In this assignment you have two case studies, and are required to critically analyse and discuss these case studies. Support your analysis with appropriate academic references and accounting standards.
Case Study A
Lotus Limited is an Australian company with two overseas subsidiaries, one in Vietnam and the other in Thailand. The Vietnam subsidiary has as its major activity the distribution in Vietnam of Lotus Ltd.'s products. It has been agreed that the subsidiary will, for a period of time, retain all profits in order to expand its distribution network in Vietnam. In the past it has remitted most of its profits to the Australian parent company.
The Thailand subsidiary of Lotus Limited has been established to manufacture a range of products for the South-East Asian market. There is also an expectation that it could in the future become the major manufacturing plant for Lotus Limited Ltd and provide a supply of products for the Australian market.
Required
Based on the above, determine the functional currency of the foreign subsidiaries. Support you discussion with applicable AASB and specific paragraphs of the AASB.
Case Study B
On 1 July 2017, Westland Limited an Australian company acquired the issued shares of Bull Limited a company incorporated in the United States. The draft statement of profit or loss and other comprehensive income and statement of financial position of Bull Ltd at 30 June 2018 was as follows:
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US$
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US$
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|
Sales revenues Cost of sales:
Opening inventories Purchases
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1,600,000
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140,000
840,000
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|
|
Closing inventories
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980,000
280,000
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700,000
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|
Gross profit Expenses:
Depreciation Other
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90,000
270,000
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900,000
360,000
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Profit before income tax Income tax expense
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540,000
200,000
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Profit
Retained earnings as at 1 July 2017
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340,000
200,000
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540,000
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Dividend paid
Dividend declared
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120,000
200,000
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320,000
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Retained earnings as at 30 June 2018
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220,000
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2014
US$
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2013
US$
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|
Current assets: Inventories Accounts receivable Cash
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280,000
20,000
20,000
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140,000
130,000
570,000
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Total current assets
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320,000
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840,000
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Non-current assets:
Patent Plant
Accumulated depreciation Land
Buildings
Accumulated depreciation
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80,000
720,000 (130,000) 500,000
920,000
(120,000)
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80,000
600,000 (80,000) 300,000
820,000
(80,000)
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Total non-current assets
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1,970,000
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1,640,000
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Total assets
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2,290,000
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2,480,000
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Current liabilities: Provisions Accounts payable
|
500,000
320,000
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620,000
940,000
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Total current liabilities
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820,000
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1,560,000
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Non-current liabilities:
Loan from Westland Ltd
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530,000
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-
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Total liabilities
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1,350,000
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1,560,000
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Net assets
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940,000
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920,000
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|
Equity:
Share capital Retained earnings
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720,000
220,000
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720,000
200,000
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Total equity
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940,000
|
920,000
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Additional information
(a) On 1 January 2018, Bull Ltd acquired new plant for US$120,000. This plant is depreciated over a 5-year period.
(b) On 1 April 2018, Bull Ltd acquired US$200,000 worth of land.
(c) On 1 October 2017, Bull Ltd acquired US$100,000 worth of new buildings. These buildings are depreciated evenly over a 10-year period.
(d) The interim dividend was paid on 1 January 2018, half of which was from profits earned prior to 1 July 2017, while the dividend payable was declared on 30 June 2018.
(e) Sales, purchases and expenses occurred evenly throughout the period. The inventories on hand at 30 June 2018 were acquired during June 2018.
(f) The loan of US$530,000 from Westland Limited was granted on 1 July 2017. The interest rate is 8% p.a. Interest is paid on 30 June and 1 January each year.
EXCHANGE RATES
The exchange rates for the financial year were as follows:
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US$1
A$
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=
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1 July 2017
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2.00
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1 October 2017
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1.80
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1 January 2018
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1.70
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1 April 2018
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1.60
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30 June 2018
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1.50
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Average June 2018
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1.52
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Average for 2017-18
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1.75
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Required
1. If the functional currency for BULL LIMITED is the US dollar, prepare the financial statements of BULL LIMITED at 30 June 2018 in the presentation currency of the Australian dollar.
2. Verify the foreign currency translation adjustment.