Question

A foreign subsidiary of Thun Corporation has one asset (inventory) and no liabilities. The functional currency for this subsidiary is the yuan. The inventory was acquired for 100,000 yuan when the exchange rate was $0.16 = 1 yuan. Consolidated statements are to be produced, and the current exchange rate is $0.12 = 1 yuan. Which of the following statements is true for the consolidated financial statements?

a. A remeasurement gain must be reported.
b. A positive translation adjustment must be reported.
c. A negative translation adjustment must be reported.
d. A remeasurement loss must be reported.

Answer 1

Answer: c. A negative translation adjustment must be reported

Explanation:

The Consolidated financial statements will need to be translated to reflect the depreciation in the Yuan. Seeing as the Yuan is the functional currency, it needs to be translated by the current rate.

The Yuan dropped in value, that means that the inventory dropped in value as well.

For this reason, the corrective measure is a NEGATIVE TRANSACTION ADJUSTMENT in the Consolidated books.