In the Process of Consolidating the Translated Financial Statements of a Foreign

question 6

Multiple Choice

In the process of consolidating the translated financial statements of a foreign operation,what will be the form of the journal entry required to eliminate the foreign currency effect of a purchase of inventory by the subsidiary from the parent entity? Assume that the value of the foreign currency of the foreign operation has increased relative to the reporting currency.

• A) \(\begin{array}{|l|l|r|r|}
• \hline \mathrm{Dr} & \text { Foreign currency loss (P\&L) } & \mathrm{X} & \\
• \hline \mathrm{Cr} & \text { Cost of goods sold } & & \mathrm{X} \\
• \hline
• \end{array}\)
• B) \(\begin{array}{|l|l|r|r|}
• \hline \mathrm{Dr} & \text { Inventory } & \mathrm{X} & \\
• \hline \mathrm{Cr} & \text { Foreign currency gain (P\&L) } & & \mathrm{X} \\
• \hline
• \end{array}\)
• C) \(\begin{array}{|l|l|r|r|}
• \hline \mathrm{Dr} & \text { Inventory } & \mathrm{X} & \\
• \hline \mathrm{Cr} & \text { Foreign currency translation reserve } & & \mathrm{X} \\
• \hline
• \end{array}\)
• D) \[\begin{array} { | l | l | r | r | }
• \hline \text { Dr } & \text { Foreign currency translation reserve } & \mathrm { X } & \\
• \hline \mathrm { Cr } & \text { Inventory } & & \mathrm { X } \\
• \hline
• \end{array}\]

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Definitions:

Investing Section

A part of the statement of cash flows that reports the purchase and sale of long-term investments and property, plant, and equipment, reflecting how the company invests its cash.

Financing Section

Part of the cash flow statement that records cash activities related to funding the company, such as obtaining loans or issuing stock.

Statement of Cash Flows

A financial statement summarizing the total cash earnings from a company's operational activities and investments, alongside the expenses and investments paid out over a specific time frame.

Accounting Equation

A fundamental principle of accounting stating that assets equal liabilities plus owners' equity (Assets = Liabilities + Equity).