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Azania is a less developed country in Africa. It is famous for its wildlife and natural beauty. Unfortunately, it is also known for its unstable political and economic situation and decline in the value of the Azanian currency, the Labola (L). Big Five Safaris (BFS) is a company that operates vacation packages for adventure seekers in Azania. Although BFS is registered in Azania, it is a wholly-owned subsidiary of Canadian Wildlife Tours (CWT), a Toronto-based company. CWT bought BFS on December 31, 2018. Before this date, BFS's only business was renting out a building. BFS's senior management consists of three Canadian citizens and one Azanian citizen. The Canadian managers are paid by CWT in Canadian dollars and take turns going to Azanian to help manage BFS. All other employees are Azanian citizens paid in Labola. CWT recruits clients for BFS through intensive marketing campaigns in North America. It operates BFS's website through which potential clients can get more information and book vacations. All prices for vacations are in Canadian dollars and paid directly to CWT. BFS earns revenues in Labola, mostly from selling various products such as souveniours and other services to clients once they are in Azania. The prices of these products are determined by local competition and Azanian government regulations. The souveniours are made by local villagers. BFS's revenues are seldomly enough to cover its day-to-day operations and shortfalls are subsidized by CWT. The financial statements for BFS for the year ended December 31, 2021 were as follows: Cash Accounts receivables Inventory Property, plant and equipment - net Accounts payable Long-term loan from CWT Big Five Safaris Limited Statement of financial position December 31, 2021 Ordinary shares Retained earnings L 26,800 53,300 68,000 229,500 L 377,600 L 26,000 120,000 20,000 211,600 L 377,600 Sales Cost of goods sold Gross profit Depreciation expense Other expenses Net income Big Five Safaris Limited Statement of Income and Retained Earnings For the Year Ended December 31, 2021 Building Equipment L 470,400 296,000 174,400 Retained earnings, January 11 Dividends paid Retained earnings, December 31 Additional information for the 2021 financial statements: L 150,000 176,000 L 326,000 29,500 109,700 L 35,200 208,400 1. Sales and other expenses occurred evenly throughout the year. 2. Details of purchases are: Beginning inventory (purchased in quarter 4 of 2020) Purchases (purchased evenly throughout the year) Ending inventory (purchased in quarter 4 of 2021) December 31, 2020/January 1, 2021 July 1, 2021 3. Details of property, plant and equipment are: Cost 32,000 211,600 Accumulated depreciation L 52,500 44,000 L 96,500 L 62,000 ,000 68,000 The building was purchased on January 1, 2015. It is being depreciated on a straight-line method over 20 years. The equipment was purchased on January 1, 2020. It is being depreciated on a straight-line basis over 8 years. 4. Dividends were paid in equal amounts on July 1 and December 31, 2021. 5. Retained earnings on January 1, 2021 in Canadian dollars were $86,800. 6. Applicable exchange rates are: January 1, 2015 December 31, 2018 January 1, 2020 Average 4th quarter 2020 $1=L2.3 $1 = L2.4 $1= L2.5 $1L3.0 $1 = L3.1 $1L3.6 Net carrying value L 97,500 132,000 L 229,500 Average for year 2021 Average 4th quarter 2021 December 31, 2021 $1= L3.5 $1= L3.8 $1= L3.9 Required: a) Discuss how CWT's investment in BFS should be classified, measured, reported and disclosed in CWT's annual financial statements. b) Translate BFS's statement of income and retained earnings statements for the year ended December 31, 2021 into Canadian dollars, assuming BFS's functional currency is the Canadian dollar. Assume a foreign exchange gain on translation for 2021 of $4,750. Azania is a less developed country in Africa. It is famous for its wildlife and natural beauty. Unfortunately, it is also known for its unstable political and economic situation and decline in the value of the Azanian currency, the Labola (L). Big Five Safaris (BFS) is a company that operates vacation packages for adventure seekers in Azania. Although BFS is registered in Azania, it is a wholly-owned subsidiary of Canadian Wildlife Tours (CWT), a Toronto-based company. CWT bought BFS on December 31, 2018. Before this date, BFS's only business was renting out a building. BFS's senior management consists of three Canadian citizens and one Azanian citizen. The Canadian managers are paid by CWT in Canadian dollars and take turns going to Azanian to help manage BFS. All other employees are Azanian citizens paid in Labola. CWT recruits clients for BFS through intensive marketing campaigns in North America. It operates BFS's website through which potential clients can get more information and book vacations. All prices for vacations are in Canadian dollars and paid directly to CWT. BFS earns revenues in Labola, mostly from selling various products such as souveniours and other services to clients once they are in Azania. The prices of these products are determined by local competition and Azanian government regulations. The souveniours are made by local villagers. BFS's revenues are seldomly enough to cover its day-to-day operations and shortfalls are subsidized by CWT. The financial statements for BFS for the year ended December 31, 2021 were as follows: Cash Accounts receivables Inventory Property, plant and equipment - net Accounts payable Long-term loan from CWT Big Five Safaris Limited Statement of financial position December 31, 2021 Ordinary shares Retained earnings L 26,800 53,300 68,000 229,500 L 377,600 L 26,000 120,000 20,000 211,600 L 377,600 Sales Cost of goods sold Gross profit Depreciation expense Other expenses Net income Big Five Safaris Limited Statement of Income and Retained Earnings For the Year Ended December 31, 2021 Building Equipment L 470,400 296,000 174,400 Retained earnings, January 11 Dividends paid Retained earnings, December 31 Additional information for the 2021 financial statements: L 150,000 176,000 L 326,000 29,500 109,700 L 35,200 208,400 1. Sales and other expenses occurred evenly throughout the year. 2. Details of purchases are: Beginning inventory (purchased in quarter 4 of 2020) Purchases (purchased evenly throughout the year) Ending inventory (purchased in quarter 4 of 2021) December 31, 2020/January 1, 2021 July 1, 2021 3. Details of property, plant and equipment are: Cost 32,000 211,600 Accumulated depreciation L 52,500 44,000 L 96,500 L 62,000 ,000 68,000 The building was purchased on January 1, 2015. It is being depreciated on a straight-line method over 20 years. The equipment was purchased on January 1, 2020. It is being depreciated on a straight-line basis over 8 years. 4. Dividends were paid in equal amounts on July 1 and December 31, 2021. 5. Retained earnings on January 1, 2021 in Canadian dollars were $86,800. 6. Applicable exchange rates are: January 1, 2015 December 31, 2018 January 1, 2020 Average 4th quarter 2020 $1=L2.3 $1 = L2.4 $1= L2.5 $1L3.0 $1 = L3.1 $1L3.6 Net carrying value L 97,500 132,000 L 229,500 Average for year 2021 Average 4th quarter 2021 December 31, 2021 $1= L3.5 $1= L3.8 $1= L3.9 Required: a) Discuss how CWT's investment in BFS should be classified, measured, reported and disclosed in CWT's annual financial statements. b) Translate BFS's statement of income and retained earnings statements for the year ended December 31, 2021 into Canadian dollars, assuming BFS's functional currency is the Canadian dollar. Assume a foreign exchange gain on translation for 2021 of $4,750.
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a CWTs investment in BFS should be classified as a subsidiary in CWTs annual financial statements Since CWT has full ownership and control over BFS it ... View the full answer
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