QUESTION 1

On December 31, 2000, Padua Limited purchased 80% of Sorrento Corporation for

Shs780,000 cash. At the date of acquisition, Sorrento's shareholders' equity consisted of

Shs 500,000 in the common share account and Shs300,000 in retained earnings. The book values

of Sorrento's assets and liabilities approximated their fair values. The excess of purchase

price over book value was goodwill.

On December 31, 2008, the condensed separate-entity balance sheets of the two

companies were as follows:

Padua Sorrento

Cash Shs 600,000 Shs 250,000

Accounts receivable 900,000 450,000

Inventories 820,000 600,000

Total current assets 2,320,000 1,300,000

Property, plant and equipment (net)1,900,000 1,000,000

Investment in Sorrento 780,000 -

Total assets Shs 5,000,000 Shs 2,300,000

Accounts payable Shs 700,000 Shs 250,000

Long-term liabilities 300,000350,000

Total liabilities 1,000,000600,000

Common shares 1,400,000 500,000

Retained earnings 2,600,000 1,200,000

Total shareholders' equity 4,000,000 1,700,000

Total liabilities and shareholders' equity Shs 5,000,000Shs 2,300,000

Additional information:

1. Padua accounts for its investment in Sorrento on the cost basis.

2. For the year ended December 31, 2008, Padua had separate - entity net income of Shs 530,000 and Sorrento had separate-entity net income of Shs215,000.

3. Dividends declared and paid during 2008 amounted to Shs235,000 for Padua and Shs100,000

for Sorrento.

4. In early 2006, Padua sold equipment to Sorrento for Shs330,000. At the date of the sale,

the equipment had a net book value of Shs180,000. The remaining useful life of the

equipment was 5 years. Sorrento amortizes on a straight-line basis with a full year

depreciation in the year of acquisition.

5. Sorrento regularly sells inventory to Padua. On December 31, 2007, Padua held

inventory of Shs200,000 that had been purchased from Sorrento. During 2008, Padua

purchased Shs1,300,000 from Sorrento. At December 31, 2008, Padua's inventory

included Shs80,000 that had been purchased from Sorrento. Sorrento's gross margin is

35% of selling price.

6. There has been no impairment of goodwill.

Required:

1. Determine the non-controlling interest in earnings of Sorrento for the year ending December 31, 2008.

2. Prepare the consolidated balance sheet for Padua as of December 31, 2008

20 marks

Question Two:

International Corporation founded a subsidiary in Sweden on December 31, 2005. At December 31, 2006, the Swedish subsidiary's balance sheet appeared as follows (in thousands of Swedish Krona):

Scandia Ltd.

Cash SK 450

Temporary investments (carried at market value) 260

Accounts receivable (net) 1,250

Inventory (lower of cost or market) 3,500

5,460

Property, plant and equipment (net) 12,650

Total assetsSK 18,110

Bank notes payable SK 2,000

Accounts payable 860

2,860

Long-term debt 8,600

11,460

Common shares (wholly-owned by International Corporation)1,000

Retained earnings 5,650

6,650

Total liabilities and shareholders' equity SK 18,110

At the balance sheet date, each Krona was worth CShs0.155. Historical exchange rate information is as follows:

EventCShs per Krona

Parent's investment in common shares 0.180

Long-term debt issued 0.175

Acquisition of PP&E 0.170

Acquisition of inventory 0.160

Bank loan obtained 0.165

Average rate for 2006 0.170

Average rate for 2006 net income (temporal) 0.168

Required:

1. Translate the Swedish subsidiary's balance sheet, assuming that the subsidiary is an integrated foreign operation.

2. Translate the Swedish subsidiary's balance sheet, assuming that the subsidiary is a self-sustaining foreign operation.

3. Under each assumption, what is the net accounting exposure to exchange rate changes?

4. What impact will each method have on International Corporation's net income? Explain.

30 marks