453 Assignment 5 Total marks 70 Note: Must show all work for full marks Question 1 (10 marks) On January 1, Year 5, Pear Inc., a B. company, sold...

453 Assignment 5 Total marks 70

Note: Must show all work for full marks

Question 1 (10 marks)

On January 1, Year 5, Pear Inc., a B.C. company, sold Apples to Bananas Co., a foreign

company, for FC400,000, with payment due on March 1, Year 5. On the same date, Pear

entered into a forward contract with the bank to sell the foreign currency (FC) on March

1, Year 5 at a rate of FC1 = C$2.00. The forward contract was designated as a fair value

hedge. On March 1, Year 5, Pear settled the forward contract with the bank.

Spot exchange rates were as follows:

January 1

March 1 FC1 = C$2.10

FC1 = C$2.03Required:

a) Prepare the memorandum and journal entries to record the above transactions.

b) Calculate the discount or premium (state which one) and explain (along with

allocation of dollar values) how it is allocated.

Question 2 (23 marks)

Sun Inc. is a Canadian company which imports goods for sale to customers in North

America. On December 4, Year 3, the company issued a purchase order to a supplier in

France for the purchase of inventory at a cost of €230,000. Payment is to be made two

months after receipt of the inventory which is scheduled to be delivered on February 1,

Year 4. On December 18, Year 3, Sun Inc. entered into a forward purchase contract with

its bank to acquire €230,000 on April 1, Year 4.

Relevant exchange rates are as follows:

Spot rates

1.500

1.530

1.540

1.520

1.538Forward rates

1.520

1.550

1.570

1.555December 4 Yr 3 December 18 Yr 3

December 31 Yr 3 February 1

April 1 Yr 4

Yr 4 Required:

(a) Assume Sun Inc. elects to account for the forward contract as a cash flow hedge,

prepare the memorandum and journal entries for Year 3 and Year 4 using the net

method. Assume apply hedge accounting. Show supporting calculations. (10

marks)

(b) Prepare a partial Comprehensive Income Statement and Balance Sheet for

December 31, Year 3 to indicate how each account would appear on thecompany's financial statements. (3 marks)

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(c) Calculate the discount or premium (state which one) and explain (along with

allocation of dollar values) how the net gain or loss (state which one) it is

allocated between cost of hedging and the value of the sale. (5 marks).

(d) Assume Sun Inc. elects not to use hedge accounting in accounting for the forward

contract, prepare only the journal entries that would be different. Also explain the

impact on the allocation of the premium/discount. (5 marks)

Question 3: (3 marks)

1. Under the functional currency translation (FCT) method, which of the following

statements is correct?

A. The relationship of balance sheet items is best preserved.

B. A single historic rate is used to translate all income statement items.

C. A net asset exposure is most likely.

D. Historic rates are used to translate most non-monetary items.

2. The risk exposure resulting from the possible reduction in terms of the domestic

reporting foreign currency, of the discounted future cash flows generated from foreign

investments or operations due to real changes in exchange rates is referred to as:

A. translation (accounting) exposure.

B. transaction exposure.

C. economic exposure.

D. business risk.

3. Which of the following statements is correct?

A. If an organization is self-sustaining (i.e., the functional currency of the foreign

operation is different than the parent), depreciation and amortization must be translated

using closing rates.

B. If an organization is self-sustaining (i.e., the functional currency of the foreign

operation is different than the parent), depreciation and amortization must be translated

using average rates.

C. If an organization is considered an integrated foreign subsidiary (i.e., the functional

currency of the foreign operation is different than the parent), depreciation and

amortization must be translated using historical rates.

D. If an organization is considered an integrated foreign subsidiary (i.e., the functional

currency of the foreign operation is the same as the parent), depreciation and amortization

must be translated using closing rates.

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Question 4: (34 marks)

On December 31, Year 6, Pilsner Enterprises of Edmonton paid $7,200,000 for 90% of

the outstanding shares of Sam Corp of the United States. Sam's fair values approximated

its book values on that date except for equipment.

Sam's comparative balance sheets for Year 6 and Year 7 are shown below:

Balance Sheet as at December 31 (in U.S. Dollars)

Year 7 Year 6Current Monetary Assets US $8,000,000 US$7,500,000Inventory $2,000,000 $3,000,000Plant and Equipment (Net) $1,500,000 $1,800,000Total Assets $11,500,000 $12,300,000Current Liabilities US$1,100,000 US$2,300,000Bonds Payable $5,000,000 $5,000,000Common Shares $4,000,000 $4,000,000Retained Earnings $1,400,000 $1,000,000Total Liabilities and Equity $11,500,000 $12,300,000Income Statement for the Year ended December 31, Year 7 (in U.S. Dollars)

Sales US$5,000,000Inventory, January 1'7 $3,000,000Purchases $3,000,000Inventory, December 31'7 ($2,000,000)Depreciation Expense $300,000Other Expenses $200,000$Net Income $500,000

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Other Information:

Exchange Rates:

December 31, Yr 6: US $1 = CDN $1.180September 30, Yr 7: US $1 = CDN $1.197December 31, Yr 7: US $1 = CDN $1.205Average for Yr 7: US $1 = CDN $1.190Sam paid US$100,000 in dividends on September 30, Year 7. The inventories on hand at

the end of Year 7 were purchased when the exchange rate was US$1 = CDN$1.195.

Pilsner partial Balance Sheet as at December 31 (in CDN Dollars)

Year 7Current Liabilities $2,000,000Bonds Payable $3,000,000Common Shares $6,000,000Retained Earnings $2,300,000Total Liabilities and Equity $13,300,000Part a.

Assuming Sam is considered to be an integrated subsidiary (i.e., the functional currency

of the foreign operation is the same as the parent):

i) Translate Sam's Income Statement for Year 7 (8 marks)

ii) Translate Sam's Statement of Retained Earnings for Year 7 (3 marks)

iii) Translate Sam's Balance Sheet for Year 7 (4 marks)

Part b.

Assuming Sam is considered to be a self-sustaining foreign operation (i.e., the functional

currency of the foreign operation is different than the parent):

i) Calculate the exchange gain or loss that would result from the translation of Sam's

Financial Statements (3 marks)

ii) Calculate the comprehensive income for Year 7 (2 marks)

iii) Prepare the calculation for equipment FVI that would appear on the consolidated

balance sheet at December 31, Year 7 assuming all acquisition differential goes to

equipment. Also prepare the calculation for the exchange gain/loss on the translation of

equipment that would be included in accumulated other comprehensive income (AOCI).

Assume the equipment has a useful life of 10 years (6 marks)

iv) Prepare account balances for the liabilities and shareholders' equity portion of the

consolidated balance sheet at December 31, Year 7 Your answer should

include a detailed calculation of consolidated RE and accumulated other comprehensive

income (AOCI). Hint: Total liabilities and equity without NCI (8 marks)