Question

Meadows Limited, a foreign subsidiary of U.S. based Meadows Inc. operates primarily for the benefit of its parent company. When the exchange rate was $1.30 per one British Pound Sterling (£), Meadows Limited purchased Inventory for £2,100 pounds. Meadows resells one-third of the inventory for £900 when the exchange rate was $1.26 per Pound Sterling and another one-third for £900 when the exchange rate was $1.28 per Pound Sterling. The parent company applies the temporal method in its process of consolidating the financial results of its subsidiaries with its own financial results.

Meadows Inc. reports sales revenue associated with its subsidiary in the amount of:

Multiple Choice

• $2,340

• $2,304

• $2,286

• $2,268

Answer 1

Answer is $2304 (Option2).

In temporal method, all expenses and revenue are converted using weighted average rates of exchange expect expenses like depreciation which are related to non monetary assets.

In the above question, 2 sales transactions have taken place. Each of them for £900. Therefore total sales in pounds will be £1800. Since there are 3 rates: $1.30, $1.26, $1.28.

Therefore, Weighted Average Rate of Exchange= $1.30+1.26+1.28/3 = $1.28

Therefore, Sales revenue= £1800* $1.28 =$2304.