Problem 2
PART A
Arkenu’s functional currency is the Canadian dollar i.e. Arkenu is an integrated
foreign subsidiary.
(a)
Current monetary position
LD
Dollars
2,400,000)  0.52
1,248,000)
16,000,000)  0.58
9,280,000)
(10,840,000)  0.58
(6,287,200)
Other expenses
(2,360,000)  0.58
(1,368,800)
Dividends (7,000 + 1,600 - 7,480)
(1,120,000)  0.62
(694,400)
Balance Jan. 1, Yr. 1 (9,600 – 2,400 – 4,800)
Changes – Year 2
Sales
Purchases
1,680,000)
Calculated monetary position
929,600)
2,177,600)
Actual position – Dec. 31/ Year 2
(10,780 – 1,900 – 4,800)
4,080,000)  0.65
Exchange gain – Year 2
2,652,000)
474,400)
(b)
LD
Dollars
Income Statement – Year 2:
Sales
16,000,000)  0.58
9,280,000)
Cost of goods sold
Depreciation expense
Other expenses
Exchange gain
11,440,000 Note 1
6,401,200
600,000)  0.52
312,000)
2,360,000)  0.58
1,368,800)
)
(474,400)
14,400,000)
7,607,600)
1,600,000)
1,672,400)
2,400,000)  0.52
1,248,000)
Purchases
10,840,000)  0.58
6,287,200)
Inventory Dec. 31
(1,800,000)  0.63
(1,134,000)
Net income
Note 1:
Inventory Jan. 1
11,440,000
6,401,200
Retained Earnings Statement – Year 2
Bal. Jan. 1
7,000,000)  0.52
3,640,000)
Net income
1,600,000)
1,672,400)
8,600,000)
5,312,400)
Dividends
1,120,000)  0.62
7,480,000)
694,400)
4,618,000)
Balance Sheet – December 31, Year 2
Current monetary assets
Inventory
10,780,000)  0.65
7,007,000)
1,800,000)  0.63
1,134,000)
Plant and equipment (net)
6,600,000)  0.52
19,180,000)
3,432,000)
11,573,000)
Current liabilities
1,900,000)  0.65
1,235,000)
Bonds payable
4,800,000)  0.65
3,120,000)
Common shares
5,000,000)  0.52
2,600,000)
Retained earnings
7,480,000)
4,618,000)
19,180,000)
11,573,000)
PART B
Arkenu’s functional currency is the Libyan dinar i.e. Arkenu is a self-sustaining
foreign subsidiary.
(a)
LD
Net assets Dec. 31, Year 1
Net Income – Year 2
Dividends – Year 2
Dollars
12,000,000)  0.52
6,240,000)
1,600,000)  0.58
928,000)
(1,120,000)  0.62
(694,400)
12,480,000)  0.65
8,112,000)
Calculated net assets – Dec. 31, Year 2
6,473,600)
Actual net assets – Dec. 31, Year 2
Exchange gain – Year 2 (to be reported in other comprehensive income)
1,638,400)
(b)
Income Statement – Year 2
Sales
Cost of goods sold
Depreciation expense
Other expenses
Net income
16,000,000)  0.58
9,280,000
11,440,000 x 0.58
6,635,200
600,000)  0.58
348,000
2,360,000)  0.58
1,368,800
14,400,000)  0.58
8,352,000
1,600,000)  0.58
928,000
Other comprehensive income – unrealized exchange gain
1,638,400
Comprehensive income
2,566,400
Retained Earnings Statement – Year 2
Bal. Jan. 1
7,000,000  0.52
3,640,000
Net income
1,600,000  0.58
928,000
8,600,000
Dividends
1,120,000  0.62
7,480,000
4,568,000
694,400
3,873,600
Balance Sheet – December 31, Year 2
Current monetary assets
Inventory
10,780,000  0.65
7,007,000
1,800,000  0.65
1,170,000
6,600,000  0.65
Plant and equipment (net)
19,180,000
4,290,000
12,467,000
Current liabilities
1,900,000  0.65
1,235,000
Bonds payable
4,800,000  0.65
3,120,000
Common shares
5,000,000  0.52
2,600,000
Retained earnings
7,480,000
3,873,600
Accumulated foreign exchange adjustments
1,638,400
19,180,000
12,467,000
(c)
Investment cost
Book value of Arkenu’s net assets
LD 13,000,000
12,000,000
Acquisition differential
1,000,000
Allocated (FV – BV)  100%
Goodwill Dec. 31/ Year 1
–0–
LD 1,000,000  0.52
520,000
50,000  0.58
29,000
950,000  0.65
617,500
Impairment loss Year 2
December 31, Year 2
Calculated goodwill
491,000
Actual goodwill
Exchange gain
DM
126,500
Consolidated goodwill – Dec. 31/ Yr. 2
617,500
(d)
Translation of financial statements
Translation of goodwill
Total Year 2 exchange gains
1,638,400
126,500
1,764,900
This will appear as a separate component in consolidated shareholders' equity as accumulated
foreign exchange adjustments.
PART C
The answer to both of these 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
4,355
4,355
4,355
Total equity including AFEA
7,212
8,122
Total equity excluding AFEA
Debt to equity ratio
Net income
6,474
.60
.54
1,672
928
Comprehensive income
2,566
Total equity including AFEA
8,122
Total equity excluding AFEA
7,212
.67
6,474
Return on shareholders’ equity
23%
32%
14%
(i) The strongest solvency position is shown under B1 where the functional currency is the
Libyan dinar and shareholders’ equity includes the accumulated foreign exchange gains.
(ii) The best return on shareholders’ equity is also shown under B1 where the functional
currency is the Libyan dinar and comprehensive income, which includes the substantial
foreign exchange gain, is used as the numerator.
Problem 3
(a)
Canadian
AP
dollars
Net monetary position
Opening balance*
(195,000)
$1 = AP2.9
(67,241)
Sales
10,350,000)
$1 = AP3.25
Purchases (Note 1)
(6,530,000)
Note 1
(2,118,590)
Other expenses (Note 2)
(3,367,500)
$1 = AP3.25
(1,036,154)
Dividends
(200,000)
$1 = AP3.6
3,184,615)
(55,556)
(92,926)
Less closing balance**
57,500)
$1 = AP3.6
Exchange gain
15,972
108,898)
* AP350 + AP405 – AP250 – AP700
** AP820 + AP317.5 – AP380 – AP700
Note 1: 2,000,000 / 3 + 4,530,000 / 3.12
Note 2: 3,490,000 – 122,500
(b) Income Statement
Sales
Argentine
Canadian
peso
dollars
10,350,000)
$1 = AP3.25
3,184,615)
Cost of sales
(6,400,000)
Note 3
3,950,000)
Other expenses
(3,490,000)
(2,091,513)
1,093,102)
Note 4
1,078,395
14,707)
Foreign exchange gain
from part (a)
Net income
108,898
123,605
Note 3:
Opening inventory
600,000)
$1 = AP2.9*
$206,897
666,667
+ Purchase #1
2,000,000)
$1 = AP3.0
+ Purchase #2
4,530,000)
$1 = AP3.12
7,130,000)
– Closing inventory
Cost of sales
(730,000)
1,451,923
2,325,487
$1 = AP3.12
6,400,000)
(233,974)
2,091,513)
* Both plant assets and the opening inventory would be translated at the rate of exchange on
the date of acquisition by the parent.
Note 4:
Depreciation
Other expenses
(122,500)
$1 = AP2.9*
(42,241)
(3,367,500)
$1 = AP3.25
(1,036,154)
3,490,000
1,078,395
Problem 5
(a)
Translated cost
Pesos
Dollars
3,200,000  341 =
9,384
6,132,000  360 =
17,033
5,530,000  375 =
14,747
14,862,000
41,164
Translated net realizable value
12,100,000  392 =
30,867
The translated balance sheet would show the lower amount:
Inventory
30,867
The translated income statement would show
Loss from inventory write-down
(b)
Translated net realizable value
12,100,000  281 = $43,060
10,297
Because this amount is greater than translated cost, the inventory will appear on the balance
sheet at the cost of $41,164. The translated income statement will not show a write-down loss,
because the existing write-down loss will be reversed before being translated. The result will be
inventory valued at cost on the translated statements, but at net realizable value on the original
statements.
Problem 6
(a)
MAPLE LIMITED
Balance Sheet
December 31, Year 10
€
Rate
C$
Cash
100,000
1.65
165,000
Accounts receivable
200,000
1.65
330,000
Inventory
180,000
1.63
293,400
120,000
1.60
192,000
1,100,000
1.42
1,562,000
Equipment — net
1,700,000
2,542,400
Accounts payable
250,000
1.65
412,500
Bonds payable
700,000
1.65
1,155,000
Common shares
100,000
1.42
142,000
Retained earnings (to balance)
650,000
832,900
1,700,000
2,542,400
(b)
Bonds payable, end of year
700,000
1.65
1,155,000
Bonds payable, beginning of year
700,000
1.56
1,092,000
Exchange loss
63,000
The exchange loss would be reported as a foreign exchange loss on the income statement for
the year ended December 31, Year 10.
(c) Items subject to exchange rate exposure (= shareholders’ equity):
Beginning
710,000
1.56
1,107,600
Net income
200,000
1.59
318,000
(160,000)
1.61
(257,600)
Dividends
Calculated
Actual
1,168,000
750,000
1.65
Exchange gain (to be reported in other comprehensive income)
1,237,500
69,500
(d)
No, this is not a valid statement. The equipment is reported at historical cost less accumulated
amortization in the euro balance sheet. When a historical cost in euros is multiplied by a closing
rate, the resulting amount is not a current value of the equipment in Canadian dollars. To get a
current value in Canadian dollars, the current value in euros of the equipment is multiplied by
the closing rate.