The net assets of English Widgets, Inc., a wholly owned subsidiary of American G
ID: 2583048 • Letter: T
Question
The net assets of English Widgets, Inc., a wholly owned subsidiary of American Gadgets Corporation, reported net assets of 300,000 British pounds at January 1, 2006, and an increase in net assets for 2006 of 50,000 pounds, all due to year 2006 operations. The exchange rate for the pound was $1.50 per pound on January 1 and $1.60 on December 31, 2006. The average rate for the year was $1.52
1. If the British pound is the functional currency, the Cumulative Foreign-Exchange Translation Adjustment account should be increased in year 2006 by:
a. $35,000
b. $34,000
c. $28,000
d. $0
2. If the U.S. dollar is the functional currency, the Cumulative Foreign-Exchange Translation Adjustment account should be increased in year 2006 by:
a. $35,000
b. $34,000
c. $28,000
d. $0
Explanation / Answer
1. b
Total value of net assets at the end of the year=300000+50000=350,000
i.Translated closing value of net assets =net assets * closing exchange rate=350,000*1.60= $560,000
ii.Translated value of net assets = Opening value of net assets *opening exchange rate + Assets accrued during the year * average exchange rate =300,000*1.50+50,000*1.52=$ 526,000
The value of foreign exchnage transalate account is =i-ii=560,000-526,000=$ 34,000
2. d- no exchange translate a/c balance will appear if the functional currency is $
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