Problem 3 Powder Inc. (Powder) is a foreign subsidiary of a Canadian company. Powder's balance sheets in foreign currency units) at the beginning and end of 2020 are as follows: January 1 December 31 Cash and receivables Inventory Property, plant and equipment Accumulated depreciation 100,000 350,000 600,000 (100.000) 950,000 250,000 300,000 700,000 (135.000) 1.115.000 Accounts payable Long term debt Common stock Retained earnings 50,000 200,000 600,000 100,000 950.000 90,000 200,000 700,000 125.000 1.115.000 Powder also reported the following in its income statement for the year: Revenues Cost of sales Depreciation expense Other expenses Net income 2,100,000 1,550,000 35,000 470,000 45,000 Other information: 1. The plant and equipment and the common stock included in the opening balance sheet, had been acquired or contributed when the exchange rate was FC1.00=Can$0.70. 2. The spot rate on January 1, 2020 was FC1.00=Can$0.85 and the spot rate on December 31, 2020 was FC1.00=Can$0.95. Exchange rates changed evenly over the period. 3. On January 1, 2020 Powder acquired new equipment with a useful life of 20 years. Powder uses straight-line depreciation and follows the practice of taking a full year of depreciation in the year of acquisition. No property, plant or equipment was sold during the year. 4. During the year when the exchange rate was FC1.00=Can$0.92, Powder issued common shares for cash. 5. Beginning inventory had been acquired during a period when the exchange rate was FC1.00=Can$0.82 and the ending inventory was acquired when the exchange rate was FC1.00=Can$0.93. Purchases were made uniformly through-out the period. 6. Dividends were declared when the exchange rate was FC1.00=Can$0.89. 7. The long term debt was issued on January 1, 2019 when the exchange rate was FC1.00=Can$0.80. The principal amount of the debt is due on December 31, 2023. Required: 1. Assume that the functional currency of Powder is the Canadian dollar. Prepare translated financial statements for Powder for the year ended December 31, 2020 and prepare a reconciliation of the beginning and ending net monetary position to directly calculate the exchange gain or loss included in the translated income statement. 2. Assume that the functional currency of Powder is not the Canadian dollar. Prepare translated financial statements for Powder for the year ended December 31, 2020 and prepare a reconciliation of foreign currency translation adjustment from the beginning of the year to the end of the year. Assume that opening translated retained earnings are $97,500. Problem 3 Powder Inc. (Powder) is a foreign subsidiary of a Canadian company. Powder's balance sheets in foreign currency units) at the beginning and end of 2020 are as follows: January 1 December 31 Cash and receivables Inventory Property, plant and equipment Accumulated depreciation 100,000 350,000 600,000 (100.000) 950,000 250,000 300,000 700,000 (135.000) 1.115.000 Accounts payable Long term debt Common stock Retained earnings 50,000 200,000 600,000 100,000 950.000 90,000 200,000 700,000 125.000 1.115.000 Powder also reported the following in its income statement for the year: Revenues Cost of sales Depreciation expense Other expenses Net income 2,100,000 1,550,000 35,000 470,000 45,000 Other information: 1. The plant and equipment and the common stock included in the opening balance sheet, had been acquired or contributed when the exchange rate was FC1.00=Can$0.70. 2. The spot rate on January 1, 2020 was FC1.00=Can$0.85 and the spot rate on December 31, 2020 was FC1.00=Can$0.95. Exchange rates changed evenly over the period. 3. On January 1, 2020 Powder acquired new equipment with a useful life of 20 years. Powder uses straight-line depreciation and follows the practice of taking a full year of depreciation in the year of acquisition. No property, plant or equipment was sold during the year. 4. During the year when the exchange rate was FC1.00=Can$0.92, Powder issued common shares for cash. 5. Beginning inventory had been acquired during a period when the exchange rate was FC1.00=Can$0.82 and the ending inventory was acquired when the exchange rate was FC1.00=Can$0.93. Purchases were made uniformly through-out the period. 6. Dividends were declared when the exchange rate was FC1.00=Can$0.89. 7. The long term debt was issued on January 1, 2019 when the exchange rate was FC1.00=Can$0.80. The principal amount of the debt is due on December 31, 2023. Required: 1. Assume that the functional currency of Powder is the Canadian dollar. Prepare translated financial statements for Powder for the year ended December 31, 2020 and prepare a reconciliation of the beginning and ending net monetary position to directly calculate the exchange gain or loss included in the translated income statement. 2. Assume that the functional currency of Powder is not the Canadian dollar. Prepare translated financial statements for Powder for the year ended December 31, 2020 and prepare a reconciliation of foreign currency translation adjustment from the beginning of the year to the end of the year. Assume that opening translated retained earnings are $97,500