On January 1, Year 3, Jets Ltd., a Winnipeg-based private company, purchased 80% of the shares of Buenos Inc. for 1,900,000 Argentine pesos (AP)-an amount which, at that date, translated to $655,172.
The Year 3 financial statements for Buenos are as follows:
BALANCE SHEET
At December 31, Year 3
Cash ............ AP 820,000
Accounts receivable ...... 317,500
Inventory ........... 730,000
Plant assets, net ........ 1,722,500
AP3, 590,000
Current monetary liabilities .. AP 380,000
Notes payable .......... 700,000
Common shares ......... 900,000
Retained earnings ...... 1,610,000
AP3, 590,000
INCOME STATEMENT
For the Year Ended December 31, Year 3
Sales ............ AP10, 350,000
Cost of sales ........ 6,400,000
Gross profit .......... 3,950,000
Other expenses ........ 3,590,000
Net income .......... AP 360,000
Additional Information
• The FIFO inventory method is used. The opening inventory, which was purchased before December 31, Year 2, cost AP 600,000. The exchange rate at the time of inventory purchase was $1 = AP2.71.
The purchases during the year were
AP ... Exchange rate
Purchase Number 1 2,000,000 $1 = AP3.0
Purchase Number 2 4,530,000 $1 = AP3.12
• The plant assets were purchased when the company was formed (January 1, Year 1). The common shares were issued at the same time. The exchange rate at that date was $1 = AP 1.5. The cost of the plant assets is AP 2,450,000, and the accumulated depreciation is AP 727,500 at December 31, Year 3. Depreciation expense of AP 122,500 is included with other expenses.
• The notes payable are due on January 1, Year 7, and were issued on December 31, Year 2.
• The "sales" and "other expenses" on the income statement were incurred evenly throughout the year.
• The dividends of AP 200,000 were paid on December 31, Year 3.
• The balances in pesos at December 31, Year 2, were as follows:
Cash ........... AP 450,000
Accounts receivable ..... AP 405,000
Current monetary liabilities ... AP (250,000)
Notes payable .......... AP (700,000)
• Exchange rates:
Dec. 31, Year 2 ...... $1 = AP2.9
Jan. 1, Year 3 ...... $1 = AP2.9
Year 3 average ..... $1 = AP3.25
Dec. 31, Year 3 .... $1 = AP3.6
Required:
(a) There will be a foreign exchange gain or loss on the translated income statement prepared in Part (b). Prepare a schedule to calculate the foreign exchange gain or loss under the temporal method.
(b) Prepare the Canadian-dollar income statement for Buenos for Year 3, using the temporal method and assuming that the income statement will be used to consolidate with Jets Ltd.