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Cadbury Company ("Cadbury") is a foreign subsidiary of Kraft Foods Corporation (a Canadian company). It was acquired on December 31, 2018. Cadbury has been manufacturing chocolates and other retail items for 100 years. Its sales prices are determined by the tough competitive market in Switzerland. The chief financial officer of Cadbury has just emailed you the December 31, 2019 financial statements of Cadbury, which are in Swiss francs (CHF). CADBURY COMPANY Balance Sheets December 31, 2019 December 31, 2018 Cash CHF 200,000 CHF 150,000 Accounts receivable 250,000 225,000 Inventory 400,000 430,000 Equipment, net 1,350,000 900,000 CHF 2,200,000 CHF 1,705,000Accounts payable CHF 310,000 CHF 355,000 Bonds payable 500,000 500,000 Ordinary shares 1,100,000 600,000 Retained earnings 290,000 250,000 CHF 2,200,000 CHF 1,705,000 CADBURY COMPANY Statement of Income For the year ended December 31, 2019 Sales CHF 2,800,000 Cost of goods sold 2,300,000 Gross profit 500,000 Selling and administrative expenses 160,000 Bond interest expense 40,0002. Cadbury has been upgrading its equipment in recent years. On January 1, 2016, it disposed of all its old equipment and acquired CHF 1,200,000 of new equipment with an expected useful life of 12 years. On July 1, 2019, it acquired another CHF600,000 of new equipment with an expected useful life of 6 years. Cadbury amortizes all of its equipment on a straight-line basis, calculated monthly. 3. Cadbury partially financed its acquisition of equipment in 2015 by issuing CHF500,000 of 10-year, 8% bonds payable in Switzerland on January 1, 2015. Similarly, Cadbury partially financed its acquisition of equipment in 2019 by issuing CHF500,000 of ordinary shares in Switzerland on July 1, 2019. 4. Inventory on hand on December 31, 2018 and December 31, 2019 were purchased from respected Swiss suppliers evenly over the last 3 months of 2018 and 2019. 5. Dividends of CHF60,000 were declared and paid on December 15, 2019. 6. All sales, purchases, and other expenses were incurred evenly during the year. Required A) Should Cadbury be classified as self-sustaining or an integrated subsidiary? State three facts from the question to support your answer. (2 marks) B) Disregard your response to part (a) and translate Cadbury's 2019 statement of income, assuming that Cadbury's functional currency is the Canadian dollar (temporal method). As part of your solution, provide a detailed calculation of the foreign exchange gain or loss. (10 marks)C) Disregard your responses to parts (a) and (b), and translate the following December 31, 2019 accounts, assuming the Cadbury's functional currency is the Swiss francs (CHF) (current rate method). (6 marks) 1. Equipment 2. Bonds payable 3. Cumulative (other comprehensive income/loss) translation adjustment D) Since the current rate method uses the closing rate to translate equipment, the translated equipment amount should represent the fair value of the equipment in Canadian dollars. Do you agree or disagree? Briefly explain. (2 marks)Amortization 150,000 Income before income taxes 150,000 Income taxes 50,000 Net income CHF 100,000 Additional information 1. Exchange rates were as follows: January 1, 2015 CHF 1 = C$0.60 January 1, 2016 CHF 1 = C$0.63 Average for Oct. 1 - Dec. 31, 2018 CHF1 = C$0.65 December 31, 2018 CHF 1 = C$0.70 Average for 2019 CHF1 = C$0.74 July 1, 2019 CHF 1 = C$0.75 Average for Oct. 1 - Dec.31, 2019 CHF1 = C$0.76 December 15, 2019 CHF 1 = C$0.78 December 31, 2019 CHF 1 = C$0.80
