MASTER OF MANAGEMENT

BSMM-8610: CONSOLIDATED FINANCIAL STATEMENTS - WINTER 2025

Problem 11 - 1

Patras Ltd. is a subsidiary located inn Greece. It uses the euro for internal reporting
purposes. At December 31, Year 11, the company's inventory on hand had a cost of
EUR 22,000 and a net realizable value of EUR 21,000. The inventory had been
purchased evenly over the year. The parent company's inventory on hand at December
31, Year 11, had a cost of $45,000 and a net realizable value of $44,000.

Foreign exchange rates were as follows:

Average for Year 11 EUR 1= $ 1.23

Average for quarter 4 Year 11 EUR 1= $ 1.27
December 31, Year 11 EUR 1= $ 1.31

Required:
a) At what amount should the inventory be shown on Pantras' balance sheet before
translation?
b) At what amount should the inventory be shown on Pantras' balance sheet after
translation assuming that Patra's functional currency is the:
i) Euro
ii) Canadian dollar
c) At what amount should the inventory be shown on the consolidated balance sheet
assuming that Patras' functional currency is the:
i) Euro
ii) Canadian dollar
Problem 11 - 5

On December 31, Year 2, PAT Inc. of Halifax acquired 90% of the voting shares of Gioco Limited
of Italy, for EUR 690,000. On the acquisition date, the fair values equalled the carrying amounts
for all of Gioco's identifiable assets and liabilities. Selected account balances from Gioco's
general ledger on December 31, Year 2, were as follows:

EUR
Equipment 150,000
Building 1,350,000
Accumulated amortization 195,000 97,500
Common shares 600,000
Retained earnings 96,000

Gioco purchased the building and equipment on January 1, Year 1.

The condensed trial balnce of Gioco for the year ending December 31, Year 5, was as follows:

EUR
Accounts receivable 197,000
Inventory 255,000
Building 1,350,000
Equipment 350,000
Cost of goods purchased 1,080,000
Change in inventory 120,000 1,700,000
Amortization expense 130,000 200,000
Other expenses 470,000 0.12
Dividends paid 300,000 49,412
Total debits 4,252,000

Current monetary liabilities 682,000

Common shares 600,000
Retained earnings, beginning 300,000
Sales 2,250,000
Accumulated amortization 420,000
Total credits 4,252,000

Additional information:

Gioco's sales, inventory purchases, and other expenses occurred uniformly over the year.

Gioco's inventory on hand at the end of each year was purchased uniformly over the last
quarter. On December 31, Year 4, the inventories totalled EUR 375,000, and on December 31,
Gioco's inventory on hand at the end of each year was purchased uniformly over the last
quarter. On December 31, Year 4, the inventories totalled EUR 375,000, and on December 31,
Year 5, they totalled EUR 255,000.

On January 1, Year 5, Gioco purchased equipment for EUR 200,000. The equipment has an
estimated useful life of eight years and a residual value of EUR 5,000. Gioco uses the double-
declining balance method to calculate amortization expense. There were no other purchases of
property, plant and equipment between Year 2 and Year 5.

Dividends were declared and pid on January 1, Year 5.

The exchange rates for the euro and the Canadian dollar were as follows:
CAD EUR
Jan. 1, Year 1 $1 = 0.50
Dec. 31, Year 2 $1 = 0.60
Average for Year 4 fourth quarter $1 = 0.68
Dec. 31, Year 4/Jan. 1, Year 5 $1 = 0.70
Dec. 31, Year 5 $1 = 0.80
Aveage Year 5 $1 = 0.76
Average for Year 5 fourth quarter $1 = 0.79

Required:
FCT
a) Translate into Canadian dollars the following items on Gioco's financial statements for the
Year ended December 31, Year 5, assuming that Gioco's functional currency is the Canadian
dollar:
i) Accounts receiveble
ii) Inventory
iii) Equipment
iv) Accumulated amortization
v) Common shares

b) Translate into Canadian dollars the following items on Gioco's financial statements for the PCT
Year ended December 31, Year 5, assuming that Gioco's functional currency is the euro:
i) Cost of goods purchased
ii) Amortization expense
iii) Inventory
iv) Common shares

c) For Gioco, which functional currency would show the strongest current ratio for the
company's translated financial statements? Briefly explain.

d) Prepare an independent calculation of the unrealized exchange gains or losses to be

included in other comprehensive income for Year 5, assuming that Gioco's functional currency
is the euro.
Problem 11 - 6

On December 31, Year 1, Precisiion Manufacturing Inc. (PMI) of Edmonton purchased 100% of the
outstanding ordinary shares of Sandora Corp. of Flint, Michigan.

Sandora's comparative statement of financial position and Year 2 income statement are as follows:
Statement of Financial Position
At December 31,
In USD
Year 2 Year 1
Plant and equipment (net) 6,790,000 7,490,000
Inventory 5,890,000 6,490,000
Accounts receivable 6,290,000 4,890,000
Cash 970,000 1,090,000
19,940,000 19,960,000

Ordinary shares 5,190,000 5,190,000

Retained earnings 7,670,000 7,190,000
Bonds payable-due- Dec. 31, Year 6 4,990,000 4,990,000
Current liabilities 2,090,000 2,590,000
19,940,000 19,960,000

Income Statement
For the year ended December 31, Year 2
In USD
Sales 49,000,000
Cost of purchases 38,220,000
Change in inventory 600,000
Depreciation expense 700,000
Other expenses 6,270,000
45,790,000
Profit 3,210,000

Additional information:

Exchange Rates:
Dec. 31, Year 1 US$ 1 = C $ 1.10
Sep. 30, Year 2 US$ 1 = C $ 1.07
Dec. 31, Year 2 US$ 1 = C $ 1.05
Average for Year 2 US$ 1 = C $ 1.08

Sandora declared and paid dividends on September 30, Year 2.

The inventories on hnd on December 31, Year 2, were purchased when the exchange rate was US$1
= C$1.06.

Required:
a) Assume that Sandora'sfunctional currency is the Canadian dollar:
i) Calculate the Year 2 exchange gain (loss) that would result from the translation of
Sandora's financial statements.
ii) Translate the Year 2 financial statements into Canadian dollars.
b) Assume that Sandora'sfunctional currency is the U.S. dollar:
i) Calculate the Year 2 exchange gain (loss) that would result from the translation of
Sandora's financial statements and would be reported in other comprehensive income.
ii) Translate the Year 2 financial statements into Canadian dollars.
c) Which functional currency would Sandora prefer to use if it wants to show the following?
i) The strongest solvency position for the company
ii) The best return on shareholders' equity
Briefly explain your answers.