Question

An U.S. MNC translates the balance sheet and income statement of a French subsidiary, which keeps its books in euro, into U.S. dollars using the money/non-monetary method. The reporting currency is US dollar. The subsidiary is at the end of its first year of operation. The historical exchange rate is $1.60/€1.00 and the most recent exchange rate is $1.80/€ What is the value of inventory in $? Balance Sheet Cash € 2,500 Inventory (current Value = €1,800) € 1,500 Net fixed assets € 4,200 Total Assets € 8,200 Current liabilities € 1,200 Long-term Debts € 2,200 Common stock € 2,700 Retained earnings € 2,100 CTA Total L&E € 8,200 Income Statement Sales Revenue € 12,000 COGS € 7,500 Depreciation € 1,000 NOI € 3,500 Tax(40%) € 1,400 Profit after tax € 2,100 Foreign Exchange gain (loss) Net income € 2,100 Dividends 0 Addition to Retained Earnings € 2,100 Multiple Choice $2,400 $1,506 $2,750 None of the above $2,078

Answer 1

Answer:

The answer is $2,880 or None of the above in the multiple choices

Explanation:

The money/non-monetary method means that monetary items (e.g. cash, accounts payable and receivable, and long-term debt) are translated at the current rate while non-monetary items (e.g. inventory, fixed assets, and long-term investments) are translated at historical rates.

Therefore, the value of inventory in $ is translated at the historical rate as follows:

Inventory's current value x historical rate = €1,800  x $1.60/€1.00 = $2,880