On January 1, 2013 Alex Ltd. purchased 100% of the outstanding common shares of Coco George Inc., a company based in Paris, France. Alex Ltd. is located in Canada and has a Canadian dollar functional and presentation currency. This is the first time that Alex Ltd. has purchased a foreign company and as such, management has several questions.
It is now January, 2014, and you have been provided with the financial statements of Coco George Inc. at the acquisition date and as at December 31, 2013. Please note that the price paid by Alex Ltd. to acquire Coco George Inc. was equal to its book value of 1.5 million Euros.
COCO GEORGE INC.
Statement of Financial Position
As at December 31, 2013
In Euros
Cash ..................... $ 450,000
Accounts Receivable ............... 900,000
Inventory .................... 1,110,000
Prepaid Expenses ................ 490,000
Property, plant and equipment (net) ......... 1,500,000
$4,450,000
Total Liabilities .................. 2,800,000
Common Shares .................. 1,000,000
Retained Earnings ................ 650,000
Total Liabilities and shareholder’s equity ....... $4,450,000
COCO GEORGE INC.
Income Statement
For the Year Ended December 31, 2013
In Euros
Sales ........................ $10,000,000
Cost of Sales ..................... 7,500,000
Gross Profit ..................... 2,500,000
Other expenses ..................... 2,100,000
Income before taxes .................. 400,000
Income taxes ..................... 250,000
Net Income ........................ $ 150,000
Other Information:
Foreign Exchange Rates
January 1, 2013: .................... €1 = C $1.38
December 31, 2013: .................... €1 = C $1.34
2013 Average Rate: .................. €1 = C $1.31
Required
(a) Since Alex Ltd.'s functional currency has already been assessed as the Canadian dollar, is it necessary to assess the functional currency of Coco George Inc.?
(b) What is the impact if Coco George Inc.'s functional currency is assessed as the Euro?
(c) What is the impact if Coco George Inc.'s functional currency is assessed as the Canadian dollar?
(d) Translate the financial statements of Coco George Inc. assuming its functional currency is the Euro.