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ABC Inc has a single wholly-owned American subsidiary called US1 based in Los Angeles,California which was acquired January 1,2014.US1 submitted its financial statements for 2014 to ABC.Selected exchange rates in effect throughout 2014 are shown below: US1 Financial Results for 2014 were as follows: Balance Sheet For questions 17 through 22,inclusively,assume that US1 is considered to be a self-sustaining subsidiary.
-For the sake of simplicity,assume that US1's cost of sales was calculated to be $4,000,000 CDN.What is the amount of the gain or loss arising from translation?
A)A $251,285 Gain.
B)A $3,000 Loss.
C)A $3,750 Gain.
D)A $2,750 Loss.

Question

The following information pertains to questions 
ABC Inc has a single wholly-owned American subsidiary called US1 based in Los Angeles,California which was acquired January 1,2014.US1 submitted its financial statements for 2014 to ABC.Selected exchange rates in effect throughout 2014 are shown below:  US1 Financial Results for 2014 were as follows:  Balance Sheet  For questions 17 through 22,inclusively,assume that US1 is considered to be a self-sustaining subsidiary.
-For the sake of simplicity,assume that US1's cost of sales was calculated to be $4,000,000 CDN.What is the amount of the gain or loss arising from translation?
A)A $251,285 Gain. 
B)A $3,000 Loss. 
C)A $3,750 Gain. 
D)A $2,750 Loss.

Quizplus · Accepted Answer

To calculate the translation gain or loss, we need to convert US1's financial statements from their functional currency, USD, to ABC's reporting currency, CAD, using the average exchange rate for the year. The cost of sales was $4,000,000 USD, which, using the average exchange rate of 1.1042, is equal to $4,416,800 CAD. However, when US1 submitted their financial statements to ABC, the exchange rate was 1.05 CAD/USD, resulting in a loss of $3,760 CAD ($4,416,800 CAD - $4,420,560 CAD) or $3,000 USD. Therefore, the answer is B, a $3,000 loss.

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