Question

On December 31, Year 1. Precision Manufacturing Inc. (PMI) of Edmonton purchased 100% of the outstanding ordinary shares of Sandora Corp. of Flint, Michigan Sandora's comparative statement of financial position and Year 2 income statement are as follows: STATENENT OF FINANCIAL POSITION At December 31 Year 2 plant and equipment (net) US$ 6,600,000 mentor 5,700,00 Accounts receivable 6,100,000 750,00 US$19,152,ese US$ 5,00, Retaimedearings Bons pleue Dec. 3. Year Year 1 US$ 7,300,eee 6,30e, cee 4,700,80 900.ece US$19, 2eeeee US$ 5.ee, eee $19.25e. US$19,200.00

Answer 1

PART A Sandora's functional currency is the Canadian dollar i.e. Sandora is an integrated foreign subsidiary Retained earnings Dec. 31, Year 1 Profit - Year 2 US 7,000,000 | 1,500,000 8,500,000 7.480,000 US 1,020,000 Retained earnings Dec. 31, Year 2 Dividends Year 2 Net monetary position US$ Cdn$ (1,600,000) x 1.10 (1.760,000) Balance Jan 1, Year 2 (4,700 + 900 - 4,800 - 2,400) Changes - Year 2 Sales 30,000,000 x 1.08 32,400,000

x 1.08 (23,400,000) (3,800,000) (1,020,000) x 1.08 Purchases Other expenses Dividends Calculated monetary position Actual monetary position (6,100 + 780 - 4,800 - 1,900) Exchange gain - Year 2 (25,272,000) (4,104,000) (1,091,400) 172,600 x 1.07 180.000 x 1.05 189.000 16.400 (b) Translation of Sandora's financial statements Income statement-Year 2 US$ Cdn$ x 1.08 x 1.08 Sales Cost of purchases Change in inventory Depreciation expense Other expenses Exchange gain 30,000,000 23,400,000 600,000 700,000 3,800,000 calc* x 1.10 32,400,000 25,272,000 888,000 770,000 4,104,000 (16,400) 31.017,600 1.382,400 x 1.08 28,500,000 1,500,000 Profit * Calc. of change in inventory Inventory - Year 1 Inventory - Year 2 x 1.10 6,300,000 5.700.000 600.000 x 1.06 6,930,000 6,042.000 888.000 Retained Earnings Statement - Year 2 Bal. Jan 1 Profit x 1.10 7,000,000 1,500,000 7,700,000 1,382,400

8,500,000 1,020,000 7,480,000 Dividends Bal. Dec 31 x 1.07 9,082,400 1,091,400 7.991.000 x 1.10 x 1.06 Statement of Financial Position - December 31, Year 2 Plant and equipment (net) 6,600,000 Inventory 5,700,000 Accounts receivable 6,100,000 Cash 780,000 19,180,000 x 1.05 7,260,000 6,042,000 6,405,000 819,000 20.526,000 x 1.05 x 1.10 Ordinary shares Retained earnings Bonds payable Current liabilities 5,000,000 7,480,000 4,800,000 1,900,000 19.180,000 x 1.05 5,500,000 7,991,000 5,040,000 1.995,000 20,526,000 x 1.05 PART B Sandora's functional currency is the US dollar i.e. Sandora is a self-sustaining foreign subsidiary US$ Cdn$ (a) x 1.08 x 1.07 Net assets Year 1 12,000,000 x 1.10 Profit - Year 2 1,500,000 Dividends - Year 2 (1,020,000) Calculated net assets Actual net assets - Year 2 12.480.000 Exchange loss - Year 2 to be reported in other comprehensive income) 13,200,000 1,620,000 (1,091,400 13,728,600 13,104,000 624,600 x 1.05 (b) Income Statement - Year 2

x 1.08 x 1.08 x 1.08 Sales 30,000,000 Cost of purchases 23,400,000 Change in inventory 600,000 x 1.08 Depreciation expense 700,000 Other expenses 3,800,000 x 1.08 Total 28,500,000 Profit 1.500.000 x 1.08 Other comprehensive income (loss) – unrealized exchange gain (loss) Comprehensive income (loss) 32,400,000 25,272,000 648,000 756,000 4,104,000 30,780,000 1,620,000 (624.600) 995.400 Retained Earnings Statement - Year 2 x 1.10 Bal. January 1 Profit x 1.08 7,000,000 1,500,000 8,500,000 1,020,000 7.480,000 7,700,000 1,620,000 9,320,000 1,091,400 8.228,600 x 1.07 Dividends Bal. December 31 Statement of Financial Position - December 31, Year 2 USS X 1.05 Plant and equipment (net) Inventory Accounts receivable x 1.05 6,600,000 5,700,000 6,100,000 780,000 19.180,000 Cdns 6,930,000 5,985,000 6,405,000 819,000 20,139,000 x 1.05 Cash x 1.05 x 1.10 5,000,000 7,480,000 Ordinary shares Retained earnings Accumulated foreign exchange adjustments Bonds payable 5,500,000 8,228,600 (624,600) 5,040,000 4,800,000 x 1.05

Current liabilities 1.900,000 x 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 (OCT) and accumulated foreign exchange adjustments (AFEA) are included (B1 below) or excluded (B2 below) from the calculations as indicated by the following: A B1 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 B2 1,382 1,620 Profit Comprehensive income Total equity including AFEA Total equity excluding AFEA Return on shareholders' equity 995 13,104 13,491 13,729 10.2% 7.6% 11.8% (1) 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. 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