ExpertHard1 markMultiple Choice
CPA · Question 20 · Area 3: Technical Accounting and Reporting
A US parent company has a subsidiary in the UK. The subsidiary's functional currency is the British Pound (GBP). The GBP strengthens against the US Dollar during the year. How will this affect the Translation Adjustment in Other Comprehensive Income (OCI)?
A US parent company has a subsidiary in the UK. The subsidiary's functional currency is the British Pound (GBP). The GBP strengthens against the US Dollar during the year. How will this affect the Translation Adjustment in Other Comprehensive Income (OCI)?
Answer options:
A.
Positive Translation Adjustment (Gain) in OCI.
B.
Negative Translation Adjustment (Loss) in OCI.
C.
Gain recognized in Net Income.
D.
No impact on OCI, only on the Balance Sheet.
How to approach this question
1. Identify Method: Functional = Local Currency -> Current Rate Method (Translation). 2. Identify Impact: Assets > Liabilities (usually). If currency goes UP, Net Assets value in USD goes UP. 3. Location: Translation gains go to OCI.
Full Answer
A.Positive Translation Adjustment (Gain) in OCI.✓ Correct
A
Under the Current Rate Method (used when Functional Currency is the local currency), all assets and liabilities are translated at the current spot rate. If the foreign currency strengthens, the US dollar value of the subsidiary's net investment increases. This increase is recorded as a positive Cumulative Translation Adjustment (CTA) in OCI.
Common mistakes
Confusing Translation (OCI) with Remeasurement (Net Income); getting the direction of the currency move wrong.
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