Modern Advanced Accounting In Canada 7th Edition By Hilton – Test Bank

Problem 11-1
PART A Sandora’s functional currency is the Canadian dollar i.e. Sandora is an integrated foreign subsidiary

(a)
Retained earnings Dec. 31, Year 1 US 7,000,000)
Profit – Year 2 1,500,000)
8,500,000)
Retained earnings Dec. 31, Year 2 7,480,000)
Dividends Year 2 US 1,020,000)

Net monetary position
US$ Cdn$
Balance Jan 1, Year 2
(4,700 + 900 – 4,800 – 2,400) (1,600,000))  1.10 (1,760,000))
Changes – Year 2
Sales 30,000,000)  1.08 32,400,000)
Purchases (23,400,000)  1.08 (25,272,000)
Other expenses (3,800,000)  1.08 (4,104,000)
Dividends (1,020,000)  1.07 (1,091,400)
Calculated monetary position 172,600)
Actual monetary position
(6,100 + 780 – 4,800 – 1,900) 180,000)  1.05 189,000)
Exchange gain – Year 2 16,400)

(b) Translation of Sandora’s financial statements

Income statement –Year 2
US$ Cdn$

Sales 30,000,000  1.08 32,400,000)
Cost of purchases 23,400,000 x 1.08 25,272,000
Change in inventory 600,000 calc* 888,000
Depreciation expense 700,000  1.10 770,000)
Other expenses 3,800,000  1.08 4,104,000)
Exchange gain (16,400)
28,500,000 31,017,600)
Profit 1,500,000 1,382,400

* Calc. of change in inventory
Inventory – Year 1 6,300,000  1.10 6,930,000)
Inventory – Year 2 5,700,000  1.06 6,042,000)
600,000 888,000)

Retained Earnings Statement – Year 2
Bal. Jan 1 7,000,000)  1.10 7,700,000)
Profit 1,500,000) 1,382,400
8,500,000) 9,082,400)
Dividends 1,020,000)  1.07 1,091,400)
Bal. Dec 31 7,480,000) 7,991,000)

Statement of Financial Position – December 31, Year 2
Plant and equipment (net) 6,600,000)  1.10 7,260,000)
Inventory 5,700,000)  1.06 6,042,000
Accounts receivable 6,100,000)  1.05 6,405,000)
Cash 780,000)  1.05 819,000)
19,180,000) 20,526,000)

Ordinary shares 5,000,000)  1.10 5,500,000)
Retained earnings 7,480,000) 7,991,000)
Bonds payable 4,800,000)  1.05 5,040,000
Current liabilities 1,900,000)  1.05 1,995,000)
19,180,000) 20,526,000)

PART B Sandora’s functional currency is the US dollar i.e. Sandora is a self-sustaining foreign subsidiary
US$ Cdn$
(a)
Net assets Year 1 12,000,000)  1.10 13,200,000)
Profit – Year 2 1,500,000)  1.08 1,620,000)
Dividends – Year 2 (1,020,000)  1.07 (1,091,400)
Calculated net assets ) 13,728,600)
Actual net assets – Year 2 12,480,000)  1.05 13,104,000)
Exchange loss – Year 2 (to be reported in other comprehensive income) 624,600)

(b) Income Statement – Year 2

Sales 30,000,000  1.08 32,400,000
Cost of purchases 23,400,000  1.08 25,272,000
Change in inventory 600,000 x 1.08 648,000
Depreciation expense 700,000  1.08 756,000
Other expenses 3,800,000  1.08 4,104,000
Total 28,500,000 30,780,000
Profit 1,500,000  1.08 1,620,000
Other comprehensive income (loss) – unrealized exchange gain (loss) (624,600)
Comprehensive income (loss) 995,400

Retained Earnings Statement – Year 2

Bal. January 1 7,000,000  1.10 7,700,000)
Profit 1,500,000 x 1.08 1,620,000)
8,500,000 9,320,000)
Dividends 1,020,000  1.07 1,091,400)
Bal. December 31 7,480,000 8,228,600)

Statement of Financial Position – December 31, Year 2
US$ Cdn$
Plant and equipment (net) 6,600,000  1.05 6,930,000)
Inventory 5,700,000  1.05 5,985,000
Accounts receivable 6,100,000  1.05 6,405,000)
Cash 780,000  1.05 819,000)
) 19,180,000 20,139,000)

Ordinary shares 5,000,000  1.10 5,500,000)
Retained earnings 7,480,000 8,228,600)
Accumulated foreign exchange adjustments (624,600)
Bonds payable 4,800,000  1.05 5,040,000)
Current liabilities 1,900,000  1.05 1,995,000)
19,180,000 20,139,000)
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 7,035 7,035 7,035
Total equity including AFEA 13,491 13,104
Total equity excluding AFEA 13,729
Debt to equity ratio .52 .54 .51

Profit 1,382 1,620
Comprehensive income 995
Total equity including AFEA 13,491 13,104
Total equity excluding AFEA 13,729
Return on shareholders’ equity 10.2% 7.6% 11.8%

(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 11-2

PART A Arkenu’s functional currency is the Canadian dollar i.e. Arkenu is an integrated foreign subsidiary.
(a)
Current monetary position LD Dollars

Balance Jan. 1, Yr. 1 (9,600 – 2,400 – 4,800) 2,400,000)  0.52 1,248,000)
Changes – Year 2
Sales 16,000,000)  0.58 9,280,000)
Purchases (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)
1,680,000) 929,600)
Calculated monetary position 2,177,600)
Actual position – Dec. 31/ Year 2
(10,780 – 1,900 – 4,800) 4,080,000)  0.65 2,652,000)
Exchange gain – Year 2 474,400)

(b)
LD Dollars
Income Statement – Year 2:
Sales 16,000,000)  0.58 9,280,000)
Cost of goods sold 11,440,000 Note 1 6,401,200
Depreciation expense 600,000)  0.52 312,000)
Other expenses 2,360,000)  0.58 1,368,800)
Exchange gain ) (474,400)
14,400,000) 7,607,600)
Net income 1,600,000) 1,672,400)

Note 1:
Inventory Jan. 1 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)
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)  0.62 694,400)
7,480,000) 4,618,000)

Balance Sheet – December 31, Year 2
Current monetary assets 10,780,000)  0.65 7,007,000)
Inventory 1,800,000)  0.63 1,134,000)
Plant and equipment (net) 6,600,000)  0.52 3,432,000)
19,180,000) 11,573,000)

Current liabilities 1,900,000)  0.65 1,235,000)
Bonds payable 4,800,000)  0.65 3,120,000)
Ordinary 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 Dollars

Net assets Dec. 31, Year 1 12,000,000)  0.52 6,240,000)
Net Income – Year 2 1,600,000)  0.58 928,000)
Dividends – Year 2 (1,120,000)  0.62 (694,400)
Calculated net assets – Dec. 31, Year 2 6,473,600)
Actual net assets – Dec. 31, Year 2 12,480,000)  0.65 8,112,000)
Exchange gain – Year 2 (to be reported in other comprehensive income) 1,638,400)

(b)
Income Statement – Year 2
Sales 16,000,000)  0.58 9,280,000

Cost of goods sold 11,440,000 x 0.58 6,635,200
Depreciation expense 600,000)  0.58 348,000
Other expenses 2,360,000)  0.58 1,368,800
14,400,000)  0.58 8,352,000
Net income 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 4,568,000
Dividends 1,120,000  0.62 694,400
7,480,000 3,873,600

Balance Sheet – December 31, Year 2

Current monetary assets 10,780,000  0.65 7,007,000
Inventory 1,800,000  0.65 1,170,000
Plant and equipment (net) 6,600,000  0.65 4,290,000
19,180,000 12,467,000

Current liabilities 1,900,000  0.65 1,235,000
Bonds payable 4,800,000  0.65 3,120,000
Ordinary 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 LD 13,000,000
Carrying amount of Arkenu’s net assets 12,000,000
Acquisition differential 1,000,000
Allocated (FV – CA)  100% –0–
Goodwill Dec. 31/ Year 1 LD 1,000,000  0.52 520,000
Impairment loss Year 2 50,000  0.58 29,000
December 31, Year 2
Calculated goodwill 491,000
Actual goodwill DM 950,000  0.65 617,500
Exchange gain 126,500

Consolidated goodwill – Dec. 31/ Yr. 2 617,500

(d)
Translation of financial statements 1,638,400
Translation of goodwill 126,500
Total Year 2 exchange gains 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 7,218 8,112
Total equity excluding AFEA 6,474
Debt to equity ratio .60 .54 .67

Net income 1,672 928
Comprehensive income 2,566
Total equity including AFEA 7,218 8,112
Total equity excluding AFEA 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.