Exercise 3

Part A

(i) On October 1, 2013, Johnson Corporation sold merchandise to an Italian customer for Euro 480,000 and received a 7-month, 5% promissory note denominated in Euro from the customer. Payment date was April 30, 2014. The bank exchange rates were shown below:

	10-1-2013	12-31-2013	4-30-2014
Spot rate	Euro 1 = US$1.37	Euro 1 = US$1.32	Euro 1 = US$1.34

How much total foreign currency transaction gain or loss should Johnson report in 2014?

(ii) Simon Company has two foreign subsidiaries. One is located in France, the other in Germany. Simon has determined the U.S. dollar is the functional currency for the French subsidiary, while the British pound is the functional currency for the German subsidiary. Both subsidiaries maintain their books and records in their local currency. What method (remeasurement and/or translation) will Simon use to convert its French subsidiary's financial statements into U.S. dollars? What method (remeasurement and/or translation) will Simon use to convert its German subsidiary's financial statements into U.S. dollars?

(iii) On January 1, 2013, Par Corporation (a U.S. company) acquired 100% of newly organized Shea Company, a Spanish enterprise. During 2013, Shea purchased Euro 150,000 of inventories. Ending inventory items (Euro 25,000 at FIFO cost) were purchased on December 2, 2013. Relevant exchange rates were as follows:

The exchange rate on December 2, 2013, was Euro 1 = US$1.32

The exchange rate on December 31, 2013, was Euro 1 = US$1.27

Average exchange rate for 2013 was Euro 1 = US$1.30

Determine the cost of goods sold and ending inventories in the remeasured/translated statements if the functional currency of Shea was the Euro.

Part B

On May 1, 2013, Davis Inc. entered into a firm commitment with a German customer to sell merchandise (costing $180,000) at a price of Euro 250,000. Delivery and payment were on July 30, 2013. Davis immediately entered into a 90-day foreign exchange forward contract with Montclair Bank to sell Euro 250,000 to be delivered on July 30. Assume that Davis Inc. prepares financial statements monthly using 12% a year discounting rate (PVF_2,1% = 0.9803 and PVF_1,1% = 0.9901). The bank spot and forward exchange rates are listed below:

Forward rate

30 days

60 days

90 days

5/1

Euro 1= US$1.18

Euro 1= US$1.19

Euro 1= US$1.21

5/31

Euro 1= US$1.17

Euro 1= US$1.18

Euro 1= US$1.20

6/30

Euro 1= US$1.19

Euro 1= US$1.21

Euro 1= US$1.22

7/30

Euro 1= US$1.25

Euro 1= US$1.26

Euro 1= US$1.27

	5-1-2013	5-31-2013	6-30-2013	7-30-2013
Spot rate	Euro 1= US$1.15	Euro 1= US$1.16	Euro 1= US$1.17	Euro 1=US$1.23

Prepare the journal entries for Davis on May 1, May 31, June 30, and July 30, 2013.