Question

10.26 Suppose the English subsidiary of a U.S. firm had current assets of £1 million, fixed assets of £2 million and current liabilities of 1 million pounds both at the start and at the end of the year. There are no long‑term liabilities. If the pound depreciated during that year from $1.50 to $1.30, the translation gain (loss) to be included in the parent company's equity account according to FASB #52 is

a) 0 since the current assets and current liabilities cancel

b) +$200,000

c) ‑$250,000

d) ‑$400,000

10.27 Suppose the German subsidiary of a U.S. firm had current assets of €3 million, fixed assets of €6 million and current liabilities of €3 million both at the start and at the end of the year. There are no long‑term liabilities. If the euro depreciated during that year from $.48 to $.38, the FASB‑52 translation gain (loss. to be included in the parent company's equity account is

a) 0, since the current assets and current liabilities cancel

b) +$300,000

c) ‑$350,000

d) ‑$600,000

Answer 1

Under FASB 52, financial statements must be translated using the current exchange rate method. According to FASB 52 when a U.S. firm had current assets of £1 million, fixed assets of £2 million and current liabilities of 1 million pounds both at the start and at the end of the year. Since the current assets and current liabilities cancel, total gain (loss) based on current rate exchange rate method will be on fixed assets.

Interest rate change £1 = $1.50 to £1 = $1.30

The translation gain (loss) = 2 million*($1.30-$1.50) = -$0.4 million

Same reason with the solution of 10.27.

Answer 10.26 d) -$400,000

Answer 10.27 d) -$700,000