Question

1.

Watson Company has a subsidiary in the country of Alonza where the local currency unit is the kamel (KM). On December 31, 2014, the subsidiary has the following balance sheet:

Cash	KM	13,500	Notes payable (due 2016)	KM	30,000
Inventory		25,000	Common stock		26,000
Land		8,000	Retained earnings		13,000
Building		45,000
Accumulated depreciation		(22,500)
	KM	69,000		KM	69,000

The subsidiary acquired the inventory on August 1, 2014, and the land and buildings in 2000. It issued the common stock in 1998. During 2015, the following transactions took place:

2015
Feb. 1	Paid 17,500 KM on the note payable.
May 1	Sold entire inventory for 34,000 KM on account.
June 1	Sold land for 9,500 KM cash.
Aug. 1	Collected all accounts receivable.
Sept.1	Signed long-term note to receive 12,000 KM cash.
Oct. 1	Bought inventory for 15,500 KM cash.
Nov. 1	Bought land for 8,000 KM on account.
Dec. 1	Declared and paid 2,400 KM cash dividend to parent.
Dec. 31	Recorded depreciation for the entire year of 2,500 KM.

The exchange rates for 1 KM are as follows:

1998	1 KM	=	$	0.26
2000	1	=		0.24
August 1, 2014	1	=		0.34
December 31, 2014	1	=		0.36
February 1, 2015	1	=		0.38
May 1, 2015	1	=		0.40
June 1, 2015	1	=		0.42
August 1, 2015	1	=		0.44
September 1, 2015	1	=		0.46
October 1, 2015	1	=		0.48
November 1, 2015	1	=		0.50
December 1, 2015	1	=		0.52
December 31, 2015	1	=		0.56
Average for 2015	1	=		0.46

a.	If this is a translation, what is the translation adjustment determined solely for 2015?

      

b.	If this is a remeasurement, what is the remeasurement gain or loss determined solely for 2015?

2. Benjamin, Inc., operates an export/import business. The company has considerable dealings with companies in the country of Camerrand. The denomination of all transactions with these companies is alaries (AL), the Camerrand currency. During 2017, Benjamin acquires 43,000 widgets at a price of 8 alaries per widget. It will pay for them when it sells them. Currency exchange rates for 1 AL are as follows:

September 1, 2017	$	0.48
December 1, 2017		0.42
December 31, 2017		0.50
March 1, 2018		0.43

1. Assume that Benjamin acquired the widgets on December 1, 2017, and made payment on March 1, 2018. What is the effect of the exchange rate fluctuations on reported income in 2017 and in 2018?
2. Assume that Benjamin acquired the widgets on September 1, 2017, and made payment on December 1, 2017. What is the effect of the exchange rate fluctuations on reported income in 2017?
3. Assume that Benjamin acquired the widgets on September 1, 2017, and made payment on March 1, 2018. What is the effect of the exchange rate fluctuations on reported income in 2017 and in 2018?

(Input all amounts as positive values.)

       

Answer 1

1. (a)

Particulars	Amount (KM)	Exchange rate	(KM)
Net asset balance [13,500 + 25,000 + 8,000]	46,500	0.36	16,740
Increase in Net assets:
Sold inventory at profit	9,000	0.40	3,600
Sold land at profit	1,500	0.42	630
Decrease in Net assets:
Dividend paid	(2,400)	0.52	(1,248)
Depreciation recorded	(2,500)	0.46	(1,150)
Net asset balance on 31st Dec	52,100		18,572
Less: Net asset balance on 31st Dec at current exchange rate	52,100	0.56	29,176
Translation adjustment			(10,604)

(b)

Particulars	Amount (KM)	Exchange rate	(KM)
Beginning net monetary liability position [30,000 - 13,500]	16,500	0.36	5,940
Increase in monetary assets:
Sold inventory	34,000	0.40	13,600
Sold land	9,500	0.42	3,990
Decrease in monetary assets:
Bought inventory	(15,500)	0.48	(7,440)
Bought Land	(8,000)	0.50	(4,000)
Dividend paid	(2,400)	0.52	(1,248)
Ending Net monetary liability position	34,100		10,862
Less: Ending Net monetary liability position at current exchange rate	34,100	0.56	19,096
Remeasurement Gain			(8,234)

2. (a)

Dec 1 2017 liability	43000 * 8 * 0.42	144,480
Dec 31 2017 liability	43000 * 8 * 0.50	172,000
Foreign exchange loss		(27,520)

Dec 31 2017 liability	43000 * 8 * 0.50	172,000
Mar 1 2018 liability	43000 * 8 * 0.43	147,920
Foreign exchange gain		24,080

(b)

Sep 1 2017 liability	43000 * 8 * 0.48	165,120
Dec 1 2017 liability	43000 * 8 * 0.42	144,480
Foreign exchange gain		20,640

(c)

Sep 1 2017 liabilty	43000 * 8 * 0.48	165,120
Dec 31 2017 liability	43000 * 8 * 0.50	172,000
Foreign exchange loss		(6,880)

Dec 31 2017 liability	43000 * 8 * 0.50	172,000
Mar 1 2018 liability	43000 * 8 * 0.43	147,920
Foreign exchange gain		24,080