Question #50
Reading: Reading 10 Multinational Operations
PDF File: Reading 10 Multinational Operations.pdf
Page: 27
Status: Incorrect
Correct Answer: A
Your Answer: B
Question
The U.S. Deter Company operates a subsidiary in the UK, and the functional currency is the British pound. The subsidiary's 2001 income statement shows GBP500 of net income and a GBP50 dividend that was paid on December 31, when the exchange rate was $1.50 per pound. The current exchange rate is $1.65 per pound, and the average rate is $1.58 per pound. What is the change in retained earnings for the period in U.S. dollars under U.S. GAAP?
Answer Choices:
A. $750
B. $725
C. $715
Explanation
The basis for using the current rate method is when Functional Currency is NOT the same
as Parent's Presentation (reporting) Currency. The basis for using the temporal method is
when Functional Currency = Parent's Presentation Currency.
Since the functional currency is the local currency, use the current rate method. The net
income is translated at the average rate, and dividends are translated at the rate that
applied when they were paid. Hence: 1.58(£500) − 1.50(£50) = $715.