CFA Practice Question

There are 334 practice questions for this study session.

CFA Practice Question

Assume that a non-US based subsidiary has inventory and uses the local currency (LC) as the functional currency. The exchange rate on the date of acquisition of the inventory was $0.16=1LC and now it is $0.19=1LC. Which of the following statements is true?
A. A remeasurement gain must be reported.
B. A positive translation adjustment must be reported.
C. A negative translation adjustment must be reported.
Explanation: The local currency is the functional currency. This implies that the current rate method must be used. The current rate method yields translation gains (losses), not remeasurement gains (losses). Finally, since the subsidiary is in a positive net asset position, the appreciation of the LC vis-a-vis the $US gives rise to a translation gain.

User Contributed Comments 5

User Comment
dimanyc Key is to note that LC appreciated.
dblueroom I understand what the question is asking. However, you must examine two things before concluding whether a gain or a loss has incurred. First, change in net exposure (A-L one year to another), and the direction of LC (since LC appreciates, ending rate>avg or beginning rate). We thus know holding effect is positive, and if change in net exposure is also positive, then we conclude a translation gain. However if we just look at inventory alone, it would be easier to make that conclusion.
aggabad Do we book it as credit or debit? credit, right?
jpducros All Current method => exchange impacts CTA. Here it is a gain, thus credit.
Felio The question has not enough information to conclude that the subsidiary is in a positive net asset position. Is the fact that it has inventory implies necessarily a positive net asset position? I am not sure !
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