CPA Exam - FAR (Financial Accounting and Reporting)Select TransactionsEasy
A multinational corporation has a subsidiary in a foreign country. The subsidiary's financial statements are denominated in its local currency, which is determined to be its functional currency. The parent company's reporting currency is the U.S. dollar. Which of the following exchange rates should be used to translate the subsidiary's equipment and accumulated depreciation at year-end using the current rate method?
- AA weighted-average exchange rate based on the dates of depreciation charges.
- BThe current exchange rate at the balance sheet date.
- CThe average exchange rate for the current year.
- DThe historical exchange rate at the time the equipment was acquired.
Show answer & explanationAnswer & explanation
Correct answer: B. The current exchange rate at the balance sheet date.
Under the current rate method, all assets and liabilities are translated using the current exchange rate at the balance sheet date. This includes Property, Plant, and Equipment and their related accumulated depreciation.
Why the other options are wrong
- A. This is not a standard translation rate for assets/liabilities.
- C. Average rates are typically used for income statement items under the current rate method.
- D. Historical rates are used for certain equity accounts or under the remeasurement method for monetary/nonmonetary items.
Foreign Currency Translation (Current Rate Method) - Assets
When the foreign subsidiary's functional currency is its local currency, assets (including PPE) are translated to the parent's reporting currency using the current exchange rate.
- Applicable when the functional currency is the local currency.
- All assets and liabilities are translated at the current (year-end) rate.
- Equity accounts (except retained earnings) are translated at historical rates.
- Translation adjustments go to Other Comprehensive Income (OCI).
Memory trick: Current Rate: Balance Sheet Now, Income Average.