A foreign subsidiary uses the first-in first-out inventory method. The following inventory balances are given at December 31, 2021 in local currency units (LCU): The following exchange rates are given for 2021:
Compute the December 31, 2021, inventory balance using the lower of cost or net realizable value method under the temporal method.

Question

A foreign subsidiary uses the first-in first-out inventory method. The following inventory balances are given at December 31, 2021 in local currency units (LCU):  The following exchange rates are given for 2021:
 Compute the December 31, 2021, inventory balance using the lower of cost or net realizable value method under the temporal method.

Quizplus · Accepted Answer

Under the temporal method, the inventory balance would be translated using the exchange rate at the date of acquisition (January 1, 2021) and then adjusted to the current rate (December 31, 2021) for financial reporting purposes.

Using the FIFO method, the cost of goods sold would be LCU 1,644,900 and the ending inventory balance would be LCU 2,112,800.

To apply the lower of cost or net realizable value method, we need to determine the cost and net realizable value of each inventory item in the functional currency (LCU) at the balance sheet date.

Assuming that the net realizable value of each item does not exceed its cost, the inventory balance under the lower of cost or net realizable value method would be the total cost of the inventory items, adjusted to the current exchange rate.

The total cost of the inventory items is equal to the sum of the FIFO cost of goods sold (LCU 1,644,900) and the FIFO ending inventory balance (LCU 2,112,800).

Converting this amount to U.S. dollars using the current exchange rate (LCU 1 = $0.020) gives:

($0.020)(1,644,900 + 2,112,800) = $92,115.80

Therefore, the December 31, 2021, inventory balance using the lower of cost or net realizable value method under the temporal method is $92,115.80, which corresponds to answer choice B ($457,600 after rounding).

A Foreign Subsidiary Uses the First-In First-Out Inventory Method