In the process of consolidating the translated financial accounts of a foreign operation,what will be the form of the journal entry required to eliminate the foreign currency effect of a purchase of inventory by the subsidiary from the parent entity? Assume that the value of the foreign currency of the foreign operation has increased relative to the reporting currency.
A)
$$\begin{array} { | l | l | r | r | }
\hline \mathrm { Dr } & \text { Foreign currency loss } ( \mathrm { P \& L } ) & \mathrm { X } & \
\hline \mathrm { Cr } & \text { Cost of goods sold } & & \mathrm { X } \
\hline
\end{array}$$
B)
$$\begin{array} { | l | l | r | r | }
\hline \mathrm { Dr } & \text { Inventory } & \mathrm { X } & \
\hline \mathrm { Cr } & \text { Foreign currency gain } ( \mathrm { P \& L } ) & & \mathrm { X } \
\hline
\end{array}$$
C)
$$\begin{array} { | l | l | r | r | }
\hline \mathrm { Dr } & \text { Inventory } & \mathrm { X } & \
\hline \mathrm { Cr } & \text { Foreign currency translation reserve } & & \mathrm { X } \
\hline
\end{array}$$
D)
$$\begin{array} { | l | l | r | r | }
\hline \mathrm { Dr } & \text { Foreign currency translation reserve } & \mathrm { X } & \
\hline \mathrm { Cr } & \text { Inventory } & & \mathrm { X } \
\hline
\end{array}$$

Question

In the process of consolidating the translated financial accounts of a foreign operation,what will be the form of the journal entry required to eliminate the foreign currency effect of a purchase of inventory by the subsidiary from the parent entity? Assume that the value of the foreign currency of the foreign operation has increased relative to the reporting currency.
A)
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Foreign currency loss } ( \mathrm { P \& L } ) & \mathrm { X } & \
\hline \mathrm { Cr } & \text { Cost of goods sold } & & \mathrm { X } \
\hline
\end{array}$$
B)
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Inventory } & \mathrm { X } & \
\hline \mathrm { Cr } & \text { Foreign currency gain } ( \mathrm { P \& L } ) & & \mathrm { X } \
\hline
\end{array}$$
C)
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Inventory } & \mathrm { X } & \
\hline \mathrm { Cr } & \text { Foreign currency translation reserve } & & \mathrm { X } \
\hline
\end{array}$$
D)
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Foreign currency translation reserve } & \mathrm { X } & \
\hline \mathrm { Cr } & \text { Inventory } & & \mathrm { X } \
\hline
\end{array}$$

Quizplus · Accepted Answer

When the value of the foreign currency increases relative to the reporting currency, the cost of inventory purchased by the subsidiary from the parent entity in the foreign currency would effectively decrease when translated back to the reporting currency. To eliminate the foreign currency effect and maintain the original cost of inventory as if the transaction had occurred within a single reporting entity, an adjustment is made by debiting the foreign currency translation reserve and crediting inventory. This adjustment ensures that the consolidated financial statements reflect the historical cost of the inventory as if the purchase was made internally, without the impact of currency fluctuations.

In the Process of Consolidating the Translated Financial Accounts of a Foreign