Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2010. Selected account balances are available for the year ended December 31, 2011, and are stated in euro, the local currency.

Relevant exchange rates for 1 euro are given below:

Assume the functional currency is the U.S. dollar, compute the U.S. income statement amount for depreciation expense for 2011.

Question

Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2010. Selected account balances are available for the year ended December 31, 2011, and are stated in euro, the local currency.
 
Relevant exchange rates for 1 euro are given below:

Assume the functional currency is the U.S. dollar, compute the U.S. income statement amount for depreciation expense for 2011.

Quizplus · Accepted Answer

Depreciation expense is a non-monetary item and is translated using the historical exchange rate. Therefore, the depreciation expense for 2011 is 11,000 euros * 1 euro / 1.40 dollars = $7,857.14. However, this amount needs to be adjusted for the change in exchange rate between January 1, 2010, and December 31, 2011, as the functional currency is the U.S. dollar. The average exchange rate for 2011 is 1 euro / 1.48 dollars, and the average rate for 2010 was 1 euro / 1.35 dollars. Therefore, the adjustment factor is (1.48 / 1.35) = 1.0963. Multiplying the translated amount by this factor gives us the U.S. income statement amount for depreciation expense for 2011: 7,857.14 * 1.0963 = $8,590.89, which is closest to option A ($8,190).