If the functional currency of a foreign subsidiary is the currency of the country where the subsidiary is located, the translation method that should be selected is the
A) temporal method
B) current rate method
C) monetary/nonmonetary method
D) the current rate method if the rate of inflation is the foreign country is 25% per month.

Question

Quizplus · Accepted Answer

If the functional currency of a foreign subsidiary is the currency of the country where the subsidiary is located, and the subsidiary's financial statements are translated into the reporting currency of the parent company, the appropriate translation method is the current rate method. Under this method, assets and liabilities are translated using the current exchange rate at the balance sheet date, while income and expenses are translated using the exchange rates prevailing at the time of the transactions. The monetary/nonmonetary method is used when an entity's financial statements have both monetary and nonmonetary items, while the temporal method is used when a foreign subsidiary's functional currency is different from its reporting currency and the subsidiary operates in a highly inflationary economy. Option D is incorrect, as the inflation rate in the foreign country is not relevant when selecting the appropriate translation method.

If the Functional Currency of a Foreign Subsidiary Is the Currency