Question

The Mexican subsidiary of US firm has current assets of Peso 1mn, long term assets of Peso 4mn, current liabilities of Peso 400,000 and long term liabilities of Peso 1.5mn. If the Peso appreciated during a year from $0.05249 to $0.05312. Under FASB-52, what is the translation gain (loss) in dollar if peso is the functional currency?

a. $ 0

b. $ 1,575 loss

c. $ 378 gain

d. $ 1,953 gain

Answer 1

d. $1,953 gain

Under FASB-52, the parent company must translate foreign subsidiary results from the functional currency to the reporting currency. Thus, in our case $ is the reporting currency and Peso is the functional currency.

As no other information is mentioned with regards to holding, we assume that the Mexican subsidiary of US firm is wholly owned subsidiary of the US firm (i.e. 100% holding by the US firm). In such a case, the US firm has to record the "networth of the subsidiary" in it's consolidated books. With the information provided, we can prepare the abridged financial statements of the Mexican Subsidiary as follows to find the Networth of the company:

Equity & liabilities	Amount	Assets	Amount
	(Peso)		(Peso)
Networth (Bal fig.)	3,100,000	Long Term Assets	4,000,000
Long Term Liabilities	1,500,000	Current Assets	1,000,000
Current Liabilities	400,000
	5,000,000		5,000,000

So, the above networth of Mexican subsidiary of the US firm is Peso 3.1mn. As the Peso appreciated, the networth of the Mexican subsidiary for the US firm will also increase/appreciate.

The gain is calculated as follows:

3,100,000 x (0.05312 - 0.05249) = $1,953/-.