Question

Miguel Corporation, a foreign subsidiary of a U.S. parent company, has one asset (marketable securities) and no liabilities. The functional currency for this subsidiary is the U.S. dollars. The marketable securities were acquired for 1,000,000 pesos when the exchange rate was $1=20 pesos. Consolidated statements are to be produced, and the current exchange rate is $1=25 pesos. Which of the following statements is true for the consolidated financial statements?

A. A positive translation adjustment must be reported.
B. No gain or loss will be reported.
C. A remeasurement gain must be reported.
D. A remeasurement loss must be reported.
E. A negative translation adjustment must be reported.

Answer 1

E) A negative translation adjustment must be reported.

Step-by-step explanation:

Under the current rate method, the company must report a negative translation adjustment on a reserve account in the consolidated balance. This reserve account is included in the consolidated balance sheet as unrealized gains/losses.

The marketable securities were purchased at 1,000,000 / 20 = $50,000 (US dollars). But now they are worth only 1,000,000 / 25 = $40,000 (US dollars).

The reserve account of the consolidated financial statements should show a negative foreign currency translation adjustment equal to $10,000 (US dollars).