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after translating consol can rsquo s inventory and long term debt into the parent cu 605286

Consolidated Motors is a U.S.-based corporation that sells mechanical engines and components used by electric utilities. Its Canadian subsidiary, Consol-Can, operates solely in Canada. It was created on 31 December 2006 and Consolidated Motors determined at that time that it should use the U.S. dollar as its functional currency.

Chief Financial Officer Monica Templeton was asked to explain to the Board of Directors how exchange rates affect the financial statements of both Consol-Can and the consolidated financial statements of Consolidated Motors. For the presentation, Templeton collects Consol-Can’s balance sheets for the years ended 2006 and 2007 (Exhibit 16-9), as well as relevant exchange rate information (Exhibit 16-10).

Templeton explains that Consol-Can uses the FIFO inventory accounting method, and that purchases of C$300 million and the sell-through of that inventory occurred evenly throughout 2007. Her presentation includes reporting the translated amounts in U.S. currency for each item, as well as associated translation related gains and losses. The Board responds with several questions.

• Would there be a reason to change the functional currency to the Canadian dollar?

• Would there be any translation effects for Consolidated Motors if the functional currency for Consol-Can were changed to the Canadian dollar?

• Would a change in the functional currency have any impact on financial statement ratios for the parent company?

• What would be the balance sheet exposure to translation effects if the functional currency were changed?

After translating Consol-Can’s inventory and long-term debt into the parent currency (US$), the amounts reported on Consolidated Motor’s financial statements at 31 December 2007 would be closest to (in millions)

a. $71 for inventory and $161 for long-term debt.

b. $71 for inventory and $166 for long-term debt.

c. $73 for inventory and $166 for long-term debt.

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