Lancer, Inc. (a U.S.-based company), establishes a subsidiary in a foreign count
ID: 2567874 • Letter: L
Question
Lancer, Inc. (a U.S.-based company), establishes a subsidiary in a foreign country on January 1, 2016. The following account balances for the year ending December 31, 2017, are stated in kanquo (KQ), the local currency:
The following U.S.$ per KQ exchange rates are applicable:
Lancer is preparing account balances to produce consolidated financial statements.
Assuming that the kanquo is the functional currency, what exchange rate would be used to report each of these accounts in U.S. dollar consolidated financial statements?
Assuming that the U.S. dollar is the functional currency, what exchange rate would be used to report each of these accounts in U.S. dollar consolidated financial statements?
Exchange rate
A . Sales
Invetory
Equipment
Rent Expense
Dividends
Note receivable
Accumilated Dep
Depreciation Expense
(Round your answers to 2 decimal places.)
Sales KQ 340,000 Inventory (bought on 3/1/17) 187,000 Equipment (bought on 1/1/16) 88,000 Rent expense 22,000 Dividends (declared on 10/1/17) 30,000 Notes receivable (to be collected in 2020) 50,000 Accumulated depreciation—equipment 26,400 Salary payable 7,800 Depreciation expense 8,800Explanation / Answer
1. Functional currency is the currency in which most of the business transactions of the company are carried out. In the given case, Kanquo is assumed to be the functional currency and therefore all the financial statements of Lancer Inc. will be consolidated in Kanquo currency. Therefore, no exchange rate will be applied if Kanquo is the functional currency of Lancer Inc.
2. If Dollar is the functional currency then all the reported amounts of foreign subsidiary will be consolidated by using the exchange rate of U.S Dollar. In the given case, following is the exchange rate for different transactions and balances.
Rate of Exchange and reporting amount of each account
Particulars
Rate on Date
Rate of Exchange
($ per KQ)
Amount in KQ
Amount in $
Sales
Date of sale / Average Rate
0.40
340,000
136,000
Inventory
Date of Purchase / Average Rate
0.40
187,000
74,800
Equipment
Closing Rate
0.42
88,000
36,960
Rent Expense
Average Rate
0.40
22,000
8,800
Dividends
On date of declaration
0.41
30,000
12,300
Note Receivable
Closing Rate
0.42
50,000
21,000
Accumulated Depreciation
Closing Rate
0.42
26,400
11,088
Depreciation Expense
Average Rate
0.40
8,800
3,520
NOTE: If dividends are paid by the subsidiary company to foreign company then the same will be recorded on the date of declaration and not on the date of payment. Therefore, we have taken exchange rate for dividends on the date of declaration.
Particulars
Rate on Date
Rate of Exchange
($ per KQ)
Amount in KQ
Amount in $
Sales
Date of sale / Average Rate
0.40
340,000
136,000
Inventory
Date of Purchase / Average Rate
0.40
187,000
74,800
Equipment
Closing Rate
0.42
88,000
36,960
Rent Expense
Average Rate
0.40
22,000
8,800
Dividends
On date of declaration
0.41
30,000
12,300
Note Receivable
Closing Rate
0.42
50,000
21,000
Accumulated Depreciation
Closing Rate
0.42
26,400
11,088
Depreciation Expense
Average Rate
0.40
8,800
3,520
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