If the functional currency of a foreign-based subsidiary of an American company is the local currency, the current rate method of translation should be used for consolidation purposes.

Question

Quizplus · Accepted Answer

The current rate method should be used when the functional currency of the subsidiary is the local currency. Under this method, all assets and liabilities are translated at the current exchange rate and income statement accounts are translated at the average exchange rate for the period. This ensures that the financial statements reflect the current value of the subsidiary's assets and liabilities in the parent company's currency.

If the Functional Currency of a Foreign-Based Subsidiary of an American