Rome Enterprises, a subsidiary of La Italia Company based in New York, reported the following information at the end of its first year of operations (all in euros): assets--1,320,000; expenses--340,000; liabilities--880,000; capital stock--80,000, revenues--400,000. Relevant exchange rates are as follows:

As a result of the translation process, what amount is recorded on the financial statements as the translation adjustment?

Question

Rome Enterprises, a subsidiary of La Italia Company based in New York, reported the following information at the end of its first year of operations (all in euros) : assets--1,320,000; expenses--340,000; liabilities--880,000; capital stock--80,000, revenues--400,000. Relevant exchange rates are as follows:

As a result of the translation process, what amount is recorded on the financial statements as the translation adjustment?

Quizplus · Accepted Answer

To calculate the translation adjustment, we need to use the functional currency method. Since Rome Enterprises is a subsidiary of La Italia Company based in New York, its functional currency is the US dollar. The assets, expenses, and revenues are already in euros, so we need to translate them into US dollars using the exchange rate of $1.10 per euro. 
- Assets: 1,320,000 euros x $1.10/euro = $1,452,000 
- Liabilities: 880,000 euros x $1.10/euro = $968,000 
- Capital stock: 80,000 euros x $1.10/euro = $88,000 
- Revenues: 400,000 euros x $1.10/euro = $440,000 
- Expenses: 340,000 euros x $1.10/euro = $374,000

Using the balance sheet equation, we can calculate the equity as: 
Equity = Assets - Liabilities 
Equity = $1,452,000 - $968,000 
Equity = $484,000

The net income for the year is: 
Net income = Revenues - Expenses 
Net income = $440,000 - $374,000 
Net income = $66,000

Therefore, the retained earnings are: 
Retained earnings = Capital stock + Net income - Dividends 
Retained earnings = $80,000 + $66,000 - 0 
Retained earnings = $146,000

To reconcile the equity calculated in US dollars with the equity calculated in euros, we need to subtract the euro-equivalent equity from the US dollar-equivalent equity: 
Translation adjustment = Euro-equivalent equity - US dollar-equivalent equity 
Translation adjustment = (1,320,000 - 880,000 - 80,000) euros - ($1,452,000 - $968,000 - $146,000) 
Translation adjustment = 360,000 euros - $338,000 
Translation adjustment = $22,000

Since the US dollar-equivalent equity is higher than the euro-equivalent equity, we have a credit adjustment to reconcile the two amounts. Therefore, the correct answer is choice C, $34,800 credit adjustment.

Rome Enterprises, a Subsidiary of La Italia Company Based in New