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:

STATEMENT OF FINANCIAL POSITION
At December 31
	Year 2			Year 1
Plant and equipment (net)	US$	6,600,000		US$	7,300,000
Inventory		5,700,000			6,300,000
Accounts receivable		6,100,000			4,700,000
Cash		780,000			900,000
	US$	19,180,000		US$	19,200,000
Ordinary shares	US$	5,000,000		US$	5,000,000
Retained earnings		7,480,000			7,000,000
Bonds payable—due Dec. 31, Year 6		4,800,000			4,800,000
Current liabilities		1,900,000			2,400,000
	US$	19,180,000		US$	19,200,000

INCOME STATEMENT
For the year ended December 31, Year 2
Sales	US$	30,000,000
Cost of purchases		23,400,000
Change in inventory		600,000
Depreciation expense		700,000
Other expenses		3,800,000
		28,500,000
Profit	US$	1,500,000

Additional Information

• Exchange rates

Dec. 31, Year 1	US$1	=	C$1.10
Sep. 30, Year 2	US$1	=	C$1.07
Dec. 31, Year 2	US$1	=	C$1.05
Average for Year 2	US$1	=	C$1.08

• Sandora declared and paid dividends on September 30, Year 2.
• The inventories on hand on December 31, Year 2, were purchased when the exchange rate was US$1 = C$1.06.

  Assume that Sandora's functional currency is the U.S. dollar:

  (i) Calculate the Year 2 exchange gain (loss) that would result from the translation of Sandora's financial statements and would be reported in other comprehensive income. (Input all amounts as positive value. Omit currency symbol in your response.)

  (Click to select)  Exchange gain  Exchange loss             C$

  (ii) Translate the Year 2 financial statements into Canadian dollars. (Round the values in the "Rate" column to 2 decimal places. Loss amounts should be indicated with a minus sign. Input all other amounts as positive values. Omit currency symbol in your response.)

  Income Statement - Year 2
  	US$		Rate	C$
  Sales	30,000,000	×
  Cost of purchases	23,400,000	×
  Change in inventory	600,000	×
  Depreciation expense	700,000	×
  Other expenses	3,800,000	×
  Total	28,500,000
  Profit	1,500,000	×
  Other comprehensive  (Click to select)  income  loss  − unrealized exchange  (Click to select)  gain  loss
  (Click to select)  Comprehensive loss  Comprehensive income

  
  

  Retained Earnings Statement - Year 2
  	US$		Rate	C$
  Bal. Jan 1	7,000,000	×
  Profit	1,500,000	×
  	8,500,000
  Dividends	1,020,000	×
  Bal. Dec 31	7,480,000

  
  

  Statement of Financial Position - December 31, Year 2
  	US$		Rate	C$
  Plant and equipment (net)	6,600,000	×
  Inventory	5,700,000	×
  Accounts receivable	6,100,000	×
  Cash	780,000	×
  	19,180,000
  Ordinary shares	5,000,000	×
  Retained earnings	7,480,000
  Accumulated foreign exchange adjustments
  Bonds payable	4,800,000	×
  Current liabilities	1,900,000	×
  	19,180,000

Answer 1

CALCULATION OF EXCHANGE GAIN OR LOSS

OPENING NET ASSSETS=(5000000+7000000)

OPENING RATE=1.10

TRANSLATINH\G=12000000*1.1=13200000

CLOSING NET ASSETS=5000000+7480000

CLOSING RATE=1.05

TRANSLATING=12480000*1.05=13104000

EXCHANGE LOSS=13104000-13200000=-96000

STATEMENT OF FINANCIAL POSITION
At December 31
	Year 2
Plant and equipment (net)	US$	6,600,000*1.05=6930000
Inventory		5,700,000*1.05=5985000
Accounts receivable		6,100,000*1.05=6405000
Cash		780,000=819000
	US$	19,180,000*1.05=20139000
Ordinary shares	US$	5,000,000*1.05=5250000
Retained earnings		7,480,000*1.05=7854000
Bonds payable—due Dec. 31, Year 6		4,800,000*1.05=5040000
Current liabilities		1,900,000=1995000
TRANSLATION LOSS	US$	19,180,000=20139000 96000