Question

Q3 Foreign currency translation A: 20 marks

On January 1, 2020, in an effort to diversify, Bauman Corp. (a Canadian company that sells decorative cedar branches), purchased 80% of Noskova Inc, an American company that manufacturers nitrous oxide, for US$50,000.

Noskova’s book values approximated its fair values on that date except for plant and equipment, which had a fair value of US$30,000 with a remaining life expectancy of 5 years.   A goodwill impairment loss of US$1,000 occurred during 2020. Noskova’s January 1, 2020, Balance Sheet is shown below (in U.S. dollars):

Current Monetary Assets	$50,000
Inventory	$40,000
Plant and Equipment	$25,000
Total Assets	$115,000
Current Liabilities	$45,000
Bonds Payable (maturity: January 1, 2026)	$20,000
Common Shares	$30,000
Retained Earnings	$20,000
Total Liabilities and Equity	$115,000

The following exchange rates were in effect during 2020:

January 1, 2020:	US $1 = CDN $1.3250
Average for 2020:	US $1 = CDN $1.3350
Date when Ending Inventory Purchased:	US $1 = CDN $1.34
December 31, 2020:	US $1 = CDN $1.35

Sales, purchases and other expenses occurred evenly throughout the year.
Dividends declared and paid December 31, 2020.
The financial statements of Bauman (in Canadian dollars) and Noskova (in U.S. dollars) are shown below:

Balance Sheets

	Bauman	Noskova
Current Monetary Assets	$42,050	$65,000
Inventory	$60,000	$50,000
Plant and Equipment	$23,500	$20,000
Investment in Martin (at Cost)	$66,250
Assets	$191,800	$135,000
Current Liabilities	$50,000	$48,000
Bonds Payable (maturity: January 1, 2026)	$35,000	$20,000
Common Shares	$60,000	$30,000
Retained Earnings	$30,000	$20,000
Net Income	$28,800	$27,000
Dividends	($12,000)	($10,000)
Liabilities and Equity	$191,800	$135,000
Income Statements	Larmer	Martin
Sales	$80,000	$50,000
Dividend Income	$10,800
Cost of Sales	($40,000)	($15,000)
Depreciation	($10,000)	($5,000)
Other expenses	($12,000)	($3,000)
Net Income	$28,800	$27,000

Translate Noskova’s 2020 Income Statement into Canadian dollars if the functional currency is the Canadian dollar (i.e. the same functional currency as the parent).

Answer 1

Here we have explained the Concept of Foreign currency exchanage rates.

As per the Foreign Exchange Rates , when the Balance sheet is formed under the Consolidation and We have to use the functional Currency for conversion of the subsidiary balance sheet(local currency ) into the subsidiary balance sheet(functional currency )

All the Profit & Loss Items are valued at Average prices and Balance Items are valued at Closing rates

Please Refer the Attachment below-