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CoursHeroTranscribedText: In Year1. Victoria Textiles Limited decided that its Asian operations had expanded such that an Asian office should be established. The office 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 of top-quality fabrics, particularly silk and lace, but from Victoria's home office in Ontario it was difficult to nd 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 [INR} was made on January 'I, Year 2. VTIL 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. 311mm allls IlllCl EIIITB {in Thousands of, Indian Rupees) Year 4 Year 3 Cash 3,000 3,300 Accounts receivable 2,000 2,?00 Inventories 3,700 3,100 Prepaid expenses 2,200 1,200 Plant assets (net) 7,900 8,900 20,400 19,200 Current monetary liabilities 2,400 000 Unearned revenue T00 300 Longterm debt 6,000 6,000 9,100 7,100 Cannon shares 10,000 10,000 Retained earnings 1,300 2,100 20,400 19,200 You: 4 You: 3 Sales 20,500 13,400 Cost: of sales 12,300 6,200 Gross profit 3,200 7,200 Operating expenses 4,300 2,500 Interest 500 300 Taxes 600 420 Net income 2,300 3,930 Additional Information The exchange rate at January 1. Year 2, when VTIL was originally established, was $0075 per rupee. Ofthe original investment of |NR10 million, |NR4 million was used to acquire plant and equipment, which is being depreciated on a straight-line basis over 10 years. At June 30, Year 3, an expansion was completed at a cost of INRE million, which was financed entirely by a 6-year 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 straight-line basis over 10 years. [A half-year's depreciation was recorded in Year 3.} Depreciation expense of INR1,000 in Year 4 and INR'IDD in Year 3 is included in operating expenses. Inventory is accounted for on the FIFO basis. The inventory at the end of Year 3 and Year 4 was acquired when the exchange rates were $0.045 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 rupee. respectively. Income taxes were paid in equal monthly instalments throughout the year. Dividends of3,500 in Year 4 and 800 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 11 $0.025 Required: (a) Prepare a Canadian-dollar balance sheet at December 31, Year 4, and an income statement for the year then ended, assuming that VTIL's functional currency is as follows: (i) The Canadian dollar (ii) The Indian rupee (Note: There is insufficient 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 BALANCE SHEET December 31, Year 4 ($000s) (i ) (ii) Temporal Current rate method method Cash 95 95 Accounts receivable 70 70 Inventories 93 76 Prepaid expenses 66 55 Plant assets (net) 526 198 850 494 Current monetary liabilities 60 60 Unearned revenue 20 18 Long-term debt 150 150 230 228 Common shares 750 750 Retained earnings (deficit) plug 130 -484 850 494VICTORIA TEXTILES (India) Limited INCOME STATEMENT for the Year Ended December 31, Year 4 ($000s) (1) (ii) Temporal Current rate method method Sales $ 636 $ 636 Cost of sales Opening inventory 140 Purchases Closing inventory 100 381 Gross profit Operating expenses excluding depreciation Depreciation Interest Taxes 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 Presentation currency translation method O Functional currency translation method

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