On January 1, 2022, Larmer Corp. (a Canadian company) purchased 80% of Martin Inc, an American company, for US$50,000.

Martin's book values approximated its fair values on that date except for plant and equipment, which had a fair value of US$30,000 with a remaining life expectancy of 5 years. A goodwill impairment loss of US$1,000 occurred during 2022.

Other Information:

Sales, purchases and other expenses occurred evenly throughout the year. Dividends declared and paid December 31, 2022. The financial statements of Larmer (in Canadian dollars) and Martin (in U.S. dollars) are shown below:

REQUIRED:

Scenario 1:a) Compute Martins exchange gain or loss for 2022 if Martin's functional currency was the Canadian dollar (i.e. the same functional currency as the parent). Hint: net monetary method.

b) Prepare the translated Income Statement under the above.

Scenario 2:c) Compute Martins exchange gain or loss for 2022 if Martin's functional currency was the US dollar (i.e. different functional currency from the parent). Hint: net assets method.

d) How would the gain or loss in step c be classified on the Income Statement?

Martin's January 1, 2022 Balance Sheet is shown below (in U.S. dollars): Current Monetary Assets $50,000 Inventory $40,000 Plant and Equipment $25.000 Total Assets $115.000 Current Liabilities $45,000 Bonds Payable (maturity: January 1, 2028) $20,000 Common Shares $30,000 Retained Earnings $20,000 Total Liabilities and $115,000 The following exchange rates were in effect during 2022: January 1, 2022: US $1 = CDN $1.4250 Average for 2022: US $1 = CDN $1.4350 Date when Ending US $1 = CDN $1.54 Inventory Purchased: December 31, 2022: US $1 = CDN $1.471 (US $) Martin $65.000 $50,000 $20,000 Balance Sheets - December 31, 2022 Current Monetary Assets Inventory Plant and Equipment Investment in Martin (at Cost) Assets Current Liabilities Bonds Payable (maturity: January 1, 2026) Common Shares Retained Earnings Net Income Dividends Liabilities and Equity Income Statements (2022) Sales Dividend Income Cost of Sales Depreciation Other expenses Net Income (CDN $) Larmer $42,050 $60,000 $23.500 $66,250 $191,800 $50,000 $35,000 $60,000 $30,000 $28.800 ($12,000) $191,800 (CDN $) Larmer $80,000 $10,800 ($40,000) ($10,000) ($12,000) $28,800 $135.000 $48.000 $20,000 $30,000 $20,000 $27,000 ($10,000) $135,000 (US$) Martin $50,000 ($15,000) ($5,000) ($3,000) $27,000