Quadros Inc., a Portugese 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.
-Assume the functional currency is the U.S. dollar, compute the U.S. income statement amount for sales for 2011.

Question

Quadros Inc., a Portugese 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. 
-Assume the functional currency is the U.S. dollar, compute the U.S. income statement amount for sales for 2011.

Quizplus · Accepted Answer

To compute the U.S. income statement amount for sales for 2011, we need to translate the euro amount using the average exchange rate for the year. Using the given exchange rates:

Average exchange rate for 2010: 1 euro = $1.25
Average exchange rate for 2011: 1 euro = $1.30

Sales for 2011 in euro = €500,000
Sales for 2011 in USD = €500,000 x $1.30/$1 = $650,000
(Under the temporal method, we use the exchange rate at the date of transaction, which is January 1, 2010, but both options A and B use a higher exchange rate, resulting in an overstated amount. Option D uses a lower exchange rate, resulting in an understated amount. Option E does not take into account the exchange rate and uses the euro amount directly, resulting in an overstated amount.)