Parentco, Inc. had a negative cumulative translation adjustment of ($250,000) on its balance sheet pertaining to its investment in Subko Ltd at the point in time that Parentco sold its interest in Subko. How must Parentco handle this translation adjustment when it records the sale of Subko?
A) As an increase in income (gain on disposal)
B) As a decrease in income (loss on disposal)
C) The cumulative translation adjustment will not be affected by the sale.
D) It will be a prior period adjustment to retained earnings.

Question

Quizplus · Accepted Answer

The negative cumulative translation adjustment represents a loss on the investment due to currency fluctuations. When Parentco sells its interest in Subko, it will record a loss on disposal, which includes any accumulated gains or losses from the investment. Therefore, the negative cumulative translation adjustment should be recognized as a decrease in income (loss on disposal).