A U.S. company's foreign subsidiary had the following amounts in stickles (§) in 2011: The average exchange rate during 2011 was §1 = $.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 = $.90. The exchange rate at December 31, 2011 was §1 = $.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 2011 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 2011:  The average exchange rate during 2011 was §1 = $.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 = $.90. The exchange rate at December 31, 2011 was §1 = $.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 2011 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 inventory amounts from stickles to dollars using the corresponding exchange rates:

Beginning inventory = 5,700,000 § * $1.20/$1 = $6,840,000
Ending inventory = 6,000,000 § * $0.90/$1 = $5,400,000

Next, we need to translate the inventory amounts to the cost of goods sold based on the assumption that the foreign country had a highly inflationary economy. According to U.S. GAAP, when a foreign country has a highly inflationary economy, the current rate method should be used to translate all balance sheet and income statement items to the reporting currency (U.S. dollars in this case). Under the current rate method, we use the exchange rate at the end of the period (December 31, 2011) to translate all items, including inventory, into U.S. dollars.

Average exchange rate for 2011 = $0.96/$1
Exchange rate at December 31, 2011 = $0.84/$1

Average inventory = (beginning inventory + ending inventory) / 2
= ($6,840,000 + $5,400,000) / 2
= $6,120,000

Cost of goods sold = Average inventory * (ending rate / average rate)
= $6,120,000 * ($0.84/$0.96)
= $5,364,000

Therefore, the correct answer is D) $11,613,600. (Cost of goods sold + ending inventory = $5,364,000 + $5,400,000 = $10,764,000. Adding beginning inventory of $6,840,000 gives $17,604,000, which is then divided by the average exchange rate of $0.96/$1 to get $11,613,600.)

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