Reference no: EM133146954
Question - On December 31, 2016, Paper Diapers Inc. (PDI), a Canadian public company, purchased 100% of the outstanding common shares of German Paper Products Corp. (GPP), which is based in Germany. GPP produces raw materials used to manufacture diapers; 70% of its products are used by PDI, and the remaining 30% of GPP's products are sold in Europe. GPP's sales and expenses are all made and incurred in euros. GPP's selling price for its products is driven by local competition and German regulatory requirements. GPP's labour costs and direct material input costs are significantly impacted by local factors. PDI believes that it is important that all its senior managers get some international experience. As a result, 60% of GPP's senior management team are former PDI employees, and there continues to be a number of employee transfers between the two companies. On February 1, 2021, PDI advanced additional funds to GPP, increasing the intercompany loan. This loan is in Canadian dollars. GPP maintains bank accounts to hold income earned from operations in both Canadian dollars and euros. The financial statements of GPP as at, and for the year ended December 31, 2021, are as follows
German Paper Products Corp. Statement of financial position As at December 31
2021 2020
Assets
Cash €305,000 €175,000
Accounts receivable 360,000 320,000
Inventory 560,000 490,000
Building - cost 2,786,200 2,456,000
Equipment - cost 925,000 925,000
Accumulated depreciation (1,777,450) (1,529,450)
Total assets €3,158,750 €2,836,550
Liabilities and shareholders' equity
Accounts payable €769,000 €765,000
Bank loans 180,000 290,000
Long-term loan from PDI 580,000 300,000
Total liabilities 1,529,000 1,355,000
Common shares 650,000 650,000
Retained earnings 979,750 831,550
Total liabilities and shareholders' equity €3,158,750 €2,836,550
German Paper Products Corp. Statement of comprehensive income For the year ended December 31
2021 2020
Sales €5,972,000 €5,810,000
Cost of goods sold (4,043,800) (4,017,900)
Depreciation (248,000) (235,300)
Other expenses (910,000) (890,000)
Net income €770,200 €666,800
Additional information:
GPP declared dividends on November 15, 2021, and paid the dividends on December 5, 2021.
GPP's sales and other expenses are earned and incurred evenly throughout the year.
The inventory on hand at the end of each year was purchased in December of that year.
GPP purchased its building on July 1, 2014, and improvements to the building were made on July 1, 2021. The building is depreciated on a straight-line basis over 20 years with NO residual value. The additions did NOT extend the original useful life of the building.
The equipment on hand at the beginning of 2021 was purchased on July 1, 2014. The equipment has an estimated residual value of €25,000, and is depreciated on a straight-line basis over eight years.
The exchange rates for the euro and the Canadian dollar were as follows: July 1, 2014 €1 = C$1.475
December 31, 2016 €1 = C$1.485
December 31, 2020 / January 1, 2021 €1 = C$1.519
Average for December 2020 €1 = C$1.508
Average for 2020 €1 = C$1.479
July 1, 2021 €1 = C$1.522
November 15, 2021 €1 = C$1.534
December 5, 2021 €1 = C$1.545
December 31, 2021 €1 = C$1.556
Average for December 2021 €1 = C$1.549
Average for 2021 €1 = C$1.532
b) Assume that GPP's functional currency is the Canadian dollar.
i. Prepare a detailed calculation of the foreign exchange gain or loss for the year ended December 31, 2021.
ii. Translate the asset section only of GPP's statement of financial position for the year ended December 31, 2021, into Canadian dollars.