Question #62

Under the current rate method, the foreign currency translation gain or loss appears on the parent firm's balance sheet in the equity accounts. (Module 10.4, LOS 10.e) Giant Company is a U.S. firm that produces parts for nuclear reactors. Giant Company has a subsidiary, Grande, Inc., that operates in Mexico and is responsible for designing and manufacturing connection fittings that are vital for the proper operation of its parent company's reactors. Giant Company considers the U.S. dollar to be the functional currency of Grande, Inc. Grande, Inc., began operations January 1, 2001. Common Stock and Fixed Assets were acquired January 1, 2000. Inventory is accounted for under the last in, first out (LIFO) cost flow assumption, and was purchased evenly through the year. The inventory in the January 1, 2001, Balance Sheet was acquired on January 1, 2001. Exchange Rates were: January 1, 2000 $0.14/M peso January 1, 2001 $0.12/M peso June 30, 2001 $0.11/M peso (this is the 2001 average rate) December 31, 2001 $0.10/M peso Grande, Inc. Balance Sheet (in M Pesos) Jan. 1, 2001 Dec. 31, 2001 Cash 5,000,000 20,000,000 Accounts Receivable 20,000,000 35,000,000 Inventory 15,000,000 15,000,000 Fixed Assets (net) 70,000,000 60,000,000 Accounts Payable 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 2001 Income Statement (in M Pesos) Sales 60,000,000 Cost of Goods Sold (45,000,000) Depreciation (10,000,000) Net Income 5,000,000