Question

XYZ Company is aU.S. subsidiary that operates in the United Kingdom where the functional currency is the British pound (£). XYZ’s income statement shows £400 of net income and a £100 dividend that was paid on October 31 when the exchange rate was $1.60 per £. The current exchange rate is $1.70 per £, and the average rate is $1.55 per £. The change in retained earnings for the period in U.S. dollars is closest to: (provide the calculations).

Answer 1

The change in retained earnings for the period in U.S. dollars is closest to $460

Information given:

XYZ's Net income = £400

Dividend paid= £100

Exchange rate on October 31 = $1.60

current exchange rate = $1.70

average rate = $1.55

EXPLANATIONS: -

Since the functional currency (￡) differs from the parent's presentation currency ($), the current rate method is used. Under the current rate method, net income is translated at the average rate. Dividends are translated at the historical rate on the date the dividends were paid.
($1.55/￡× ￡400) - ($1.60/￡× ￡100) = $460