ExpertHard1 markMultiple Choice
CPA · Question 33 · Area II: Technical Accounting
A US company has a subsidiary in the UK. The subsidiary's functional currency is the British Pound (GBP). <br/>- Year-end rate: $1.30<br/>- Average rate: $1.25<br/>- Historical rate (Capital Stock): $1.10<br/><br/>Which exchange rate should be used to translate the subsidiary's Common Stock and Retained Earnings for the consolidated balance sheet?
A US company has a subsidiary in the UK. The subsidiary's functional currency is the British Pound (GBP). <br/>- Year-end rate: $1.30<br/>- Average rate: $1.25<br/>- Historical rate (Capital Stock): $1.10<br/><br/>Which exchange rate should be used to translate the subsidiary's Common Stock and Retained Earnings for the consolidated balance sheet?
Answer options:
A.
Common Stock: Current Rate; Retained Earnings: Average Rate
B.
Common Stock: Historical Rate; Retained Earnings: Current Rate
C.
Common Stock: Average Rate; Retained Earnings: Composite Rate
D.
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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