We must not reset the charset in slave after each statement, otherwise the SET CHARACTER SET is cancelled immediately.
Instead, we write a SET CHARACTER SET DEFAULT to the master's binlog when needed (like we already do for SET FOREIGN_KEY_CHECKS);
such writing is not necessary in 4.1 (in 4.1 the bug does not exist, as the SET ONE_SHOT syntax is used).
I have written a test and it works, but I'm not pushing the test as it requires building with all charsets.
I have noticed differences between what is inserted in the master's table in 4.0 and 4.1, and alerted Bar.