Problem 11-2 Cost of 40% investment in Sandora Carrying amounts of Sandora s net assets: Ordinary shares US$5,000,0 00 Retained earnings 7,000,000 Total shareholders equity 12,000,000 US$6,400,000 % acquired 40% 4,800,000 Acquisition differential, December 31, Year 1 1,600,000 Allocation: Plant (40% x 600,000) 240,000 Balance Goodwill US$1,360,000 Balance Amortization Balance Dec. 31, Year 1 Year 2 Dec. 31, Year 2 Plant US$ 240,000 US$ 16,000 US$ 224,000 Goodwill 1,360,000 500,000 860,000 US$1,600,000 US$516,000 US$1,084,000 (a) Use rate of US$1 = C$1.10 for all items in acquisition differential because all items are measured at historical cost. Balance Amortization Balance Dec. 31, Year 1 Year 2 Dec. 31, Year 2 Plant C$ 264,000 C$ 17,600 C$ 246,400 Goodwill 1,496,000 550,000 946,000 C$1,760,000 C$567,600 C$1,192,400 (b) Rates: #1 is US$1 = C$1.10; #2 is US$1 = C$1.08; #3 is US$1 = C$1.05 Balance 1 Amortization 2 Unadjusted Exchange Adjusted Balance 3 Dec. 31, Year 1 Year 2 Dec. 31, Year 2 Adjustment Dec. 31, Year 2 Plant C$ 264,000 C$ 17,280 C$ 246,720 C$11,520 C$235,200 Goodwill 1,496,000 540,000 956,000 53,000 903,000 C$1,760,000 C$557,280 C$1,202,720 C$64,520 C$1,138,200
Journal entries C$ as FC US$ as FC Dec. 31, Year 1 Investment in Sandora 7,040,000 7,040,000 Cash 7,040,000 7,040,000 Sept. 30, Year 2 Cash (1) 436,560 436,560 Investment in Sandora 436,560 436,560 Dec. 31, Year 2 Investment in Sandora 552,960 398,160 OCI exchange adjustment (4) 249,840 Equity method income (2) 552,960 Equity method income (3) 648,000 Equity method income 567,600 557,280 OCI exchange adjustment 64,520 Investment in Sandora 567,600 621,800 Report amortization/impairment of acquisition differential Notes: 1).4 x 1,091,400 = 436,560 2).4 x 1,382,400 = 552,960 3).4 x 1,620,000 = 648,000 4).4 x 624,600 = 249,840
Problem 11-3 (a) Arkenu s functional currency is the Canadian dollar (i) Current monetary position LD Dollars Balance Jan. 1, Yr. 1 $2,367,000) 0.52 $1,230,840) (9,670K 2,433K 4,870K) Changes Year 2 Sales 16,206,000 0.58 9,399,480 Purchases (10,938,000) 0.58 (6,344,040) Other expenses (1,598,000) 0.58 (926,840) Dividends (7,081K + 2,741K 8,271K) (1,551,000) 0.62 (961,620) 2,119,000 1,166,980 Calculated monetary position 2,397,820 Actual position Dec. 31/ Year 2 (11,361K 2,005K 4,870K) $4,486,000) 0.65 2,915,900 Exchange gain Year 2 $518,080
(ii) LD Dollars Income Statement Year 2: Sales $16,206,000) 0.58 $9,399,480) Cost of goods sold 11,461,000 Note 1 6,407,220 Depreciation expense 406,000) 0.52 211,120) Other expenses 1,598,000) 0.58 926,840) Exchange gain ) (518,080) 13,465,000) 7,027,100) Net income $2,741,000) $2,372,380) Note 1: Inventory Jan. 1 $2,421,000) 0.52 $1,258,920) Purchases 10,938,000) 0.58 6,344,040) Inventory Dec. 31 (1,898,000) 0.63 (1,195,740) $11,461,000 $6,407,220 Retained Earnings Statement Year 2 Bal. Jan. 1 $7,081,000) 0.52 $3,682,120) Net income 2,741,000) 2,372,380) 9,822,000) 6,054,500) Dividends 1,551,000) 0.62 961,620) $8,271,000) $5,092,880) Balance Sheet December 31, Year 2 Current monetary assets $11,361,000) 0.65 $7,384,650) Inventory 1,898,000) 0.63 1,195,740) Plant and equipment (net) 6,957,000) 0.52 3,617,640) $20,216,000) $12,198,030) Current liabilities $2,005,000) 0.65 $1,303,250) Bonds payable 4,870,000) 0.65 3,165,500) Ordinary shares 5,070,000) 0.52 2,636,400)
Retained earnings 8,271,000) 5,092,880) $20,216,000) $12,198,030) (b) (i) Arkenu s functional currency is the Libyan dinar LD Dollars Net assets Dec. 31, Year 1 $12,151,000) 0.52 $6,318,520) Net Income Year 2 2,741,000) 0.58 1,589,780) Dividends Year 2 (1,551,000) 0.62 (961,620) Calculated net assets Dec. 31, Year 2 6,946,680) Actual net assets Dec. 31, Year 2 13,341,000) 0.65 8,671,650) Exchange gain Year 2 (to be reported in other comprehensive income) $1,724,970) (ii) Income Statement Year 2 Sales $16,206,000) 0.58 $9,399,480 Cost of goods sold 11,461,000 x 0.58 6,647,380 Depreciation expense 406,000) 0.58 235,480 Other expenses 1,598,000) 0.58 926,840 13,465,000) 0.58 7,809,700 Net income $2,741,000) 0.58 1,589,780 Other comprehensive income unrealized exchange gain 1,724,970 Comprehensive income $3,314,750 Retained Earnings Statement Year 2 Bal. Jan. 1 $7,081,000 0.52 $3,682,120 Net income 2,741,000 0.58 1,589,780 9,822,000 5,271,900 Dividends 1,551,000 0.62 961,620 $8,271,000 $4,310,280
Balance Sheet December 31, Year 2 Current monetary assets $11,361,000 0.65 $7,384,650 Inventory 1,898,000 0.65 1,233,700 Plant and equipment (net) 6,957,000 0.65 4,522,050 $20,216,000 $13,140,400 Current liabilities 2,005,000 0.65 1,303,250 Bonds payable 4,870,000 0.65 3,165,500 Ordinary shares 5,070,000 0.52 2,636,400 Retained earnings 8,271,000 4,310,280 Accumulated foreign exchange adjustments 1,724,970 $20,216,000 $13,140,400 (iii) Investment cost LD 13,700,000 Carrying amount of Arkenu s net assets 12,151,000 Acquisition differential 1,549,000 Allocated (FV CA) 100% 0 Goodwill Dec. 31/ Year 1 LD 1,549,000 0.52 805,480 Impairment loss Year 2 50,000 0.58 29,000 December 31, Year 2 Calculated goodwill 776,480 Actual goodwill LD 1,499,000 0.65 974,350 Exchange gain $197,870 Consolidated goodwill Dec. 31/ Yr. 2 $974,350 (iv) Translation of financial statements $1,724,970 Translation of goodwill 197,870 Total Year 2 exchange gains $1,922,840
Problem 11-5 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 280,000 1.32 369,600 Purchases (Note) 2,045,000 1.28 2,617,600 Available for sale 2,325,000 2,987,200 Ending inventory before write down 325,000 1.26 409,500 Cost of goods sold 2,000,000 2,577,700 Note: 2,000,000 + 325,000 280,000 = 2,045,000 ii) Depreciation expense 150,000 1.44 216,000 iii) Inventory 300,000 1.25 375,000* iv) Unearned revenue 295,000 1.27 374,650 v) Ordinary shares 100,000 1.44 144,000 * The closing rate is used to derive the market value in Canadian dollars under the lower-ofcost-and-market principle. c) The main factors causing the difference in the foreign exchange gains/losses are as follows: 1) the decline in foreign currency reduces the Canadian dollar amount of assets and liabilities after they are translated at the closing rate
2) under the FCT method, there are more liabilities than assets translated at the closing rate; this will result in exchange gains 3) under the PCT method, there are more liabilities than assets translated at the closing rate; this will result in exchange losses