The local currency is:
a) [the preferred functional currency for subsidiaries that are highly integrated with the parent.]
b) [translated into the functional currency under the current rate method.]
c) [the same as the functional currency under the current rate method.]
Answer is C) but don’t really understand. I though under current rate method, parent and sub have different functional currencies. Since local currency is the sub country’s currency, would it not differ from the functional currency?
Please enlighten me.
None of the answers is correct.
You use the current rate method when the functional currency is different from the presentation currency. Whether the local currency is the same as the functional currency or different from the functional currency doesn’t matter; the current rate method deals only with the functional currency and the presentation currency.
On the exam, if they want you to use the current rate method they’ll tell you that the local currency is the same as the functional currency, but that’s only to forestall using the temporal method. In the real world, it’s possible that the local currency, the functional currency, and the presentation currency are all different from each other, in which case you’ll use both the temporal method and the current rate method: the temporal method to remeasure the local currency into the functional currency, and the current rate method to translate the functional currency into the presentation currency.
I see… not that good of a question. Thank you for the enlightenment Magician!