_____ Povax has a long-term intercompany receivable resulting from a loan made to a foreign subsidiary several years ago. No due date is specified inasmuch as settlement is not planned in the foreseeable future. The receivable is denominated in euros. During 2006, the U.S. dollar strengthened. Povax uses the temporal method of translation. At 12/31/06, Povax should
A) Adjust the intercompany receivable downward and debit OCI-Translation Adjustment
B) Adjust the intercompany receivable downward and debit FX Transaction Loss.
C) Adjust the intercompany receivable downward and debit Investment in Subsidiary.
D) Make no adjustment to the intercompany receivable account.
E) None of the above.

Question

Quizplus · Accepted Answer

Under the temporal method, monetary assets and liabilities denominated in a foreign currency are translated at the current exchange rate at the balance sheet date. If the U.S. dollar strengthens, the value of the euro-denominated receivable decreases when translated back into dollars, resulting in a foreign exchange transaction loss. This loss is recognized in the income statement, not in other comprehensive income (OCI) or against the investment in the subsidiary account.

_____ Povax Has a Long-Term Intercompany Receivable Resulting from a Loan