Liverpool Company Operates Retail Stores in Canada and an Exporting $\text { LIVERPOOL COMPANY, London Branch }$

Essay

Liverpool Company operates retail stores in Canada and an exporting business in London that specializes in buying and selling British tweeds. The London subsidiary, which was acquired on January 1, 1986, provided the following financial statements in pounds sterling to the Canadian parent company.
$\text { LIVERPOOL COMPANY, London Branch }$
$\text {Statement of Comprehensive Income}$
$\text { Year Ended December 31. 20X5}$ $$\begin{array} { l l } \text { Sales } & £2,300,000 \\\text { Cost of goods sold } & ( 1,200,000 ) \\\text {Depreciation expense } & ( 300,000 ) \\\text { Other expenses } & \underline{ ( 300,000 )}\end{array}$$ $\begin{array}{ll}\text { Comprehensive income }&£\underline{500,000}\end{array}$
$$\text { LIVERPOOL COMPANY, Landan Branch }$$ Statement of Changes in Equity-Partial-Retained Earnings section
$$\text { Year Ended Derember } 31,20X5$$ $\begin{array}{ll}\text { Retained earnings-January } 1 & £ 850,000 \\\text { Comprehensive income for the year } & 500,000\end{array}$ Less: Dividends declared and paid,
$\begin{array}{ll}\text { December } 31 &\underline{ (200,000)} \\\text { Retained earnings-December } 31 & £\underline{ 1,150,000}\end{array}$ $\text { LIVERPOOL COMPANY, London Branch }$
$\text {Statement of Financial Position}$
$\text {December \( 31,20X5 \)}$ $\begin{array}{lll}\text { Assets } & 20X5 & 20X4 \\\text { Cash and receivables } & £ 1,150,000 & £ 520,000 \\\text { Merchandise inventory } & 450,000 & 380,000 \\\text { Property, plant, and equipment } & \underline{3,450,000} & \underline{3,750,000} \\\text { Total } & £ \underline{5,050,000} & £ \underline{4.650,000}\end{array}$
$\begin{array}{lll}\text {Current liabilities } & £ 700,000 & £ 600,000 \\\text { Capital stock } & 1,200,000 & 1,200,000 \\\text { Retained earnings } & 2,000,000 & 2,000,000 \\\text { Total } & \underline{1,150,000} & \underline{850,000} \\&\underline{£ 5,050,000 }&\underline{ £ 4,650,000}\end{array}$
Liverpool Company was incorporated on January 1, 1984, at which time an amount of property, plant, and equipment with a present (December 31, 20X5)net book value of £3,000,000 was purchased. Additional equipment was purchased December 31, 20X4 (20% of depreciation expense relates to this new equipment). The long-term notes were issued, to replace financing provided by the parent, on January 1, 20X4.
Direct exchange rates for the pound sterling are:
$\begin{array}{ll}\text { January 1, 1984 }&£ \$ 1=\$ 1.9180 \\\text { January 1, 1986 } & 1.8365 \\\text { January 1,20X4 } & 1.6000\\\text { Average for quarter } 4,20X4 & 1.5612 \\\text { December } 31,20X4 \text { / January 1, 20X5 } & 1.5426 \\\text { December } 31,20X5 & 1.4730 \\\text { Average for } 20X5 & 1.5093 \\\text { Average for quarter } 4,20X5 & 1.4950\end{array}$

- The January 1, 20X5, retained earnings balance of the London Branch of the Liverpool Company correctly translated to Canadian dollars was $1,783,774. The beginning inventory of £380,000 was acquired during the last quarter of 20X4 and the ending inventory was acquired during the last quarter of 20X5. Sales and purchases were made, and other expenses were incurred, evenly throughout the year.
Required:
Translate the December 31, 20X5, statement of financial position of Liverpool Company into dollars assuming the London branch has a functional currency of C$s and a presentation currency of C$s.
Explain how it might be determined that the London branch had a function currency of Canadian $s.