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 cost of goods associated with its subsidiary in the amount of:

Multiple Choice

• $1,764

• $1,820

• $1,778

• $1,792

Answer 1

The temporal method or historical method converts the currency of a foreign subsidiary into the currency of the parent company. This technique of foreign currency translation is used when the local currency of the subsidiary is not the same as the currency of the parent company. In temporal method monetary items like cash are recorded at Current Exchange Rate and non monetary items like inventory are recorded at historical exchange rate.

HISTORICAL EXCHANGE RATE=$1.30

Purchase Inventory=£2100

Sold 1/3 of 2100£(700£) =900£

Sold 1/3 of 2100£(700£) =900£

1400£ Inventory Sold at 1800£

Cost of goods associated with its subsidiary in the amount of:1400£*1.30(Historical Rate)=$1820.

Solution:(b) $1820

Note:As Inventory is non monetary item it will be converted at historical rate.($1.30).

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