A U.S. company has a subsidiary located in Great Britain. Information for the subsidiary for the year ended December 31, 2006 is as follows:
$$\begin{array} { | l | l | }
\hline & \text { British pound } \
\hline \text { Gross profit margin } & 40 \% \
\hline \text { Inventory } & 2,000 \
\hline & \text { Exchange Rate } \
\hline \text { Balance Sheet date } & 1 \text { pound } = \$ 1.6 \
\hline \text { Average exchange rate } & 1 \text { pound } = \$ 1.5 \
\hline \text { Historical rate } & 1 \text { pound } = \$ 1.4 \
\hline
\end{array}$$
-After converting to U.S. dollars using the appropriate method, gross profit margin is 40%. What method is being used to record British subsidiaries financial statements?

Question

A U.S. company has a subsidiary located in Great Britain. Information for the subsidiary for the year ended December 31, 2006 is as follows:
 $$\begin{array} { | l | l | } 
\hline & \text { British pound } \
\hline \text { Gross profit margin } & 40 \% \
\hline \text { Inventory } & 2,000 \
\hline & \text { Exchange Rate } \
\hline \text { Balance Sheet date } & 1 \text { pound } = \$ 1.6 \
\hline \text { Average exchange rate } & 1 \text { pound } = \$ 1.5 \
\hline \text { Historical rate } & 1 \text { pound } = \$ 1.4 \
\hline
\end{array}$$
-After converting to U.S. dollars using the appropriate method, gross profit margin is 40%. What method is being used to record British subsidiaries financial statements?

Quizplus · Accepted Answer

The Current Rate Method is used when the gross profit margin remains the same after conversion, as it translates income statement items at the average rate and balance sheet items at the current rate.

A US Company Has a Subsidiary Located in Great Britain