On January 1, Year 2, P Ltd paid $900,000 for 100% of the outstanding shares of S
Question:
On January 1, Year 2, P Ltd paid $900,000 for 100% of the outstanding shares of S Ltd., a foreign subsidiary. S Ltd. purchases all it's inventory from P. P issues S Notes Receivable for all inventory purchased with a term of 8 months and 5% annual interest rate. At the time of aquisition S’s fair values approximated its book values. Both companies have December 31 year-end.
S’s financial statements for Year 7 are shown below:
Balance Sheet
As at December 31, Year 7 (in FC)
Current Monetary Assets 500,000
Inventory 120,000
Plant and Equipment (Net) 680,000
Total Assets 1,300,000
Current Liabilities 170,000
Loan Payable 300,000
Common Stock 500,000
Retained Earnings 330,000
Total Liabilities and Equity 1,300,000
Income Statement
For the Year Ended December 31, Year 7 (in FC)
Sales 700,000
Inventory, January 1, Year 7 70,000
Purchases 300,000
Inventory, December 31, Year 7 (120,000)
Cost of Goods Sold 250,000
Depreciation Expense 100,000
Other Expenses 150,000
500,000
Net Income 200,000
Other information:
- S declared and paid FC 60,000 in dividends on September 30, Year 7 when the exchange rate was 1FC=1.36 CDN;
- The inventories on hand at the end of year 7 were purchased when the exchange rate was 1FC = $1.35 CDN;
- The inventories on hand at the end of Year 6 were purchased when the exchange rate was 1FC = $1.31 CDN;
- All Plant and Equipment in the books was purchased on June 30, Year 4 when exchange rate was1FC = 1.29 CDN
- Balance of Net Monetary Assets on December 31, Year 6 was (170,000FC ) liability position.
- Balance of Net Assets on Dec 31, Year 6 was 380,000 FC
Other Exchange Rates:
- January 1, Year 2 (date of acquisition): 1FC = $1.28 CDN
- December 31, Year 6: 1FC = $1.31 CDN
- January 1, year 7: 1FC = $1.31 CDN
- December 31, year 7: 1FC = $1.37 CDN
- Average for year 7: 1FC = $1.34 CDN
a) From the information given, what would you say is the functional currency of S Ltd? Explain
b) Assume S has same functional currency as that of P (Canadian $). What is the exchange gain/loss on Dec 31, year 7?
c) In which financial statement would it be reported?
Expert Answer:
aThe functional currency of a company is the currency in which they primarily conduct their business ... View the full answer
