A Ltd has an 80% investment in B Inc. A Ltd lent $US500,000 to B Inc on 1 January 20X4. The loan is considered to form part of the net investment in B Inc. The functional currency of A Ltd is Australian dollars and for B Inc is US dollars.
The exchange rate on 1 January 20X4 was $A1.00 = $US0.875 and on 30 June 20X4 was $A1.00 = $US0.750.
The consolidation adjustment to the foreign currency translation reserve at 30 June 20X4 in relation to the loan (to the nearest whole dollar) is:

Question

Quizplus · Accepted Answer

To calculate the foreign currency translation adjustment for the loan, we need to use the temporal method.
Since the loan is considered a part of the net investment in B Inc., we need to translate it at the exchange rate at the time it was taken (i.e. 1 January 20X4), which was $A1.00 = $US0.875.
So, the loan amount in Australian dollars would be:
$US500,000 x $A0.875/$US1 = $A437,500

At 30 June 20X4, we need to retranslate the loan amount using the exchange rate at that date, which was $A1.00 = $US0.750.
The loan amount in US dollars would be:
$A437,500 x $US1/$A0.750 = $US583,333.33

We need to compare this amount to the original loan amount in US dollars ($US500,000) to determine the foreign currency translation adjustment.

Difference = $583,333.33 - $500,000 = $83,333.33

Since the Australian dollar weakened against the US dollar, we need to credit the foreign currency translation reserve with the translation gain.
The amount of the adjustment, to the nearest dollar, is $95,238 (=$83,333.33 / 0.875).

Therefore, the answer is C) $95,238 credit.

A Ltd Has an 80% Investment in B Inc