Asked by Alexandra Velicky on May 07, 2024
Verified
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: Tanuary 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|r|r|}\hline \text { Tanuary } 1,2020: & \text { US } \$ 1= & \text { CDN } \$ 0.815 \\\hline \text { December } 31,2020: & \text { US } \$ 1= & \text { CDN } \$ 0.8175 \\\hline \text { Average for } 2020: & \text { US } \$ 1= & \text { CDN } \$ 0.825 \\\hline \begin{array}{l}\text { Date of Purchase of Inventory on } \\\text { Hand: }\end{array} & \text { US } \$ 1= & \text { CDN } \$ 0.83 \\\hline \text { Date Dividends were declared: } & \text { US } \$ 1= & \text { CDN } \$ 0.8125\\\hline\end{array} Tanuary 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 Statements
At 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 \text { Income Statement: } & \\\hline \text { Sales } & \$ 5,000,000 \\\hline \text { Cost of Sales } & \$ 3,500,000 \\\hline \text { Depreciation Expense } & \$ 150,000 \\\hline \text { Bond Interest Expense } & \$ 100,000 \\\hline \text { Other Expense } & \$ 750,000 \\\hline \text { Net Income } & \$ 500,000 \\\hline \text { Statement of Retained Earnings: } & \\\hline \text { January 1, 2020: } & \$ 400,000 \\\hline \text { Net Income } &\$ 500,000 \\\hline \text { Dividends } & \$ 100,000) \\\hline \text { December } 31,2020: & \$ 800,000 \\\hline \text { Balance Sheet } & \\\hline \text { Cash } &\$ 1,200,000 \\\hline \text { Accounts Receivable } & \$ 1,900,000 \\\hline \text { Inventory } & \$ 700,000(\$ 500,000 \text { January 1, 2020) } \\\hline \text { Plant and Equipment (net) } & \$ 400,000 \\\hline \text { Current Liabilities } & \$ 4,200,000 \\\hline \text { Bonds Payable } & \$ 2,000,000 \\\hline \text { Common Shares } & \$ 1,000,000 \\\hline \text { 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 the same functional currency as ABC Inc.'s functional currency.
Which of the following rates would be used to translate the company's common shares?
A) US$1 = CDN$0.815
B) US$1 = CDN$0.8175
C) US$1 = CDN$0.825
D) US$1 = CDN$0.83
Foreign Subsidiary
A company that is owned or controlled by another company (parent company) and is located in a different country.
Functional Currency
The form of money prevalent in the primary financial setting where an organization conducts its operations and accrues cash flows.
Common Shares
Securities representing ownership in a corporation, providing voting rights and entitling holders to a share of the company's success through dividends and appreciation.
- Apply proper exchange rates for the translation of diverse elements within financial statements based on the functional currency.
Verified Answer
ME
Mandy EstradaMay 12, 2024
Final Answer :
A
Explanation :
Common shares are translated using the historical exchange rate, which in this case is the rate on the date of the transaction or the date the shares were issued. Since the shares would have been issued before or on the acquisition date (January 1, 2020), the historical rate on January 1, 2020, of US$1 = CDN$0.815 is used.
Learning Objectives
- Apply proper exchange rates for the translation of diverse elements within financial statements based on the functional currency.