Question

Gymson is an Italian subsidiary of U.S. company Universal Playgrounds, Inc.

Gymson began operations on January 1,2018. Its comparative balance sheets for January 1 and December 31, 2018, are presented below in euros:

                                                                                       1/1/18       12/31/18

Cash and receivables                                             € 10,000       € 20,000

Inventories, at cost 40,000          90,000

Noncurrent assets, net 700,000      530,000

Total assets €750,000      €640,000

Liabilities €550,000      €420,000

Capital stock 200,000      200,000

Retained earnings 0                 20,000

            Total liabilities and equity                       €750000       €640,000

During 2018, the following events occurred:

Sales revenue was €2,000,000, earned evenly during the year.

Inventory purchases were €1,200,000, made evenly over the year.

Out-of-pocket operating expenses were €650,000, incurred evenly throughout the year.

Depreciation expense on equipment was €170,000.

Dividends of €10,000 were declared and paid when the exchange rate was $1.52/€

REQUIRED: Calculate the translation gain/loss or the remeasurement gain/loss under each of the following assumptions. Be sure to clearly identify which it is and whether it is a gain or loss.

Assume Gymson’s functional currency is the euro.

Assume Gymson’s functional currency is the U.S. dollar.

Relevant exchange rates are as follows:

January 1, 2018                  $1.40

2018 average                      1.50

December 31, 2018          1.55

Answer 1

When the functional currency is euro

Particular	1 Jan 2018	31 Dec 2018
Cash and Receivable	10000	20000
Inventory	40000	90000
Non current asset	700000	530000
Total Asset ( A )	750000	640000
Liability	550000	420000
Capital Stock	200000	200000
Retained Earning	0	20000
Total ( B )	750000	640000

Cost of inventory consumed = 40000+1200000-90000

= 1150000

Profit = Sale-inventory consumed -operating expenses - depr. - dividend

=2000000-1150000-650000-170000-10000

=20000

When the functional currency is dollar

Particular	1/1/18 ( € )	1/1/18 ( $ )	31/12/18 ( € )	31/12/18 ( $ )
Cash and Receivable	10000	14000	20000	31000
Inventory	40000	56000	90000	139500
Non current asset	700000	840000	530000	821500
Total ( A )	750000	910000	640000	992000
Liability	550000	770000	420000	651000
Capital Stock	200000	280000	200000	310000
Retained Earning	0	0	20000	31000
Total ( B )	750000	1050000	640000	992000
Foreign exchange reserve		-140000		0

Sale 2000000*1.50 = 3000000$

Inventory consumed = (1200000*1.50)+56000-139500

= 1716500$

Operating Expenses = 650000*1.50 = 975000$

Depreciation = 170000*1.55 = 263500$

Dividend = 10000*1.52 = 15200$

Profit = 3000000-1716500-975000-263500-15200

= 29800$