ABC Inc Has a Single Wholly-Owned American Subsidiary Called US1 Based

question 29

Multiple Choice

ABC Inc. has a single wholly-owned American subsidiary called US1 based in Los Angeles, California, which was acquired January 1, 2020. US1 submitted its financial statements for 2020 to ABC. Selected exchange rates in effect throughout 2020 are shown below: $\begin{array}{|l|r|r|}\hline \text { Tanuary } 1,2020: & \text { US } \$ 1= & \text { CDN } \$ 0.815 \\\hline \text { December } 31,2020: & \text { US } \$ 1= & \text { CDN } \$ 0.8175 \\\hline \text { Average for } 2020: & \text { US } \$ 1= & \text { CDN } \$ 0.825 \\\hline \begin{array}{l}\text { Date of Purchase of Inventory on } \\\text { Hand: }\end{array} & \text { US } \$ 1= & \text { CDN } \$ 0.83 \\\hline \text { Date Dividends were declared: } & \text { US } \$ 1= & \text { CDN } \$ 0.8125\\\hline\end{array}$ US1 financial results for 2020 were as follows:
US1 Financial Statements
At December 31, 2020
(in U.S. dollars)
$\begin{array}{|l|r|}\hline \text { Income Statement: } & \\\hline \text { Sales } & \$ 5,000,000 \\\hline \text { Cost of Sales } & \$ 3,500,000 \\\hline \text { Depreciation Expense } & \$ 150,000 \\\hline \text { Bond Interest Expense } & \$ 100,000 \\\hline \text { Other Expense } & \$ 750,000 \\\hline \text { Net Income } & \$ 500,000 \\\hline \text { Statement of Retained Earnings: } & \\\hline \text { January 1, 2020: } & \$ 400,000 \\\hline \text { Net Income } &\$ 500,000 \\\hline \text { Dividends } & \$ 100,000) \\\hline \text { December } 31,2020: & \$ 800,000 \\\hline \text { Balance Sheet } & \\\hline \text { Cash } &\$ 1,200,000 \\\hline \text { Accounts Receivable } & \$ 1,900,000 \\\hline \text { Inventory } & \$ 700,000(\$ 500,000 \text { January 1, 2020) } \\\hline \text { Plant and Equipment (net) } & \$ 400,000 \\\hline \text { Current Liabilities } & \$ 4,200,000 \\\hline \text { Bonds Payable } & \$ 2,000,000 \\\hline \text { Common Shares } & \$ 1,000,000 \\\hline \text { Retained Earnings } & \$ 800,000 \\\hline & \$ 4,200,000 \\\hline\end{array}$ Sales, purchases, bond interest, and other expenses occurred evenly throughout the year.
US1 is considered to be a foreign subsidiary that has the same functional currency as ABC Inc.'s functional currency.
Which of the following rates would be used to translate the company's sales?

• A) US$1 = CDN$0.815
• B) US$1 = CDN$0.8175
• C) US$1 = CDN$0.825
• D) US$1 = $0.83 CDN

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Definitions:

Activity-Based Costing

An accounting method that assigns costs to products and services based on the activities they require, aiming for more precise cost allocation.

General Factory

A term generally referring to the main production site where various goods are manufactured.

Activity-Based Costing

A method of accounting that recognizes and allocates expenses to overhead operations, before distributing those expenses to the products.

General Factory

Expenses related to the general operation of a manufacturing plant, not directly tied to specific units of production.