What is one problem in translating retained earnings using either the temporal or current rate method?
A) There is no problem, since both methods use the historic rate method for stockholders' equity accounts.
B) Dividends are based on an average cost method.
C) Net income is calculated differently, depending upon which method is used.
D) Dividends are based on the current exchange rate under the current rate method, while they are based on historical rates under the temporal method.

Question

Quizplus · Accepted Answer

Net income, which is a component of retained earnings, is affected by the exchange rates used in translation. Under the temporal method, historical rates are used for most assets and liabilities, affecting the cost of goods sold and, consequently, net income. Under the current rate method, all assets and liabilities are translated at the current rate, leading to a different impact on net income. This discrepancy can cause retained earnings to be translated differently under the two methods.

What Is One Problem in Translating Retained Earnings Using Either