On December 31, Year 1, Kelly Corporation of Toronto paid 14.30 million Libyan dinars (LYD) for 100% of the outstanding common shares of Arkenu Company of Libya. On this date, the fair values of Arkenus identifiable assets and liabilities were equal to their carrying amounts. Arkenus comparative balance sheets and Year 2 income statement are as follows:

BALANCE SHEET
At December 31
		Year 2			Year 1
Current monetary assets	LYD	11,859,000		LYD	9,730,000
Inventory		1,982,000			2,439,000
Plant and equipment (net)		7,263,000			7,417,000
	LYD	21,104,000		LYD	19,586,000
Current monetary liabilities	LYD	2,095,000		LYD	2,451,000
Bonds payable, due Dec. 31, Year 6		4,930,000			4,930,000
Common shares		5,130,000			5,130,000
Retained earnings		8,949,000			7,075,000
	LYD	21,104,000		LYD	19,586,000

INCOME STATEMENT
For the year ended December 31, Year 2
Sales	LYD	16,374,000
Inventory, Jan. 1		2,439,000
Purchases		11,022,000
Inventory, Dec. 31		(1,982,000	)
Depreciation expense		154,000
Other expenses		607,000
		12,240,000
Net income	LYD	4,134,000

Additional Information

• Exchange rates

Dec. 31, Year 1	LYD1	=	$0.52
Sep. 30, Year 2	LYD1	=	$0.62
Dec. 31, Year 2	LYD1	=	$0.65
Average for Year 2	LYD1	=	$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 LYD1 = $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. (Enter answers in whole dollars and not in millions of dollars. Input all amounts as positive value. Omit currency symbol in your response.)

  (Click to select) Exchange gain Exchange loss $

  (ii) Prepare translated financial statements for Year 2. (Round the values in the "Rate" column to 2 decimal places. Exchange gain, if any, should be entered as positive value, and Exchange loss, if any, should be entered with a minus sign. Enter answers in whole dollars and not in millions of dollars. Input all other amounts as positive values. Omit currency symbol in your response.)

(i) Calculate the Year 2 exchange gain or loss that would result from the translation of Arkenu's financial statements. (Enter answers in whole dollars and not in millions of dollars. Input all amounts as positive value. Omit currency symbol in your response.) Exchange gain $ (ii) Prepare translated financial statements for Year 2. (Round the values in the "Rate" column to 2 decimal places. Exchange gain, if any, should be entered as positive value, and Exchange loss, if any, should be entered with a minus sign. Enter answers in whole dollars and not in millions of dollars. Input all other amounts as positive values. Omit currency symbol in your response.) Income Statement - Year 2 Rate Dollars $ X Sales Cost of goods sold Depreciation expense Other expenses (Click to select) v LYD 16,374,000 11,479,000 154,000 607,000 X 12, 240,000 4,134,000 Net income Rate Dollars $ Retained Earnings Statement - Year 2 LYD Bal. Jan. 1 7,075,000 Net income 4,134,000 11, 209,000 Dividends 2,260,000 Bal. Dec. 31 8,949,000 Rate Dollars $ $ Balance Sheet - December 31, Year 2 LYD Current monetary assets 11,859,000 Inventory 1,982,000 Plant and equipment (net) 7,263,000 21,104,000 Current monetary liabilities 2,095,000 Bonds payable 4,930,000 Common shares 5,130,000 Retained earnings 8,949,000 21,104,000 $ $ (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. (Enter answers in whole dollars and not in millions of dollars. Input all amounts as positive value. Omit currency symbol in your response.) Exchange gain $ (ii) Prepare translated financial statements for Year 2. (Round the values in the "Rate" column to 2 decimal places. Loss amounts should be indicated with a minus sign. Enter answers in whole dollars and not in millions of dollars. Input all other amounts as positive values. Omit currency symbol in your response.) Income Statement - Year 2 Rate Dollars $ X Sales Cost of goods sold Depreciation expense Other expenses X LYD 16,374,000 11,479,000 X 154,000 607,000 X 12, 240,000 4,134,000 x - unrealized exchange X Net income Other comprehensive (Click to select) (Click to selec (Click to select) Rate Dollars $ Retained Earnings Statement - Year 2 LYD Bal. Jan. 1 7,075,000 Net income 4,134,000 X 11, 209,000 Dividends 2,260,000 Bal. Dec. 31 8,949,000 10 X $ Balance Sheet - December 31, Year 2 Rate Dollars $ Current monetary assets Inventory Plant and equipment (net) LYD 11,859,000 X 1,982,000 X 7,263,000 X 21,104,000 Current monetary liabilities Bonds payable Common shares Retained earnings Accumulated foreign exchange adjustments 2,095,000 x 4,930,000 X 5,130,000 8,949,000 21,104,000 $ (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 LYD50,000 during the year. (Enter answers in whole dollars and not in millions of dollars. Input all other amounts as positive values. Omit currency symbol in your response.) Goodwill - December 31, 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 LYD50,000 during the year. (Enter answers in whole dollars and not in millions of dollars. Input all other amounts as positive values. Omit currency symbol in your response.) Goodwill - December 31, Year 2 $ (iv) Calculate the amount of the exchange gain or loss that would appear in Kelly's Year 2 consolidated financial statements. (Enter answers in whole dollars and not in millions of dollars. Input all amounts as positive value. Omit currency symbol in your response.) Exchange gain (c) Which functional currency would Arkenu prefer to use if it wants to show the following? (i) The strongest solvency position for the company O Functional currency is Canadian dollar. O Functional currency is Libyan dinar and accumulated foreign exchange adjustments (AFEA) are included in equity. O Functional currency is Libyan dinar and AFEA are excluded from equity. (ii) The best return on shareholders' equity O Functional currency is Canadian dollar. O Functional currency is Libyan dinar and other comprehensive income (OCI) is included in income and AFEA included in equity. O Functional currency is Libyan dinar and OCl is excluded from income and AFEA are excluded from equity. (i) Calculate the Year 2 exchange gain or loss that would result from the translation of Arkenu's financial statements. (Enter answers in whole dollars and not in millions of dollars. Input all amounts as positive value. Omit currency symbol in your response.) Exchange gain $ (ii) Prepare translated financial statements for Year 2. (Round the values in the "Rate" column to 2 decimal places. Exchange gain, if any, should be entered as positive value, and Exchange loss, if any, should be entered with a minus sign. Enter answers in whole dollars and not in millions of dollars. Input all other amounts as positive values. Omit currency symbol in your response.) Income Statement - Year 2 Rate Dollars $ X Sales Cost of goods sold Depreciation expense Other expenses (Click to select) v LYD 16,374,000 11,479,000 154,000 607,000 X 12, 240,000 4,134,000 Net income Rate Dollars $ Retained Earnings Statement - Year 2 LYD Bal. Jan. 1 7,075,000 Net income 4,134,000 11, 209,000 Dividends 2,260,000 Bal. Dec. 31 8,949,000 Rate Dollars $ $ Balance Sheet - December 31, Year 2 LYD Current monetary assets 11,859,000 Inventory 1,982,000 Plant and equipment (net) 7,263,000 21,104,000 Current monetary liabilities 2,095,000 Bonds payable 4,930,000 Common shares 5,130,000 Retained earnings 8,949,000 21,104,000 $ $ (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. (Enter answers in whole dollars and not in millions of dollars. Input all amounts as positive value. Omit currency symbol in your response.) Exchange gain $ (ii) Prepare translated financial statements for Year 2. (Round the values in the "Rate" column to 2 decimal places. Loss amounts should be indicated with a minus sign. Enter answers in whole dollars and not in millions of dollars. Input all other amounts as positive values. Omit currency symbol in your response.) Income Statement - Year 2 Rate Dollars $ X Sales Cost of goods sold Depreciation expense Other expenses X LYD 16,374,000 11,479,000 X 154,000 607,000 X 12, 240,000 4,134,000 x - unrealized exchange X Net income Other comprehensive (Click to select) (Click to selec (Click to select) Rate Dollars $ Retained Earnings Statement - Year 2 LYD Bal. Jan. 1 7,075,000 Net income 4,134,000 X 11, 209,000 Dividends 2,260,000 Bal. Dec. 31 8,949,000 10 X $ Balance Sheet - December 31, Year 2 Rate Dollars $ Current monetary assets Inventory Plant and equipment (net) LYD 11,859,000 X 1,982,000 X 7,263,000 X 21,104,000 Current monetary liabilities Bonds payable Common shares Retained earnings Accumulated foreign exchange adjustments 2,095,000 x 4,930,000 X 5,130,000 8,949,000 21,104,000 $ (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 LYD50,000 during the year. (Enter answers in whole dollars and not in millions of dollars. Input all other amounts as positive values. Omit currency symbol in your response.) Goodwill - December 31, 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 LYD50,000 during the year. (Enter answers in whole dollars and not in millions of dollars. Input all other amounts as positive values. Omit currency symbol in your response.) Goodwill - December 31, Year 2 $ (iv) Calculate the amount of the exchange gain or loss that would appear in Kelly's Year 2 consolidated financial statements. (Enter answers in whole dollars and not in millions of dollars. Input all amounts as positive value. Omit currency symbol in your response.) Exchange gain (c) Which functional currency would Arkenu prefer to use if it wants to show the following? (i) The strongest solvency position for the company O Functional currency is Canadian dollar. O Functional currency is Libyan dinar and accumulated foreign exchange adjustments (AFEA) are included in equity. O Functional currency is Libyan dinar and AFEA are excluded from equity. (ii) The best return on shareholders' equity O Functional currency is Canadian dollar. O Functional currency is Libyan dinar and other comprehensive income (OCI) is included in income and AFEA included in equity. O Functional currency is Libyan dinar and OCl is excluded from income and AFEA are excluded from equity