A foreign subsidiary uses the first-in first-out inventory method. The following inventory balances are given at December 31, 2011 in local currency units (LCU): Compute the December 31, 2011, inventory balance using the lower of cost or market method under the temporal method.

Question

A foreign subsidiary uses the first-in first-out inventory method. The following inventory balances are given at December 31, 2011 in local currency units (LCU):  Compute the December 31, 2011, inventory balance using the lower of cost or market method under the temporal method.

Quizplus · Accepted Answer

Under the temporal method, the inventory balance is translated using the historical exchange rate at the time of purchase. To apply the lower of cost or market method, we need to convert the inventory balance to the functional currency (assumed to be US dollars).

Step 1: Convert the inventory balance to US dollars using the historical exchange rate at the time of purchase (average rate for the year is given as $1 = LCU 1.2):

Raw materials: LCU 240,000 / 1.2 = $200,000
Work in process: LCU 480,000 / 1.3 = $369,230
Finished goods: LCU 720,000 / 1.4 = $514,285
Total inventory balance in US dollars = $1,083,515

Step 2: Apply the lower of cost or market method. The market value is given as 85% of selling price and the selling prices are as follows (in US dollars):

Raw materials: $110 per unit
Work in process: $200 per unit
Finished goods: $285 per unit

Calculations for the ending inventory balance:

Raw materials: 5,000 units x $90 (lower of cost or market) = $450,000
Work in process: 2,000 units x $180 (lower of cost or market) = $360,000
Finished goods: 3,000 units x $256 (lower of cost or market) = $768,000
Total inventory balance = $1,578,000

Step 3: Convert the ending inventory balance to LCU using the current exchange rate at December 31, 2011 (given as $1 = LCU 1.4):

Ending inventory balance in LCU = $1,578,000 x 1.4 = LCU 2,209,200

Therefore, the December 31, 2011 inventory balance using the lower of cost or market method under the temporal method is LCU 2,209,200, which is equivalent to $457,600 (LCU 2,209,200 / 1.4). Option B is the correct answer.

A Foreign Subsidiary Uses the First-In First-Out Inventory Method