In Year 1, Victoria Textiles Limited decided that its Asian operations had expanded such that an...

Transcribed Image Text:

In Year 1, Victoria Textiles Limited decided that its Asian operations had expanded such that an Asian office should be established. The office would be involved in selling Victoria's current product lines; it was also expected to establish supplier contacts. In the Asian market, there were a number of small manufacturers of top-quality fabrics, particularly silk and lace, but from Victoria's home office in Ontario it was difficult to find and maintain these suppliers. To assist in doing so, a wholly owned company, Victoria Textiles (India) Limited, was created, and a facility was established in India in January, Year 2. The new company, VTIL, was given the mandate from head office to buy and sell with other Victoria divisions and offices across Canada as if it were an autonomous, independent unit. To establish the company, an investment of 10,000,000 Indian rupees (INR) was made on January 1, Year 2. VTIL proved to be quite successful, as shown in the following financial statements at December 31, Year 4. After one year of operations, VTIL had borrowed funds and expanded facilities substantially, as the initial market estimates had turned out to be quite conservative. However, during this time the rupee had fallen in value relative to the Canadian dollar. As a result, Victoria's management was somewhat confused about how to evahuate VTIL's success, given the changing currency values. Financial Statements Balance Sheet Income Statement (In Thousands of, Indian Rupees) Year 4 Year 3 Year 4 Year 3 Sales 17,600 12,400 Cash 4,100 3,700 Cost of sales 10,200 6,100 Account Receivable 3,400 2,100 Gross profit 7,400 6,300 Inventories Prepaid Expenses Plant Assets (net) 3,000 3,400 2,300 Operating Expenses Interest Expense 4,200 2,400 1,200 200 400 7,900 20,800 8,900 Taxes 100 430 19,300 1,000 Net Income 2,900 3,170 Current Montary Liabilities 2,500 Unearned Revenue 700 400 Long-Term Debt 6,000 6,000 7,400 9,200 Common Shares 10,000 10,000 Retailed Earnighs 1,600 1,900 19,300 20,800 Additional Information 1. The exchange rate at January 1, Year 2, when VTIL was originally established, was S 0.075 per rupee. 2. Of the original investment of INR10 million, INR4 million was used to acquire plant and equipment, which is being depreciated on a straight-line basis over 10 years. 3. At June 30, Year 3, an expansion was completed at a cost of INR6 million, which was financed entirely by a 6-year note obtained from an Indian bank. Interest is to be paid semiannmually. The exchange rate at July 1, Year 3, was $0.062 per rupee. The new expansion is also to be depreciated on a straight-line basis over 10 years. (A half-year's depreciation was recorded in Year 3.) in Year 3 is included in operating expenses. Depreciation expense of INR 4. Inventory is accounted for on the FIFO basis. The inventory at the end of Year 3 and Year 4 was acquired when the exchange rates were S 5.Sales, purchases, and operating expenses were incurred evenly throughout the year, and the average exchange rate for the year was $0.031 1,000 in Year 4 and INR 700 0.045 and $ 0.027 per rupee, respectively. 6.The prepaid expenses and unearned revenue at December 31, Year 4, arose when the exchange rates were 7.-Income taxes were paid in equal monthly instalments throughout the year. 8. Dividends of $0.03 and $ 0.028 per rupee, respectively. 3,200 in Year 4 and 700 in Year 3 were declared and paid each year on December 31. 9. The foreign exchange rates per rupee at each of the following dates were as follows: 31-Dec Year 3 $0.041 30-Jun Year 4 $0.036 31-Dec Year 4 $0.025 Required Create a Canadian-dollar balance sheet at December 31, Year 4, and an income statement for the year then ended, assuming that VTIL's functional currency is as follows: a. The Canadian dollar b. The Indian rupee (Note: There is insufficient information to translate retained earnings and accumulated foreign exchange adjustments. Phug these two items with the amount required to balance the balance sheet.) Calculation Purchases 9,800 Operating exp 3,200 Depreciation 400 0.075 = 30.0 600 S0.062 = $37.2 $67.2 Foreign Exchange Gain Loss IND RS. RATE DOLLAR Net monetary Position, opening -1,200 S0.041 -$49 Inflows: Sales 17,900 S0.031 S555 $506 Outflows: Purchases 9,800 s0.031 $304 Operating expenses 4,400 $0.031 $136 Interest 200 S0.031 $6 Taxes 100 S0.031 S3 Dividends 3,200 S0.025 $80 S530 Expected Net Monetary position -$24 -1,000 s0.025 Actual net monetary assets Foreign Exchnage Loss -$25 $1.20 In Year 1, Victoria Textiles Limited decided that its Asian operations had expanded such that an Asian office should be established. The office would be involved in selling Victoria's current product lines; it was also expected to establish supplier contacts. In the Asian market, there were a number of small manufacturers of top-quality fabrics, particularly silk and lace, but from Victoria's home office in Ontario it was difficult to find and maintain these suppliers. To assist in doing so, a wholly owned company, Victoria Textiles (India) Limited, was created, and a facility was established in India in January, Year 2. The new company, VTIL, was given the mandate from head office to buy and sell with other Victoria divisions and offices across Canada as if it were an autonomous, independent unit. To establish the company, an investment of 10,000,000 Indian rupees (INR) was made on January 1, Year 2. VTIL proved to be quite successful, as shown in the following financial statements at December 31, Year 4. After one year of operations, VTIL had borrowed funds and expanded facilities substantially, as the initial market estimates had turned out to be quite conservative. However, during this time the rupee had fallen in value relative to the Canadian dollar. As a result, Victoria's management was somewhat confused about how to evahuate VTIL's success, given the changing currency values. Financial Statements Balance Sheet Income Statement (In Thousands of, Indian Rupees) Year 4 Year 3 Year 4 Year 3 Sales 17,600 12,400 Cash 4,100 3,700 Cost of sales 10,200 6,100 Account Receivable 3,400 2,100 Gross profit 7,400 6,300 Inventories Prepaid Expenses Plant Assets (net) 3,000 3,400 2,300 Operating Expenses Interest Expense 4,200 2,400 1,200 200 400 7,900 20,800 8,900 Taxes 100 430 19,300 1,000 Net Income 2,900 3,170 Current Montary Liabilities 2,500 Unearned Revenue 700 400 Long-Term Debt 6,000 6,000 7,400 9,200 Common Shares 10,000 10,000 Retailed Earnighs 1,600 1,900 19,300 20,800 Additional Information 1. The exchange rate at January 1, Year 2, when VTIL was originally established, was S 0.075 per rupee. 2. Of the original investment of INR10 million, INR4 million was used to acquire plant and equipment, which is being depreciated on a straight-line basis over 10 years. 3. At June 30, Year 3, an expansion was completed at a cost of INR6 million, which was financed entirely by a 6-year note obtained from an Indian bank. Interest is to be paid semiannmually. The exchange rate at July 1, Year 3, was $0.062 per rupee. The new expansion is also to be depreciated on a straight-line basis over 10 years. (A half-year's depreciation was recorded in Year 3.) in Year 3 is included in operating expenses. Depreciation expense of INR 4. Inventory is accounted for on the FIFO basis. The inventory at the end of Year 3 and Year 4 was acquired when the exchange rates were S 5.Sales, purchases, and operating expenses were incurred evenly throughout the year, and the average exchange rate for the year was $0.031 1,000 in Year 4 and INR 700 0.045 and $ 0.027 per rupee, respectively. 6.The prepaid expenses and unearned revenue at December 31, Year 4, arose when the exchange rates were 7.-Income taxes were paid in equal monthly instalments throughout the year. 8. Dividends of $0.03 and $ 0.028 per rupee, respectively. 3,200 in Year 4 and 700 in Year 3 were declared and paid each year on December 31. 9. The foreign exchange rates per rupee at each of the following dates were as follows: 31-Dec Year 3 $0.041 30-Jun Year 4 $0.036 31-Dec Year 4 $0.025 Required Create a Canadian-dollar balance sheet at December 31, Year 4, and an income statement for the year then ended, assuming that VTIL's functional currency is as follows: a. The Canadian dollar b. The Indian rupee (Note: There is insufficient information to translate retained earnings and accumulated foreign exchange adjustments. Phug these two items with the amount required to balance the balance sheet.) Calculation Purchases 9,800 Operating exp 3,200 Depreciation 400 0.075 = 30.0 600 S0.062 = $37.2 $67.2 Foreign Exchange Gain Loss IND RS. RATE DOLLAR Net monetary Position, opening -1,200 S0.041 -$49 Inflows: Sales 17,900 S0.031 S555 $506 Outflows: Purchases 9,800 s0.031 $304 Operating expenses 4,400 $0.031 $136 Interest 200 S0.031 $6 Taxes 100 S0.031 S3 Dividends 3,200 S0.025 $80 S530 Expected Net Monetary position -$24 -1,000 s0.025 Actual net monetary assets Foreign Exchnage Loss -$25 $1.20

Answer rating: 100% (QA)

b Which method should Victoria Text... View the full answer