The exchange rate at January 1, Year 2, when VTIL was originally established, was $0.075 per rupee.
Of the original investment of IR10 million, IR4 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 IR6 million, which was financed entirely by a six-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 9 depreciation was recorded in Year 3.) Depreciation expense of IR 1,000 in Year 4 and IR700 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 $0.027 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 installments throughout the year.
Dividends of 3,500 in Year 4 and 500 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 4 ….. $0.025
(a) Prepare a Canadian-dollar balance sheet at December 31, Year 4, and an income statement for the year then ended, assuming that VTIL functional currency is as follows:
(i) The Canadian dollar
(ii) The Indian rupee
(b) Which method should Victoria Textiles Limited apply to its investment in this subsidiary? Explain.