaning of the term "functional Currency". What factors should a (6 marks) parent company consider in deciding what the functional currency of an associate is? (a) On December 31, 2019, P Ltd, a Canadian company, established a new subsidiary in the U.K., S Ltd Limited. P Ltd invested C$375,000 to acquire £150,000 in S Ltd common shares. At the time of the purchase, the British pound sterling (E) was worth C$2.50. The financial statements for the year ended December 31, 2021 are shown below: Cash Accounts receivable (net) Inventory Equipment (net) Total assets Accounts payable Long-term debt S Ltd Limited Balance Sheet December 31 2021 2020 Common shares Retained earnings Total liabilities and shareholder's equity Sales revenue Operating expenses: Cost of inventory sold General, selling and administrative expenses Amortization expense Net income £90,000 120,000 110.000 320,000 220,000 E 540.000 £ 100,000 200.000 300,000 150,000 90.000 240.000 £540.000 £50,000 100,000 90,000 240,000 250.000 £490,000 £80,000 200,000 280,000 150,000 60.000 210.000 £490.000 S Ltd Limited Income Statement Year ended December 31, 2021 £900.000 650,000 170,000 30.000 850.000 £50.000 S Ltd Limited Statement of Retained Earnings Year ended December 31, 2821 Retained earnings, December 31, 2020 Plus net income for 2021 Less dividends paid Retained earnings, December 31, 2021 Additional information: £60,000 50,000 (20.0800 £ 90.000 S Ltd's equipment was purchased when the British pound sterling (E) was worth C$2.48. No equipment had been added to the equipment account in 2021. b) The long-term debt was issued to a venture capital firm when the pound was worth C$2.45. c) 6603200 d) c) g) i) j) General, selling and administrative expenses were incurred evenly throughout 2021. S Lad's dividends were paid at the end of 2021. The year-end 2020 inventory had been acquired when £1.00-C$2.38. The year-end 2020 exchange rate was £1.00-C$2.30. Both sales and inventory purchases occurred evenly throughout 2021. The year-end 2021 inventory was acquired when £1.00-C$2.20. The average exchange rate throughout 2021 was £1.00-C$2.25. On December 30, 2021, the exchange rate was C$2.15. Assume that 2020 revenues and expenses had been translated at a variety of rates that averaged to $2.40 in the final retained earnings amount at December 31, 2020. Required: (6 marks) 1.Assume that S Ltd is a self-sustaining foreign operation. Compute the translation gain or loss for 2021. (6 marks) 2.Assume instead that S Ltd is an integrated foreign operation. Prepare a translated income statement. (6 marks) 3.Assume that S Ltd is an integrated foreign operation. Compute the translation gain or loss for 2021. 4. Calculate the net translation gain or loss on monetary items for 2021. (6 marks) (b) Explain the meaning of the term "functional Currency". What factors should a (6 marks) parent company consider in deciding what the functional currency of an associate is?

Answer rating: 100% (QA)

1 To compute the translation gain or loss for 2021 we need to compare the net assets of S Ltd at the beginning and end of the year using the average exchange rate and the closing exchange rate a Calcu... View the full answer