A Canadian subsidiary of a U.S. parent firm is instructed to bill an export to the parent in U.S. dollars. The Canadian subsidiary records the accounts receivable in Canadian dollars and notes a profit on the sale of goods. Later, when the U.S. parent pays the subsidiary the contracted U.S. dollar amount, the Canadian dollar has appreciated 10% against the U.S. dollar. In this example, the Canadian subsidiary will record a:
A) 10% foreign exchange loss on the U.S. dollar accounts receivable.
B) 10% foreign exchange gain on the U.S. dollar accounts receivable.
C) Since the Canadian firm is a U.S. subsidiary, neither a gain nor loss will be recorded.
D) Any gain or loss will be recorded only by the parent firm.

Question

Quizplus · Accepted Answer

When the Canadian dollar appreciates against the U.S. dollar, the value of the U.S. dollar decreases in terms of Canadian dollars. Therefore, when the subsidiary receives payment, the U.S. dollars convert to fewer Canadian dollars than initially recorded, resulting in a foreign exchange loss.

A Canadian Subsidiary of a U