A US company has a subsidiary in the UK. The subsidiary's functional currency is the British Pound (GBP). - Year-end rate: $1.30 - Average rate: $1.25 - Historical rate (Capital Stock): $1.10 Which exchange rate should be used to translate the subsidiary's Common Stock and Retained Earnings for the consolidated balance sheet?

Answer options:

Common Stock: Current Rate; Retained Earnings: Average Rate

Common Stock: Historical Rate; Retained Earnings: Current Rate

Common Stock: Average Rate; Retained Earnings: Composite Rate

Common Stock: Historical Rate; Retained Earnings: Composite/Rolled-forward amount

How to approach this question

Current Rate Method Rules: Assets/Liabilities = Current Rate. Income Statement = Average Rate. Stock = Historical Rate. RE = Roll forward.

Full Answer

D.Common Stock: Historical Rate; Retained Earnings: Composite/Rolled-forward amount✓ Correct

Common Stock is a non-monetary equity item translated at the historical rate in effect when issued. Retained Earnings is not translated at a single rate; it is the accumulation of prior years' income (average rates) and dividends (historical rates).

Common mistakes

Using the current rate for equity accounts.

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