On December 31, Year 1, Kelly Corporation of Toronto paid 14.70 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	12,191,000		LYD	9,770,000
Inventory		2,038,000			2,451,000
Plant and equipment (net)		7,467,000			7,653,000
	LYD	21,696,000		LYD	19,874,000
Current monetary liabilities	LYD	2,155,000		LYD	2,487,000
Bonds payable, due Dec. 31, Year 6		4,970,000			4,970,000
Common shares		5,170,000			5,170,000
Retained earnings		9,401,000			7,247,000
	LYD	21,696,000		LYD	19,874,000

INCOME STATEMENT
For the year ended December 31, Year 2
Sales	LYD	16,506,000
Inventory, Jan. 1		2,451,000
Purchases		11,078,000
Inventory, Dec. 31		(2,038,000	)
Depreciation expense		186,000
Other expenses		733,000
		12,410,000
Net income	LYD	4,096,000

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.)

Income Statement Year 2
	LYD		Rate	Dollars
Sales	16,506,000			$
Cost of goods sold	11,491,000
Depreciation expense	186,000
Other expenses	733,000
(Click to select) Exchange gain Exchange loss
	12,410,000
Net income	4,096,000			$

Retained Earnings Statement Year 2
	LYD		Rate	Dollars
Bal. Jan. 1	7,247,000			$
Net income	4,096,000
	11,343,000
Dividends	1,942,000
Bal. Dec. 31	9,401,000			$

Balance Sheet December 31, Year 2
	LYD		Rate	Dollars
Current monetary assets	12,191,000			$
Inventory	2,038,000
Plant and equipment (net)	7,467,000
	21,696,000			$
Current monetary liabilities	2,155,000			$
Bonds payable	4,970,000
Common shares	5,170,000
Retained earnings	9,401,000
	21,696,000			$

(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.)

(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. 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
	LYD		Rate	Dollars
Sales	16,506,000			$
Cost of goods sold	11,491,000
Depreciation expense	186,000
Other expenses	733,000
	12,410,000
Net income	4,096,000
Other comprehensive (Click to select) income loss unrealized exchange (Click to select) gain loss
(Click to select) Comprehensive income Comprehensive loss				$

Retained Earnings Statement Year 2
	LYD		Rate	Dollars
Bal. Jan. 1	7,247,000			$
Net income	4,096,000
	11,343,000
Dividends	1,942,000
Bal. Dec. 31	9,401,000			$

Balance Sheet December 31, Year 2
	LYD		Rate	Dollars
Current monetary assets	12,191,000			$
Inventory	2,038,000
Plant and equipment (net)	7,467,000
	21,696,000			$
Current monetary liabilities	2,155,000
Bonds payable	4,970,000
Common shares	5,170,000
Retained earnings	9,401,000
Accumulated foreign exchange adjustments
	21,696,000			$

(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 $

(iv) Calculate the amount of the exchange gain or loss that would appear in Kellys 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.)

(Click to select) Exchange gain Exchange loss $

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

(i) The strongest solvency position for the company

multiple choice 8

• Functional currency is Canadian dollar.

• Functional currency is Libyan dinar and accumulated foreign exchange adjustments (AFEA) are included in equity.

• Functional currency is Libyan dinar and AFEA are excluded from equity.

(ii) The best return on shareholders' equity

multiple choice 9

• Functional currency is Canadian dollar.

• Functional currency is Libyan dinar and other comprehensive income (OCI) is included in income and AFEA included in equity.

• Functional currency is Libyan dinar and OCI is excluded from income and AFEA are excluded from equity.