The following information is also available for Grace Org: i. ii. Non-current assets were acquired on...

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The following information is also available for Grace Org: i. ii. Non-current assets were acquired on 1 January 2014 and were revalued on 1 January 2016. Opening inventories were acquired on 15 November 2018 and closing inventories were acquired on 12 December 2020. iii. Exchange rates are given as follows; 1 January 2014 1 = 5 "curls" 1 January 2016 1 = 4 "curls" 15 November 2018 1 = 2 "curls" 1 January 2020 13.5 "curls" average for 2020 1 = 6 "curls" 12 December 2020 1 = 5 "curls" 31 December 2020 18 "curls" iv. The translated retained earnings brought forward for Grace Org is 80,000 under the temporal method. Required: (a) Explain the main differences between the temporal method and the closing rate method? Why are foreign exchange differences recorded as they are in each of the methods? (b) Translate the statement of comprehensive income for the year ending 31 December 2020 and the statement of financial position as at 31 December 2020 of Grace Org using the temporal method. FINANCING ALTERNATIVES The Howe Computer Company has grown rapidly during the past 5 years. Recently, its commercial bank urged the company to consider increasing its permanent financing. Its bank loan under a line of credit has risen to $150,000, carrying a 10% interest rate, and Howe has been 30 to 60 days late in paying trade creditors. Discussions with an investment banker have resulted in the decision to raise $250,000 at this time. Investment bankers have assured Howe that the following alternatives are feasible (flotation costs will be ignored): Alternative 1: Sell common stock at $10 per share. Alternative 2: Sell convertible bonds at a 10% coupon, convertible into 80 shares of common stock for each $1,000 bond (i.e., the conversion price is $12.50 per share). Alternative 3: Sell debentures with a 10% coupon; each $1,000 bond will have 80 warrants to buy 1 share of common stock at $12.50. Keith Howe, the president, owns 80% of Howe's common stock and wants to maintain control of the company; 50,000 shares are outstanding. The following are summaries of Howe's latest financial statements: Balance Sheet Current liabilities $200,000 Common stock, $1 par Retained earnings 50,000 25,000 Total assets $275,000 Total liabilities and equity $275,000 Income Statement Sales $550,000 All costs except interest 495,000 EBIT $ 55,000 Interest EBT Taxes (40%) Net income Shares outstanding Earnings per share Price/earnings ratio Market price of stock 15,000 $ 40,000 16,000 $ 24,000 50,000 $0.48 18 $8.64 2. On 1 January 2014, Daisy Ltd acquired 80% of the ordinary shares of a subsidiary, Grace Org. Grace Org trades in the currency "curls". On 1 January 2014 the balance on the accumulated profits of Grace Org was 280,000 "curls" and the share capital of Grace Org was 4,400,000 "curls". The summary statement of comprehensive income and statement of financial position of Grace Org is given as follows: Statement of financial position as at 31 December 2020 Grace Org "curls" Non-current assets - land 5,534,000 Inventories Cash 900,000 300,000 Total assets 6,734,000 Share capital 4,400,000 Retained earnings brought forward 790,000 Profit for the year 580,000 Revaluation reserve 400,000 Inter-company payable to Daisy Ltd 192,000 Payables 372,000 Equity and liabilities 6,734,000 Statement of comprehensive income for Grace Org for the year ended 31 December 2020 Grace Org Grace Org "curls" "curls" Revenue 1,520,000 Cost of sales Opening inventory 200,000 Purchases 800,000 Closing inventory (900,000) (100,000) Gross profit 1,420,000 Other expenses (100,000) Profit before tax 1,320,000 Tax (740,000) Profit for the year 580,000 The following information is also available for Grace Org: i. ii. Non-current assets were acquired on 1 January 2014 and were revalued on 1 January 2016. Opening inventories were acquired on 15 November 2018 and closing inventories were acquired on 12 December 2020. iii. Exchange rates are given as follows; 1 January 2014 1 = 5 "curls" 1 January 2016 1 = 4 "curls" 15 November 2018 1 = 2 "curls" 1 January 2020 13.5 "curls" average for 2020 1 = 6 "curls" 12 December 2020 1 = 5 "curls" 31 December 2020 18 "curls" iv. The translated retained earnings brought forward for Grace Org is 80,000 under the temporal method. Required: (a) Explain the main differences between the temporal method and the closing rate method? Why are foreign exchange differences recorded as they are in each of the methods? (b) Translate the statement of comprehensive income for the year ending 31 December 2020 and the statement of financial position as at 31 December 2020 of Grace Org using the temporal method. FINANCING ALTERNATIVES The Howe Computer Company has grown rapidly during the past 5 years. Recently, its commercial bank urged the company to consider increasing its permanent financing. Its bank loan under a line of credit has risen to $150,000, carrying a 10% interest rate, and Howe has been 30 to 60 days late in paying trade creditors. Discussions with an investment banker have resulted in the decision to raise $250,000 at this time. Investment bankers have assured Howe that the following alternatives are feasible (flotation costs will be ignored): Alternative 1: Sell common stock at $10 per share. Alternative 2: Sell convertible bonds at a 10% coupon, convertible into 80 shares of common stock for each $1,000 bond (i.e., the conversion price is $12.50 per share). Alternative 3: Sell debentures with a 10% coupon; each $1,000 bond will have 80 warrants to buy 1 share of common stock at $12.50. Keith Howe, the president, owns 80% of Howe's common stock and wants to maintain control of the company; 50,000 shares are outstanding. The following are summaries of Howe's latest financial statements: Balance Sheet Current liabilities $200,000 Common stock, $1 par Retained earnings 50,000 25,000 Total assets $275,000 Total liabilities and equity $275,000 Income Statement Sales $550,000 All costs except interest 495,000 EBIT $ 55,000 Interest EBT Taxes (40%) Net income Shares outstanding Earnings per share Price/earnings ratio Market price of stock 15,000 $ 40,000 16,000 $ 24,000 50,000 $0.48 18 $8.64 2. On 1 January 2014, Daisy Ltd acquired 80% of the ordinary shares of a subsidiary, Grace Org. Grace Org trades in the currency "curls". On 1 January 2014 the balance on the accumulated profits of Grace Org was 280,000 "curls" and the share capital of Grace Org was 4,400,000 "curls". The summary statement of comprehensive income and statement of financial position of Grace Org is given as follows: Statement of financial position as at 31 December 2020 Grace Org "curls" Non-current assets - land 5,534,000 Inventories Cash 900,000 300,000 Total assets 6,734,000 Share capital 4,400,000 Retained earnings brought forward 790,000 Profit for the year 580,000 Revaluation reserve 400,000 Inter-company payable to Daisy Ltd 192,000 Payables 372,000 Equity and liabilities 6,734,000 Statement of comprehensive income for Grace Org for the year ended 31 December 2020 Grace Org Grace Org "curls" "curls" Revenue 1,520,000 Cost of sales Opening inventory 200,000 Purchases 800,000 Closing inventory (900,000) (100,000) Gross profit 1,420,000 Other expenses (100,000) Profit before tax 1,320,000 Tax (740,000) Profit for the year 580,000