On December 31, Year 2, PAT Inc. of Halifax, Nova Scotia, acquired 90% of the voting shares of Gioco Limited of Italy, for 690,000 euros (€). On the acquisition date, the fair values equaled the carrying amounts for all of Gioco’s identifiable assets and liabilities. Selected account balances from Gioco’s general ledger on
December 31, Year 2, were as follows:
Equipment ............ € 150,000
Building .......... 1,350,000
Accumulated amortization .... 195,000
Common shares ....... 600,000
Retained earnings ....... 96,000
Gioco purchased the building and equipment on January 1, Year 1. The condensed trial balance of Gioco for the year ending December 31, Year 5, was as follows:
Accounts receivable ........ € 197,000
Inventory ............ 255,000
Building ............ 1,350,000
Equipment ............ 350,000
Cost of goods purchased ....... 1,080,000
Change in inventory ......... 120,000
Amortization expense ......... 130,000
Other expenses ......... 470,000
Dividends paid ......... 300,000
Total debits ........... €4,252,000
Current monetary liabilities ..... € 682,000
Common shares ........ 600,000
Retained earnings, beginning ...... 300,000
Sales .............. 2,250,000
Accumulated amortization ..... 420,000
Total credits ............ €4,252,000
Additional Information
• Gioco’s sales, inventory purchases, and other expenses occurred uniformly over the year.
• Gioco’s inventory on hand at the end of each year was purchased uniformly over the last quarter. On December 31, Year 4, the inventories totaled €375,000, and on December 31, Year 5, they totaled €255,000.
• On January 1, Year 5, Gioco purchased equipment for €200,000. The equipment has an estimated useful life of eight years and a residual value of €5,000. Gioco uses the double-declining-balance method to calculate amortization expense. There were no other purchases of property, plant, and equipment between Year 2 and Year 5.
• The dividends were declared and paid on January 1, Year 5.
• The exchange rates for the euro and the Canadian dollar were as follows:
Jan. 1, Year 1 ............. $1 = €0.50
Dec. 31, Year 2 .......... $1 = €0.60
Average for the Year 4 fourth quarter ..... $1 = €0.68
Dec. 31, Year 4/Jan. 1, Year 5 ........ $1 = €0.70
Dec. 31, Year 5 .......... $1 = €0.80
Average for Year 5 .......... $1 = €0.76
Average for the Year = fourth quarter .... $1 = €0.79
Required:
(a) Translate into Canadian dollars the following items on Gioco’s financial statements for the year ended December 31, Year 5, assuming that Gioco’s functional currency is the Canadian dollar:
(i) Accounts receivable
(ii) Inventory
(iii) Equipment
(iv) Accumulated amortization
(v) Common shares
(b) Translate into Canadian dollars the following items on Gioco’s financial statements for the year ended December 31, Year 5, assuming that Gioco’s functional currency is the euro:
(i) Cost of goods purchased
(ii) Amortization expense
(iii) Inventory
(iv) Common shares
(c) For Gioco, which functional currency would show the strongest current ratio for the company’s translated financial statements? Briefly explain.
(d) Prepare an independent calculation of the unrealized exchange gains or losses to be included in other comprehensive income for Year 5, assuming that Gioco’s functional currency is the euro.