On January 1, Year 2, P Ltd paid $500,000 for 100% of the outstanding shares of S Ltd., a foreign subsidiary. S Ltd. purchases all its inventory from P Ltd. On June 30^th Year 3, S ltd disposed of all its plant and equipment and then borrowed $300,000 FCT from P ltd to acquire new plant and equipment. The exchange rate on June 30, year 3 was 1FC=1.29 CDN.

On the date of acquisition, Ss fair values approximated its book values. Both companies have December 31 year-end. Ss financial statements for Year 7 are shown below:

Balance Sheet

As at December 31, Year 7 (in FC)

• Current Monetary Assets 500,000
• Inventory 120,000
• Plant and Equipment (Net) 380,000
• Total Assets 1,000,000
• Current Liabilities 170,000
• Loan Payable to P Ltd. in year 12 300,000
• Common Stock 200,000
• Retained Earnings 330,000
• Total Liabilities and Equity 1,000,000
• Income Statement
• For the Year Ended December 31, Year 7 (in FC)
• Sales 700,000
• Inventory, January 1, Year 7 70,000
• Purchases 300,000
• Inventory, December 31, Year 7 (120,000)
• Cost of Goods Sold 250,000
• Depreciation Expense 100,000
• Other Expenses 150,000
• 500,000
• Net Income 200,000

Other information:

• S declared and paid FC 50,000 in dividends on September 30, Year 7 when the exchange rate was 1FC=1.36 CDN;
• The inventories on hand at the end of year 7 were purchased when the exchange rate was 1FC = $1.35 CDN;
• The inventories on hand at the end of Year 6 were purchased when the exchange rate was 1FC = $1.31 CDN;
• Balance of Net Monetary Assets on December 31, Year 6 was (170,000FC ) liability position.
• Balance of Net Assets on Dec 31, Year 6 was 380,000 FC

Other Exchange Rates:

• January 1, Year 2 (date of acquisition): 1FC = $1.28 CDN
• December 31, Year 6: 1FC = $1.31 CDN
• January 1, year 7: 1FC = $1.31 CDN
• December 31, year 7: 1FC = $1.37 CDN
• Average for year 7: 1FC = $1.34 CDN

a) What is the functioning currency of the Subsidiary? Explain (3 marks)

b) Calculate the translation exchange gain or loss assuming S Ltd had CDN$ functional currency, same as P Ltd. and was using the FCT method. (7 marks)

c) In which statement would the exchange gain/loss be reported if using FCT method. (2 marks)

d) If using FTC method, what is the translated account balance for Inventory as at Dec 31, Year 7?