Widening Horizons Limited, a UK company which owns and rents out properties, established a wholly-owned overseas subsidiary in South Africa, Foreign Venture Limited, on 1 January 2017. Widening Horizons Limited subscribed £100,000 in cash for one million shares of 1 Rand (ZAR1) each. Foreign Venture Limited immediately raised a long-term loan of ZAR500,000 and purchased land and buildings, suitable for renting, at a cost of ZAR1,200,000. Following these transactions, the opening balance sheet of Foreign Venture Limited, in both ZAR and £ is as follows:
Opening Balance Sheet as at 1 January 2017
ZAR Exchange rate £
Land and Buildings 1,200,000 12 100,000
Current Assets 300,000 12 25,000
1,500,000 125,000
Less: Long-term loan 500,000 12 41,667
1,000,000 83,333
Following the 1 January 2017, Foreign Venture Limited collects rentals and incurs expenses. The profit and loss account for the year and balance sheet as at 31 December 2017 are as follows:
Profit and loss account for the year ended 31 December 2017
ZAR ZAR
Rental income 400,000
Less: Expenses
Operational expenses 115,000
Depreciation of buildings 50,000
Interest on long-term loan 75,000 240,000
Profit before taxation 160,000
Less Taxation 60,000
Retained profit for the year 100,000
Foreign Venture Limited
Balance sheet as at 31 December 2017
Land and Buildings ZAR
At cost 1,200,000
Less Depreciation 50,000
1,150,000
Net current assets (debtors plus cash less creditors) 450,000
1,600,000
Less Long term loan 500,000
1,100,000
Share capital
1,000,000 shares of ZAR1 each 1,000,000
Retained Profit 100,000
1,100,000
REQUIRED:
Translate the statements using both the closing rate method and the temporal method. In each case explain how the difference on translation arises.
Assume the following exchange rates between the Rand and Sterling
ZAR to £
1 January 2017 12
Average for the year to 31 December 2017 10
31 December, 2017 8
