Question #18

Under LIFO, the last goods purchased are the first goods out to COGS. Hence, although technically the historical rate is used to remeasure COGS, a more recent rate is typically more appropriate for COGS under LIFO. (Module 10.3, LOS 10.e) Giant Company is a U.S. Company with a subsidiary, Grande, Inc., that operates in Mexico. Giant Company uses either the temporal or the current rate method of foreign currency translation for its subsidiaries. Grande, Inc., began operations January 1, 2012. Common Stock and Fixed Assets were acquired January 1, 2011. Inventory is accounted for under the last in, first out (LIFO) cost flow assumption, with a slow rate of turnover. The beginning U.S. dollar value of Giant's retained earnings was $2,600,000. The inventory in the January 1, 2012, Balance Sheet was acquired on January 1, 2012. Exchange Rates were: January 1, 2011 $0.14/peso January 1, 2012 $0.12/peso June 30, 2012 $0.11/peso (this is the 2012 average rate) December 31, 2012 $0.10/peso Grande, Inc. Balance Sheet (in M Pesos) Jan. 1, 2012 Dec. 31, 2012 Cash 5,000,000 20,000,000 Accounts Receivable (A/R) 20,000,000 35,000,000 Inventory 15,000,000 15,000,000 Fixed Assets (net) 90,000,000 60,000,000 Accounts Payable (A/P) 10,000,000 10,000,000 Long Term Debt 40,000,000 35,000,000 Common Stock 80,000,000 80,000,000 Retained Earnings 5,000,000 2012 Income Statement (in Pesos) Sales 60,000,000 Cost of Goods Sold (COGS) (45,000,000) Depreciation (10,000,000) Net Income 5,000,000 Assume that Giant Company considers the Mexican peso to be both the local currency and the functional currency of Grande, Inc.