Question #115
Reading: Reading 10 Multinational Operations
PDF File: Reading 10 Multinational Operations.pdf
Page: 63
Status: Unattempted
Question
The Herlitzka Company, a U.S. multinational firm, has a 100% stake in a Swiss subsidiary. The Swiss franc (SF) has been determined to be the functional currency. All the common stock of the subsidiary was issued at the beginning of the year and the subsidiary uses the FIFO inventory cost-flow assumption. In addition, the value of the SF is as follows: Beginning of year $0.5902 Average throughout the year $0.6002 End of year $0.6150 The SF-based balance sheet and income statement data for the Swiss subsidiary are as follows: Accounts receivable = 3,000 Inventory = 4,000 Fixed assets = 12,000 Accounts payable = 2,000 Long-term debt = 5,000 Common stock = 10,000 Retained earnings = 2,000 Net income = 2,000 The translated value of accounts receivable and inventory respectively are:
Answer Choices:
A. $1,845 and $2,401
B. $1,801 and $2,401
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 SF is the functional currency, then the current rate method is employed to
translate the SF amounts into USD. Hence, A/R = 0.615 × 3,000 = $1,845 and 0.615 × 4,000
= $2,460.