Question

33) A Canadian subsidiary of a U.S. parent firm is instructed to bill an export to the parent in U.S. dollars. The Canadian subsidiary records the accounts receivable in Canadian dollars and notes a profit on the sale of goods. Later, when the U.S. parent pays the subsidiary the contracted U.S. dollar amount, the Canadian dollar has appreciated 10% against the U.S. dollar. In this example, the Canadian subsidiary will record a: A) 10% foreign exchange loss on the U.S. dollar accounts receivable. B) 10% foreign exchange gain on the U.S. dollar accounts receivable. C) Since the Canadian firm is a U.S. subsidiary, neither a gain nor loss will be recorded. D) Any gain or loss will be recorded only by the parent firm.

Answer 1

Inter company owings in consolidated financial statements.

Sale of goods by subsidary company to its holding company is an inter company transaction , and accounts receivable by subsidary company from its holding company for sale of goods is an inter company transaction which is to be eliminated while preparing consolidated financial statements

Since the canadian firm is a subsidary of us company , no gain or loss on the inter company transactions will be recognized in consolidated financial statements.

But in the stand alone financial statements ( which is prepared by canadian firm alone with out consolidating with us firm) , since the canadian dollar appreciated by 10% and canadian firm has us dollars receivables , there will be 10% loss on us dollar receivables.

Option A- canadian subsidary will record loss of 10% on us dollar accounts receivables( in their stand alone financial statements)