On December 31, Year 1, Kelly Corporation of Toronto paid 13.7 million Libyan dinars (LD) for 100% of the outstanding common shares of Arkenu Company of Libya. On this date, the fair values of Arkenu's identifiable assets and liabilities were equal to their carrying amounts. Arkenu's comparative balance sheets and Year 2 income statement are as follows:

Additional Information:

• Exchange rates

Dec. 31, Year 1                                  LD1 = $0.52

Sep. 30, Year 2                                  LD1 = $0.62

Dec. 31, Year 2                                  LD1 = $0.65

Average for Year 2                           LD1 = $0.58 

• Arkenu Company declared and paid dividends on September 30, Year 2.

• The inventories on hand on December 31, Year 2, were purchased when the exchange rate was LD1 = $0.63.

Required:

(a) Assume that Arkenu's functional currency is the Canadian dollar:

(i) Calculate the Year 2 exchange gain or loss that would result from the translation of Arkenu's financial statements.

(ii) Prepare translated financial statements for Year 2.

(b) Assume that Arkenu's functional currency is the Libyan dinar:

(i) Calculate the Year 2 exchange gain or loss that would result from the translation of Arkenu's financial statements.

(ii) Prepare translated financial statements for Year 2.

(iii) Calculate the amount of goodwill that would appear on the December 31, Year 2, consolidated balance sheet if there was an impairment loss of LD50,000 during the year.

(iv) Calculate the amount, description, and location of the exchange gain or loss that would appear in Kelly's Year 2 consolidated financial statements.

(c) Which functional currency would Arkenu prefer to use if it wants to show the following?

(i) The strongest solvency position for the company

(ii) The best return on shareholders' equity Briefly explain your answers.

Transcribed Image Text:

BALANCE SHEET At December 31 Year 2 Year 1 LD11,361,000 LD 9,670,000 Current monetary assets 2,421,000 Inventory 1,898,000 Plant and equipment (net) 7,363,000 6,957,000 LD20,216,000 LD19,454,000 LD 2,005,000 LD 2,433,000 Current monetary liabilities Bonds payable, due Dec. 31, Year 6 4,870,000 4,870,000 5,070,000 Common shares 5,070,000 Retained earnings 7,081,000 8,271,000 LD20,216,000 LD19,454,000 INCOME STATEMENT For the year ended December 31, Year 2 Sales LD16,206,000 Inventory, Jan. 1 2,421,000 10,938,000 Purchases Inventory, Dec. 31 (1,898,000) Depreciation expense 406,000 Other expenses 1,598,000 13,465,000 LD 2,741,000 Net income