Question #95

of 126 Which of the following statements regarding the translation of a foreign subsidiary into the reporting currency is most accurate? A) A multinational firm with small liability balances generally has minimal foreign currency exposure on its balance sheet. B) If the functional currency is equal to the local currency, exchange gains and losses on translation will be recognized in the income statement. C) If the reporting currency is the functional currency, the temporal method is applied and exposure is equal to net monetary assets. South Seas Inc, a subsidiary of Seven Seas Inc., reported its most recent performance in its local currency (LC) which is the functional currency. The reporting currency of Seven Seas is the U.S. dollar (USD). South Seas also paid a dividend of 16,000LC at year end, at which time the exchange rate was 2 LC/USD. Last year, Seven Seas reported balance sheet retained earnings of 90,000 USD for its South Seas subsidiary. Rates LC/US$ Current rate 2.00 Average rate 2.20 Historical rate for common stock 2.50 Historical rate for COGS 2.30 Historical rate for depreciation 2.10 Historical rate for ending inventory 2.30 Historical rate for fixed assets 2.10 LC Revenues 520,000 Cost of Goods Sold (COGS) 225,000 SG&A 100,000 Depreciation 80,000 Income Taxes 46,000 Net Income 69,000 The balance sheet for South Seas is given below. LC Cash 25,000 Accounts Receivable 30,000 Inventory 35,000 Net Fixed Assets 500,000 Total Assets 590,000 Accounts Payable 20,000 Long term debt 100,000 Common Stock 250,000 Retained Earnings 220,000 Total Liabilities & Equity 590,000