Question

Suppose an American subsidiary of UK company showed:

            Current assets of dollar 5 million;

            Current liabilities of dollar 4.1 million;

            Total assets = dollar 7.2 million;

            Total liabilities = dollar 8.2 million

            If the dollar deprecated during that year from £0.7538 to £0.7500.

Under FASB-52, what is the translation gain (loss) in pound if dollar is the functional currency?

a. £ 0

b. £ 7,220 gain

c. £ 3,800 gain

d. £ 3,420 loss

Answer 1

Under FASB-52, U.K. has net dollar exposure equal to $7.2 million - $8.2 million = -$1 million.

At the original exchange rate of £0.7538, the value of this net exposure is -£0.7538 million. By the end of the year, this net dollar exposure is worth only -1 million x £0.7500 = -£0.75 million.

The net result is a translation gain for U.K.'s parent equal to the difference between the beginning and end-of-year values = -£0.75 million - (-£0.7538 million) = £0.0038 million, or £3,800

Hence, Option "C" is correct.