Question

Lancer, Inc. (a U.S.-based company), establishes a subsidiary in a foreign country on January 1, 2016. The following account balances for the year ending December 31, 2017, are stated in kanquo (KQ), the local currency: Sales KQ 340,000 Inventory (bought on 3/1/17) 187,000 Equipment (bought on 1/1/16) 88,000 Rent expense 22,000 Dividends (declared on 10/1/17) 30,000 Notes receivable (to be collected in 2020) 50,000 Accumulated depreciation—equipment 26,400 Salary payable 7,800 Depreciation expense 8,800 The following U.S.$ per KQ exchange rates are applicable: January 1, 2016 $0.33 Average for 2016 0.34 January 1, 2017 0.38 March 1, 2017 0.39 October 1, 2017 0.41 December 31, 2017 0.42 Average for 2017 0.40 Lancer is preparing account balances to produce consolidated financial statements. Assuming that the kanquo is the functional currency, what exchange rate would be used to report each of these accounts in U.S. dollar consolidated financial statements? Assuming that the U.S. dollar is the functional currency, what exchange rate would be used to report each of these accounts in U.S. dollar consolidated financial statements?

Answer 1

1. Functional currency is the currency in which most of the business transactions of the company are carried out. In the given case, Kanquo is assumed to be the functional currency and therefore all the financial statements of Lancer Inc. will be consolidated in Kanquo currency. Therefore, no exchange rate will be applied if Kanquo is the functional currency of Lancer Inc.

2. If Dollar is the functional currency then all the reported amounts of foreign subsidiary will be consolidated by using the exchange rate of U.S Dollar. In the given case, following is the excha

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