a) Sunshine, a private limited company, has two overseas subsidiaries, Osako and Cancelo. Sunshine is based in
Question:
a) Sunshine, a private limited company, has two overseas subsidiaries, Osako and Cancelo. Sunshine is based in a country which has a currency of the dollar. Osako is based in Japan where the currency is the yen. Cancelo is based in Portugal which has the currency of the euro. Sunshine and Cancelo sell golf clothing and Osako sells golf equipment.
Osako and Cancelo are financed by the provision of long-term loans at market interest rates in dollars from Sunshine. Sunshine's sales are mainly in its own jurisdiction, and are priced and collected in dollars. The legal requirements and the business environment in Sunshine's jurisdiction determines the pricing of Sunshine's products.
Goods and services are sourced locally and paid in dollars but occasionally the entity trades in small amounts in other currencies. Osako conducts its business with significant autonomy from Sunshine as it manufactures golf equipment which it sells mainly in Japan in yen. Local management determines prices based upon the local legal and business conditions. Most raw materials and labour are sourced from local suppliers with a small amount of specialised equipment sourced from China.
Osako sells a small amount of golf clothing, which it purchases from Sunshine and pays in dollars. Cancelo imports golf clothing manufactured by Sunshine and pays Sunshine in dollars. All other operating expenses are paid in euros. Sunshine gives Cancelo a discount on the normal selling price of its products. Cancelo sells its products mainly in Portugal in euros. The local legal and business conditions and the cost of the product from Sunshine dictate the pricing of products but all prices have to be agreed by Sunshine. At the month end, an intra-group dividend is paid in cash to Sunshine in euros which amounts to the net profit made by Cancelo for the month.
Required:
Advice the directors on the determination of each of the functional currencies of Sunshine, Osako and Cancelo.
b) On 1st July 2020, Sunshine, who report in dollars, purchased a machine from Mendes, a company who deal in euros, for €200,000. Sunshine have a year-end of 30th September.
The machine was paid for in full on 1st December 2020.
Required:
Show how the above transaction would appear in the income statements of Sunshine for the years ended 30th September 2020 and 30th September 2021 and the statement of financial position as at 30th September 2020.
Expert Answer:
a AS 21 prescribes how an entity should account for foreign currency transactions translate financial statements of a foreign operation into the entit... View the full answer
