Question

Question 2                                                                                    

In 2015, Corbus Co., a Canadian company, created a foreign subsidiary called Snazzy Ltd. by investing $2,000,000 CAD (800,000 FC) in return for all of Snazzy’s common shares. In preparing to start operations, Snazzy acquired equipment for 960,000 FC and took out a 320,000 FC loan. Snazzy is committed to repaying the loan in 3 years. In 2016, Snazzy acquired a tract of land for 320,000 FC. All dividends were paid on December 31 of the years in which they were declared.

Snazzy’s financial statements for its first 2 years of operations are presented below.

Snazzy Ltd.

Statement of Financial Position

As of December 31

(in FC)

                                                                                                      2016                          2015

Assets:

Current assets:

Cash                                                                                      $     48.000                $   256,000

Accounts receivable                                                                                64,000                        48,000

                                                                                                     112,000                     304,000

Noncurrent assets:

Land                                                                                            320,000                            -

Equipment                                                                                 960,000                      960,000

Accumulated amortization                                                     (192,000)                     (96,000)

                                                                                                   1,088,000                     864,000

Total assets                                                                           $ 1,200,000               $ 1,168,000

Liabilities and shareholder’s equity:

Current liabilities:

Accounts payable                                                                        16,000                        32,000

Noncurrent liabilities:

Loan payable                                                                              320,000                      320,000

                                                                                                      336,000                      352,000

Shareholder’s equity:

Share capital                                                                                          800,000                      800,000

Retained earnings                                                                     _64,000                      _16,000

                                                                                                      864,000                      816,000

Total liabilities and shareholder’s equity                         $ 1,200,000               $ 1,168,000

Snazzy Ltd.

Statement of Comprehensive Income

For the year ended December 31

(in FC)

                                                                                                    2016                           2015

            Revenue                                                                   $ 480,000                  $ 352,000

            Expenses:

                        Amortization                                                       96,000                        96,000

                        Interest                                                                64,000                        64,000

                        Other expenses                                               192,000                      128,000

                                                                                                   352,000                      288,000

            Net and comprehensive income                           $ 128,000                  $   64,000

Snazzy Ltd.

Statement of Changes in Equity – Retained Earnings Section

For the year ended December 31

(in FC)

                                                                                                                 2016              2015

Retained earnings, beginning of year                                         $   16,000       $          -

Net income                                                                                           128,000             64,000

Dividends declared                                                                             (80,000)          (48,000)

Retained earnings, end of year                                                    $   64,000       $    16,000

Selected exchange rates

when the equipment was purchased                              1FC = $2.30 CAD

when the loan was negotiated                                          1FC = $2.40 CAD

when the land was purchased                                          1FC = $1.90 CAD

average during 2015                                                           1FC = $2.20 CAD

December 31, 2015                                                             1FC = $2.00 CAD

Average during 2016                                                          1FC = $1.70 CAD

December 31, 2016                                                             1FC = $1.50 CAD

Required:

Assume that Snazzy’s functional currency is the Canadian dollar.

Translate Snazzy’s 2015 financial statements using the appropriate method.

Independently calculate the translation gain/loss.

Repeat (i) and (ii) for 2016.

Assume that Snazzy’s functional currency is the FC.

Translate Snazzy’s 2015 financial statements using the appropriate method.

Independently calculate the translation gain/loss.

Repeat (i) and (ii) for 2016.

Answer 1

solution

Balance Sheet
	Amount	Convection Rate	Amount
Assets
Current Assets
Cash	48000	1.5	72000
Accounts Receivable	64000	1.5	96000
	112000		168000
Non Current Assets
Land	320000	1.5	480000
Equipment	960000	1.5	1440000
Accumulated Amortization	-192000	1.5	-288000
	1088000		1632000
Total Assets	1200000		1800000
Liabilities and Shareholders’ equity
Current Liabilities:
Accounts Payable	16000	1.5	24000
Non Current Liabilities:
Loan Payable	320000	1.5	480000
	336000		504000
Share Capital	800000		2000000
Retained earning	64000		-
Loss	-		-704000
	864000		1296000
Total liabilities and shareholder’s equity	1200000		1800000
Profit and Loss Account
	Amount	Convection Rate	Amount
Retained earnings beginning of year	16000	2	32000
Net income	128000	1.7	217600
Dividends declared	-80000	1.5	-120000
Retained earnings end of year	64000		129600
Exchange translation Loss			833600
Net Loss			-704000