Question
QUESTION #3 Y Company was incorporated on January 2 nd . 2013 and commenced active operations immediately. Common shares were issued on the date of
QUESTION #3
Y Company was incorporated on January 2nd. 2013 and commenced active operations immediately. Common shares were issued on the date of incorporation and no new common shares have been issued since then. On December 31, 2016 X Company purchased 70% of the outstanding common shares of Y for 1.5 million Swiss francs(SF).
Ys main operations are located in Switzerland. It manufactures and sells fine Swiss chocolates. X acquired control over Y so that it could use Ys extensive distribution network throughout Western Europe. Y will continue to manufacture and sell Swiss chocolates. However, it will also purchase and sell products manufactured by X in Canada. Y will have 90 days to pay for its purchases from X. During this time, Y should be able to resell the products in Europe and collect the receivables. Y does not expect to have to hire additional sales people to sell the product. It will need to build a new distribution centre in Europe. The facility will be financed with retained earnings of Y.
For the year ended December 31, 2020, the condensed income statement for Y was as follows:-
Y COMPANY
Condensed Income Statement
Year ended December 31,2020
(000s)
Sales and other revenueSF 8,500
Cost of goods sold...(4,000)
Amortization expense. (150)
Loss on decline in value of invent. (50)
Other expenses(3,800)
Net Income..SF 500
The comparative and condensed balance sheets for Y were as follows:-
Y COMPANY
Comparative and Condensed Balance Sheets
December 31,2020 and 2019
(000s)
2020..2019
Inventory..SF 200.SF 180
Capital assets, net1,700.1,850
Other assets..2,400..2,170
SF 4,300SF 4,200
Unearned revenue.. SF 195.SF 170
Other liabilities 2,400..2, 500
Common shares, no par value. 100. 100
Retained Earnings..1,605..1,400
SF 4,300SF 4,200
Additional Information:-
- The ending inventory was purchased evenly throughout the last month of both years. The ending inventory on December 31, 2020 costing Y SF250,000, was written down to its net realizable value of SF 200,000. Purchases and sales of merchandise inventory occurred evenly throughout the year.
- The capital assets on hand at the end of 2019 and 2020 were purchased by Y on May 26, 2016. There were no purchases or sales of capital assets during 2020.
- The unearned revenue represents deposits received from customers for chocolates to be delivered in the next month.
- The financial statements of Y must be translated into Canadian dollars so that they can be consolidated with the financial statements of X.
- Exchange rates were as follows:-
January 2, 2013.SF1 = $2.30
May 26,2016..SF1 = $2.60
December 31,2016SF1 = $2.70
Average, 2019SF1 = $2.90
Average Qtr. 4, 2019 SF1 = $3.00
Average December 2019.SF1 = $3.10
December 31, 2019..SF1 = $3.30
Average for 2020 .SF1 = $3.50
Average Qtr. 4,2020.SF1 = $3.70
Average December 2020 SF1 = $3.80
December 31, 2020 .SF1 = $3.90
Required:-
- Identify the two methods that can be used in translating the financial statements of Y. Provide two arguments in support of each method from the given data in the question
- Using the temporal method, calculate the Canadian dollar amount for the following items on the financial statements of Y
- Cost of goods sold for the year ended December 31,2020
- Amortization expense for the year ended December 31,2020
- Inventory, at the end of year 2020
- Unearned revenue, at the end of year 2020
- Common shares at end of year 2020
- Using the current rate method, identify the exchange rate to be used in translating the following items on the financial statements of Y
I Cost of Goods sold for the year ended December 31, 2020
ii. Amortization expense for the year ended December 31, 2020
Iii. Unearned revenue, at end of year 2020
Iv. Common shares, at end of year 2020
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