A U.S. company's foreign subsidiary had the following amounts in stickles (§) in 2011:

The average exchange rate during 2011 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, 2011 was §1 = $.84. Assuming that the foreign country had a highly inflationary economy, at what amount should the foreign subsidiary's cost of goods sold have been reflected in the 2011 U.S. dollar income statement?

Question

A U.S. company's foreign subsidiary had the following amounts in stickles (§) in 2011:

The average exchange rate during 2011 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, 2011 was §1 = $.84. Assuming that the foreign country had a highly inflationary economy, at what amount should the foreign subsidiary's cost of goods sold have been reflected in the 2011 U.S. dollar income statement?

Quizplus · Accepted Answer

To calculate the cost of goods sold, we need to find the value of beginning inventory, ending inventory, and purchases.

Beginning inventory: 
§600,000 x $1.20 = $720,000

Ending inventory: 
§800,000 x $0.90 = $720,000

Purchases: 
§3,000,000 x (($1.20 + $0.90)/2) = $2,550,000

Total cost of goods available for sale: 
$720,000 + $2,550,000 + $720,000 = $3,990,000

Now we need to convert this amount to US dollars using the average exchange rate: 
$3,990,000 x 0.96 = $3,830,400

Since the foreign country is highly inflationary, we need to adjust this amount using the ending exchange rate: 
$3,830,400 ÷ 0.84 = $4,561,905.

Finally, we subtract the ending inventory from this amount to get the cost of goods sold: 
$4,561,905 - $720,000 = $3,841,905.

Therefore, the foreign subsidiary's cost of goods sold should have been reflected as $11,613,600 in the 2011 US dollar income statement (3 x $3,841,905).

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