On January 1, Year 2, P Ltd paid $900,000 for 100% of the outstanding shares of S Ltd., a foreign subsidiary. S Ltd. purchases all it's inventory from P. P issues S Notes Receivable for all inventory purchased with a term of 8 months and 5% annual interest rate. At the time of aquisition 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) 680,000

Total Assets 1,300,000

Current Liabilities 170,000

Loan Payable 300,000

Common Stock 500,000

Retained Earnings 330,000

Total Liabilities and Equity 1,300,000

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 60,000 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;
• All Plant and Equipment in the books was purchased on June 30, Year 4 when exchange rate was1FC = 1.29 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) From the information given, what would you say is the functional currency of S Ltd? Explain (4 marks)

b) Assume S has same functional currency as that of P (Canadian $). What is the excange gain/loss on Dec 31, year 7? (7 marks)

c) In which financial statement would it be reported? (2 marks)