A U.S. company's foreign subsidiary had the following amounts in stickles (§), the functional currency, in 2021: The average exchange rate during 2021 was §1 = $0.98. The beginning inventory was acquired when the exchange rate was §1 = $1.18. The ending inventory was acquired when the exchange rate was §1 = $0.92. The exchange rate at December 31, 2021 was §1 = $0.82. At what amount should the foreign subsidiary's cost of goods sold have been reflected in the 2021 U.S. dollar income statement?

Question

A U.S. company's foreign subsidiary had the following amounts in stickles (§), the functional currency, in 2021:  The average exchange rate during 2021 was §1 = $0.98. The beginning inventory was acquired when the exchange rate was §1 = $1.18. The ending inventory was acquired when the exchange rate was §1 = $0.92. The exchange rate at December 31, 2021 was §1 = $0.82. At what amount should the foreign subsidiary's cost of goods sold have been reflected in the 2021 U.S. dollar income statement?

Quizplus · Accepted Answer

To calculate the cost of goods sold, we need to find the total cost of inventory acquired during the year and then subtract the cost of the ending inventory.

Cost of beginning inventory = §11,000,000 × $1.18 = $12,980,000

Cost of ending inventory = §6,900,000 × $0.92 = $6,348,000

Total cost of inventory acquired = §20,000,000 × $0.98 = $19,600,000

Cost of goods sold = ($19,600,000 - $12,980,000 + $6,348,000) = $13,968,000

To convert this to U.S. dollars using the exchange rate at December 31, 2021:

Cost of goods sold = $13,968,000 ÷ $0.82 = $17,064,390.24

Therefore, the foreign subsidiary's cost of goods sold should have been reflected as $17,640,000 in the 2021 U.S. dollar income statement.

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