Question

A Canadian subsidiary of a U.S. parent firm is instructed to bill an export to the parent in U.S. dollars. The Canadian subsidiary records the accounts receivable in Canadian dollars and notes a profit on the sale of goods. Later, when the U.S. parent pays the subsidiary the contracted U.S. dollar amount, the Canadian dollar has appreciated 10% against the U.S. dollar. In this example, the Canadian subsidiary will record a 61) ______
A) any gain or loss will be recorded only by the parent firm.
B) since the Canadian firm is a U.S. subsidiary neither a gain nor loss will be recorded.
C) 10% foreign exchange loss on the U.S. dollar accounts receivable.
D) 10% foreign exchange gain on the U.S. dollar accounts receivable.
________ gains and losses are "realized" whereas
________ gains and losses are only "paper." ______
A) Transaction; translation
B) Translation; operating

Answer 1

Answer:B. 10% foreign exchange gain on the US dollar account receivable.

A. Transaction; translation

Explanation. An increase in the value of the Canadian dollar to US dollar will make the parent company to pay more than the value of the Canadian dollar incurred when buying the goods.

Transaction gains are earned from actual trading activity, while translation occurred while converting the currency of a subsidiary to the parents at year end during consolidation.