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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 once again that US1's cost of sales was calculated to be $4,000,000 CDN.What is the amount (in Canadian dollars)of US1's net income?
A)$414,000
B)$422,500
C)$421,000
D)$440,250

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 once again that US1's cost of sales was calculated to be $4,000,000 CDN.What is the amount (in Canadian dollars)of US1's net income?
A)$414,000 
B)$422,500 
C)$421,000 
D)$440,250

Quizplus · Accepted Answer

To calculate US1's net income in Canadian dollars, we will need to convert US1's revenue, cost of sales, and operating expenses from USD to CAD using the average exchange rate for 2014 (1.1043).
Net sales = 3,500,000 USD x 1.1043 = 3,861,505 CAD
Cost of sales = 4,000,000 USD x 1.1043 = 4,417,200 CAD
Operating expenses = 1,350,000 USD x 1.1043 = 1,490,755 CAD
Net income = Net sales - Cost of sales - Operating expenses = 3,861,505 - 4,417,200 - 1,490,755 = - 1,046,450 CAD
Since US1 has a negative net income, we can conclude that it did not make a profit in 2014. Therefore, the correct answer is B)$422,500, which is not listed as an option.

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