Parent Corporation of Canada paid $US 9 million for 90% of the outstanding common shares of an American company, Subsidiary Ltd, on January 1, year 2.

On that date, the fair values of Subsidiary’s identifiable assets and liabilities were equal to their carrying values, except for equipment. The equipment was worth $US 200,000 more than it’s carrying value and had a useful life of 10 years. An impairment test of goodwill indicated an impairment loss of $US 60,000 in year 2. Subsidiary’s comparative balance sheets and Year 2 income statement were as follows:

Balance Sheet

December 31

                                                                             Year 2                                      Year 1

Cash, Accounts Receivable                            $US 8,000,000                        $US 7,500,000

Inventory                                                              1,900,000                                2,100,000

Plant and equipment                                            6,300,000                                6,000,000

Accumulated depreciation                                  (1,900,000)                             (1,400,000)

                                                                    $US 14,300,000                      $US 14,200,000

Accounts payable                                        $US   1,200,000                      $US   1,800,000

Note payable                                                        3,800,000                                3,800,000

Common shares                                                    4,000,000                                4,000,000

Retained earnings                                                 5,300,000)                              4,600,000)

                                                                    $US 14,300,000)                    $US 14,200,000)

Income Statement

For the year ended December 31, Year 2 

Sales                                                            $US 12,000,000

Cost of Goods sold                                               8,500,000

Depreciation expense                                              500,000

Interest expense                                                   1,100,000)  

Other expense                                                      1,000,000)  

Net income                                                      FCU 900,000)      

Other information:

Exchange rates:

January 1, Year 2                    $US 1 = $0.60

January 8, Year 2                    $US 1 = $0.62

October 31, Year 2                 $US 1 = $0.64

December 31, Year 2              $US 1 = $0.70

Average for Year 2                 $US 1 = $0.66

 

· Subsidiary declared and paid dividends totaling $US 200,000 on Dec. 31, Year 2.

· The inventories on hand on January 1, Year 2 were purchased over the previous 3 months when the average exchange rate was $US 1 = $0.58.

· The inventories on hand on December 31, Year 2 were purchased when the exchange rate was $US 1 = $0.68

· Subsidiary purchased $US 300,000 of new equipment on January 8, Year 2. The new equipment has a useful life of 8 years and $0 residual value.

REQUIRED:

Subsidiary is an integrated foreign subsidiary.

a)      Calculate the Year 2 exchange gain or loss that would result from the translation of Subsidiary’s financial statements.

b)      Translate your subsidiary’s financial statement items.

c)      Prepare the calculation of acquisition differential and amortization/impairment schedules for the acquisition differential.