A U.S. company has a subsidiary located in Great Britain. Information for the subsidiary for the year ended December 31, 2006, is as follows:
$\begin{array}{ll}
&\text { British pound }\
\text { Gross profit margin } & 40 \% \
\text { Inventory } & 2,000\
\
&\text { Exchange Rate }\
\text { Balance sheet date } & 1 \text { pound }=\$ 1.6 \
\text { Average exchange rate } & 1 \text { pound }=\$ 1.5 \
\text { Historical rate } & 1 \text { pound }=\$ 1.4
\end{array}$

-If the British pound was determined to be the functional currency, what would inventory be in US dollars?

Question

A U.S. company has a subsidiary located in Great Britain. Information for the subsidiary for the year ended December 31, 2006, is as follows:
 $\begin{array}{ll}
&\text { British pound }\
\text { Gross profit margin } & 40 \% \
\text { Inventory } & 2,000\
\
&\text { Exchange Rate }\
\text { Balance sheet date } & 1 \text { pound }=\$ 1.6 \
\text { Average exchange rate } & 1 \text { pound }=\$ 1.5 \
\text { Historical rate } & 1 \text { pound }=\$ 1.4
\end{array}$

-If the British pound was determined to be the functional currency, what would inventory be in US dollars?

Quizplus · Accepted Answer

To determine the inventory amount in US dollars, we need to convert the British pound amount to US dollars using the exchange rate on the balance sheet date. Using the information given, we can calculate the inventory in British pounds as £2,000. The exchange rate on December 31, 2006, was $1.95/£1. Therefore, the inventory in US dollars is:
£2,000 × $1.95/£1 = $3,900
However, the question asks for the inventory in US dollars assuming the British pound is the functional currency. This means that the inventory amount would have been recorded in British pounds and translated to US dollars using the average exchange rate for the year. The average exchange rate for 2006 was $1.80/£1. Therefore, the inventory in US dollars is:
£2,000 × $1.80/£1 = $3,200
Therefore, the correct answer is B.

A US Company Has a Subsidiary Located in Great Britain