US CMA Part 2 · Chapter 2 · Question 13 of 15
A US parent consolidates a subsidiary whose functional currency is the euro, using the current rate method. During the year the euro weakens against the US dollar and the subsidiary has net assets (assets exceed liabilities). How is the translation effect reported?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) As a negative translation adjustment in other comprehensive income
Explanation
Under the current rate method, translation adjustments bypass net income and are accumulated in other comprehensive income. When the foreign currency weakens, a net asset position translates into fewer dollars, producing a negative (loss) adjustment. Remeasurement gains and losses go through net income only when the temporal method applies.
More Financial statement analysis: profitability, market measures and special issues MCQs
- Q15Which inventory cost flow method is permitted under US GAAP but prohibited under IFRS?
- Q1Mercer Apparel had net sales of $2,400,000 and cost of goods sold of $1,560,000. What is its gross profit margin?
- Q2Norland Foods earned net income of $288,000. Its average total assets for the year were $3,200,000. What is its return on assets?
- Q3Using the DuPont model, what is the return on equity of a company with a net profit margin of 6%, total asset turnover of 1.5 times and an…
- Q4Orchard Holdings has a return on equity of 15% and a return on assets of 6%, both based on the same net income and year-end balances. What…