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ACCA Strategic Professional · Strategic Business Reporting (International) · Foreign transactions and entities

Dorn, a dollar-reporting parent, acquired 100% of a foreign subsidiary (functional currency krona, K) on 1 January for K5,000,000 net assets, with no goodwill arising. At 1 January K1 = $0.20. At 31 December net assets were K6,000,000 after profit of K1,000,000 earned evenly; the average rate was $0.21 and the closing rate $0.22. No dividends were paid. What exchange difference on translation is recognised in other comprehensive income for the year?

The exchange difference in other comprehensive income is $110,000. Closing net assets of $1,320,000 less opening net assets of $1,000,000 less profit at the average rate of $210,000 gives $110,000. It comprises $100,000 on opening net assets and $10,000 on the profit.

  1. A$110,000Correct
  2. B$100,000
  3. C$120,000
  4. D$10,000

Explanation

Closing net assets: 6,000,000 × 0.22 = $1,320,000. Opening net assets: 5,000,000 × 0.20 = $1,000,000. Profit at average: 1,000,000 × 0.21 = $210,000. Exchange difference = 1,320,000 − 1,000,000 − 210,000 = $110,000. Check: opening gain 5,000,000 × 0.02 = 100,000 plus profit gain 1,000,000 × 0.01 = 10,000, which is $110,000. The $100,000 option ignores the gain on retranslating the year's profit.

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