Question 2 In 2015, Corbus Co., a Canadian company

| June 1, 2016

Question
Question 2

In 2015, Corbus Co., a Canadian company, created a foreign subsidiary called Snazzy Ltd. by investing $2,000,000 CAD (800,000 FC) in return for all of Snazzy’s common shares. In preparing to start operations, Snazzy acquired equipment for 960,000 FC and took out a 320,000 FC loan. Snazzy is committed to repaying the loan in 3 years. In 2016, Snazzy acquired a tract of land for 320,000 FC. All dividends were paid on December 31 of the years in which they were declared.

Snazzy’s financial statements for its first 2 years of operations are presented below.

Snazzy Ltd.

Statement of Financial Position

As of December 31

(in FC)

2016 2015

Assets:

Current assets:

Cash $ 48.000 $ 256,000

Accounts receivable 64,000 48,000

112,000 304,000

Noncurrent assets:

Land 320,000 –

Equipment 960,000 960,000

Accumulated amortization (192,000) (96,000)

1,088,000 864,000

Total assets $ 1,200,000 $ 1,168,000

Liabilities and shareholder’s equity:

Current liabilities:

Accounts payable 16,000 32,000

Noncurrent liabilities:

Loan payable 320,000 320,000

336,000 352,000

Shareholder’s equity:

Share capital 800,000 800,000

Retained earnings _64,000 _16,000

864,000 816,000

Total liabilities and shareholder’s equity $ 1,200,000 $ 1,168,000

Snazzy Ltd.

Statement of Comprehensive Income

For the year ended December 31

(in FC)

2016 2015

Revenue $ 480,000 $ 352,000

Expenses:

Amortization 96,000 96,000

Interest 64,000 64,000

Other expenses 192,000 128,000

352,000 288,000

Net and comprehensive income $ 128,000 $ 64,000

Snazzy Ltd.

Statement of Changes in Equity – Retained Earnings Section

For the year ended December 31

(in FC)

2016 2015

Retained earnings, beginning of year $ 16,000 $ –

Net income 128,000 64,000

Dividends declared (80,000) (48,000)

Retained earnings, end of year $ 64,000 $ 16,000

Selected exchange rates

when the equipment was purchased 1FC = $2.30 CAD

when the loan was negotiated 1FC = $2.40 CAD

when the land was purchased 1FC = $1.90 CAD

average during 2015 1FC = $2.20 CAD

December 31, 2015 1FC = $2.00 CAD

Average during 2016 1FC = $1.70 CAD

December 31, 2016 1FC = $1.50 CAD

a) Assume that Snazzy’s functional currency is the FC.

i) Translate Snazzy’s 2015 financial statements using the appropriate method.

ii) Independently calculate the translation gain/loss.

iii) Repeat (i) and (ii) for 2016.

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