50.1K

Verified Solution

Link Copied!

CoursHeroTranscribedText: In Year 1, Victoria Textiles Limited decided that its Asian operations had expanded such that an Asian ofce should be established. The ofce would be involved in selling Victoria's current product lines', it was also expected to establish supplier contacts. In the Asian market, there were a number of small manufacturers oftopquality fabrics, particularly silk and lace, but from Victoria's home office in Ontario it was difcult to find and maintain these suppliers. To assist in doing so. a wholly owned company, Victoria Textiles {India} Limited, was created, and a facility was established in India in January, Year 2. The new company, VTIL, was given the mandate from head office to buy and sell with other Victoria divisions and offices across Canada as if it were an autonomous, independent unit. To establish the company, an investment of 10,000,000 Indian rupees {INRJ was made on January 1, Year 2. VTlL proved to be quite successful, as shown in the following financial statements at December 31, Year 4. After one year of operations, VTIL had borrowed funds and expanded facilities substantially, as the initial market estimates had turned out to be quite conservative. However, during this time the rupee had fallen in value relative to the Canadian dollar. As a result, Victoria's management was somewhat confused about how to evaluate VTIL's success, given the changing currency values. FINANCIAL STATEMENTS BALANCE SHEETS [in Thousands of, Indian Rupees) Year 4 Year 3 Cash 4,199 2,799 Accounts receivable 2,899 3,999 Inventories 4,999 3,299 Prepaid expenses 1,899 2,199 Plant assets (net) ?,999 8,999 29,699 19,999 Current monetary liabilities 2,999 1,199 Unearned revenue 699 399 Longterm debt 6,999 6,999 8,699 ?,499 Common shares 19,999 19,999 Retained earnings 2,999 2,599 29,999 19,999 INCOME STATEMENTS Year 4 Year 3 Sales 18,599 12,999 Cost of sales 19,299 6,399 Gross profit 8,399 5,399 Operating expenses 4,599 2,999 Interest 299 299 Taxes 699 459 Net income 3,999 2,?59 Additional Information - The exchange rate at January 1, Year 2, when VTIL was originally established. was $0.075 per rupee. - Of the original investment oleRiO million. INR4 million was used to acquire plant and equipment, which is being depreciated on a straightline basis over 10 years. - At June 30. Year 3, an expansion was completed at a cost ofINR6 million. which was financed entirely by a 6year note obtained from an Indian bank. Interest is to be paid semiannually. The exchange rate at July 1, Year 3, was $0.062 per rupee. The new expansion is also to be depreciated on a straightline basis over 10 years. {A halfyear's depreciation was recorded in Year 3.] Depreciation expense ofINR1,000 in Year 4 and INR7OO in Year 3 is included in operating expenses. - Inventory is accounted for on the FIF-{II basis. The inventory at the end of Year 3 and Year 4 was acquired when the exchange rates were $0045 and $0.02? per rupee, respectively. - Sales. purchases, and operating expenses were incurred evenly throughout the year, and the average exchange rate for the year was $0.031. - The prepaid expenses and unearned revenue at December 31, Year 4. arose when the exchange rates were $0.03 and $0.028 per ru pee. respectively. - Income taxes were paid in equal monthly instalments throughout the year. - Dividends of 3.500 in Year 4 and 400 in Year 3 were declared and paid each year on December 31. - The foreign exchange rates per rupee at each of the following dates were as follows: Dec. 31. Year 3 $0.041 June 30. Year 4 $0.036 Dec. 31. Year 4 $0.025 | Red u ired: [a] Prepare a Canadian-dollar balance sheet at December 31, Year 4. and an income statement for the year then endedr assuming that VTIL's functional currency is as follows: [i] The Canadian dollar {ii} The Indian rupee (Note: There is insufcient information to translate retained earnings and accumulated foreign exchange adjustments. Plug these two items with the amount required to balance the balance sheet.) (Negative amounts should be indicated by a minus sign. Enter your answers in thousands of dollars. Round your intermediate calculations and the final answers to the nearest whole dollar. Omit $ sign in your response.} VICTORIA TEXTILES (India) Limited INCOME STATEMENT for the Year Ended December 31, Year 4 ($000s) (i ) (ii) Temporal Current rate method method Sales $ 573 573 Cost of sales Opening inventory Purchases Closing inventory 108 316 Gross profit 257 Operating expenses excluding depreciation Depreciation Interest 6.1 6.1 Taxes 19 19 Net income (loss) before foreign Exchange gains (losses) Foreign exchange gains (losses) Net income (loss) (b) Which method should Victoria Textiles Limited apply to its investment in this subsidiary? O Functional currency translation method O Presentation currency translation method

Answer & Explanation Solved by verified expert

See Answer