Gunther Co Gunther Concluded That the Subsidiary's Functional Currency Was the Dollar

question 12

Multiple Choice

Gunther Co.established a subsidiary in Mexico on January 1,2011.The subsidiary engaged in the following transactions during 2011: $\begin{array}{llr} \text { Jan. 1 } & \text { Sold common stock to Gunther for \( 5,000,000 \) pesos. Purchased } \\& \text { inventory throughout the year, \( 8,000,000 \) pesos \( (1 / 4 \) remained at year } \\& \text { end) . } \\\end{array}$
$\begin{array}{l}&\text { Sales for the year totaled } 12,000,000 \text { pesos. } \\\text { Dec. } 31& \text { Purchased equipment for } 1,000,000 \text { pesos. }\end{array}$

Gunther concluded that the subsidiary's functional currency was the dollar. Exchange rates for 2011 were

$\begin{array}{ll}\text { Jan. } 1& 1 \text { peso }=\$ .20 \\\quad\quad 31 & 1 \text { peso }=\$ .19 \\ \text { Dec. } 31 & 1 \text { peso }=\$ .16 \\\text { Weighted average rate for the year } &1 \text { peso }=\$ .18\end{array}$
What amount of foreign exchange gain or loss would have been recognized in Gunther's consolidated income statement for 2011?

• A)$800,000 gain.
• B)$760,000 gain.
• C)$320,000 loss.
• D)$280,000 loss.
• E)$440,000 loss.

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