Solutions - Chapter 11

Problem 11-1
(a) The inventory must be reported at the lower of cost and net realizable value (LC&NRV) for
all situations. The inventory would be reported at €21,000 on Patras’s balance sheet before
translation
(b) After translation, the inventory would be reported on Patra’s balance sheet at
i. Functional currency is the Euro. Implies PCT method:
NRV x closing rate: €21,000 x 1.31 = $27,510;
ii. Functional currency is the Canadian dollar. Implies FCT method:
cost in $ = €22,000 x 1.23 = $27,060; NRV in $ = €21,000 x 1.31 = $27,510;
Since cost is lower than NRV, the writedown in € is reversed and inventory is stated at
cost = $27,060
(c) The parent’s own inventory would have to be carried at LC & NRV = $44,000
i. $44,000 + $27,510 = $71,510
ii. $44,000 + $27,060 = $71,060

Problem 11-2
(a)
Since the Canadian dollar is the functional currency, use the FCT method.
Exchange gain calculation

Net monetary position

SSP Cdn$
* Balance Jan 1, Year 4 (5,525,000) /104 (53,125))
Changes – Year 2
Sales 12,500,000) /110 113,636)
Purchases (4,750,000) /110 (43,182)
Selling and admin expenses (1,375,000) /110 (12,500)
Interest expenses (500,000) /110 (4,545)
Income taxes (1,732,500) /110 (15,750)
Dividends (500,000) /110 (4,545)
Calculated monetary position (20,011))
**Actual monetary position (1,882,500)) /116 (16,228))
Exchange gain – Year 4 3,783)

*(5,250,000) = 300,000+900,000 – 2,725,000 – 4,000,000

**(1,882,500) = 1,950,000+1,450,000 – 1,282,500-4,000,000

(b)
Income statement –Year 4
SSP Cdn$

Sales 12,500,000 /110 113,636

Cost of goods sold 4,500,000 calc* 41,350
Selling and admin expenses 1,375,000 /110 12,500
Amortization 725,000 /100 7,250
Other expenses 500,000 /110 4,545
Income taxes 1,732,500 /110 15,750
Exchange gain (3,783)
Total expenses 8,832,500 77,612
Profit 3,667,500 36,024

* Calc. of cost of goods sold

Inventory – Year 3 1,250,000 /107 11,682
Add purchases) 4,750,000 /110 43,182
Less ending Inventory – Year (1,500,000) /111 (13,514)
4,500,000 41,350)

(c)
Exchange gain/loss – PCT method – Year 4
*Net assets. Jan 1, Year 4 9,500,000) /104 91,346
Profit 3,667,500) /110 33,341
13,167,500) 124,687)
Dividends 500,000) /110 4,545)
Calculated net assets 120,142
**Actual net assets 12,667,500 /116 109,203

Exchange loss (10,939))

*9,500,000 = 6,000,000+3,500,000
**12,667,500 = 6,000,000+6,667,500

Problem 11-4
a)
The following factors indicate that the Canadian dollar is the functional currency: EVA sells and
distributes equipment manufactured by the parent company, PAL. PAL finances EVA’s
purchases of PAL’s equipment because PAL allows 90 days for EVA to pay and EVA will have
sold the equipment and received the money from their customers by then. The following factors
indicate that the Euro is the functional currency:
EVA continues to sell its equipment in Europe
EVA will construct a new distribution centre and finance it with EVA’s own retained earnings
b)
i) Cost of goods sold
Euro Rate $
Beginning inventory 335,000 1.57 525,950
Purchases (Note) 2,347,700 1.53 3,591,981
Available for sale 2,682,700 4,117,931
Ending inventory before write down 392,200 1.51 592,222
Cost of goods sold 2,290,500 3,525,709

Note: 2,290,500 + 392,200 – 335,000 = 2,347,700

ii) Depreciation expense 186,600 1.69 315,354

iii) Inventory 361,800 1.50 542,700*
iv) Unearned revenue 484,000 1.52 735,680
v) Ordinary shares 100,000 1.69 169,000
* The closing rate is used to derive the market value in Canadian dollars under the lower-of-
cost-and-market principle.
c) The main factors causing the difference in the foreign exchange gains/losses are as
follows: the decline in foreign currency reduces the Canadian dollar amount of assets and
liabilities after they are translated at the closing rate. Under the FCT method, there are more
liabilities than assets translated at the closing rate; this will result in exchange gains.
Under the PCT method, there are more liabilities than assets translated at the closing rate; this
will result in exchange losses

Problem 11-5
(a)
€ Rate C$
(i) Accounts receivable 197,000 / 0.80 246,250
(ii) Inventory 255,000 / 0.79 322,785
(iii) Equipment 150,000 / 0.60 250,000
200,000 / 0.70 285,714
(iv) Accumulated amortization
200,000 (1/8 × 2) 50,000 / 0.70 71,429
(420,000 – 50,000) 370,000 / 0.60 616,667
(v) Common shares 600,000 / 0.60 1,000,000

(b)
€ Rate C$
(i) Cost of goods purchased 1,080,000 / 0.76 1,421,053
(ii) Amortization expense 130,000 / 0.76 171,053
(iii) Inventory 255,000 / 0.80 318,750
(iv) Common shares 600,000 / 0.60 1,000,000

(c) Gioco’s only working capital item that is translated at different rates under the two translation
methods is inventory. Since inventory is higher in part a), Gioco’s translated financial
statements would show the highest current ratio if the Canadian dollar is Gioco’s functional
currency.

(d)
Shareholders’ equity, beginning of year 900,000 / 0.70 1,285,714
Net income 450,000 / 0.76 592,105
Dividends paid (300,000) / 0.70 (428,571)
Shareholders’ equity, end of year 1,449,248
Actual shareholders’ equity, end of year 1,050,000 / 0.80 1,312,500
Exchange adjustment to be reported in other comprehensive income 136,748

Problem 11-6
(a) (i)
Retained earnings Dec. 31, Year 1 US 7,190,000)
Profit – Year 2 3,210,000)
10,400,000)
Retained earnings Dec. 31, Year 2 7,670,000)
Dividends Year 2 US 2,730,000)

Net monetary position

US$ Cdn$
Balance Jan 1, Year 2
(US$ 4,890 + 1,090 – 4,990 – 2,590) (1,600,000))6333  1.10
(1,760,000))
Changes – Year 2
Sales 49,000,000)  1.08 52,920,000)
Purchases (38,220,000)  1.08 (41,277,600)
Other expenses (6,270,000)  1.08 (6,771,600)
Dividends (2,730,000)  1.07 (2,921,100)
Calculated monetary position 180,000 189,700)
Actual monetary position
(US$ 6,290 + 970 – 4,990 – 2,090) 180,000)  1.05 189,000)
Exchange loss – Year 2 (700))

(a) (ii)
Income statement –Year 2
US$ Cdn$

Sales 49,000,000  1.08 52,920,000)

Cost of purchases 38,220,000 x 1.08 41,277,600
Change in inventory 600,000 calc* 895,600
Depreciation expense 700,000  1.10 770,000)
Other expenses 6,270,000  1.08 6,771,600)
Exchange loss 700
45,790,000 49,715,500)
Profit 3,210,000 3,204,500

* Calc. of change in inventory

Inventory – Year 1 6,490,000  1.10 7,139,000)
Inventory – Year 2 5,890,000  1.06 6,243,400)
600,000 895,600)

Retained Earnings Statement – Year 2

Bal. Jan 1 7,190,000)  1.10 7,909,000)
Profit 3,210,000) 3,204,500
10,400,000) 11,113,500)
Dividends 2,730,000)  1.07 2,921,100)
Bal. Dec 31 7,670,000) 8,192,400)

Statement of Financial Position – December 31, Year 2

Plant and equipment (net) 6,790,000)  1.10 7,469,000)
Inventory 5,890,000)  1.06 6,243,400
Accounts receivable 6,290,000)  1.05 6,604,500)
Cash 970,000)  1.05 1,018,500)
19,940,000) 21,335,400)

Ordinary shares 5,190,000)  1.10 5,709,000)

Retained earnings 7,670,000) 8,192,400)
Bonds payable 4,990,000)  1.05 5,239,500
Current liabilities 2,090,000)  1.05 2,194,500)
19,940,000) 21,335,400)
(b) (i) US$ Cdn$
Net assets Year 1 12,380,000)  1.10 13,618,000)
Profit – Year 2 3,210,000)  1.08 3,466,800)
Dividends – Year 2 (2,730,000)  1.07 (2,921,100)
Calculated net assets ) 14,163,700)
Actual net assets – Year 2 12,860,000)  1.05 13,503,000)
Exchange loss – Year 2 (to be reported in other comprehensive income) 660,700)

(b) (ii)
Sales 49,000,000  1.08 52,920,000
Cost of purchases 38,220,000  1.08 41,277,600
Change in inventory 600,000 x 1.08 648,000
Depreciation expense 700,000  1.08 756,000
Other expenses 6,270,000  1.08 6,771,600
Total 45,790,000 49,453,200
Profit 3,210,000  1.08 3,466,800
Other comprehensive income (loss) – unrealized exchange gain (loss) (660,700)
Comprehensive income (loss) 2,806,100

Retained Earnings Statement – Year 2

Bal. January 1 7,190,000  1.10 7,909,000)
Profit 3,210,000 x 1.08 3,466,800)
10,400,000 11,375,800)
Dividends 2,730,000  1.07 2,921,100)
Bal. December 31 7,670,000 8,454,700)

Statement of Financial Position – December 31, Year 2

US$ Cdn$
Plant and equipment (net) 6,790,000  1.05 7,129,500)
Inventory 5,890,000  1.05 6,184,500
Accounts receivable 6,290,000  1.05 6,604,500)
Cash 970,000  1.05 1,018,500)
) 19,940,000 20,937,000)

Ordinary shares 5,190,000  1.10 5,709,000)

Retained earnings 7,670,000 8,454,700)
Accumulated foreign exchange adjustments (660,700)
Bonds payable 4,990,000  1.05 5,239,500)
Current liabilities 2,090,000  1.05 2,194,500)
19,940,000 20,937,000)

(c)
The answer to both questions depends on whether other comprehensive income (OCI) and
accumulated foreign exchange adjustments (AFEA) are included (B1 below) or excluded (B2
below) from the calculations as indicated by the following:
A B1 B2
Total debt 7,434 7,434 7,434
Total equity including AFEA 13,901 13,503
Total equity excluding AFEA 14,164
Debt to equity ratio .53 .55 .52

Profit 3,205 3,467

Comprehensive income 2,806
Total equity including AFEA 13,901 13,503
Total equity excluding AFEA 14,164
Return on shareholders’ equity 23.1% 20.8% 24.5%

(i) The strongest solvency position is shown under B2 where the functional currency is the US
dollar and shareholders’ equity excludes the accumulated foreign exchange losses.

(ii) The best return on shareholders’ equity is shown under B2 where the functional currency is
the US dollar but the profit rather than comprehensive income is used as the numerator.

Problem 11-7
Cost of 40% investment in Sandora US$7,400,000
Carrying amounts of Sandora’s net assets:
 Ordinary shares US$5,190,000
Retained earnings 7,190,000
Total shareholders’ equity 12,380,000
% acquired 40% 4,952,000
Acquisition differential, December 31, Year 1 2,448,000
Allocation:
Plant (40% x 900,000) 360,000
Balance—Unrecognized Goodwill US$2,088,000

Balance Changes Balance

Dec. 31, Year 1 Year 2 Dec. 31, Year 2
Plant US$ 360,000 US$(24,000) US$ 336,000

Goodwill 2,088,000 (600,000) 1,488,000

US$2,448,000 US$(624,000) US$1,824,000

(a) Use rate of US$1 = C$1.10 for all items in acquisition differential because all items are
measured at historical cost.
Balance Changes Balance

Dec. 31, Year 2 Dec. 31, Year 2

Year 1
Plant C$ 396,000 C$ (26,400) C$ 369,600
Goodwill 2,296,800 (660,000) 1,636,800
C$2,692,800 C$(686,400) C$2,006,400

(b) If Sandora’s functional currency is the US dollar

Relevant Rates: Dec 31, Year 1 is US$1 = C$1.10;
Average for Year 2 is US$1 = C$1.08;
Dec 31, Year 2 is US$1 = C$1.05
Balance Changes Unadjusted Adjusted Balance Exchange
(using Year I end rate) (using average rate) Balance (using Year 2 end ) Adjustment
Dec. 31, Year 1 Year 2 Dec. 31, Year 2 Dec. 31, Year 2
Plant C$ 396,000 C$ (25,920) C$ 370,080 C$352,800 C$(17,280)
Goodwill 2,296,800 (648,000) 1,648,800 1,562,400 (86,400)
C$2,692,800 C$(673,920) C$2,018,880 C$1,915,200 C$(103,680)

Journal entries (Credits in brackets) C$ as FC US$ as FC

Dec. 31, Year 1
Investment in Sandora (US$ 7,400 x 1.1) 8,140,000 8,140,000
Cash (8,140,000) (8,140,000)

Sept. 30, Year 2 (Receipt of dividends)

Cash (C$ 2,921,100 x 40%) 1,168,440 1,168,440
Investment in Sandora (1,168,440) (1,168,440)
Dec. 31, Year 2 (Record share of income)
Investment in Sandora (C$ 3,204,500 x 40%)1,281,800 1,122,440
OCI – exchange adjustment (C$ 660,700 x 40%) 264,280
Equity method income (C$ 3,204,500 x 40%) (1,281,800)
Equity method income (C$ 3,466,800 x 40%) (1,386,720)

Equity method income 686,400 673,920

OCI – exchange adjustment 103,680
Investment in Sandora (686,400) (777,600)
Report changes to acquisition differential

Problem 11-8
(a) Assume that Astral’s functional currency is the Canadian dollar, this implies use of the FCT
method.
Balance Sheet – December 31, Year 9
Cash and cash equivalents LYD 861,000)  0.65 $559,650)
Accounts receivable 750,000  0.65 487,500
Inventory 898,000)  0.63 565,740)
Plant and equipment (net) 1,600,000)  0.52 832,000)
LYD 4,109,000) $2,444,890)

Accounts payable LYD 805,000)  0.65 $523,250)

Notes payable 200,000)  0.65 130,000)
Common shares 1,000,000)  0.74 740,000)
Retained earnings 2,104,000) Plug 1,051,640)
LYD 4,109,000) $2,444,890)

Retained Earnings Statement – Year 9

Bal. Jan. 1 LYD 1,963,000) given $1,040,000)
Net income 1,041,000 plug 569,640)
3,004,000) 1,609,640)
Dividends 900,000*)  0.62 558,000)
Closing retained earnings LYD 2,104,000) B/S above $1,051,640)

*Dividend = Op. RE + NI – CL RE
= 1,963,000 + 1,041,000 – 2,104,000
= 900,000

LYD Dollars
Income Statement – Year 9:
Sales LYD 6,206,000)  0.58 $3,599,480)
Cost of goods sold 4,461,000 Note 1 2,485,640
Depreciation expense 200,000)  0.52 104,000)
Other expenses 504,000)  0.58 292,320)
Exchange loss ) 147,880
5,165,000) 3,029,840)
Net income LYD1,041,000) $569,640)

Note 1:
Inventory Jan. 1 LYD 1,421,000)  0.54 $767,340)
Purchases 3,938,000)  0.58 2,284,040)
Inventory Dec. 31 (898,000)  0.63 (565,740)
LYD 4,461,000 $2,485,640

(b) Assume that Astral’s functional currency is the Libyan dinar, this implies use of the PCT
method.

LYD Dollars
Income Statement – Year 9:
Sales LYD 6,206,000)  0.58 $3,599,480)
Cost of goods sold 4,461,000  0.58 2,587,380
Depreciation expense 200,000)  0.58 116,000)
Other expenses 504,000)  0.58 292,320)
5,165,000) 2,995,700)
Net income LYD 1,041,000) $603,780)
Retained Earnings Statement – Year 9
Bal. Jan. 1 LYD 1,963,000) given $1,230,000)
Net income 1,041,000  0.58 603,780)
3,004,000) 1,833,780)
Dividends 900,000)  0.62 558,000)
Closing retained earnings LYD 2,104,000) B/S above $1,275,780)

Balance Sheet – December 31, Year 9

Cash and cash equivalents LYD 861,000)  0.65 $559,650)
Accounts receivable 750,000  0.65 487,500
Inventory 898,000)  0.65 583,700)
Plant and equipment (net) 1,600,000)  0.65 1,040,000)
LYD 4,109,000) $2,670,850)

Accounts payable LYD 805,000)  0.65 $523,250)

Notes payable 200,000)  0.65 130,000)
Common shares 1,000,000)  0.74 740,000)
Retained earnings 2,104,000 From RE 1,275,780
OCI - Exchange gain ) Plug 1,820)
LYD 4,109,000) $2,670,850)

Problem 11-12
PART A Functional currency is the Canadian dollar
RUB Rate Dollars
Cost of sales:
Inventory Jan. 1/ yr. 11 525,000 28.00 18,750
Purchases* 1,512,000 27.90 54,194
2,037,000 72,944
Inventory Dec. 31/ yr. 11 357,000 28.04 12,732
1,680,000 60,212

RUB
* Inventory Jan. 1/ yr.11 525,000
Inventory Dec. 31/ yr.11 357,000
Decrease in inventory 168,000
Cost of sales 1,680,000
Purchases, yr. 11 1,512,000

Equipment
Purchased yr. 11 125,000 28.18 4,436
On hand Jan. 1/ yr. 11 358,000 28.00 12,786
Equipment balance, Dec. 31/ yr. 11 483,000 17,222

Year 11 equipment depreciation

Year 11 purchase 25,000 28.18 887
On hand Jan. 1/ yr. 11 38,000 28.00 1,357
63,000 2,244

Accumulated depreciation
Year 11 purchase 25,000) 28.18 887
On hand Jan. 1/ yr.11 143,000) 28.00 5,107
168,000) 5,994

Net monetary position RUB Dollars

Balance Jan. 1/ yr.11 (910,000) 28.00 (32,500)
Changes Year 11
Sales 3,150,000) 27.90 112,903)
Purchases – inventory (1,512,000) 27.90 (54,194)
– equipment (125,000) 28.18 (4,436)
Other expenses (840 – 73 – 63) (704,000) 27.90 (25,233)
Dividends (450,000) 28.02 (16,060)
359,000) 12,980)

Calculated position Dec. 31/ yr. 11 (19,520)

Actual position Dec. 31/ yr. 11
Cash 106,000)
 Accounts receivable 167,000)
273,000)
Accounts payable (210,000)
Bonds payable (500,000)
Misc. payables (114,000) (551,000) 28.02 (19,665)
Exchange loss (145))

Income Statement – Year 11

Sales 3,150,000 27.90 112,903)
Cost of sales 1,680,000 calc. 60,212)
Depreciation – building 73,000 28.00 2,607)
– equipment 63,000 calc. 2,244)
Other expenses 704,000 27.90 25,233)
Exchange loss ) 145)
2,520,000 90,441)
Net income 630,000 22,462)

Retained Earnings Statement – Year 11 RUB Dollars

Balance Jan. 1 470,000) 28.00 16,786)
Net Income 630,000) 22,462)
1,100,000) 39,248)
Dividends 450,000) 28.02 16,060)
Balance Dec. 31 650,000) 23,188)

Balance Sheet – December 31, Year 11

Cash 106,000) 28.02 3,783)
Accounts receivable 167,000) 28.02 5,960)
Inventories 357,000) 28.04 12,732)
Land 430,000) 28.00 15,357)
Buildings 1,460,000) 28.00 52,143)
Accumulated depreciation (511,000) 28.00 (18,250)
Equipment 483,000) calc. 17,222)
Accumulated depreciation (168,000) calc. (5,994)
2,324,000) 82,953)
Accounts payable 210,000) 28.02 7,495)
Miscellaneous payables 114,000) 28.02 4,069
4,069
Bonds payable 500,000) 28.02 17,844)
Common shares 850,000) 28.00 30,357)
Retained earnings 650,000) 23,188)
2,324,000 82,953

PART B Functional currency is the Russian ruble

RUB Dollars
Net assets – Jan. 1/ yr. 11 (850 + 470) 1,320,000) 28.00 47,143
Net income – Year 11 630,000) 27.90 22,581
Dividends (450,000) 28.02 (16,060)
Calculated net assets – Dec. 31/ yr. 11 53,664
Actual net assets – Dec. 31/ yr. 11 1,500,000) 28.02 53,533
Exchange loss – Year 11(to be reported in other comprehensive income) 131

Retained Earnings – Dec. 31/ yr. 11

Bal. Jan. 1 470,000) 28.00 16,786
Net income 630,000) 27.90 22,581
Dividends (450,000) 28.02 (16,060)
Bal. Dec. 31 650,000) 23,307

Balance Sheet – December 31, Year 11

Cash 106,000 28.02 3,783
Accounts receivable 167,000 28.02 5,960
Inventories 357,000 28.02 12,741
Land 430,000 28.02 15,346
Buildings 1,460,000 28.02 52,106
Accumulated depreciation (511,000) 28.02 (18,237)
Equipment 483,000 28.02 17,238)
Accumulated depreciation (168,000) 28.02 (5,996)
2,324,000 82,941)
Accounts payable 210,000 28.02 7,495)
Miscellaneous payables 114,000) 28.02 4,069)
Bonds payable 500,000) 28.02 17,844)

Shareholders' equity
Common shares 850,000) 28.00 30,357)
Retained earnings 650,000) 23,307)
Accumulated foreign exchange adjustments (loss) ) (131))
2,324,000) 82,941)
PART C
PART C
The PCT method does not produce a translated amount consistent with the way we normally
measure assets and liabilities. When the closing rate is applied to the historical cost in foreign
currency, the translated amount is not historical cost or current value in Canadian dollars. This
is a problem for inventory and property, plant and equipment, which are supposed to be
measured at historical cost.

Problem 11-13
(a) Sub’s functional currency is the Canadian dollar
(i) Net monetary position B$ Dollars
Balance Jan. 1, Yr. 1 B$2,376,000)  1/0.52 $4,569,231
(9,640K – 2,424K – 4,840K)
Changes – Year 2
Sales 16,122,000  1/0.58 27,796,552
Purchases (10,896,000)  1/0.58 (18,786,207)
Other expenses (2,093,000)  1/0.58 (3,608,621)
Dividends (7,084K + 2,045K – 7,932K) (1,197,000)  1/0.62 (1,930,645)
1,936,000 3,471,079
Calculated monetary position 4,312,000 8,040,310
Actual position – Dec. 31/ Year 2
(11,112K – 1,960K – 4,840K) B$4,312,000)  1/0.65 6,633,846
Exchange loss – Year 2 $1,406,464
(ii)
B$ Dollars
Income Statement – Year 2:
Sales B$16,122,000)  1/0.58 $27,796,552)
Cost of goods sold 11,452,000 Note 1 20,478,637
Depreciation expense 532,000)  1/0.52 1,023,077)
Other expenses 2,093,000)  1/0.58 3,608,621)
Exchange loss ) 1,406,464
14,077,000) 26,516,799)
Net income B$2,045,000) $1,279,753)

Note 1:
Inventory Jan. 1 B$2,412,000)  1/0.52 $4,638,462)
Purchases 10,896,000)  1/0.58 18,786,207)
Inventory Dec. 31 (1,856,000)  1/0.63 (2,946,032)
B$11,452,000 $20,478,637

Retained Earnings Statement – Year 2

Bal. Jan. 1 B$7,084,000)  1/0.52 $13,623,077)
Net income 2,045,000) 1,279,753)
9,129,000) 14,902,830)
Dividends (1,197,000))  1/0.62 (1,930,645))
B$7,932,000) $12,972,185))

Balance Sheet – December 31, Year 2

Current monetary assets B$11,112,000)  1/0.65 $17,095,385)
Inventory 1,856,000)  1/0.63 2,946,032)
Plant and equipment (net) 6,804,000)  1/0.52 13,084,615)
B$19,772,000) $33,126,032)

Current liabilities B$1,960,000)  1/0.65 $3,015,385)

Bonds payable 4,840,000)  1/0.65 7,446,154)
Ordinary shares 5,040,000)  1/0.52 9,692,308)
Retained earnings 7,932,000) 12,972,185)
B$19,772,000) $33,126,032)

Problem 11-15 (PARTIAL SOLUTION)

(a) i FCs Dollars

Cost of 90% of S Company 15,580)  1.10 $17,138

Implied value of 100% 17,311 x 1.10 19,042)
Carrying amount of S Company’s net assets 13,650  1.10 15,015)
Acquisition differential 3,661)  1.10 4,027)
Allocated:
Plant and equipment 2,000)  1.10 2,200)
Goodwill 1,661)  1.10 $1,827)

(i) The Canadian dollar is the functional currency

C = closing rate Dec. 31/4 Av = average rate year 4 H = historical rate
FCs Dollars

Net monetary position – Jan. 1/4 * (15,450))  1.10H $(16,995)

Sales 210,000)  1.16Av 243,600)
Purchases (132,600 + 12,100 – 9,100) (135,600)  1.16Av (157,296)
Other monetary expenses ** (65,200)  1.16Av (75,632)
Dividends (4,100)  1.22C (5,002)
Calculated position Dec. 31/4 (11,325))
Actual monetary position Dec. 31/4 *** (10,350)  1.22C (12,627))
Exchange loss – Dec. 31/4 $(1,302))

*11,100 – $10,550 – $16,000

**67,200 – depreciation expense of 20,000 / 10
***19,200 – 13,550 – 16,000

Translated Income Statement

 FC $
Sales 210,000)  1.16Av $243,600)
Cost of sales# (132,600) calc. (152,907)
Other expenses (67,200) calc. (77,832)
Exchange loss ) (1,302))
Profit 10,200 11,559
Retained earnings, Jan. 1 3,650)  1.10H 4,015)
Dividends (4,100)  1.22C (5,002)
Retained earnings, Dec. 31 9,750 $10,572 (a)

#
Cost of sales
Inventory Jan. 1 9,100)  1.10H $10,010)
Purchases 135,600)  1.16Av 157,296)
144,700) 167,306)
Inventory Dec. 31 (12,100))  1.19H (14,399))
Cost of sales – calc. 132,600) $152,907)

Other expenses
Depreciation (20,000 / 10 years) (2,000)  1.10H $(2,200)
Other expenses (65,200)  1.16Av (75,632)
(67,200) $(77,832)
Translated Balance Sheet
S Company – December 31 Year 4
FCs Dollars
Plant and equipment (net) 18,000)  1.10H $19,800)
Inventory 12,100)  1.19H 14,399)
Monetary assets 19,200)  1.22C 23,424)
49,300) $57,623)

Ordinary shares 10,000)  1.10H $11,000)

Retained earnings 9,750) see above 10,572)
Bonds payable 16,000)  1.22C 19,520)
Current liabilities 13,550)  1.22C 16,531)
49,300) $57,623)
Changes to acquisition differential schedule
Balance Jan. 1 Changes Balance
FCs Dollars Dollars Dec. 31/4

Plant and equipment (net) 2,000  1.10 $2,200 $(220) $1,980

Goodwill 1,661  1.10 1,827 * (110) 1,717
3,661  1.10 $4,027 $(330) $3,697
* Translation of impairment loss
FCs100 x 1.10 = $110

Calculation of consolidated profit – Year 4

P Company – profit $31,802
Less: Dividends from S Company (as recorded) (4,502)
27,300
S Company – profit 11,559
Less: Changes to acquisition diff.. (330)

11,229
Profit $38,529
Attributable to:
Shareholders of P Company ((27,300 + (90% x 11,229)) 37,406
Non-controlling interest (10% x 11,229) 1,123

Consolidated Income Statement - Year 4

Sales (411,800 + 243,600) $655,400
Cost of sales (206,400 + 152,907) (359,307)
Other expenses (178,100 + 77,832 + 220) (256,152)
Goodwill impairment loss (110)
Exchange loss (1,302)
(616,871)
Profit $38,529
Attributable to:
Shareholders of P Company 37,406
Non-controlling interest 1,123
Consolidated Retained Earnings Statement – Year 4
Balance Jan. 1 $39,298
Profit 37,406
76,704
Dividends (23,200)
Bal. Dec. 31 $53,504

Calculation of non-controlling interest – Dec. 31, Year 4

Dollars
Ordinary shares (FC10,000  1.10) $11,000)
Retained earnings (a) 10,572)
21,572
Add: undepleted acquisition differential 3,697

25,269
10%)
$2,527

Consolidated Statement of Financial Position

At Dec. 31, Year 4
Plant and equipment (net) (68,800 + 19,800 + 1,980) $90,580)
Goodwill 1,717 )
Inventory (34,400 + 14,399) 48,799)
Monetary assets (31,552 + 23,424) 54,976)
$196,072)

Ordinary shares $34,400)

Retained earnings 53,504)
Non-controlling interest 2,527
Bonds payable (46,500 + 19,520) 66,020)
Current liabilities (23,090 + 16,531) 39,621)
) $196,072)

(ii) The foreign-currency unit is the functional currency

FCs Dollars
Net assets – Jan. 1 13,650)  1.10H $15,015)
Profit – Year 1 10,200)  1.16Av 11,832)
Dividends – Year 1 (4,100)  1.22C (5,002)
Calculated net assets ) 21,845)
Actual net assets – Dec. 31/4 19,750)  1.22C 24,095)
Exchange gain – Year 1 (to be reported in other comprehensive income) $2,250)

Translated Income Statement

Sales 210,000)  1.16Av 243,600)
Cost of sales (132,600)  1.16Av (153,816)
Other expenses (67,200)  1.16Av (77,952)
Profit 10,200)  1.16Av 11,832

Other comprehensive income – unrealized exchange gain 2,250

Comprehensive income $14,082

Retained earnings, Jan 1 3,650 x 1.1 $4,015

Profit 10,200 calc 11,832
Dividends (4,100) x 1.22 (5,002)
Retained earnings, Dec 31 9,750 $10,845

Translated Balance Sheet

S Company – December 31/4
FCs Dollars
Plant and equipment (net) 18,000)  1.22C $21,960)
Inventory 12,100)  1.22C 14,762)
Monetary assets 19,200)  1.22C 23,424)
49,300) $60,146)

Ordinary shares 10,000)  1.10H 11,000)

Retained earnings 9,750) calc 10,845)
Accumulated foreign exchange adjustments ) 2,250)
Bonds payable 16,000)  1.22C 19,520)
Current liabilities 13,550)  1.22C 16,531)
49,300) $60,146)

Changes to acquisition differential schedule

Bal. Jan. 1 Changes Bal. Dec. 31 Rate Dollars
FCs FCs FCs
Plant and equipment (net) 2,000) (200) 1,800 x 1.22 $2,196
Goodwill 1,661) (100)) 1,561 x 1.22 1,904
3,661 (300) $3,361 $4,100

Translated changes to acquisition differential schedule

FCs Dollars
Balance January 1 3,661 x 1.10H $4,027)
Changes – Plant and equip. (200)  1.16Av (232)
Goodwill impairment loss (100)  1.16Av (116)
Calculated acquisition differential ) 3,679)
Actual acquisition differential 3,361)  1.22C 4,100)
Exchange gain $421)
Calculation of consolidated accumulated foreign exchange adjustments
Exch. Consolidated
gain 10%** bal. sheet
From translation of S Company $2,250 $225 $2,025
From translation of acquisition differential 421 42 379
Total – Year 4 $2,671 $267 $2,404

**10% non-controlling interest

Calculation of consolidated profit – Year 4

P Company – profit $31,802
Less: Dividends from S Company (4,502)
27,300
S Company – profit 11,832
Less: Changes to acquisition diff.
Plant and equipment (232)
Goodwill (116)
 11,484
Consolidated profit $38,784
Profit attributable to:
Shareholders of P Company 37,636
Non-controlling interest (10% x 11,484) 1,148

Consolidated Income Statement – Year 4

Sales (411,800 + 243,600) $655,400
Cost of sales (206,400 + 153,816) (360,216)
Goodwill impairment loss (116)
Other expenses (178,100 + 77,952 + 232) (256,284)
(616,616)
Profit 38,784
Other comprehensive income – unrealized exchange gain (2,250 + 421) 2,671
Comprehensive income $41,455

Profit attributable to:

Shareholders of P Company 37,636
Non-controlling interest (10% × 11,484) 1,148

Comprehensive income attributable to:

Shareholders of P Company 40,040
Non-controlling interest (10% × [11,484 + 2,671]) 1,415

Consolidated Retained Earnings Statement – Year 4

Balance Jan. 1 $39,298
Profit 37,636
76,934
Dividends (23,200)
Balance Dec. 31 $53,734

Calculation of non-controlling interest – Dec. 31, Year 4

Common shares (FC10,000  1.10) 11,000
Retained earnings (4,015 + 11,832 – 5,002) 10,845
Undepleted acquisition differential 4,100
Accumulated foreign exchange adjustments from translation of S Company (**) 2,250
28,195
10%
$2,819

**The NCI’s share of the OCI relating to the translation of the acquisition differential is included
in the undepleted acquisition differential.

Consolidated Statement of Financial Position

At Dec. 31, Year 4
Plant and equipment (net) (68,800 + 21,960 + 2,196) $92,956
Goodwill 1,904
Inventory (34,400 + 14,762) 49,162
Monetary assets (31,552 + 23,424) 54,976
$198,998

Common shares $34,400

Retained earnings 53,734
Accumulated foreign exchange adjustments 2,404
Non-controlling interest 2,819
Bonds payable (46,500 + 19,520) 66,020
Current liabilities (23,090 + 16,531) 39,621
$198,998
(b) Sub’s functional currency is the Bahamian dollar
(i)
B$ Dollars

Net assets Dec. 31, Year 1 B$12,124,000)  1/0.52 $23,315,385)

Net Income – Year 2 2,045,000)  1/0.58 3,525,862)
Dividends – Year 2 (1,197,000)  1/0.62 (1,930,645)
Calculated net assets – Dec. 31, Year 2 12,972,000 24,910,602)
Actual net assets – Dec. 31, Year 2 B$ 12,972,000)  1/0.65 19,956,923)
Exchange loss – Year 2 (to be reported in other comprehensive income) $4,953,679)

(ii)
Income Statement – Year 2
Sales B$16,122,000)  1/0.58 $27,796,552

Cost of goods sold 11,452,000 x 1/0.58 19,744,828

Depreciation expense 532,000)  1/0.58 917,241
Other expenses 2,093,000)  1/0.58 3,608,621
14,077,000)  1/0.58 24,270,690
Net income B$2,045,000)  1/0.58 3,525,862
Other comprehensive income – unrealized exchange loss (4,953,679)
Comprehensive loss $(1,427,817)

Retained Earnings Statement – Year 2

Bal. Jan. 1 $7,084,000  1/0.52 $13,623,077
Net income 2,045,000  1/0.58 3,525,862
9,129,000 17,148,939
Dividends (1,197,000)  1/0.62 (1,930,645)
$7,932,000 $15,218,294

Balance Sheet – December 31, Year 2

Current monetary assets $11,112,000  1/0.65 $17,095,385

Inventory 1,856,000  1/0.65 2,855,385
Plant and equipment (net) 6,804,000  1/0.65 10,467,692
$19,772,000 $30,418,462

Current liabilities 1,960,000  1/0.65 3,015,385

Bonds payable 4,840,000  1/0.65 7,446,154
Ordinary shares 5,040,000  1/0.52 9,692,308
Retained earnings 7,932,000 15,218,294
Accumulated foreign exchange adjustments (4,953,679)
$19,772,000 $30,418,462