Accounting Problems in Consolidation Statement and Foreign Currency Transactions

Please provide detailed and necessary explanations for the answers and calculations.

This assignment consists of two questions. Both questions come from previous exams. To give you some perspective, each question should take about 30 minutes to complete under exam conditions.

 QUESTION 1                                                                                                                                   

Heslin Corporation, a fertilizer manufacturer in Hamilton, has traditionally bought most of its supplies from local suppliers in Ontario. Americhem Inc., a supplier of a chemical use in the manufacturing of fertilizer has recently opened a manufacturing plant in Cleveland, Ohio. Due to the high quality of the chemical, favourable prices and the proximity of Americhem, Heslin decided to purchase some of its raw materials from Americhem.

Heslin Corporation ordered chemicals on February 2 for US$500,000. Delivery took place on February 10 and the full amount was payable in US dollars on June 30. To minimize financing costs of inventory, Heslin Corporation does not pay accounts payable until the due date. Applicable spot rates were:

            February 2                   CDN$1 = US$0.80

            February 10                 CDN$1 = US$0.78

            June 30                        CDN$1 = US$0.75

Fearful that the Canadian dollar might depreciate in value, Amanda Lu, the senior financial accountant for Heslin Corporation, entered into a forward contract on February 2 to buy US$500,000 on June 30 at a forward rate of CDN$1 = US$0.76. She designated the forward contract as a cash flow hedge.

The following exchange took place between Alex Dias, the CEO of Heslin Corporation and Amanda Lu during a senior management meeting on July 18:

Alex:               It was clearly a huge mistake to import raw materials from the USA. Any price advantage was negated by a foreign currency exchange loss. Entering into a forward exchange contract compounded this mistake.

Amanda:         I don’t agree. The forward exchange contract actually saved us money.

Alex:               Well, you should have recorded the payable at CDN$625,000 on February 2. But because you entered into the forward exchange contract, we ended up paying CDN$657,895. That is a loss of CDN$32,895.

Amanda:         No, that’s not right. The cash flow hedge…

Alex:               That’s another thing. By designating the forward exchange contract as a cash flow hedge, you cost the company even more money. If you had designated it as a fair value hedge, our financial statements would have been better. In fact, you should not have applied hedged accounting at all 

Required:

Comment on the conversation between Amanda and Alex.

QUESTION 2                                                                                                                                   

Vettori Manufacturing Company (VMC) is a Canadian private company in the manufactory industry. VMC has a September 30 year-end and applies ASPE. It is very active in Canada, but has only recently decided to explore overseas markets.

VMC recently decided to expand its operations to Southern Africa. On March 16, 2020, VMC invested $359,000 in a subsidiary in South Africa. The subsidiary immediately purchased a piece of land for R1.7 million ($200,000) and inventory for R714,000 ($84,000) and invested R637,500 ($75,000) in a company listed on the Johannesburg Stock Exchange (JSE). (R = South African rand).

By September 30, 2020, the value of the rand had weakened relative to the Canadian dollar and was quoted at $1 = R9.00. The fair value of the land had increased to R1.75 million and the investment on the JSE had increased in value to R700,000. The net realizable value of the inventory was estimated at R720,000. The annual inflation rate in South Africa is approximately 5%.

Required:

Discuss how VMC should report the land, inventory, investment and any related exchange gains or losses associated with the subsidiary for consolidation purposes.

END