Reference no: EM132470977
Seed corporation is a foreign subsidiary of Arbor Company, a Canadian Company. Seed was acquired on January 1, 2015 and manufactures gardening tools for sale based on sales prices determined by worldwide competition. Seed provided you with the following December 31, 2016, financial statements stated in Euros:
Seed Corporation Balance sheet (in euros)
December 31, 2016 December 31, 2015
Assets
Cash 300,000 250,000
Accounts receivable 350,000 325,000
Inventory 500,000 425,000
Equipment, net 575,000 300,000
1,725,000 1,300,000
Liabilities and shareholder's equity
Accounts payable 145,000 200,000
Bonds payable 400,000 400,000
Ordinary shares 900,000 500,000
Retained earnings 280,000 200,000
1,725,000 1,300,000
Seed Corporation Statement of Income Years ended 31, 2016 and 2015 (in Euros)
2016 2015
Sales 2,100,000 2,000,000
Cost of goods sold 1,600,000 1,500,000
Gross profit 500,000 500,000
Selling and administrative 145,000 120,000
Bond interest expense 30,000 30,000
Amortization 125,000 100,000
Income before income taxes 200,000 250,000
Income taxes 80,000 100,000
Net Income 120,000 150,000
Additional Information:
Point 1. The following exchange rates are noted:
January 1, 2010
Euro 1 = 1.55 Canadian dollar
January 1, 2015
Euro 1 = 1.52 Canadian dollar
Average for October 1 - December 31, 2015
Euro 1 = 1.48 Canadian dollar
Average for 2015
Euro 1 = 1.50 Canadian dollar
December 31, 2015
Euro 1 = 1.45 Canadian dollar
July 1, 2016
Euro 1 = 1.44 Canadian dollar
Average for October 1- December 31, 2016
Euro 1 = 1.43 Canadian dollar
November 1, 2016
Euro 1 = 1.41 Canadian dollar
Average for 2016
Euro 1 = 1.42 Canadian dollar
December 31, 2016
Euro 1 = 1.40 Canadian dollar
Point 2. On January 1, 2010, Seed acquired equipment for 900,000 (Euros) with and expected useful life of nine years and no residual value. On July 1, 2016 it acquired 400,000 (euros) of new equipment with an expected useful life of eight years and no residual value. Seed amortizes its equipment on a straight line basis, calculated monthly.
Point 3. Seed partly financed its acquisition of equipment in 2010 by issuing 400,000 (euros) eight year, 5% bonds payable on January 1, 2010. Similarly, Seed financed its acquisition of equipment in 2016 by issuing 400,000 (euros) of ordinary shares July 1, 2016.
Point 4. Inventory on hand on December 31, 2015 and December 31, 2016 includes a significant amount of direct materials imported from Canadian firms. It was purchased evenly over the last three months of 2015 and 2016 respectively.
Point 5. Dividends of 40,000 (euros) were declared and paid on November 1, 2016. No dividends were paid in 2015.
Point 6. All other sales, purchases and expenses occurred evenly each year.
Required:
Question a) Should Seed's financial statements be translated into Canadian dollars using the foreign currency transactions approach (temporal method) or the foreign operations approach (current rate method)? Provide two facts from the question to support your answer.
Question b) Disregard your response to part (a). Using the foreign operations approach, translate Seed's December 31, 2016 liabilities and ordinary shares into Canadian dollars and calculate cumulative other comprehensive income. Provide detailed calculations.
Question c) Disregard your response to parts (a) and (b). Using the foreign currency transactions approach, translate the following accounts into Canadian dollars at December 31, 2016.
I. Equipment
II. Cost of goods sold.