CFA Practice Question

There are 334 practice questions for this study session.

CFA Practice Question

A subsidiary of Shaw Inc. has one asset (Inventory) and one liability (Accounts Payable). The functional currency of this subsidiary is the Euro (€). The inventory was acquired for €90,000 when the exchange rate was $1 = €1.025. Accounts Payable, which has a balance of €50,000, was established when the exchange rate was $1 = €1.0050. At year-end, the exchange rate was $1 = €.9850. Which one of the following statements is true for the consolidated financial statements?

A. The consolidated financial statement are not affected by this situation.
B. A debit translation adjustment must be reported.
C. A credit translation adjustment must be reported.
D. A transaction loss must be reported.
E. A transaction gain must be reported.
Correct Answer: C

A translation is appropriate since the € is the functional currency of the subsidiary. All assets and liabilities are translated and reported using the current exchange rate, as of the balance sheet date.

User Contributed Comments 8

User Comment
PhiWong Local currency was appreciating against USD, therefore, with positive Net Asset at the end of the year, each of the local currency will "translate" into more USD asset. In order to balance the B/S, a "credit" translation adjustment should be in place to balance the B/S.
jiashufen are you sure it's a credit, PhiWong?
ehc0791 the problem is that we don't know what is the local currency and reporting currency, only the function currency is known.
PASS0808 Inv eur 90000 /(eur1.025/$)=87,805
A/P Eur 50000 /(eur1.0050/$)=49751
Net asset before adj. 87805-49751=38054
Net asset should be: Eur 40000/(.9850)=40609
Therefore debit of 2556 is needed
bmeisner Recall that assets are increased by debits while liabilities and shareholders equity are increased by credits. Since the affect to net assets is an increase due to the appreciation of the Euro, the translation adjustment (an adjustment to shareholders equity) must be an increase as well, thus it must be a credit.
jmcarr02 When you obtain a translation gain, you need to CREDIT the Cumulative Translation Adjustment (CTA) account. There is clearly a translation gain here since the EUR is rising against the USD. Debiting the CTA account, as PASS0808 suggests, makes no sense since this would deepen the gap between net asset value ($40609) and the shareholder's equity (which includes the CTA account).
charliedba the euro appreciated, so there's a gain. and there should be credit adjustment to the equity account.
quanttrader but actual value of net assets is lower via using end of the year exchange rate, thus shouldn't this be a translation debit-- compare from #1 where it was opposite situation and a translation credit
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