Hosgood Distributing Inc.converts its foreign subsidiary financial statements using the translation process.Their German subsidiary reported the following for 2014: revenues and expenses of 9,050,000 and 6,400,000 marks,respectively,earned or incurred evenly throughout the year,dividends of 2,000,000 marks were paid during the year.The following exchange rates are available:

Translated net income for 2014 is

Question

Hosgood Distributing Inc.converts its foreign subsidiary financial statements using the translation process.Their German subsidiary reported the following for 2014: revenues and expenses of 9,050,000 and 6,400,000 marks,respectively,earned or incurred evenly throughout the year,dividends of 2,000,000 marks were paid during the year.The following exchange rates are available:

Translated net income for 2014 is

Quizplus · Accepted Answer

To translate the subsidiary's financial statements into the parent's reporting currency, we need to use the average exchange rate for the year, which is 1 mark = $0.45. Therefore, the subsidiary's revenues and expenses in USD are:
Revenues = 9,050,000 marks ÷ 1.0 marks/USD = $4,072,500
Expenses = 6,400,000 marks ÷ 1.0 marks/USD = $2,880,000
Net Income = Revenues - Expenses = $4,072,500 - $2,880,000 = $1,192,500

However, we also need to consider the effect of dividends on the translation process. Dividends are not included in net income but are considered a remittance of profits to the parent company. Therefore, we need to use the historical exchange rate at the time the dividends were paid, which is 1 mark = $0.50. The amount of dividends in USD is:
Dividends = 2,000,000 marks ÷ 1.0 marks/USD = $1,000,000

To calculate the translated net income, we need to subtract the dividends from the net income and use the average exchange rate for the year:
Translated Net Income = (Net Income - Dividends) ÷ Average Exchange Rate
Translated Net Income = ($1,192,500 - $1,000,000) ÷ 0.45 = $715,555.56 ≈ $715,500

Therefore, the best choice is B.