QUESTION 5 13 points Save Answer On January 1, Year 2, P Ltd paid $300,000 for 100% of the outstanding shares of S Ltd., a foreign subsidiary. S Ltd. has full autonomy and operates in an industry different to that of the parent with all its suppliers and customers residing outside Canada with no business relation with P Ltd. On the date of acquisition, S's fair values approximated its book values. Both companies have December 31 year-end. S's financial statements for Year 7 are shown below: Balance Sheet As at December 31, Year 7 (in FC) Current Monetary Assets 500,000 Inventory 120,000 Plant and Equipment (Net) 380,000 Total Assets 1,000,000 Current Liabilities 170,000 Loan Payable 300,000 Common Stock 200,000 Retained Earnings 330,000 Total Liabilities and Equity I 1,000,000 Income Statement For the Year Ended December 31, Year 7 (in FC) Sales 700,000 Inventory, January 1, Year 7 70,000 Purchases 300,000 Inventory, December 31, Year 7 (120,000) Cost of Goods Sold 250,000 Depreciation Expense 100,000 Other Expenses 150.000 500,000 Net Income 200.000 Other information: S declared and paid FC 50,000 in dividends on September 30, Year 7 when the exchange rate was 1FC=1.36 CDN; The inventories on hand at the end of year 7 were purchased when the exchange rate was 1FC = $1.35 CDN; Depreciation Expense Other Expenses 100,000 150,000 500,000 200,000 Net Income Other information: S declared and paid FC 50,000 in dividends on September 30, Year 7 when the exchange rate was 1FC=1.36 CDN; The inventories on hand at the end of year 7 were purchased when the exchange rate was 1FC = $1.35 CDN; . The inventories on hand at the end of Year 6 were purchased when the exchange rate was 1FC = $1.31 CDN; All Plant and Equipment in the books was purchased on June 30, Year 4 when exchange rate was 1FC = 1.29 CDN Balance of Net Monetary Assets on December 31, Year 6 was (170,000FC ) liability position. Balance of Net Assets on Dec 31, Year 6 was 380,000 FC Other Exchange Rates: January 1, Year 2 (date of acquisition): . December 31, Year 6: January 1, year 7: I December 31, year 7: Average for year 7: 1FC = $1.28 CDN 1FC = $1.31 CDN 1FC = $1.31 CDN 1FC = $1.37 CDN 1FC = $1.34 CDN a) From the information given, what would you say is the functional currency of S Ltd? Explain (4 marks) b) Assume S has same functional currency as that of P (Canadian $). What is the excange gain/loss on Dec 31, year 7? (7 marks) c) In which financial statement would it be reported? (2 marks) For the toolbar, press ALT+F10 (PC) or ALT+FN+F10 (Mac). QUESTION 5 13 points Save Answer On January 1, Year 2, P Ltd paid $300,000 for 100% of the outstanding shares of S Ltd., a foreign subsidiary. S Ltd. has full autonomy and operates in an industry different to that of the parent with all its suppliers and customers residing outside Canada with no business relation with P Ltd. On the date of acquisition, S's fair values approximated its book values. Both companies have December 31 year-end. S's financial statements for Year 7 are shown below: Balance Sheet As at December 31, Year 7 (in FC) Current Monetary Assets 500,000 Inventory 120,000 Plant and Equipment (Net) 380,000 Total Assets 1,000,000 Current Liabilities 170,000 Loan Payable 300,000 Common Stock 200,000 Retained Earnings 330,000 Total Liabilities and Equity I 1,000,000 Income Statement For the Year Ended December 31, Year 7 (in FC) Sales 700,000 Inventory, January 1, Year 7 70,000 Purchases 300,000 Inventory, December 31, Year 7 (120,000) Cost of Goods Sold 250,000 Depreciation Expense 100,000 Other Expenses 150.000 500,000 Net Income 200.000 Other information: S declared and paid FC 50,000 in dividends on September 30, Year 7 when the exchange rate was 1FC=1.36 CDN; The inventories on hand at the end of year 7 were purchased when the exchange rate was 1FC = $1.35 CDN; Depreciation Expense Other Expenses 100,000 150,000 500,000 200,000 Net Income Other information: S declared and paid FC 50,000 in dividends on September 30, Year 7 when the exchange rate was 1FC=1.36 CDN; The inventories on hand at the end of year 7 were purchased when the exchange rate was 1FC = $1.35 CDN; . The inventories on hand at the end of Year 6 were purchased when the exchange rate was 1FC = $1.31 CDN; All Plant and Equipment in the books was purchased on June 30, Year 4 when exchange rate was 1FC = 1.29 CDN Balance of Net Monetary Assets on December 31, Year 6 was (170,000FC ) liability position. Balance of Net Assets on Dec 31, Year 6 was 380,000 FC Other Exchange Rates: January 1, Year 2 (date of acquisition): . December 31, Year 6: January 1, year 7: I December 31, year 7: Average for year 7: 1FC = $1.28 CDN 1FC = $1.31 CDN 1FC = $1.31 CDN 1FC = $1.37 CDN 1FC = $1.34 CDN a) From the information given, what would you say is the functional currency of S Ltd? Explain (4 marks) b) Assume S has same functional currency as that of P (Canadian $). What is the excange gain/loss on Dec 31, year 7? (7 marks) c) In which financial statement would it be reported? (2 marks) For the toolbar, press ALT+F10 (PC) or ALT+FN+F10 (Mac)