Asked by joseph onuorah on May 18, 2024
Verified
Suppose General Motors built an assembly plant in Canada at a cost of fifty million Canadian dollars. At the time the plant was built, the direct quote for the Canadian dollar was $.7376. If one year later the Canadian dollar strengthened to $0.7388, what gain or loss would GM show on its financial books?
A) A translation loss of $81,213
B) A translation gain of $60,000
C) A translation gain of $81,213
D) A transaction gain of $60,000
Financial Books
Records and documents that capture all financial transactions of a business, facilitating the preparation of financial statements.
Canadian Dollar
The official currency of Canada, often represented by the symbol CAD or C$.
Translation Gain
Profit or gain recognized from converting foreign currency transactions into the functional currency of a business during the consolidation of financial statements.
- Analyze the fiscal impacts caused by variances in exchange rates during cross-border business transactions.
Verified Answer
EJ
Emily JonesMay 25, 2024
Final Answer :
B
Explanation :
To calculate the gain or loss on the financial books, we need to calculate the change in value of the Canadian dollar against the US dollar.
At the time the plant was built:
$50,000,000 CAD x $0.7376 = $36,880,000 USD
One year later:
$50,000,000 CAD x $0.7388 = $36,934,000 USD
The difference between these two values is:
$36,934,000 - $36,880,000 = $54,000
Since the Canadian dollar strengthened, this is a translation gain for GM. Therefore, the correct answer is B) A translation gain of $60,000.
At the time the plant was built:
$50,000,000 CAD x $0.7376 = $36,880,000 USD
One year later:
$50,000,000 CAD x $0.7388 = $36,934,000 USD
The difference between these two values is:
$36,934,000 - $36,880,000 = $54,000
Since the Canadian dollar strengthened, this is a translation gain for GM. Therefore, the correct answer is B) A translation gain of $60,000.
Learning Objectives
- Analyze the fiscal impacts caused by variances in exchange rates during cross-border business transactions.