XYZ Corporation,a U.S.parent firm,has a wholly owned sales affiliate,ABC Ltd.,in the United Kingdom.The affiliate was established to service the local market. Assume that
1.the functional currency of ABC is the pound.
2.the reporting currency is the dollar.
3.the initial exchange rate $1.00 = £0.67.
ABC's nonconsolidated balance sheets and the footnotes to the financial statements indicate that ABC owes the parent firm £200,000.Assume that,XYZ had made an investment of $500,000 in the affiliate.Under FASB 52,the intercompany debt and investment will appear on the consolidated balance sheet as

Question

Quizplus · Accepted Answer

Under FASB 52, when consolidating the financial statements of a foreign affiliate, the intercompany balances (such as the debt owed by ABC to XYZ) and the investment in the affiliate are eliminated. This means they do not appear as separate items on the consolidated balance sheet. Instead, the consolidation process involves translating the affiliate's financial statements into the reporting currency (in this case, dollars) and combining them with the parent's financial statements, adjusting for any intra-group transactions or balances.