A U.S. company's foreign subsidiary had the following amounts in stickles (§), the functional currency, in 2013: $\begin{array}{lr}
\text { Cost of goods sold } & \S 12,000,000 \
\text { Ending inventory } & 600,000 \
\text { Beginning inventory } & 240,000
\end{array}$ The average exchange rate during 2013 was §1 = $.96. The beginning inventory was acquired when the exchange rate was §1 = $1.20. The ending inventory was acquired when the exchange rate was §1 = $.90. The exchange rate at December 31, 2013 was §1 = $.84. Assuming that the foreign nation for the subsidiary had a highly inflationary economy, at what amount should that foreign subsidiary's purchases have been reflected in the 2013 U.S. dollar income statement?

Question

Quizplus · Accepted Answer

The correct answer is A because the cost of goods sold should be translated at the average exchange rate for the year, which is §1 = $.96. The beginning inventory should be translated at the exchange rate when it was acquired, which is §1 = $1.20. The ending inventory should be translated at the exchange rate when it was acquired, which is §1 = $.90. The purchases can then be calculated as follows:Purchases = Cost of goods sold + Ending inventory - Beginning inventoryPurchases = §12,000,000 + §600,000 - §240,000Purchases = §12,360,000Translating the purchases into U.S. dollars at the average exchange rate for the year, we get:Purchases = §12,360,000 x $.96Purchases = $11,865,600

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