A U.S. company's foreign subsidiary had the following amounts in stickles (§)in 2021: The average exchange rate during 2021 was §1 = $0.96. The beginning inventory was acquired when the exchange rate was §1 = $1.20. The ending inventory was acquired when the exchange rate was §1 = $0.90. The exchange rate at December 31, 2021 was §1 = $0.84. Assuming that the foreign country had a highly inflationary economy, at what amount should the foreign subsidiary's cost of goods sold have been reflected in the 2021 U.S. dollar income statement?
A)$11,253,600.
B)$11,577,600.
C)$11,649,600.
D)$11,613,600.
E)$11,523,600.

Question

A U.S. company's foreign subsidiary had the following amounts in stickles (§)in 2021:  The average exchange rate during 2021 was §1 = $0.96. The beginning inventory was acquired when the exchange rate was §1 = $1.20. The ending inventory was acquired when the exchange rate was §1 = $0.90. The exchange rate at December 31, 2021 was §1 = $0.84. Assuming that the foreign country had a highly inflationary economy, at what amount should the foreign subsidiary's cost of goods sold have been reflected in the 2021 U.S. dollar income statement?
A)$11,253,600. 
B)$11,577,600. 
C)$11,649,600. 
D)$11,613,600. 
E)$11,523,600.

Quizplus · Accepted Answer

To calculate the cost of goods sold in U.S. dollars, we need to convert the beginning and ending inventories and the average inventory balance during the year using their respective exchange rates, as follows:

Beginning inventory: §11,000,000 × $1.20/§1 = $13,200,000
Ending inventory: §6,900,000 × $0.90/§1 = $6,210,000
Average inventory: [($11,000,000 + $6,900,000)/2] × $0.96/§1 = $10,296,000

Then, we need to adjust the cost of goods sold for the effect of inflation, which is determined by comparing the ending inventory at the current exchange rate with the beginning inventory at the historical exchange rate. Since the ending inventory is lower than the beginning inventory, the difference represents a loss of purchasing power due to inflation. Therefore, we need to increase the cost of goods sold by this amount, as follows:

Inflation loss: ($13,200,000 - $6,210,000) × $0.84/§1 = $5,858,400

Finally, we can calculate the adjusted cost of goods sold as follows:

Adjusted cost of goods sold: Beginning inventory + Purchases - Ending inventory + Inflation loss
Adjusted cost of goods sold: $13,200,000 + §TB8300.00 × $0.96/§1 - $6,210,000 + $5,858,400
Adjusted cost of goods sold: $13,200,000 + $11,305,600 - $6,210,000 + $5,858,400
Adjusted cost of goods sold: $11,613,600

Therefore, the correct answer is D) $11,613,600.

A US Company's Foreign Subsidiary Had the Following Amounts in Stickles