Question

Gordon Ltd., a 100% owned British subsidiary of a U.S. parent company, reports its financial statements in local currency, the British pound. A local newspaper published the following U.S. exchange rates to the British pound at year end:

Current rate $1.50
Historical rate (acquisition) $1.70
Average rate $1.55
Inventory (FIFO) $1.60

Which currency rate should Gordon use to convert its income statement to U.S. dollars at year end?

Answer 1

Average rate = $1.55

Step-by-step explanation:

Normally all companies use the current rates for the transaction, revenue department and profit loss, but it is not fair to use the same current rate on different dates.

Therefore, businesses usually use average exchange rates to overcome these kinds of shortcomings.

Therefore in this example, it would be appropriate to use the average exchange rates by the parent company to find the income of the subsidiary.