CFA Practice Question

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CFA Practice Question

A subsidiary of Harris Inc. is located in Germany. The functional currency of this subsidiary is the Euro (€). The subsidiary acquires inventory on October 31, 2004 for €150,000 which is sold on January 15, 2005 for €200,000. Collection of the money takes place on February 4, 2005. Applicable exchange rates are as follows (Spot rate = € / US$):

What amount is reported for this inventory on the December 31, 2004 U.S. dollar balance sheet?

A. $147,000.00.
B. $157,894.74.
C. $153,061.22.
Correct Answer: C

A translation is appropriate since the € is the functional currency of the subsidiary. All assets are translated and reported using the current exchange rate, as of the balance sheet date. Translated value at 12/31/04 (150,000 € / $.9800) = $153,061.

User Contributed Comments 6

User Comment
danlan2 Why use December 31, 2004 rate?

current exchange rate=rate at reporting time (Dec 31, 2004)
PASS0808 Assuming all-current method used instead of the temporal one
yxten1 A very critical assumption
sjurrens not too critical, all transactions are shown to be done in Euros, so given only that information, you would almost have to assume all-current.
arudkov 2 sjurrens:
hks101 "the FUNCTIONAL currency of this subsidiary is the Euro" -- since the question tells us what the functional currency is, we have to use all current.
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