Question 4 (20.5 marks) On January 1, 20X7, CP Co. (a Canadian company) purchased 80% of SF Co. (a U.S. company) at a cost of US$50,000 The book values of SF's net assets were equal to their fair market values on this date except for the building, which had a fair market value of US$65,000 and a remaining useful life of 10 years. This building was purchased by SF on January 2, 20X3, the date SF Co. was incorporated and all its common shares issued. Goodwill was not impaired in 20x7 The statement of financial position of SF in U.S. dollars on January 1, 20X7, is as follows: SF Co. Statement of financial position As at January 1, 20x7 Cash 5,000 Accounts receivable 15,000 Inventory (purchased Dec. 17, 20X6) 5,000 Building (net) 55,000 80.000 Current liabilities 18,000 Bonds payable 25,000 Common shares 10,000 Retained earnings 27 000 80.000 On July 1, 20X7, SF purchased machinery at a cost of US$30,000. The machinery has a 10-year useful life with zero residual value. Straight-line depreciation is appropriate. The following exchange rates were in effect during 20x7: January 2, 20X3 US$1 = $1.32 December 17, 20X6 US$1 = $1.37 January 1, 20X7 US$1 = $1.40 March 1, 20X7 US$1 = $1.41 July 1, 20X7 US$1 = $1.42 December 31, 20X7 US$1 = $1.39 20X7 average US$1 = $1.38 The financial statements of SF for December 31, 20X7, are reported below. SF Co. Statement of financial position As at December 31, 20X7 SF (US$) Cash 6,000 Accounts receivable 12,500 Inventory (purchased March 1, 2007) 7,000 Machinery (net) 28,500 Building (net) 49.500 103.500 Current liabilities Bonds payable Common shares Retained earnings, Dec 31 20,000 25,000 10,000 48,500 103.500 SF Co. Statement of comprehensive income For the year ended December 31, 20x7 Sales Cost of goods sold Depreciation Other expenses 76,500 20,000 7,000 26.000 23.500 Assume that expenses have been incurred evenly throughout the year. SF does not have any balances related to accumulated other comprehensive income, where applicable. When SF declares dividends for a particular year, it always does so on December 31 Required: a) Assuming that SF's functional currency is the Canadian dollar: i. Calculate the foreign exchange gain or loss on net monetary items for 20x7. (5.5 marks) ii. Translate the statement of comprehensive income for the year ended December 31, 20x7.(2.5 marks) iii. Reconcile the change in translated retained earnings for the year ended December 31, 20x7.(1 mark) iv. Translate the statement of financial position for the year ended December 31, 20x7. (3.5 marks) b) Assuming that SF's functional currency is the U.S. dollar: i. Calculate the foreign exchange gain or loss on net assets for 20x7. (4 marks) ii. Translate the statement of comprehensive income for the year ended December 31, 20X7. (2 marks) iii. Translate the statement of financial position for the year ended December 31, 20x7. (2 marks)
