Question 4.

Raven plc is a UK based company which manufactures drones. On 1 April 2020, it set up a wholly-owned subsidiary, Rook Ltd, in the country of Crowland. Crowlands currency is the Crowland dollar (C$). Raven subscribed for the 200 million C$1 shares by paying the nominal value in cash. Rook started trading on 1 April 2020 and prepares its financial statements using the Crowland dollar (C$). Raven plc uses pounds sterling () as its functional currency.

The summarised balance sheet and statement of profit or loss of Rook Ltd for the year ended 31 March 2021 were as follows:

Rook Ltd Balance Sheet at 31 March 2021	C$000
Non-Current Assets at NBV	230,000
Current Assets: Inventory Receivables Cash and cash equivalents	50,000 3,000 2,000
	285,000
Equity and Liabilities
Share capital (200m C$1 shares)	200,000
Retained earnings	42,000
Non-Current Liabilities	34,000
Current Liabilities:
Payables	9,000
	285,000
Rook Ltd Statement of Profit or Loss for the year ended 31 March 2021 C$000
Revenue	120,000
Cost of Sales	(48,000)
Gross Profit	72,000
Expenses	(30,000)
Net Profit	42,000

Exchange rates for the period were:

Date	C$/
1 April 2020	1/0.54
Average for the year ended 31 March 2021	1/0.52
31 March 2021	1/0.51

Additional information:

On 31 March 2021, Rook provided consultancy advice to a security company in the United States for US$1,500. The amount is outstanding at the year end and no entries have been made in the financial statements. The rate of exchange at that date was US$1:C$1.60.

Crowland does not follow international accounting standards and the following items may need adjustment before consolidation into Raven Group accounts:

Item 1. Rooks non-current assets include a machine used in the manufacture of drones. It has a carrying value of C$80,000 however the estimated net realisable value is C$60,000 and the net present value of expected future cashflows is C$70,000. (You are can ignore the effect on depreciation).

Item 2. Inventory has been valued at its net realisable value. The cost of inventory at 31 March 2021 was C$30,000.

Required:

• Analyse items 1 and 2, explaining the requirements under international accounting standards and showing any adjustments required in the financial statements. (You are not required to rewrite the balance sheet and statement of profit or loss). [10 marks]

1. Prepare the translated accounts of Rook Ltd for the year ended 31 March 2021, that will be used for the consolidated accounts of Raven plc. Make any necessary adjustments for the additional information and use the closing rate method. Show the foreign currency gain or loss. [15 marks]

Total 25 marks