In: Accounting
A Belgium subsidiary's beginning and ending trial balances appear below:
Dr (Cr) |
January 1 |
December 31 |
|
Cash, receivables |
€ 1,500 |
€ 1,200 |
Inventories |
3,000 |
3,500 |
Plant & equipment, net |
30,000 |
39,000 |
Liabilities |
(18,500) |
(27,200) |
Capital stock |
(4,000) |
(4,000) |
Retained earnings, beginning |
(12,000) |
(12,000) |
Sales revenue |
-- |
(15,000) |
Cost of sales |
9,500 |
|
Out-of-pocket selling & administrative expenses |
-- |
4,000 |
Depreciation expense |
-- |
1,000 |
Total |
€ 0 |
€ 0 |
Exchange rates ($/€) are:
Beginning of year |
$1.25 |
Average for year |
1.22 |
End of year |
1.20 |
The subsidiary was acquired at the beginning of the year. Its
sales, inventory purchases, and out-of-pocket selling and
administrative expenses occurred evenly during the year. Equipment
was purchased for €10,000 when the exchange rate was $1.23.
Depreciation for the year includes €200 related to the equipment
purchased during the year. The ending inventory was purchased at
the end of the year, and the beginning inventory was purchased at
the end of the previous year.
If the subsidiary's functional currency is the euro, what is the
translation gain or loss for the year?
A. |
$810 loss |
|
B. |
$1,130 gain |
|
C. |
$2,020 loss |
|
D. |
$1,030 gain |
1. A subsidiary is considered as an Non-Intergral foreign operation, the activities of which are carried out with a significant degree of autonomy from those of the reporting enterprise;
2. A non integral foreign operation accumulates cash and other monetary items, incurs expenses, generates income and arranges borrowings all in its local currency.
3. All Monetary and Non-monetary items are translated using Closing rate. Income and expenses using Transaction date or average rate.
4. Any exchange gain or loss is not recognized in Profit and loss but is accumulated in Foreign Currency Translation Reserve in the reporting entity’s financial statements until the disposal of the net investment.
Trial Balance | Dec-31 | |||
€ - | Applicable Exchange rate | $ | ||
Cash, receivables | € 1,200 | 1.2 | Closing | $ 1,440 |
Inventories | € 3,500 | 1.2 | Closing | $ 4,200 |
Plant & equipment, net | € 39,000 | 1.2 | Closing | $ 46,800 |
Liabilities | € (27,200) | 1.2 | Closing | $(32,640) |
Capital stock | € (4,000) | 1.25 | Beginning | $ (5,000) |
Retained earnings, beginning | € (12,000) | 1.25 | Beginning | $(15,000) |
Sales revenue | € (15,000) | 1.22 | Average | $(18,300) |
Cost of sales | € 9,500 | 1.22 | Average | $ 11,590 |
Out-of-pocket selling & administrative expenses | € 4,000 | 1.22 | Average | $ 4,880 |
Depreciation expense | € 1,000 | 1.22 | Average | $ 1,220 |
Total | € - | Foreign Exchange gain or loss | $ (810) |