The Herlitzka Company, a U.S. multinational firm, has a 100 percent stake in a Swiss subsidiary. The U.S. dollar (USD) has been determined to be the functional currency. All the common stock of the subsidiary was issued at the beginning of the year and the subsidiary uses the weighted-average inventory cost-flow assumption. In addition, the value of the SF is as follows: Beginning of year $0.5902 Average throughout the year $0.6002 End of year $0.6150 The SF-based balance sheet and income statement data for the Swiss subsidiary are as follows: Accounts receivable = 3,000 Inventory = 4,000 Fixed assets = 12,000 Accounts payable = 2,000 Long-term debt = 5,000 Common stock = 10,000 Retained earnings = 2,000 Net income = 2,000 The remeasured value of accounts receivable and inventory respectively are closest to: A) $1,845 and $2,401. B) $1,771 and $2,361. C) $1,845 and $2,361. D) $1,771 and $2,401. Question: How do we know whether to use to temporal or the all-current method with the information provided???
Given that US Dollar is the functional currency, you would use the temporal method… At least I hope so!
The Herlitzka Company, a U.S. multinational firm, has a 100 percent stake in a Swiss subsidiary. The U.S. dollar (USD) has been determined to be the functional currency. The Swiss subsidiary’s local currency is not the USD right, so since the LC is not equal to the FC (USD as stated), you use Temporal. Just remember LC = FC --> All Current LC Not = FC --> Temporal.
if it states: The REMEASURED VALUE we should use the temporal method… right? Also, why are you assuming that bcz the functional currency is ($) we use the temporal method, is that a rule?
Yes, If parent currency is functional currency, use temporal method.
The rule is LC = FC --> All Current LC Not = FC --> Temporal Since the subsidiary is located in Switzerland, the local currency is the Swiss Franc. They tell you the functional currency is the USD, so then you have a different local and functional currency which tells you to do temporal. I took the John Harris class and he mentioned that the CFAI is not always consistent with the questions they ask as far as making the distinction between remeasured and translated in their questions. He suggested we look for the relationship between local and functional and use that rule above.
I’m getting C… AR at the current rate and inventory at historical
LC = FC --> ALL CURRENT LC OTHER THAN FC --> TEMPORAL got it! thanks. I’ll squeeze another issue i have here: the ending inventory, shouldn’t we remeasure it with ending Exchange Rate using the temporal method?
When the currency of the parent is the functional currency, use Temporal.
I get A
Under the temporal method, nonmonetary assets (inventory, fixed assets, etc) are remeasured under the historical rate. Under the all current method, all assets are translated at the current rate.
I thought since it says that the inventory uses weighted average cost - that it would mean to use average rate. I know normally non monetary assets are done at historic rate but there are a few exceptions where you would use average rate for inventory. When do we use average rate for inventory when using temporal method?
I get A too. Inventory is always at historical in the temporal method. I think the average rate is used as a proxy for historical rate (since it is more practical). I use average rate for historical unless there is additional info (like beg. inventory, purchases etc).
The answer should be C?
prob_13 Wrote: ------------------------------------------------------- > The answer should be C? The answer would be C) if all of their inventory on hands was bought on Dec 31
but its using average cost of inventory - so shouldn’t we use average rate in this case?
I thought that you were supposed to use the assumption that inventory was bought evenly throughout the year, thus using the average rate does actually capture historical rate for remaining inventory.