Windsor Enterprises,a subsidiary of Kennedy Company based in New York,reported the following information at the end of its first year of operations (all in British pounds): assets--338,000;expenses--360,000;liabilities--101,000;capital stock--80;000,revenues--517,000.Relevant exchange rates are as follows: As a result of the translation process,what amount is recorded on the financial statements as the translation adjustment?

Question

Windsor Enterprises,a subsidiary of Kennedy Company based in New York,reported the following information at the end of its first year of operations (all in British pounds): assets--338,000;expenses--360,000;liabilities--101,000;capital stock--80;000,revenues--517,000.Relevant exchange rates are as follows:  As a result of the translation process,what amount is recorded on the financial statements as the translation adjustment?

Quizplus · Accepted Answer

To determine the translation adjustment, we need to first calculate the functional currency of the subsidiary. We can observe that the financial statements are in British pounds, which is also the local currency. Therefore, British pounds are the functional currency.

Next, we need to convert the financial statements from British pounds to the reporting currency (presumably, US dollars). We can use the average exchange rate of the year, which is not given in the question. Let's assume it to be 1 pound = $1.5.

Assets = 338,000 pounds x $1.5/pound = $507,000
Expenses = 360,000 pounds x $1.5/pound = $540,000
Liabilities = 101,000 pounds x $1.5/pound = $151,500
Capital = 80,000 pounds x $1.5/pound = $120,000
Revenues = 517,000 pounds x $1.5/pound = $775,500

Now, we can calculate the translation adjustment as the difference between the total assets and liabilities in the reporting currency and the equity balance. In this case:

Total assets - Total liabilities = $507,000 - $151,500 = $355,500
Equity balance = Capital + Revenues - Expenses = $120,000 + $775,500 - $540,000 = $355,500

The equity balance equals the total assets minus total liabilities, which implies that there is no translation adjustment needed. However, if we assume that the functional currency was the US dollar instead of the British pound, we would get different values for the financial statements and a different amount for the translation adjustment. In that case, the answer would not be A.

Windsor Enterprises,a Subsidiary of Kennedy Company Based in New York,reported