Question

A U.S. company owns an 80% interest in a company located on Mars. Martian currency is called the Martian Credit. During the year the parent company sold inventory that had cost $24,500 to the subsidiary on account for $28,500 when the exchange rate was $0.5192. The subsidiary still held one-half of the inventory and had not paid the parent company for the purchase at the end of the fiscal period. The unsettled account is denominated in dollars. The exchange rate at the fiscal year-end was $0.4994.

Answer 1

To determine the impact of the foreign exchange rate changes on the unsettled account, we need to calculate the gain or loss arising from the fluctuation in the exchange rate.

Let's break down the transactions and calculations step by step:

1. Initial Purchase: The parent company sold inventory to the subsidiary on account for $28,500 when the exchange rate was $0.5192 per Martian Credit. So, the initial transaction in Martian Credit is:

Martian Credit (MC) = $28,500 / $0.5192 ≈ 54,988.62 MC

2. Unsettled Account: The subsidiary still owes the parent company for half of the inventory purchased. Therefore, the unsettled account in Martian Credit is:

Unsettled Account (MC) = 0.5 * 54,988.62 MC ≈ 27,494.31 MC

3. Year-End Exchange Rate: At the fiscal year-end, the exchange rate was $0.4994 per Martian Credit.

4. Recalculation of Unsettled Account in Dollars: To calculate the unsettled account in dollars at the year-end exchange rate, we need to convert the Martian Credit amount back to dollars:

Unsettled Account (USD) = 27,494.31 MC * $0.4994/MC ≈ $13,736.77

5. Gain/Loss on Foreign Exchange: To determine the gain or loss on the unsettled account, we compare the initial value of the account in dollars with its value at the year-end exchange rate:

Gain/Loss (USD) = Initial Value (USD) - Year-End Value (USD) Gain/Loss (USD) = $28,500 - $13,736.77 ≈ $14,763.23 (Loss)

In this case, there is a foreign exchange loss of approximately $14,763.23 due to the fluctuation in the exchange rate between the initial purchase and the year-end.

Please note that foreign exchange rates can fluctuate frequently, and these calculations are based on the given exchange rates. Additionally, companies may use different accounting methods for handling foreign exchange gains and losses, such as using different accounts for translation adjustments in the financial statements. The specific accounting treatment may vary based on accounting standards and the company's policies.

Answer 2

To calculate the foreign currency transaction gain or loss on the unsettled account denominated in dollars, we need to consider the change in the exchange rate between the time of the transaction and the fiscal year-end.

Let's break down the steps:

1. Calculate the original transaction amount in Martian Credit: Amount in Martian Credit = $28,500 / Exchange rate at the time of the transaction ($0.5192)

2. Calculate the ending account balance in Martian Credit: Ending account balance = (Original transaction amount in Martian Credit) * (1 - 80%) Note: The parent company owns an 80% interest in the subsidiary, so the subsidiary's ending account balance will be 20% of the original transaction amount.

3. Calculate the ending account balance in dollars: Ending account balance in dollars = Ending account balance in Martian Credit * Exchange rate at the fiscal year-end ($0.4994)

4. Calculate the foreign currency transaction gain or loss: Foreign currency transaction gain/loss = Ending account balance in dollars - Original transaction amount in dollars

Let's proceed with the calculations:

1. Calculate the original transaction amount in Martian Credit: Amount in Martian Credit = $28,500 / $0.5192 ≈ 54,976.69 Martian Credit

2. Calculate the ending account balance in Martian Credit: Ending account balance = 54,976.69 * (1 - 80%) ≈ 10,995.34 Martian Credit

3. Calculate the ending account balance in dollars: Ending account balance in dollars = 10,995.34 * $0.4994 ≈ $5,493.69

4. Calculate the foreign currency transaction gain or loss: Foreign currency transaction gain/loss = $5,493.69 - $28,500 ≈ -$23,006.31

Since the value is negative, it represents a foreign currency transaction loss of approximately $23,006.31. The subsidiary would need to settle the account by paying the parent company an additional $23,006.31 in dollars to complete the transaction.