Question

Zugar Company is domiciled in a country whose currency is the dinar. Zugar begins 2017 with three assets: cash of 27,200 dinars, accounts receivable of 81,800 dinars, and land that cost 218,000 dinars when acquired on April 1, 2016. On January 1, 2017, Zugar has a 168,000 dinar note payable, and no other liabilities. On May 1, 2017, Zugar renders services to a customer for 138,000 dinars, which was immediately paid in cash. On June 1, 2017, Zugar incurred a 118,000 dinar operating expense, which was immediately paid in cash. No other transactions occurred during the year. Currency exchange rates for 1 dinar follow:

April 1, 2016 $0.51 = 1 dinar

January 1, 2017 0.54 = 1

May 1, 2017 0.55 = 1

June 1, 2017 0.57 = 1

December 31, 2017 0.59 = 1

A. Assume that Zugar is a foreign subsidiary of a U.S. multinational company that uses the U.S. dollar as its reporting currency. Assume also that the dinar is the subsidiary’s functional currency. What is the translation adjustment for this subsidiary for the year 2017?

B. Assume that Zugar is a foreign subsidiary of a U.S. multinational company that uses the U.S. dollar as its reporting currency. Assume also that the U.S. dollar is the subsidiary’s functional currency. What is the remeasurement gain or loss for 2017?

C. Assume that Zugar is a foreign subsidiary of a U.S. multinational company. On the December 31, 2017, balance sheet, what is the translated value of the Land account? On the December 31, 2017, balance sheet, what is the remeasured value of the Land account?

Answer 1

Solution:

a. The translation adjustment is based on changes in the net assets of the subsidiary.

                                               Dinars              Exchange Rate   U.S. Dollars

Net assets, Jan. 1                   159,000                   .54                  $85,860

Increase in net assets:

Service revenue, May 1        138,000                    0.55                  75,900

Decrease in net assets:

Operating expense, June 1 (118,000)                      0.57                (67,260)

Net assets, Dec. 31                179,000                                             94,500

Net asset, Dec. 31

at current exchange rate       179,000                      0.59                105,610

Translation adjustment (credit ­ positive)                                     $(11,110)

b. The remeasurement gain or loss is based on changes in the net monetary assets (liabilities) of the subsidiary.

                                                                           Dinars                      Exchange Rate         U.S. Dollars

Net monetary assets (liabilities), Jan. 1              (59,000)                        0.54                  $(31,860)

Changes in net monetary assets:

Service revenue, May 1                                       138,000                      0.55                     75,900

Operating expense, June 1                                  (118,000)                       0.57                     (67,260)

Net monetary assets (liabilities), Dec. 31             (39,000)                                               (23,220)

Net monetary assets (liabilities), Dec. 31

at current exchange rate                                        (39,000)                    0.59                      (23,010)

Remeasurement gain (credit)                                                                                                    $(210)

c.

Translated value of land   218,000 dinars×$ 0.59= $ 128,620

Remeasured value of land    218,000 dinars×$ 0.51= $ 111,180