Assume that your Italian affiliate reports sales revenue of 2,500,000 euros. If your spot rate is...
Assume that your Italian affiliate reports sales revenue of 2,500,000 euros. If your spot rate is $1=€0.7084 and the end of year rate is $1=€0.7080 and the average rate is $1=€0.7082.
The parent company in the US uses the US$ for its reports. If 100% of the Italian affiliate is owned by the US parent company, you are given the following accounts extracted from the trial balance of the Italian affiliate.
- Translate the revenue and indicate why you opted for a particular exchange rate.
- Indicate which exchange rate would be used assuming that the foreign currency is the functional currency?
- Indicate which exchange rate would use if the parent currency were the functional currency?
_____________________________________________________________________________________Trial Balance Accounts in€(000)
Cash 10,000
Inventory (market) 5,000
Equipment 30,000
Purchases 105,000
Retained earnings 90,000
Homework Answers
Translation of Revenue of the ITalian Affiliate:
Total Sales Revenue = 2,500,000 Euros , we should convert the revenue to report on Spot Rates since it represents the actual figures based on the financial reporting IFRS standards.
Hence reported revenue = 2500000 / 0.7084 = $ 3,529,079 Approx
Functional currency refers to the main currency used by business or a unit. Hence closing rates would be used as an exchange.
Exchange rate to be used if the parent company were the functional currency:
Cash 10000 = Closing Rate
Inventory = Average Rate
Purchases = Spot Rate
Equipment = Closing Rate
Retained Earnings = Average Rate
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