Question

Patents are on the books of a British subsidiary of a U.S. firm at a value of 50,000 pounds. The patents were acquired in 2017 when the exchange rate was 1 pound = $1.50. The British subsidiary was acquired by the U.S. firm in 2019 when the exchange rate was 1 pound = $1.40. The exchange rate on December 31, 2020, the date of the most current balance sheet, is 1 pound = $1.55. The average rate of exchange for 2020 is $1.53. Assuming the dollar is the functional currency of the subsidiary, what exchange rate will be used to re-measure patents for the consolidated statements dated December 31, 2020?

Answer 1

Answer:

The exchange rate that will be used to re-measure patents for the consolidated statements dated December 31, 2020 is:

= 1 pound = $1.55.

Explanation:

a) Data and Calculations:

Patents on the books of a British subsidiary = 50,000 pounds

Patent's acquisition date = 2017 at 1 pound = $1.50

Subsidiary's acquisition date = 2019 at 1 pound = $1.40

Current exchange rate, most current balance sheet on December 31, 2020 = 1 pound = $1.55.

Average rate of exchange for 2020 is $1.53

Value of Patent for the consolidated accounts = $77,500 (50,000 pounds * $1.55)

b) The accounting standard rule is that assets and liabilities of subsidiaries should be consolidated at the current exchange rates.  Business transactions are translated at the average rate of exchange for the year.  For equity accounts, you can use either the current or historical exchange rates.