Question

Charleston Corporation operates a branch operation in a foreign country. Although this branch operates in euros, the U.S. dollar is its functional currency. Thus, a remeasurement is necessary to produce financial information for external reporting purposes. The branch began the year with 528,000 euros in cash and no other assets or liabilities. However, the branch immediately used 300,000 euros to acquire a warehouse. On May 1, it purchased inventory costing 100,000 euros for cash that it sold on July 1 for 160,000 euros cash. The branch transferred 10,000 euros to the parent on October 1 and recorded depreciation on the warehouse of 10,000 euros for the year. Currency exchange rates for 1 euro follow:

January 1 . . . . . . . . . . $1.14 = 1 euro
May 1 . . . . . . . . . . . . . 1.18 = 1
July 1 . . . . . . . . . . .. . . 1.20 = 1
October 1 . . . . . . . . . . 1.18 = 1
December 31 . . . . . . . 1.08 = 1
Average for the year. . 1.16 = 1

What is the remeasurement gain or loss to be recognized in the consolidated income statement? Choose the correct.
a. $100 gain.
b. $200 gain.
c. $100 loss.
d. $200 loss.

Answer 1

Answer: Remeasurement loss of $‭21,970

Step-by-step explanation:

The figures will have to be converted from Euros to US$ for the calculation.

The relevant exchange rate will be the rate on the date of the transaction.

Amount Exchange rate $Amount

Opening cash 528,000 1.14 ‭601,920‬

Increase in Cash assets:

Sale of inventory 160,000 1.20 192,000

688,000 793,920‬

Decrease in cash assets:

Acquisition of warehouse 300,000 1.14 (342,000)

Purchase of inventory 100,000 1.18 (118,000)

Transfer to parent 10,000 1.18 (11,800)

Ending net cash assets 278,000 ‭ 322,120‬

Remeasurement gain(loss) at 31 December = Ending net cash assets at current rate - Ending net cash assets

= (278,000 * 1.08) - 322,120

= ‭300,240‬ - 322,120

= ($21,970)

Options are not for this question.