ABC Inc. has a single wholly-owned American subsidiary called US1 based in Los Angeles, California, which was acquired January 1, 2020. US1 submitted its financial statements for 2020 to ABC. Selected exchange rates in effect throughout 2020 are shown below: January 1 , 2020 : US $ 1 = CDN $ 0.815 December 31 , 2020 : US $ 1 = CDN $ 0.8175 Average for 2020 : US $ 1 = CDN $ 0.825 Date of Purchase of Inventory on Hand: US $ 1 = CDN $ 0.83 Date Dividends were declared: US $ 1 = CDN $ 0.8125 \begin{array}{|l|l|r|}\hline ext { January } 1,2020: & ext { US } \$ 1= & ext { CDN } \$ 0.815 \\hline ext { December } 31,2020: & ext { US } \$ 1= & ext { CDN } \$ 0.8175 \\hline ext { Average for } 2020: & ext { US } \$ 1= & ext { CDN } \$ 0.825 \\hline ext { Date of Purchase of Inventory on Hand: } & ext { US } \$ 1= & ext { CDN } \$ 0.83 \\hline ext { Date Dividends were declared: } & ext { US } \$ 1= & ext { CDN } \$ 0.8125\\hline\end{array} January 1 , 2020 : December 31 , 2020 : Average for 2020 : Date of Purchase of Inventory on Hand: Date Dividends were declared: US $1 = US $1 = US $1 = US $1 = US $1 = CDN $0.815 CDN $0.8175 CDN $0.825 CDN $0.83 CDN $0.8125 US1 financial results for 2020 were as follows:US1 Financial StatementsAt December 31, 2020(in U.S. dollars) Income Statement: Sales $ 5 , 000 , 000 Cost of Sales $ 3 , 500 , 000 Depreciation Expense $ 150 , 000 Bond Interest Expense $ 100 , 000 Other Expense $ 750 , 000 Net Income $ 500 , 000 Statement of Retained Earnings: January 1, 2020: $ 400 , 000 Net Income $ 500 , 000 Dividends $ 100 , 000 ) December 31 , 2020 : $ 800 , 000 Balance Sheet Cash $ 1 , 200 , 000 Accounts Receivable $ 1 , 900 , 000 Inventory $ 700 , 000 ( $ 500 , 000 January 1, 2020) Plant and Equipment (net) $ 400 , 000 Current Liabilities $ 4 , 200 , 000 Bonds Payable $ 2 , 000 , 000 Common Shares $ 1 , 000 , 000 Retained Earnings $ 800 , 000 $ 4 , 200 , 000 \begin{array}{|l|r|}\hline ext { Income Statement: } & \\hline ext { Sales } & \$ 5,000,000 \\hline ext { Cost of Sales } & \$ 3,500,000 \\hline ext { Depreciation Expense } & \$ 150,000 \\hline ext { Bond Interest Expense } & \$ 100,000 \\hline ext { Other Expense } & \$ 750,000 \\hline ext { Net Income } & \$ 500,000 \\hline ext { Statement of Retained Earnings: } & \\hline ext { January 1, 2020: } & \$ 400,000 \\hline ext { Net Income } & \$ 500,000 \\hline ext { Dividends } & \$ 100,000) \\hline ext { December } 31,2020: & \$ 800,000 \\hline ext { Balance Sheet } & \\hline ext { Cash } & \$ 1,200,000 \\hline ext { Accounts Receivable } & \$ 1,900,000 \\hline ext { Inventory } & \$ 700,000(\$ 500,000 ext { January 1, 2020) } \\hline ext { Plant and Equipment (net) } & \$ 400,000 \\hline ext { Current Liabilities } & \$ 4,200,000 \\hline ext { Bonds Payable } & \$ 2,000,000 \\hline ext { Common Shares } & \$ 1,000,000 \\hline ext { Retained Earnings } & \$ 800,000 \\hline & \$ 4,200,000 \\hline\end{array} Income Statement: Sales Cost of Sales Depreciation Expense Bond Interest Expense Other Expense Net Income Statement of Retained Earnings: January 1, 2020: Net Income Dividends December 31 , 2020 : Balance Sheet Cash Accounts Receivable Inventory Plant and Equipment (net) Current Liabilities Bonds Payable Common Shares Retained Earnings $5 , 000 , 000 $3 , 500 , 000 $150 , 000 $100 , 000 $750 , 000 $500 , 000 $400 , 000 $500 , 000 $100 , 000 ) $800 , 000 $1 , 200 , 000 $1 , 900 , 000 $700 , 000 ( $500 , 000 January 1, 2020) $400 , 000 $4 , 200 , 000 $2 , 000 , 000 $1 , 000 , 000 $800 , 000 $4 , 200 , 000 Sales, purchases, bond interest, and other expenses occurred evenly throughout the year.US1 is considered to be a foreign subsidiary that has a different functional currency than ABC Inc.'s functional currency.Which of the following rates would be used to translate US1's income statement items?A) US$1 = CDN$0.815B) US$1 = CDN$0.8175C) US$1 = CDN$0.825D) US$1 = CDN$0.83

Question

ABC Inc. has a single wholly-owned American subsidiary called US1 based in Los Angeles, California, which was acquired January 1, 2020. US1 submitted its financial statements for 2020 to ABC. Selected exchange rates in effect throughout 2020 are shown below:    January  1 , 2020 :  US  $ 1 =  CDN  $ 0.815  December  31 , 2020 :  US  $ 1 =  CDN  $ 0.8175  Average for  2020 :  US  $ 1 =  CDN  $ 0.825  Date of Purchase of Inventory on Hand:   US  $ 1 =  CDN  $ 0.83  Date Dividends were declared:   US  $ 1 =  CDN  $ 0.8125 \begin{array}{|l|l|r|}\hline 	ext { January } 1,2020:  &  	ext { US } \$ 1=  &  	ext { CDN } \$ 0.815 \\hline 	ext { December } 31,2020:  &  	ext { US } \$ 1=  &  	ext { CDN } \$ 0.8175 \\hline 	ext { Average for } 2020:  &  	ext { US } \$ 1=  &  	ext { CDN } \$ 0.825 \\hline 	ext { Date of Purchase of Inventory on Hand: }  &  	ext { US } \$ 1=  &  	ext { CDN } \$ 0.83 \\hline 	ext { Date Dividends were declared: }  &  	ext { US } \$ 1=  &  	ext { CDN } \$ 0.8125\\hline\end{array}  January  1 , 2020 :  December  31 , 2020 :  Average for  2020 :  Date of Purchase of Inventory on Hand:   Date Dividends were declared:  ​  US  $1 =  US  $1 =  US  $1 =  US  $1 =  US  $1 = ​  CDN  $0.815  CDN  $0.8175  CDN  $0.825  CDN  $0.83  CDN  $0.8125 ​ ​   US1 financial results for 2020 were as follows:US1 Financial StatementsAt December 31, 2020(in U.S. dollars)  Income Statement:   Sales  $ 5 , 000 , 000  Cost of Sales  $ 3 , 500 , 000  Depreciation Expense  $ 150 , 000  Bond Interest Expense  $ 100 , 000  Other Expense  $ 750 , 000  Net Income  $ 500 , 000  Statement of Retained Earnings:   January 1, 2020:  $ 400 , 000  Net Income  $ 500 , 000  Dividends  $ 100 , 000 )   December  31 , 2020 : $ 800 , 000  Balance Sheet   Cash  $ 1 , 200 , 000  Accounts Receivable  $ 1 , 900 , 000  Inventory  $ 700 , 000 ( $ 500 , 000  January 1, 2020)    Plant and Equipment (net)   $ 400 , 000  Current Liabilities  $ 4 , 200 , 000  Bonds Payable  $ 2 , 000 , 000  Common Shares  $ 1 , 000 , 000  Retained Earnings  $ 800 , 000 $ 4 , 200 , 000 \begin{array}{|l|r|}\hline 	ext { Income Statement: }  &  \\hline 	ext { Sales }  &  \$ 5,000,000 \\hline 	ext { Cost of Sales }  &  \$ 3,500,000 \\hline 	ext { Depreciation Expense }  &  \$ 150,000 \\hline 	ext { Bond Interest Expense }  &  \$ 100,000 \\hline 	ext { Other Expense }  &  \$ 750,000 \\hline 	ext { Net Income }  &  \$ 500,000 \\hline 	ext { Statement of Retained Earnings: }  &   \\hline 	ext { January 1, 2020: }  &  \$ 400,000 \\hline 	ext { Net Income }  & \$ 500,000 \\hline 	ext { Dividends }  &   \$ 100,000)  \\hline 	ext { December } 31,2020:  &  \$ 800,000 \\hline 	ext { Balance Sheet }  &   \\hline 	ext { Cash }  & \$ 1,200,000  \\hline 	ext { Accounts Receivable }  &  \$ 1,900,000 \\hline 	ext { Inventory }  &  \$ 700,000(\$ 500,000 	ext { January 1, 2020)  } \\hline 	ext { Plant and Equipment (net)  }  &  \$ 400,000 \\hline 	ext { Current Liabilities }  &  \$ 4,200,000 \\hline 	ext { Bonds Payable }  &  \$ 2,000,000 \\hline 	ext { Common Shares }  &  \$ 1,000,000 \\hline 	ext { Retained Earnings }  &  \$ 800,000 \\hline  &  \$ 4,200,000 \\hline\end{array}  Income Statement:   Sales   Cost of Sales   Depreciation Expense   Bond Interest Expense   Other Expense   Net Income   Statement of Retained Earnings:   January 1, 2020:   Net Income   Dividends   December  31 , 2020 :  Balance Sheet   Cash   Accounts Receivable   Inventory   Plant and Equipment (net)    Current Liabilities   Bonds Payable   Common Shares   Retained Earnings  ​ $5 , 000 , 000 $3 , 500 , 000 $150 , 000 $100 , 000 $750 , 000 $500 , 000 $400 , 000 $500 , 000 $100 , 000 )  $800 , 000 $1 , 200 , 000 $1 , 900 , 000 $700 , 000 ( $500 , 000  January 1, 2020)   $400 , 000 $4 , 200 , 000 $2 , 000 , 000 $1 , 000 , 000 $800 , 000 $4 , 200 , 000 ​ ​   Sales, purchases, bond interest, and other expenses occurred evenly throughout the year.US1 is considered to be a foreign subsidiary that has a different functional currency than ABC Inc.'s functional currency.Which of the following rates would be used to translate US1's income statement items?A)  US$1 = CDN$0.815B)  US$1 = CDN$0.8175C)  US$1 = CDN$0.825D)  US$1 = CDN$0.83

Sarah Gegen · Accepted Answer

Final Answer : C, Explanation :  Income statement items for a foreign subsidiary are translated using the average exchange rate over the period in which the revenues and expenses occurred. In this case, the average exchange rate for 2020 is US$1 = CDN$0.825.

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