Question

Kwon Company is headquartered in Seoul, Korea and maintains its accounting records in the Korean Won currency. However, Kwon Company applies US accounting principles. Kwon owns 100% of Siesta Company that is located in Chile. Siesta's workers are Chilean and 85% of the material used in Siesta's factory is purchased in Chile while the remainder is purchased in Korea. Siesta Company sells its products all over the world and prices are denominated in the Chilean Peso. During the past three years Chile's inflation rate has averaged 35% annually. Based on this information which of the following statements are true?

Please select the correct answer from the choices:

a. Siesta's functional currency is the Chilean Peso and the current method should be used for translation.

b. Siesta's functional currency is the Korean Won and the current method should be used for translation.

c. Siesta's functional currency is the Korean Won and the temporal method should be used for re-measurement.

d. Siesta's functional currency is the Chilean Peso and the temporal method should be used for re-measurement.

e. None of the Above

Answer 1

As per International accounting standard 21 (IAS 21 The effects of Changes in Foreign Currency) defines functional curreny as " the currency of the primary economic environment in which entity operates."

In this case Siesta Company sells its products all over the world and prices are denominated in Chilean Peso.

So as per above definition, Siesta company operates Chilean Peso as a currency in primary economic environment.

So Functional currency is Siesta Company is Chilean Peso.

In temporal method technique of foreign currency translation is used when the local currency of the subsidairy is not the same as the currency of parent company.

So in this case Siesta company operates in Chilean Peso which not the currency of parent. so this case temporal method should use for re-measurement.

Option d is correct answer.