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

Parent Co (functional and presentation currency: dollars) owns 100% of Sub Co, whose functional currency is the krona. Sub Co's net assets at the start of the year were 5,000,000 kronor at 1 krona = $0.50 and at the end of the year were 6,000,000 kronor at 1 krona = $0.55. Profit for the year was 1,000,000 kronor, earned evenly, with an average rate of 1 krona = $0.52. No dividends were paid. Ignoring goodwill, what is the exchange gain recognised in other comprehensive income on translation of Sub Co's net assets?

The gain is $280,000, being 250,000 on opening net assets plus 30,000 on the profit translated at average rather than closing rate.

  1. A$200,000Correct
  2. B$300,000
  3. C$250,000
  4. D$180,000

Explanation

Opening net assets: 5,000,000 x 0.50 = $2,500,000. Profit: 1,000,000 x 0.52 = $520,000. Closing: 6,000,000 x 0.55 = $3,300,000. Gain = 3,300,000 - 2,500,000 - 520,000 = $280,000. Check: opening 5,000,000 x (0.55-0.50)=250,000 plus profit 1,000,000 x (0.55-0.52)=30,000 gives 280,000. So none of the listed options equals 280,000; the first option is therefore wrong.

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